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ARE ALL ONLINE TRAVEL SITES GOOD FOR

THE CONSUMER: AN EXAMINATION OF SUPPLIER-OWNED ONLINE TRAVEL SITES

HEARING

BEFORE THE

SUBCOMMITTEE ON

COMMERCE, TRADE, AND CONSUMER PROTECTION

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

JULY 18, 2002

Serial No. 107–120

Printed for the use of the Committee on Energy and Commerce

(

Available via the World Wide Web: http://www.access.gpo.gov/congress/house

2

COMMITTEE ON ENERGY AND COMMERCE

W.J. ‘‘BILLY’’ TAUZIN, Louisiana, Chairman

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

RICHARD BURR, North Carolina

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES ‘‘CHIP’’ PICKERING, Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

TOM DAVIS, Virginia

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

ERNIE FLETCHER, Kentucky

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

DAVID V. MARVENTANO, Staff Director

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION

CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan

NATHAN DEAL, Georgia

Vice Chairman

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

JOHN B. SHADEGG, Arizona

ED BRYANT, Tennessee

GEORGE RADANOVICH, California

CHARLES F. BASS, New Hampshire

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

ERNIE FLETCHER, Kentucky

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

(Ex Officio)

EDOLPHUS TOWNS, New York

DIANA DEGETTE, Colorado

LOIS CAPPS, California

MICHAEL F. DOYLE, Pennsylvania

CHRISTOPHER JOHN, Louisiana

JANE HARMAN, California

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

3

C O N T E N T S

Page

Testimony of:

Cooper, Mark N., Research Director, Consumer Federal of America .......... 37

Gilliland, Sam, President and Chief Executive Officer, Travelocity.com ..... 20

Ruden, Paul M., Senior Vice President for Legal and Industry Affairs,

American Society of Travel Agents ............................................................. 42

Wolff, Bruce, Chairman, TravelWeb, LLC ..................................................... 28

Zuck, Jonathan, President, Association for Competitive Technology ........... 33

(III)

(1)

ARE ALL ONLINE TRAVEL SITES GOOD FOR

THE CONSUMER: AN EXAMINATION OF SUPPLIER-OWNED ONLINE TRAVEL SITES

THURSDAY, JULY 18, 2002

HOUSE OF REPRESENTATIVES,

COMMITTEE ON ENERGY AND COMMERCE,

SUBCOMMITTEE ON COMMERCE, TRADE,

AND CONSUMER PROTECTION,

Washington, DC.

The subcommittee met, pursuant to notice, at 9:30a.m., in room

2123, Rayburn House Office Building, Hon. Cliff Stearns (chairman) presiding.

Members present: Representatives Stearns, Deal, Bryant, Bass,

Walden, Terry, Towns, DeGette, Markey, Rush, and Eshoo.

Also present: Representatives Boucher and Grucci.

Staff present: Ramsen Betfarhad, majority counsel; Mike

O’Rielly, professional staff; Brendan Williams, legislative clerk;

Jonathan Cordone, minority counsel; and Bruce Gwinn, minority

professional staff.

Mr. STEARNS. Good morning. I would like to welcome all of you

to this hearing of the Subcommittee on Commerce, Trade, and Consumer Protection, entitled, ‘‘Are All On-Line Travel Sites Good for

the Consumer: An Examination of Supplier-Owned On-Line Travel

Sites.’’

I would like to especially thank our witnesses on behalf of the

committee for their appearance today and their testimony. Notwithstanding the hyper-enthusiasm for all things Internet and electronic commerce of the recent past, the fact remains that the Internet as an efficient ubiquitous communication tool has substantially

transformed in fundamental ways commerce as we know it today.

Electronic commerce transversing the communications network

that is the Internet is real, substantial, and rapidly becoming a key

component of our economy. The hyperpredictions of not so long ago

that e-commerce would reach between $3 and $4 trillion by the

year 2003 may not have come true.

But by most estimates the value of business-to-business commer- cial transactions that transpire on-line is well over $1 trillion

today. More significantly, the rate of growth of such business-tobusiness transactions is increasing unabated and it is far in excess

of the growth rate for off-line commerce.

Business-to-consumer e-commerce may also have not met the glorious prediction of abundance who reigned during the .com bubble,

but the fact, my colleagues, remains that it has grown substanVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 81955.TXT HCOM1 PsN: HCOM1
2

tially and it continues to grow at rates unmatched by off-line commerce.

One of the more stellar examples of business-to-consumer e-commerce growth is the on-line travel business. For example, in just

over 3 years, 15 percent of all airline tickets are now being sold online, and the growth rate for such transactions is still accelerating.

More significantly, increasingly consumers are seeking and receiving more advanced travel services through on-line travel sites;

such as arranging multi-city, or even country trips, involving a

myriad of reservations for air travel, car, hotel reservations, and

tours.

During the dot.com bubble, it seemed that any and all business

models were tried as investors in their euphoric state, vis-a-vis

anything Internet, had the penchant to welcome and accept them

all.

However, as the dust settled and we learned that while selling

books on-line made sense, selling groceries didn’t, a sort of new

business model has gained in appeal among dominant suppliers,

but only in certain industries.

That sort of new business model calls for the dominant firms

within an industry to collectively create an on-line distribution network for their goods and services.

In practice, this business model has manifested itself in a number of supplier owned, on-line distribution joint ventures, where the

participating companies tend to be the top 5 or 6 in that industry.

These supplier-owned on-line distribution joint ventures are now

present across a number of industries, including air travel, lodging,

cosmetics, music, and even foreign currency exchange.

Now, there is no question that such supplier-owned on-line distribution systems engender economic efficiency and also consumer

benefits. At the same time there is also no question that any time

competitors come together in collaborative efforts such as these

joint ventures that there is a risk.

There is a risk for collusion activity that may impede commerce

and harm consumers. This hearing is meant to create an educational forum simply to examine both the benefits and possible

risks that supplier-owned on-line distribution systems hold for the

American consumer.

As examining the supplier-owned on-line distribution system

across a multitude of differing industries within which they appear

is a tall order at this hearing to accomplish, but we are going to

try to focus on the online tavel business only.

This hearing will focus only on on-line joint ventures in the air

travel and lodging industries. We have before us some great expert

witnesses on these issues. We had hoped to have Orbitz, and at

least one of the five major airlines that are involved with and own

Orbitz, to speak on Orbitz’s behalf.

Unfortunately, it did not work out, and they are unable to attend. However, Gary Doernhoefer, Vice President and General

Counsel of Orbitz, LLC, has provided the subcommittee with written testimony on behalf of Orbitz, which I now offer to be included

as part of the record, and without objection, it is so ordered.

[The prepared statement of Gary Doernhoefer follows:]

3

1The federal agencies that so found were the Civil Aeronautics Board, the Department of Justice, the Department of Transportation, and the General Accounting Office.

PREPARED STATEMENT OF GARY R. DOERNHOEFER, VICE PRESIDENT AND GENERAL

COUNSEL, ORBITZ LLC

Online distribution of travel is the Internet’s greatest success story. Travel is the

most successful sector of Internet commerce. The Internet has offered services to

travelers that a great many of them find convenient and informative, and so consumers of travel have given the Internet their highest vote of confidence—they

choose to use it, they like it, and they choose to use it again.

At the same time, we all have to recognize that leading up to the use of the Internet, the automated distribution of travel has long been a sector troubled by insufficient competition, and that has resulted, among other things, in the costs of selling

through many of these systems being unreasonably high. Those costs are paid in

the first instance by the airlines, but are ultimately paid for by consumers as part

of the cost of air travel.

The purpose of Orbitz is to bring new competition to automated distribution: new

price competition, new technology, competition in the quality and content of the information provided, and new customer service competition. We believe that the results to date speak for themselves. We launched just 13 months ago, and since our

launch (and despite our relatively small size)

• price competition has increased (with several of our larger competitors for the

first time engaging in price reductions on the cost of making a booking), • technology and information quality has increased (with at least one of our larger

competitors moving to new search technology), and • customer service at many websites, both online agencies and individual airline

websites, has improved considerably in competitive response to improvements

in customer service first launched by Orbitz.

In short, as a result of new competition from Orbitz, competition has increased,

and competition is doing what it is supposed to do, which is to reduce cost and improve products and services. The consumer is better off for Orbitz having entered

the market, whether or not that consumer actually uses Orbitz.

Let me review each of these arenas of increased competition:

Price Competition

Automated distribution came to air travel two decades before the Internet did. It

came in the form of Computer Reservations Systems (CRSs). These were enormous

mainframe computer systems with terminals placed in travel agencies. Typically a

travel agent was placed under contract by a CRS, that travel agent used only that

one CRS, and there were very few CRSs (there are only four in the world today).

That meant that any airline could only sell through the agents that used a particular CRS by agreeing to pay whatever that CRS decided to charge for each booking made. As every government agency that looked at the issue found,1 that gave

the CRSs the power to price their services at levels far above what would exist in

the case of a competitive market.

Furthermore, what were excessive prices paid for CRS booking fees 15 years ago,

have continued to climb every year since then, despite the fact that computing and

telecommunications costs have declined dramatically over the years.

In 1984, federal rules were put in place to try to limit the monopoly powers of

the CRSs. In some instances, those rules have been somewhat successful, as in limiting the display bias of the CRSs. But the rules have been completely ineffective

with respect to monopoly pricing of CRS services, and so those excessive costs have

been built in to air transportation ever since, and get worse with each passing year.

The coming of the Internet to air travel in the late 1990’s brought hope that this

anti-competitive bottleneck might be opened up, restoring competitive market forces.

It was impossible to launch a new CRS competitor, since they operated under contract to travel agents and all the travel agents were locked up in existing contracts.

But new Internet sites were being launched every day. Users don’t have contracts

with websites—they just use the website if they want to. The hope was that the new

open competition model of the Internet would remedy the long-standing anti-competitive problems of the CRS business.

However, the biggest of the CRSs, Sabre, moved quickly to establish its own dominance of the Internet. It used its unusually large profits at Sabre to build the first

major online agency, Travelocity. Every booking on Travelocity was a booking on

Sabre and imposed the same CRS booking fee that Sabre charged off the Internet.

Other online agencies that came along followed the same model—their bookings

went through a CRS and charged the same CRS booking fee. Thus the Internet beVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00007 Fmt 6633 Sfmt 6621 81955.TXT HCOM1 PsN: HCOM1
4

came a branch office of the CRS oligopoly, rather than a competitive alternative to

it. And the hope of the Internet acting as a new source of badly needed price competition was dashed.

That is where Orbitz came in. Orbitz was determined that the Internet could provide price competition, and Orbitz has done so, despite the fact that Orbitz also uses

a CRS to make each booking.

Orbitz offers every airline two options;

• It can pay the standard CRS booking fee, and make available to Orbitz only the

fares it makes available to all other websites and CRSs, in which case Orbitz

will give it no-bias display of its schedules and services and will book its tickets,

or

• It can get a rebate equal to about one-third of its booking fee, in return for an

agreement that any fare the airline chooses to sell to the general public through

any other outlet, it will also make available to Orbitz. If it accepts this latter

proposition, it can put that same fare anywhere else it wants—Orbitz expressly

does not limit what that airline may do with that fare anywhere else, because

this is an expressly non-exclusive arrangement. And the airline also gets nonbiased display and booking capability. This lower priced option is has been chosen not only by the 5 airlines who have invested in Orbitz, but by 37 other airlines as well.

That is the basic offer to encourage price competition: pay us the standard

amount and give us only the standard fares to sell, or give us a few more fares to

sell and we will give you a discount on the price of having your tickets sold by us.

That is exactly what happens in any competitive distribution market. We have not

previously had price competition in air travel distribution, so some of our competitors neither recognize it nor welcome it. A few of them would like you to help them

get government to prohibit price competition in the distribution of air travel. But

that would not be in the interest of competition or of consumers.

The results speak for themselves. The largest online agencies, Travelocity and

Expedia, caterwauled for months, alleging that Orbitz had exclusive rights to

webfares, or that we didn’t, but the airlines individually refused to make webfares

available to them. What was really going on was that these largest websites wanted

to get the webfares without engaging in the price-cutting competition to get them.

When government did not come to their rescue by requiring the airlines to have

these websites sell their webfares without regard to what the websites charged for

the selling of those fares, the websites did what any business would do, which is

engaged in price competition. They made offers to airlines to charge less for selling

tickets through their website in return for availability of webfares, and the airlines

individually began accepting those deals. Travelocity and Expedia now have

webfares and advertise that fact. But they got them by finally engaging in normal

price competition.

Let there be no doubt or mistake. Orbitz’ competitors are getting the websfares

now that they have begun to compete for them. Statistics that Orbitz uses to track

whether it can still substantiate the marketing claim of ‘‘the most low fares’’ shows

the unmistakable trend toward common fare offerings by all of the major online

travel agents. Expedia clearly leads Travelocity in this competitive battle, and their

recent marketing proudly proclaims their access to webfares. But the point is the

same. Our competitors allowed us an advantage in having better fares for about six

months while they complained to Congress and the regulators. Then they began to

do what they should—compete. The fact is that the complaints about Orbitz we have

heard for nearly two years simply are not being proven by the online travel marketplace. Today it is increasingly apparent that the complaints are nothing more than

the efforts of competitors who dominated a market to hold on to the past. Granting

them their desires will unquestionably, immediately and perhaps irrevocably harm

consumers and raise airlines’ costs at the worst possible time.

Now the question is being replayed by the CRSs. They are caterwauling that

Orbitz has exclusive fares, or that we do not but airlines are individually refusing

to make webfares available to the CRSs. What is really going on is that the largest

CRSs want to get the webfares without engaging in price competition to get them.

The question again is whether you will call for government to require airlines to

buy the distribution services of the CRSs without regard to what the CRSs charge

for that service. If you do, you would be ending any hope of price competition in

the automated distribution of air travel. You would be granting a government-protected monopoly pricing power to the CRSs.

When government requires party A to buy party B’s service, without regard to the

price party B chooses to charge, party B may now price with impunity. Why should

that excessive cost be built into the price of air travel? What public purpose could

5

that possibly serve? Wouldn’t that, in this case, serve the interests of the largest

CRSs at the expense of the travelling public?

A few more points need to be made here.

First, Orbitz did not invent webfares. They were invented long before Orbitz was

even conceived. They came about because the CRSs had raised their booking fees

so high, that the cost of selling tickets through a travel agent using a CRS became

so high, that airlines could no longer afford to sell their lowest fares through that

increasingly expensive channel. When the airlines developed their own individual

airline websites, and found that those websites were by far the cheapest way to sell

a ticket, they began putting their lowest fares only on their own website. And those

fares became known as webfares. What Orbitz has done is take those webfares that

were only available on the airline’s own website, and made them more widely available by putting them also on Orbitz. And what the price competition brought by

Orbitz has done is to also take those webfares and, by pushing Travelocity and

Expedia to engage in price competition, made those webfares even more widely

available by putting many of them on Travelocity and Expedia. And if competition

is allowed to continue to work, we expect that the CRSs will sooner or later start

to engage in price competition as well, and those webfares will show up on the CRSs

also.

So webfares are spreading. They are becoming more and more widely available.

But there is also the benefit of spreading price competition. It is a double benefit

for consumers.

Second, not only are airlines and consumers being harmed by excessive CRS booking fees, but so are travel agents. The cost of selling through a travel agent went

up over the past decade not because travel agents charged airlines more for their

services, but because CRSs kept charging airlines more for selling through a travel

agent. The travel agent was priced out of selling the lowest airline fares, not because of any cost imposed by the travel agent, but because of costs imposed by the

CRSs, decisions over which travel agents had no control. To the extent travel agents

have been harmed by the inability to sell the lowest fares through the CRS that

has them under contract, that travel agent is the collateral damage of the CRSs

having been allowed to excessively price their service for so many years. Travel

agents would benefit from competitive pressure on CRSs to more reasonably price

their services, because that would make travel agents a more price-competitive way

to sell airline tickets.

The high CRS booking fees that have burdened airlines and their customers for

years have now become a major problem for travel agents as well. Agents are being

priced out of selling the lowest airline fares by costs that are decided by somebody

else and are paid by somebody else to somebody else.

Third, Orbitz has in fact not only offered to reduce the costs of distribution as described above, but has also offered further cost reductions well into the future.

Orbitz has agreed to a specified schedule of fees that are reduced every year for

many years into the future. With CRSs the airlines have seen their costs going up

every year. With Orbitz they see their costs going down every year. In addition,

Orbitz has offered every airline the option of using new technology being developed

by Orbitz to remove not only the search from the CRS (which Orbitz has already

done), but also the booking itself. This would eliminate the CRS booking fee, rather

than merely reduce it. Thus airlines can see substantially greater cost savings in

the future.

And fourth, the importance of the CRS booking fee is easy to underestimate, and

it is important not to. A typical CRS booking fee today is about $4.30 per segment.

So for a single connection each way, round trip itinerary, the booking fee would be

over $17. It doesn’t sound like much. But that equates to over $2 billion per year

for US airlines, and ultimately for their customers who pay for that in their ticket

prices. Distribution costs are the third biggest cost category airlines have, after only

labor and fuel. And that is in the context of a US airline industry that lost $7.7

billion last year, an all-time record worst year by far. So far this year airline losses

have been equally disastrous. There is no question that the airlines have a vital interest in seeing price competition come to distribution costs.

Two numbers are particularly revealing: in the first quarter of this year, US airlines had an operating profit margin of negative 14%. Sabre, the largest CRS, had

an operating profit margin of positive 26%, extraordinary for any industry, let alone

one that is presumably suffering the consequences of post-9/11 downturn in the

economy in general and travel in particular.

Technology and Information Quality Competition

The CRS’s were built on technology that was cutting edge technology in its day.

Unfortunately, that day was in the 1960’s and 70’s. CRSs are built on mainframe

6

computing technology, and built around programming languages that few even

know anymore. One of the characteristics of a monopoly is that it stifles innovation.

CRSs have added features to their old platforms, but at a time when most of the

world has moved from mainframes to server-based computing, the CRSs are the last

bastion of the old mainframes.

Orbitz introduced to travel distribution the use of modern server-based technology

to do searches. No online agency had done that before. It brought major new benefits to consumers in the form of improved and expanded information, and it substantially lowered the costs of building and operating the heart of the system.

The old mainframes were limited in the size of the search they could do in response to a customers request. The Orbitz search is unlimited. The websites that

used CRS technology for their searches typically returned only 9 or 12 options for

the consumer to choose from. Orbitz returns hundreds of options to choose from, and

provides a handy matrix by which the consumer can readily organize those options

by airline, by lowest fare, by elapsed time, and so on. The consumer on Orbitz gets

more information and gets it in a more readily understandable and useable form—

and that is good for competition in and of itself.

The positive consumer reaction to the Orbitz offer of more and better information

produced what it should have produced, which is competitive pressure on others to

improve their offerings. Expedia, for example, after Orbitz launched, took its search

function off the old CRS mainframe and put it on modern servers. Furthermore, it

borrowed the matrix idea in a somewhat simpler version. Travelocity has also said

it intends to move off the mainframes, but has yet to do so.

This is technological competition doing exactly what it should do—pushing everybody to get better. Not only are Orbitz customers better off because Orbitz entered

this market, but so are Expedia’s customers.

However, while the technological innovations of Orbitz now look like obvious improvements, at the time they were considered very risky. No one had ever attempted

to operate a CRS or an online agency using anything other than mainframe technology. Some predicted that anything other than mainframes would fail. In this environment, the only investors willing to take the risk of investing in Orbitz were

airlines. They had both the knowledge of reservations systems to be able to evaluate

the technological risk involved, and their vital interest as consumers of distribution

services in increased competition. The combination propelled them to be willing investors when no one else was.

This is exactly the kind of situation the Department of Justice and the Federal

Trade Commission had in mind when they stated, in their guidelines for business

ventures that are collaborations of competitors, that such collaborations by competitors can be pro-competitive. In cases where it takes a collaboration of competitors

to create a new competitor in a field sorely lacking in competition, that can be a

very positive development both for competition and for consumers. That is certainly

the case with Orbitz.

Orbitz, however, has no interest in remaining a company with only airline investors. We need to expand our pool of investors, and that means going outside the

world of airlines to find additional investors. We have filed a registration with the

SEC for a public offering. It is our intent to make that public offering, and bring

in public investors and all the obligations that entails, as soon as market conditions

permit.

One other innovation we have brought to information quality, which unfortunately has not been imitated by our competitors, is our no-bias displays. The typical

practice of the largest online agencies is that they sell—or perhaps short-term rent

would be more accurate—to airlines a commitment ‘‘to swing market share’’ to one

particular airline at the expense of the others. What that means in practice is that

a large online agency commits to a particular airline that it will get more consumers

to buy that airline’s tickets than would normally be the case, in return for extra

payment from that airline. Orbitz, by contrast, has barred itself by contract from

doing that. The Orbitz displays are strictly zero-bias. Our strategy is to present to

consumers the most options, in the clearest format, with no bias among any carriers

(and we offer the schedules and fares of over 450 airlines). This is an especially important benefit for small and low-fare airlines such as National Airlines and Midwest Express; as the DOT Inspector General has recognized, ‘‘their fares alone will

define where they are featured in the Orbitz display.’’

On Orbitz any airline will get exactly the same display advantages as any other—

no better and no worse. And they don’t have to pay extra not to be biased against.

And any consumer will get thorough and unbiased information, without efforts to

push them to one airline or another. We believe that this approach offers a better

deal both to airlines and to consumers.

7

Customer Service Competition

Our view was that online agency websites before Orbitz offered lots of schedules

and lots of fares, but not much in the way of service after the consumer bought a

ticket. We decided that was an area where consumers wanted more and we could

deliver more. We built a series of features we call Customer Care, designed to provide consumers that follow-on service that was so lacking. When you book a ticket

on Orbitz, you have the option of signing up for follow-up information about your

flights. Orbitz will sent to you electronically continuous update information about

your flight: a delay, a change of gates, a weather problem, congestion on the road

to the airport, a delayed connecting flight, a local problem with air traffic control

delays, alternative flights or hubs you might use to solve the problem, and a great

deal more.

We find that many of our customers love this service. They tell us they often learn

of problems from Orbitz before the airline informs them of those problems.

Again, competition did what it was supposed to do. Our competitors discovered

that our customers loved this service, and they began working on up-grading their

post-booking service as well. As a result, everybody has gotten better. In fact, many

of the individual airline websites have significantly improved the follow-on service

they provide. Competition works.

The Subcommittee

The Subcommittee needs to recognize that Orbitz is an issue not because it has

reduced competition, but because it has increased it. And in particular, it has increased competition in an arena that has not been accustomed to price competition

in particular in many years. The largest CRSs, Sabre in particular, are having a

difficult time adjusting to the fact that they, like other businesses in America, are

going to have to operate in a competitive marketplace. This is a new development

for them, and some of them are not adjusting well.

Orbitz is not the cause of an anti-competitive situation, it is part of the remedy

to an anti-competitive situation that has been allowed to perpetuate itself far too

long. Orbitz is part of the process of the competitive marketplace returning to an

arena from which competitive forces have long been excluded.

Some in their effort to persuade government to block new competition have alleged that Orbitz has such advantages that it will sweep all before it and thus ultimately reduce competition. That argument is as silly as it is self-serving.

Most fundamentally, Orbitz has no advantage that others cannot duplicate if they

choose to.

• Orbitz got access to webfares, but only because it was willing to engage in reduction of booking costs to get those fares. To the extent others have been willing

to do so (particularly Expedia, and to a lesser extent Travelocity) they have gotten webfares as well. CRSs have thus far not been willing to compete on the

basis of the booking fees they charge. But it is clear that if they were willing

to do so, they could get access to webfares as well. So far they would rather

preserve their high booking fees. It is their choice.

• Orbitz has better search technology, performed by modern and far less expensive

computers. The Orbitz approach of using the Internet and modern server-based

computers is an approach with far lower costs of competitive entry than was

the case with CRS technology, in which new entry was fundamentally impossible and never occurred. Orbitz has opened up the possibility of others entering

this marketplace by demonstrating that new technology offers significantly

lower barriers to entry. Any competitor could make the same upgrade in technology and enjoy not only better performance, but lower operating costs. It is

their choice.

• Orbitz pushed the envelope in follow-on service to consumers, but others can do

that as well, and some have. It is their choice.

• Orbitz has offered airlines commitments of further cost reductions going into the

future, and has offered the option of making most of their bookings without use

of the CRS. Any other competitor can offer that as well; they only have to make

the technology investment to make those advances possible. It is their choice.

• Orbitz offers consumers a no-bias display, with no pressure or influence on the

consumer to buy one airline over another. Orbitz loses a potential revenue

source by adopting this approach, but in return it gains some customers who

prefer the no-bias approach. Any other competitor can adopt the Orbitz no-bias

approach as well, if they are willing to give up the extra revenues that come

from selling bias. It is their choice.

• Where we are today is that CRSs sell about 70% of all airline tickets by dollar

volume. Orbitz sells less than 2%.

8

• Orbitz launched in June, 2001, and quickly became the third largest online agency, after Travelocity and Expedia. One year later Orbitz’s relative position to

those two competitors is virtually unchanged. Among the three, Orbitz had

slightly less than a third of that market a year ago, and that is what it has

today. There is no trend line of Orbitz gobbling up all before it.

The Internet share of all air travel sold is growing, and is now at about 15% by

value. But over half of that is individual airline websites, and those are growing

faster than the online agency segment, including Orbitz. Following these numbers

through, that means that Orbitz has less than 2 percent of the total distribution

of airline tickets in the U.S. Hardly the dominant position that our critics have proclaimed.

Most basically, if, in some unforeseen and unlikely future, Orbitz did start eliminating competition, we have federal agencies with more than sufficient powers

under the anti-trust laws and aviation statutes to step in and stop it. We do not

need to stop a new competitor today, risking the elimination of clear consumer benefits, because someday, in somebody’s fevered imagination, Orbitz might become so

successful as to start eliminating competition itself.

In short, we do not engage in this country in anti-trust action based on future

speculation. We act in response to evidence of an actual problem, not an imagined

problem.

As the Department of Transportation recently concluded, ‘‘. . . government intervention in the marketplace should be designed to correct a failure of market forces,

not to replace or pre-empt them in ways that could potentially stifle competition.’’

Federal and state regulators who are charged with enforcing the antitrust laws

have reviewed Orbitz extensively, spanning more than two years. And despite this

extensive review, nothing has come to light that has led any regulator to seek

changes to the Orbitz business model, agreements or structures. In contrast, the

most definitive conclusions the Department of Transportation has noted in its multiple reviews is that Orbitz entry has led to material pro-competitive advantages for

consumers and the airlines.

In April, 2000, long before Orbitz launched, Orbitz went to the Department of

Justice and suggested that they review our agreements, business plan, and the like.

We provided to Justice all our agreements, contracts, and other relevant documents.

Justice has reviewed our materials and continues to monitor our actual performance. In addition, they have sought information from airlines and from our competitors. If at any time before our launch or since they had concluded that our approach,

or any aspect of our arrangements, was anti-competitive, they had full powers under

the anti-trust laws to move to stop us or to force us to modify our approach. They

have never done so.

Similarly, at approximately the same time, we made the same materials available

to the Department of Transportation and to the Inspector General of the DOT. Both

have thoroughly reviewed our agreements, contracts, business plans, and the like,

and have sought information from airlines and our competitors. DOT concluded before our launch that there was no basis for using their authority to either prevent

us from launching or to direct us to modify any aspect of our approach. They in fact

found that on balance we offered both pro-competitive and pro-consumer effects.

Like Justice, they have continued to monitor our actual performance. DOT recently

issued a report on that monitoring and found no basis for changing their original

view. It is clear that if they had found an anti-competitive problem, they have both

the legal authority and the will to act to prevent it. But they did not.

Orbitz has been thoroughly scrutinized by both Justice and DOT, and continues

to be. We have passed every test to date. This Subcommittee, if it wishes a careful

review of Orbitz, need do nothing. That review has been underway for years and

continues, despite the fact that it has found no anti-competitive problems.

Those agencies should be allowed to continue and complete their work in a thorough and balanced way. No public interest is served by one-sided calls for thorough

scrutiny of Orbitz, and not of the CRS problem.

Automated distribution of air travel has long-standing problems with respect to

adequate competition. We need to work toward a restoration of competitive market

forces in this arena. Reactionary calls to artificially preserve an inadequately competitive status quo do not serve the public interest and in fact work against both

competition and the consumer.

Mr. STEARNS. I want to also add that in a Washington Post article on June 19, I was quoted as saying that I intended to hold this

hearing on this subject prior to the August recess.

9

I attempted to accommodate some folks on this, and I was willing

to delay this hearing, but it did not work out. So we are proceeding

with our witnesses, and I want to thank them, and I look forward,

of course, to their testimony.

[The prepared statement of Hon. Cliff Stearns follows:]

PREPARED STATEMENT OF HON. CLIFF STEARNS, CHAIRMAN, SUBCOMMITTEE ON

COMMERCE, TRADE, AND CONSUMER PROTECTION

Good morning. I would like to welcome you all to this oversight hearing of the

subcommittee on Commerce, Trade and Consumer Protection entitled: ‘‘Are all Online Travel Sites Good for the Consumer: An Examination of Supplier-Owned Online

Travel Sites.’’ I would like to especially thank our witnesses on behalf of the Committee for their appearance and testimony.

Notwithstanding the hyper-enthusiasm for all things Internet and electronic commerce of the recent past, the fact remains that the Internet as an efficient, ubiquitous communications tool has substantially transformed, in fundamental ways,

commerce as we have known it. Electronic commerce traversing the communications

network that is the Internet is real, substantial and rapidly becoming a key component of our economy. The hyper-predictions of not so long ago that e-commerce will

reach $3 to 4 trillion dollars by 2003 may not have come true, but by most estimates, the value of business-to-business commercial transactions that transpire online is well over $1 trillion today. More significantly, the rate of growth of such business-to-business transactions is increasing unabated and it is far in excess of the

growth rate for offline commerce.

Business-to-consumer e-commerce may also have not meet the glorious predictions

of the pundits who rained during the .com bubble, but the fact remains that it has

grown substantially and it continues to grow at rates unmatched by offline commerce. One of the more stellar examples of business-to-consumer e-commerce growth

is the online travel business. For example, in just over three years, 15% of all airline

tickets are now being sold online and the growth rate for such transactions is still

accelerating. More significantly, increasingly consumers are seeking and receiving

more advanced travel services through online travel sites, such as arranging multicity or even country trips involving a myriad of reservations for air travel, car and

hotel reservations and tours.

During the .com bubble it seemed that any and all business models were tried,

as investors, in their euphoric state vis-a`-vis ‘‘anything Internet’’ had the penchant

to welcome and accept them all. As the dust settled and we learned that while selling books online made sense, selling groceries didn’t, a ‘‘sort’’ of new business model

has gained in appeal among dominant suppliers in certain industries. That ‘‘sort’’

of new business model calls for the dominant firms within an industry to collectively

create an online distribution network for their goods and services. In practice this

business model has manifested itself in a number of supplier-owned online distribution joint-ventures, where the participating companies tend to be the top five or six

in the industry. These supplier-owned online distribution joint-ventures are now

present across a number industries, including the air travel, lodging, cosmetics,

music, and foreign currency exchange.

There is no question that such supplier-owned online distribution systems engender economic efficiencies and consumer benefits. At the same time, there is also no

question that any time competitors come together in collaborative efforts, such as

these joint-ventures, there exits the risk for collusive activity that may impede commerce and harm consumers. This hearing is meant to create an educational forum

to examine both the benefits and possible risks that supplier-owned online distribution systems hold for the American consumer. As examining supplier-owned online

distribution systems across the multitude of differing industries within which they

appear would have been a tall order for one hearing. Therefore, this hearing will

focus only on online joint-ventures in the air travel and lodging industries.

We have before us great expert witnesses on the issue. We had hoped to have

Orbitz and at least one of the five major airlines that own it to speak to Orbitz’s

business model directly. Unfortunately, due scheduling conflicts they were unable

to attend. However, Mr. Gary Doernhoefer, Vice President and General Counsel of

Orbitz, L.L.C. has provided the subcommittee with written testimony on behalf of

Orbitz, which I now offer to be included as part of the record.

I thank the witnesses and look forward to their testimony.

10

Mr. STEARNS. At this point, the ranking member is on his way,

and so I will ask the vice chairman of the subcommittee, the distinguished member from Georgia, Nathan Deal.

Mr. DEAL. Thank you, Mr. Chairman. There is no admonition to

trial lawyers that says that if the facts are on your side, argue the

facts. If the law is on your side, argue the law. If neither the facts

nor the law are on your side, pound on the table.

I find it highly regrettable that this hearing has been intentionally staged to provide a forum for parties who simply want to

pound on the table, since they have neither the facts nor the law

on their side.

It is even more regrettable that the company upon whom much

of this hearing is focused, Orbitz, was not afforded the same respect and common courtesy with regard to notice and opportunity

to testify as those who will testify against it here today.

It is not only regrettable in my opinion, but inexcusable, that

those of us on the subcommittee who believe that all parties should

be treated fairly and equally have likewise been regarded as second-class committee members by the staff and by some in leadership positions, and who apparently don’t want anyone to interfere

with this public lynching of Orbitz in absentia.

Since the pounding on the table will soon begin, let me first set

forth some facts. Automated distribution of airline travel through

large mainframe computers began two decades before the Internet.

These are known as computer reservation systems, CRSs, and

there are only four of them in the world today. CRSs charge airlines booking fees that average over $17 for a single connection

round-trip. These booking fees cost U.S. airlines over $2 billion per year. The

largest CRS is Sabre, which owns Travelocity, and today CRSs sell

about 70 percent of all airline tickets, whereas Orbitz sells less

than 2 percent.

CRSs were considered so monopolistic that in 1984 Federal rules

were created to attempt to limit their powers. Even so, the booking

fees charged by CRSs have continued to rise every year over the

past 15 years, and since 1999 they have increased 4 to 7 percent

every year, despite the falling costs of the information processing

and computer systems.

And 75 percent of Sabre’s revenues are from booking fees, which

have increased an average of 5 percent per year for the past 10

years. Thirteen months ago, five major airlines created Orbitz in

order to provide customers with better service and cheaper travel

costs.

Last year U.S. airlines lost $7.7 billion, and are carrying debt

burdens of $110 billion, and for the first quarter of this year have

an operating profit margin of negative 14 percent.

Sabre, the largest CRS, and the parent company of Travelocity,

had an operating net profit margin of positive 26 percent. Orbitz

has been success by applying advance technology and making its

products user friendly for those who want to book their flights online.

Travelocity, through its old CRS mainframes, are still using

those old mainframes, but wants Congress to protect it. How can

this subcommittee, which is charged with consumer protection, conVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6602 81955.TXT HCOM1 PsN: HCOM1
11

demn those who have been innovative, and attempt to reward old

monopolistic entities who refuse to modernize in an effort to try to

eliminate their competition through this committee means.

Just as the facts are not on the side of those who criticize Orbitz,

neither is the law. Before Orbitz was launched, it went to the Justice Department and asked them to review their business plan and

agreements, and DOJ did so, and had they thought that Orbitz was

anti-competitive, they had the power to stop them, but they have

not done so.

The Department of Transportation and the Inspector General of

the DOT have also monitored Orbitz and have likewise found their

practices to be not anti-competitive.

The recently released DOT report to Congress on Orbitz that was

engineered by some of the witnesses here today don’t find any violations either, and contain this statement, and I quote:

‘‘Government intervention in the market place should be designed to correct the failure of market forces, and not to replace or

preempt them in ways that could potentially stifle innovation.’’

That is good advice for this subcommittee.

Those are the facts and the law, and no amount of pounding on

the table is going to change them. By taking financial risks and by

employing innovative technology, Orbitz has lowered the cost of air

travel, has made booking of flights over the Internet user friendly,

and through the power of competition has rattled the cages of some

of this monopolistic opponents.

That is what this subcommittee should encourage and not vilify.

Thank you, Mr. Chairman.

Mr. STEARNS. I thank my colleague, and I think your robust testimony will provide advocacy for anyone who could not make it in

a very, very confident and able way. The gentleman from Nebraska, Mr. Terry.

Mr. TERRY. Thank you, Mr. Chairman. I want to thank you for

holding this hearing. My friend from Georgia is a trial lawyer, and

the adage is that if the facts are not on your side, argue the law;

and if the law is not on your side, settle and get out of the case

as fast as possible.

Otherwise, the other part of the adage is attack their credibility,

and I hope that is not what we are here to do today as may be suggested. But I am one of those people who signed the letter asking

for this hearing, because I am worried about what appears to be

an attempt for on-line anti-competitive behavior.

And I will submit my full statement for the record, only highlight

the two points that concern me, and why I want to have this level

of discussion here today. Any time you have an entity, when there

is vertical integration, and you have the five major airlines that

own this, the first thought can only be that they want to control

every facet of booking airlines.

Fortunately, as Mr. Deal has pointed out in his statement, there

is so much competition on-line anymore that it may just be commercially impossible to dominate at the level that probably they intended when they formed this.

The other issue that I think probably gives you credibility where

you can argue facts, and can argue law in a case like this is the

most favored nations clause that is in here that gives those people

12

that participate, started up Orbitz, the self-serving lowest fares

that others can’t get.

So I want to talk about that. Now, fortunately, I think the fact

that they haven’t been able to dominate the market probably

speaks well for the market. The fact that they intend to go out for

an IPO certainly lessens my concerns of the vertical integration,

that it is the five major airlines that own this entity of Orbitz.

Mr. Chairman, I have a more complete statement that I wish to

enter into the record, but I am anxious to hear from the witnesses,

and I know that their time is short as well. So I yield back.

[The prepared statement of Hon. Lee Terry follows:]

PREPARED STATEMENT OF HON. LEE TERRY, A REPRESENTATIVE IN CONGRESS FROM

THE STATE OF NEBRASKA

Thank you, Mr. Chairman, and I thank you for holding this hearing on an issue

of growing concern, not only in the airline industry, but other sectors as well. As

I noted in a letter to you May 16th requesting this hearing, brick-and-mortar competitors in any industry joining forces for an e-commerce venture raises serious concerns. We have seen this trend extend past online travel and into the music and

hospitality industries, and I commend you for holding this hearing to ensure members of your subcommittee are well informed on the issues surrounding supplierowned online ventures.

In April, I joined more than 20 of my colleagues in a letter to Deputy Assistant

Attorney General Hugh Pate, requesting the Justice Department fully investigate

the practices of Orbitz, a supplier-owned online travel company. My concerns in this

regard were twofold. First, the owners of Orbitz are the five largest airline companies: United, American, Northwest, Delta, and Continental. Moreover, representatives of these companies sit on the board of directors of Orbitz. These facts raise

obvious concerns as to the completeness of information provided to consumers about

competing airlines when surfing Orbitz.com. Is it coincidental these five airlines represent lowest fares on Orbitz searches more than 70% of the time, whereas other

online travel sites return lowest fares for these same five airlines little more than

60% of the time? I understand Orbitz soon will be offering an IPO, which will diminish some of my concerns of it being owned by the five major carriers, but will do

nothing to ease my apprehensions it is still being operated by the five largest air

carriers.

My second concern is the so-called ‘‘most-favored nation’’ clause mandated by

Orbitz for participating airlines. MFN requires participating airlines to produce lowest fares and make them available to Orbitz at all times. This clause provides a

competitive advantage to Orbitz, and consequently its five owners. Worst of all, this

clause makes consumers dependent on the company, rather than the company dependent on consumers, which is the essence of a free market and open competition.

One question I would like answered at this hearing, Mr. Chairman, is why the MFN

clause is even necessary? It would seem to me that a company engaging in ethical

business practices with a solid business plan could gain success through innovation

and capturing the attention of consumers, not artificially manufacturing its own

market by trapping its competitors. Orbitz’s own general counsel, Gary Doernhoefer,

admitted in a July 12th CNET News interview that Orbitz’s MFN clause is not necessary for the company to be profitable. Why not, then, let the market dictate survivability rather than contractual clauses?

I want to be clear that I wholeheartedly endorse increased competition. I also applaud Orbitz, Expedia, Travelocity, and a variety of other online ventures for using

technology to expand our economy, and I’m pleased other sectors are doing the

same. However, it is the responsibility of this subcommittee in general and a matter

of specific concern to me that markets expand fairly; that consumer, not corporate,

behavior drives profitably; and that above all, competition is preserved. I look forward to the testimony, and I yield back.

Mr. STEARNS. I thank the gentleman, and your complete statement will be part of the record, and the distinguished ranking

member of the committee, Mr. Towns, is recognized.

Mr. TOWNS. Thank you very much, Mr. Chairman. Let me begin

by thanking you for holding this hearing. I strongly believe that

13

companies using the Internet to reach more consumers and to move

their goods and services at inexpensive costs to consumers—and I

have consistently voted with other members of this body to keep

the Internet free from sales taxes and other regulations would stifle the growth of on-line commerce.

I think by and large we have accomplished that we set out to do,

and that is to maintain competition in the on-line marketplace.

Often times I think there is more competition on-line than off-line.

But I most admit to you, Mr. Chairman, that I have concerns

that certain aspects of these supplier owned business models, the

new controversy surrounds Orbitz, and which the carriers have

placed a significant investment.

And while I have no problem with the airlines seeking to make

more money, because that would preclude them from having to borrow money from the government, I do have some concerns regarding the competitive environment, or the perception of anti-competitive environment that exists on on-line travel sites.

Earlier this year, I signed on to a letter with my colleagues, Mr.

Boucher, and Mr. Grucci, which asked the Justice Department to

continue to monitor Orbitz and other on-line travel sites which may

be using unseemly practices to squash competition.

It is my understanding that the airlines have a compelling story

to tell, and I wish, I wish, that they were here today to discuss

their side with us at this hearing. I say again, I regret that they

are not here. So I will be asking questions of those assembled this

morning, because it is my priority to ensure that the Internet continues to be a competitive marketplace, which benefits not only

companies, but consumers as well.

Let me add, Mr. Chairman, that I am somewhat confused on why

Orbitz is not here on their own accord today. I feel that as always

that in this committee we have tried to put together a fair and balanced hearing, and don’t understand why we have zero representation from Orbitz or the carriers.

However, I look forward to hearing the testimony before us

today, Mr. Chairman, and hope to get more information on this

complicated subject, and I yield back, because this is the most bipartisan committee in the U.S. Congress, and I want to let you

know that is directly affecting upon your leadership. Thank you.

Mr. STEARNS. I thank our distinguished colleague. We have two

members who do not serve on the subcommittee, and both of these

individuals have approached me, and wish to have an opening

statement, or to have an opportunity to comment.

Now, this cannot be done without unanimous consent of this

committee. So if there is any objection, you can voice it now. The

gentleman from Georgia.

Mr. DEAL. Mr. Chairman, reserving the right to object, and I will

not object, certainly Mr. Boucher is an esteemed member of the

overall committee, and I am well aware of his position, having also

seen the letter that he and others have circulated back in April

asking the Justice Department to continue to monitor Orbitz.

And I have no objection to Mr. Grucci also making a statement.

I would have, of course, much preferred that they take the witness

table so that they would be subject to being asked questions about

14

their positions, which in opening statements first of all don’t afford

us that opportunity for that dialog and interchange.

And of course by the virtue of their positioning in their opening

statements, they in effect have the last word. But I will not object,

and I welcome both members to this committee.

Mr. STEARNS. I thank the gentleman, and by unanimous consent,

both of them will be able to offer their opening statement, and at

this point we will take Mr. Boucher, who is recognized.

Mr. BOUCHER. Well, thank you very much, Mr. Chairman. I appreciate the opportunity to participate in the hearing today, and I

want to thank the Chairman for accommodating my presence here,

as well as the presence of another member who also does not serve

on the subcommittee.

I have a very strong interest in the matter that will be discussed

today, and I want to comment you, mr. Chairman, for focusing the

attention of the subcommittee on how consumers are affected by

practices of supplier-owned on-line travel sites.

There is a growing and in my view disturbing trend of companies

in a given industry banding together to create a website for distributing their products or services, and then favoring that website

with information or other benefits not shared with other websites

that compete with the industry owned site.

The denial of this information or other benefit by those exclusively in control of it to the web-based competitors of the industryowned website, directly hinders competition in electronic commerce,

by injuring the businesses of existing on-line competitors, and by

discouraging new entrants into the market.

Consumers are hurt as the number of websites offering products

or services to them are restricted. Today, we examine this practice

as it exists in the airline reservations market. I would point out to

the members that troubling examples of the same practice are also

found elsewhere.

In the music industry, the five major record labels have created

two websites for the delivery of their music inventories across the

Internet. They have denied to the on-line competitors of those

websites comparable licenses for the significant foreclosure of Internet-based competition and music delivery.

And incidentally, I have introduced legislation that is designed

to address that practice by requiring non-discriminatory licensing

in that instance. Elsewhere, we observe the creation of websites

jointly owned by other suppliers, from a hotel distribution system

that is owned by five major hotel groups, to Gloss.com, that is

owned by three leading beauty products manufacturers.

To MovieLink, that is owned by the six major motion picture studios; to FX-All, for currency exchange, and that is owned by 17

leading international financial institutions. Now, while I am not

aware of the particular practices of these supplier-owned ventures,

I think that they may deserve this committee’s inquiry and attention at some future time.

Their creation clearly marks a trend of suppliers in a broad

range of industries participating in the creation of websites that

hold the potential of injuring commerce and adversely affecting

consumers, and I think they bear watching.

15

I am familiar with the practices of the industry that we are focusing on this morning. Orbitz, jointly owned by the largest air carries, in my view gets an unfair break. The carriers give Orbitz their

best fairs.

These lowest fairs are not available to the non-industry affiliated

websites, Expedia and Travelocity.com. The ability of these independent companies to offer vigorous on-line competition to Orbitz

is injured by this practice.

Consumers of Internet-based travel sales are hurt as a result.

Orbitz gets yet another break. Its contract with its carrier owners

requires that all fares given by any carrier to its own website, or

to a third-party site, such as Expedia or Travelocity, also be given

to Orbitz.

So no carrier can enter into an exclusive promotion with a thirdparty site that would offer exceptional bargains to the public. Some

of the best opportunities for inexpensive travel used to come from

these exclusive promotions. Not anymore.

As my constituents frequently say to me when they are outraged

about an obvious unfairness, there ought to be a law, and in the

off-line world, there is a law. The Department of Transportation

has a rule that airlines owning 5 percent or more of a computer

reservations system must give other computer reservation system

the same low fairs they give to the system they partially own.

A rule like that I think is badly needed to address the problems

in the on-line world, about which we will learn more during the

course of this morning. Mr. Chairman, I thank you for calling the

committee’s attention to what is an obvious problem.

Consumers, I think, will be benefited by the work that your subcommittee is undertaking, and I again thank you for the opportunity to take part in the hearing.

Mr. STEARNS. I thank my colleague. You can tell your constituents to be careful what he asks for when he said there ought to

be a law. Mr. Grucci from New York is recognized.

Mr. GRUCCI. Thank you, Mr. Chairman. And let me thank you

and the ranking member, and the esteemed members of this committee for giving me the opportunity to be here this morning.

I am not a member of this subcommittee, nor am I a member of

the Commerce Committee, but I am a member of the Small Business Committee where we had a similar hearing that dealt with

Orbitz, and airlines, and the issue dealt with the unilateral decision by the airline industries to stop making payments to the travel agents, while continuing to make payments to organizations like

Orbitz, which is owned by the five major airlines.

This issue first came to my attention when a travel agent in my

district, a small businessman, came to my office to explain the

hardships that both on-line and traditional travel agencies were

facing because of the policies of the major airlines.

He gave me examples of policies ranging from the recent elimination of commissions to U.S. travel agencies, to limited access to

air fares. While many of his concerns were diverse in nature, each

one of them shared a common theme; the policies were anti-competitive, anti-consumer, and anti-small business.

One need not look beyond the issue of Orbitz to highlight the

very airline practices my constituents spoke of. Orbitz is a company

16

that was started by the five major airlines; Delta, United, Northwest, American, and Continental.

While the purpose for its creation is of some concern, the greatest

of problems lies within Orbitz’s anti-competitive practices. Please

allow me to review some of these practices with you. First, Orbitz

receives airfares that are not available on any other travel site or

through any other travel agency.

Orbitz refutes this claim by standing behind the technology they

use called ITA. An informal study by the owner of OneTravel.com,

which I would like to submit for the record, Orbitz not only receives better fares than the average travel site, but also the very

technology it claims to receive these fares from. For example, a flight from New York to Dallas costs $255 through ITA, but $249 on Orbitz. Second, Orbitz is clearly biased

in favor of its own airlines. According to a report recently filed with

the Department of Transportation, 71.6 percent of bookings on

Orbitz between July 1, 2001 and February 28, 2002 was for its

owner airlines, known as the big five.

During that same period, 51.3 percent, 61.4 percent, and 62.7

percent were reported big five bookings on OneTravel, Travelocity,

and Expedia, respectively. Third, while the owner airlines of Orbitz

have chosen to eliminate commissions to travel agencies in the

United States, they continue to pay $6.37 to Orbitz for every ticket

purchased.

I may add that the other group of companies that airlines have

chosen to continue to pay commissions to, are travel agencies in

foreign countries. In closing, I might add that it is greatly troubling

that both Orbitz and the airlines are not represented here today.

In a Small Business Committee hearing on this issue on May 2,

the airlines also turned down invitations to testify. Oddly enough,

before Congress gave airlines $15 billion in financial assistance, it

was difficult to leave your office without seeing airline executives

and lobbyists.

Now when their true practices are being highlighted, as travel

agencies are forced to go out of business, these airlines seem to be

hiding. Again, Mr. Chairman, I want to thank you for allowing me

the opportunity to be here, and I would ask that my complete

statement be submitted for the record, as well as the attachments.

Mr. STEARNS. Without objection, it is so ordered.

[The prepared statement and attachment of Hon. Felix J. Grucci

follows:]

PREPARED STATEMENT OF HON. FELIX J. GRUCCI, JR., A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NEW YORK

First, I would like to thank Chairman Stearns for inviting me to today’s hearing

addressing the issue of supplier owned online travel sites. I appreciate the committee’s generosity in allowing me to be here this morning.

This issue first came to my attention when a travel agent in my district—a small

businessman—came to my office to explain the hardships that both on-line and traditional travel agencies were facing because of the policies of the major airlines. He

gave me examples of policies ranging from the recent elimination of commission to

U.S. travel agencies to limited access to airfares.

While many of his concerns were diverse in nature, each one of them shared a

common theme: the policies were anti-competitive, anti-consumer and anti-small

business. I might also add that his concerns were not specific to his company—since

I have been involved in this issue, hundreds of travel agencies have contacted my

office mirroring the very concerns expressed to me by my constituent.

17

One need not look beyond the issue of Orbitz to highlight the very airline practices my constituent spoke of. Orbitz is a company that was started by the five

major airlines—Delta, United, Northwest, American and Continental.

While many would argue that Orbitz was launched in 2001 in order to drive

Expedia and Travelocity out of the market, airlines claim that Orbitz was created

because of the high cost of the travel agency industry. Despite the fact that they

have eliminated commission to U.S. travel agencies, airlines claim that the costs associated with the Computer Reservation Systems—or CRSs—used by travel agencies

are growing too expensive.

Gary Doernhoefer, the Vice President and General Counsel to Orbitz, recently

stated in a Small Business Committee hearing that ‘‘the changes in the industry are

bringing about needed relief to a distribution system that is broken; a system that

for years has boasted leading edge technology—Computer Reservation Systems or

CRSs—deployed in a tragically inefficient, unnecessarily costly structure.’’ He also

made reference to CRS costs later in his testimony, stating, ‘‘as these costs went

up, fares had to go up as well.’’

The great irony of this argument rests in the fact that the airlines created, and

until recently, owned each of the four computer reservation systems. One of the

CRSs, Worldspan, is owned by three of the owners of Orbitz—Delta, American and

Northwest. How can they argue that the CRS’ are charging too much money, when

the airlines are the ones responsible for setting rates for the CRS they own?

While the purpose for its creation is of some concern, the greatest of problems lies

within Orbitz’ anti-competitive practices. Please allow me to review some of these

practices with you:

• First, Orbitz receives airfares that are not available on any other travel site or

through any other travel agency. Orbitz refutes this claim by standing behind

the technology they use called ITA. In an informal study by the owner of

Onetravel.com, which I would like to submit for the record, Orbitz not only receives better fares than the average travel site, but also the very technology it

claims to receive these fares from. For example, a flight from New York to Dallas costs $255 through ITA but $249 on Orbitz.

• Secondly, Orbitz is clearly biased in favor of its owner airlines. According to a report recently filed with the Department of Transportation, 71.6% of bookings on

Orbitz between July 1, 2001 and February 28, 2002 was for its owner airlines—

known as the big five. During that same period, 51.3%, 61.4% and 62.7% were

reported big five bookings on Onetravel, Travelocity and Expedia respectively.

• Third, while the owner airlines of Orbitz have chosen to eliminate commission to

travel agencies in the United States, they continue to pay $6.37 to Orbitz for

every ticket purchased. I may add that the other group of companies that airlines have chosen to continue to pay commission to are travel agencies in foreign countries—at the same time that travel agencies are struggling to survive

in the United States because of commission cuts.

Orbitz has a series of restrictive provisions in its contract with an airline that are

heavily anti-competitive. Orbitz requires the airline to give all fares available

through the airline’s own website to Orbitz. It also requires airlines to give Orbitz

any deal that the airline reaches with other travel sites. Lastly, it requires the airline to provide either marketing support valued at $14 million a year or access to

exclusive fares.

Mr. Chairman, I believe Michael Thomas of Onetravel said it best when he said,

‘‘It is as if GM, Ford and Chrysler decided to form a super-dealership that would

compete head-on with independently owned car dealers, and would withhold certain

automobiles from the independents—the cars the public most desired.’’

In closing, I might add that it is greatly troubling that both Orbitz and the airlines are not represented here today. In a Small Business Committee Hearing on

this issue on May 2, the airlines also turned down invitations to testify. Oddly

enough, before Congress gave airlines $15 billion in financial assistance, it was difficult to leave your office without seeing airline executives and lobbyists. Now, when

their true practices are being highlighted—as travel agencies are forced to go out

of business—these airlines seem to be hiding.

Again, Mr. Chairman, thank you for allowing me to join you here this morning

and I look forward to hearing the testimony of the witnesses and trying to find a

way to eliminate the anti-competitive practices of both the airlines and Orbitz that

are forcing hard working Americans with the travel agency industry—both on-line

and off-line—to look for new jobs.

Thank you.

Mr. STEARNS. The gentlelady from Colorado.

18

Ms. DEGETTE. Thank you, Mr. Chairman. I just have a couple of

thoughts that I would like to share, and I don’t come into this hearing with a preconception about what I think we should do about

the issue, but let me say last night I decided to see what Orbitz

did for myself.

And so I went on to my computer, and I got some prices for

flights from my hometown of Denver to Washington and back, and

I went on some of the other travel sites and got comparable fares.

And I did find with some of the fares that Orbitz was cheaper,

but I also found at the same time that Orbitz did not feature

flights from Frontier Airlines, which is our big competitor in the

Denver-Washington market.

So my question is that while Orbitz may be very helpful for consumers right now, and because of its structure may be able to really help consumers get low airfares, what happens in the long run

in markets like my market, which is a hub for United, if sites like

Orbitz don’t feature some of the startup competitors.

What happens to overall airline ticket prices in the long run. On

the other hand, does the availability of a supplier-owned distribution system like this turn the concept of anti-trust on its head, and

do we really have anti-trust issues with a company like Orbitz,

which is an Internet company, and only one of many Internet companies.

So I guess the question we need to ask is whether this model is

inherently anti-consumer or pro-consumer. Are these businesses

destined to inhibit competition in the long run, or is there some

way they could enhance competition in the long run.

I think that from the consumer standpoint that this is critically

important to answer, because over time given Orbitz’s successful

business model, this is not going to just affect the airline industry,

but all kinds of different industries.

So I look forward to this hearing, and I thank the chairman for

having it, and I yield back the balance of my time.

Mr. STEARNS. I thank the gentlelady. The gentleman from New

Hampshire, Mr. Bass, is recognized.

Mr. BASS. Thank you, Mr. Chairman, and I appreciate you holding the hearing, and as a former member of the Aviation Subcommittee and a licensed pilot myself, and I have been an instrumented pilot now for 32 years, I would like to be back thinking

about aviation issues just for a couple of hours.

We are all aware of the boom and bust cycle of most e-commerce

enterprises over the past few years, but from the beginning travel

planning was among the very limited number of industry sectors

that could be profitable on-line. It could be because it makes sense.

And for better or for worse, instead of calling a travel agent for

airline or hotel directly on the phone, you can now do it yourself,

and we all do that, sometimes directly with airlines, and sometimes

with intermediaries.

It has obvious consumer appeal, and you can check prices, and

it has really made the business of understanding airline travel a

lot easier. But more broadly, I think today’s hearing will be an opportunity to consider the consumer benefits of moving outside proprietary networks into a more open architecture.

19

So this is like Orbitz and TravelWeb represent a shift in the

technology S-curve, but interestingly enough, they are also joint

ventures of the old economy firms, airlines, and hotels.

Nevertheless, there is a certain need for oversight to ensure that

the issues of competitiveness and market power are not abused. As

such, I welcome the FTC’s disclosure requirements for websites

that receive compensation from supplies, and although none of us

spilt many tears for buggy whip manufacturers when the automobile arrived, small travel agents across the Nation are facing a

change in industry model, and their significant power in small

business America.

Nevertheless, I believe it is clear that the market consumers

have not yet spoken on which model they prefer. The bottom line

is that I appreciate this hearing, and I am wondering where the

beef is.

And we will hopefully get both sides of the issue here, and let’s

stick up for the consumer, because I think it is a great opportunity

for consumers to get good deals for travel, while at the same time

maintaining a good strong economy hopefully in the air. Thanks a

lot, Mr. Chairman.

Mr. STEARNS. And I thank the gentleman.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. W.J. ‘‘BILLY’’ TAUZIN, CHAIRMAN, COMMITTEE ON

ENERGY AND COMMERCE

Thank you, Mr. Chairman for calling this hearing. As a former Subcommittee

chair, I spent a great deal of time examining e-commerce issues, particularly those

impacting consumers and the long-term development of e-commerce. Additionally, it

is refreshing to examine a segment of the economy that is growing and flourishing.

Much of the Committee’s time and energy recently has been spent examining failing

industries or collapsing companies. While that is an important function, it is sad

to have to focus on such events. And so, I think this is an important and beneficial

hearing and look forward to the testimony of the witnesses.

The online travel industry has grown by leaps and bounds in a short amount of

time. As one of the largest e-commerce success stories, it highlights the great possibilities of the Internet and e-commerce. Consumers have certainly found cause to

take advantage of the myriad of web sites offered to improve their travel experiences. The Internet practically has turned each and every consumer into his or her

own travel agent, with travel sites offering various business models to meet consumer demand and interest. From the bidding mechanisms of Priceline.com, to web

auctions, to the new independent sites like Expedia and Travelocity, and to the supplier-owned site of Orbitz, we are seeing some refreshing developments. These results are being duplicated throughout the entire travel industry, including the lodging industry. This innovation isn’t stopping with how the travel services are offered

but extends to what is being offered as well. Online travel companies are developing

some of the most creative consumer attentive services imaginable all with the goal

of obtaining consumer loyalty and consumer attention.

However, this portrait is not completely rosy. As consumers continue to use the

Internet for travel purposes and transparency continues to improve, some business

approaches will fail. Furthermore, some traditional services, such as the old role of

the travel agent, may no be longer necessary. It used to be that when a person

wanted to travel to a distant city they called their local travel agent and booked

the best plan for their needs. Such a function may be no longer applicable, forcing

the travel agent of yesterday to adapt to a new role. I believe this is exactly what

travel agents are preparing to do.

Technology advances eliminate old-style jobs all the time. We no longer have

Blacksmiths and candle makers to name a few. This is the traditional debate captured in the children’s tale of Paul Bunyan. We probably ought not try to protect

jobs supplanted by new technologies or failed business models. However, there may

be legitimate concern if such technology advances are coupled with creative relationships that could mask old-time trickery, funny business, or collusion.

20

Supplier-owned distribution systems in the online world within various industries

have generated some heated debate in both the academic and practical worlds. As

a group such sites, which go beyond just the travel industry, raise some interesting

questions. I will admit that it is quite unusual to see the biggest industry players

within an industry—longtime fierce competitors in the off-line world—come together

in one happy family to jointly sell services or products online.

Orbitz and Travelweb hold out the many potentially positive benefits for their

owners such as lowing the operating costs, creating a new avenue for unloading excess supply of travel services or products, creating new relationships with end-consumers, and promoting efficiency. There is legitimate concern when the controllers

of supply also get a major role in distribution. A remaining question is whether the

creation of these sites by the suppliers was done or is operating with malicious intent to block new entrants from getting their foot in the door. This remains the crux

of this debate for which I will reserve judgment. I will say that I would be concerned

if Orbitz and Travelweb are contemplating becoming the new OPEC of the online

travel industry.

Mr. STEARNS. Now I welcome our panel. Mr. Sam Gilliland,

President and Chief Executive Officer of Travelocity.com; Mr.

Bruce Wolff, Chairman, of Travelweb, LLC; Jonathan Zuck, President, Association for Competitive Technologies; Dr. Mark N. Cooper, Research Director, Consumer Federal of America; and Mr.

Paul M. Ruden, Senior Vice President for Legal and Industry Affairs, the American Society of Travel Agents.

I welcome all of you, and we will start with you, Mr. Gilliland,

for your opening statement.

STATEMENTS OF SAM GILLILAND, PRESIDENT AND CHIEF EXECUTIVE OFFICER, TRAVELOCITY.COM; BRUCE WOLFF,

CHAIRMAN, TRAVELWEB, LLC; JONATHAN ZUCK, PRESIDENT, ASSOCIATION FOR COMPETITIVE TECHNOLOGY;

MARK N. COOPER, RESEARCH DIRECTOR, CONSUMER FEDERAL OF AMERICA; AND PAUL M. RUDEN, SENIOR VICE

PRESIDENT FOR LEGAL AND INDUSTRY AFFAIRS, AMERICAN

SOCIETY OF TRAVEL AGENTS

Mr. GILLILAND. Chairman Stearns and Congressman Towns, I

am Sam Gilliland, President and CEO of Travelocity.com, the Nation’s most popular on-line travel site.

I want to thank you for the opportunity to testify. This hearing

is an excellent opportunity for you to begin examining, and I hope

reversing, a dangerous e-commerce trend across a growing number

of industries.

Travelocity, along with many others, has been an outstanding

critic of Orbitz, a joint venture owned by five of the Nation’s largest

airlines, which together account for 80 percent of the Nation’s airlift.

It is very troubling from both an anti-trust and e-commerce perspective when the overwhelming majority of suppliers in an industry band together to coordinate distribution strategies.

Still, Travelocity has never argued that Orbitz should be restricted from entering the on-line travel market. There is certainly

room for other competitors. We have instead focused on certain

anti-competitive features of the Orbitz contract, the so-called most

favored nations and exclusivity provisions.

These clauses, which provide Orbitz’s long term contractual access to the full array of major airlines’ fares and inventory threaten

all independent travel retailers and consumers that we serve.

21

We believe that Orbitz should be required to compete on the merits of its technology, its customer service, and marketing ability,

and not on contractual guarantees that deter airlines from offering

their lowest fares to more consumers.

As Orbitz grows larger, consumers are being denied a choice in

travel agents. They are required to pay increasing service fees on

Orbitz that major independent on-line sites do not currently

charge, and are losing the benefits of airline competition that the

independent websites have fostered.

The on-line travel market is the fastest growing e-commerce category. With the rise of the Internet, independent travel agents are

increasingly using this distribution channel to benefit consumers.

I believe the role played by such independent agents is critical in

maintaining and enhancing effective competition.

The travel sector of e-commerce has tremendous upside potential.

The product that we sell is a virtual one, ideally suited to the

Internet. Travelocity can help people dream about travel, and give

them reliable tools to book their trips.

Even the paper ticket, the last physical product in travel distribution, has largely given way to the increasingly popular e-ticket. At Travelocity, we don’t need to maintain warehouses or take

return shipments.

However, independent travel agents can have the latest technology tools, but it makes little difference without the full array of

fares and inventory to sell. The Orbitz strategy is about choking off

the flow of critical content to independent travel distributors, a

strategy that has a long checkered history in travel distribution,

and one that led to the imposition of rules of fair play in the mid1980’s.

These so-called CRS rules, which have now been updated by the

DOT for 10 years, do not apply to Internet sales, a loophole that

Orbitz exploits every single day. And yet the very same conduct

that the CRS rules restrain, where airline owners use their control

to harm airline competition and consumers, is the exact conduct

that Orbitz is engaging in today.

We believe that the rules should be updated to create regulatory

parity. Orbitz and Orbitz alone has received wave after wave of

web fares from its airline owners, often for discounts across their

entire network of flights.

Our research shows that web fares account for a whopping 60

percent of Orbitz’s total airfare sales, and those fares were generally denied to other travel retailers, to the detriment of consumers.

The data also shows that Orbitz is hardly a friendly site for most

low fare and smaller airlines, which consistently sell a lower percentage of tickets in Orbitz than in the independent sites, a growing threat to their ability to compete.

On June 27, the DOT issued a report to Congress that raised the

concerns about Orbitz, but was essentially inconclusive about what

should be done, deferring instead to DOJ, which continues to pursue its own longstanding investigation.

Of course, consumers in competition are suffering while the agencies delay action. They fail to tackle these problems and it may be

necessary for Congress to act. Now, the remedy is simple.

22

DOT and DOJ should remove the contract provisions that give

Orbitz an unfair advantage and force Orbitz to compete on its own

merits. Mr. Chairman, the rise of the Internet has initiated a true

revolution in the travel industry. It holds the promise of greater efficiency and enhanced competition at all levels.

And as a policy matter and as a legal matter, we do not believe

that suppliers should be able to engage in collective action to withhold information from independent distributors. This is an obstacle

to consumer choice that this committee should strive to remove.

Thank you again for the opportunity to testify, and I look forward to your questions.

[The prepared statement of Sam Gilliland follows:]

PREPARED STATEMENT OF SAM GILLILAND, PRESIDENT AND CHIEF EXECUTIVE

OFFICER, TRAVELOCITY.COM

INTRODUCTION

Chairman Stearns, Ranking Member Towns, I am Sam Gilliland, President and

CEO of Travelocity.com, the nation’s most popular online travel site. I want to

thank you for the opportunity to testify today. This Subcommittee has shown great

leadership on many critical electronic commerce and consumer protection issues,

ranging from privacy to cyber-crime to restraints on digital trade. We at Travelocity

share your commitment to facilitating public policy that will create an online environment that is good for business and good for consumer welfare. The focus of this

hearing on the consumer implications of online, supplier-owned travel agency joint

ventures is an excellent opportunity for you to begin examining, and I hope reversing, a dangerous e-commerce trend across a growing number of industries.

Travelocity (along with other independent travel retailers, business travelers, consumer groups, several small and low cost airlines, a large and growing number of

Members of Congress, and other government officials) has been an outspoken critic

of Orbitz, the joint venture owned by five of the nations’ largest airlines. Travelocity

has never argued that Orbitz should be restricted from entering the market; to the

contrary, there is room for more competition in online travel. Our concern has instead been focused on certain features of the Orbitz contract which we believe unnecessarily restrict the ability of airlines to provide consumers better access to the

lowest fares in the marketplace. These features are the so-called ‘‘most favored nations’’ (MFN) provisions and exclusivity incentives. These clauses, which provide to

Orbitz long-term contractual access to a full array of the major airlines’ fares and

inventory, threaten all independent travel retailers and the consumers we serve.

We hope that this hearing will help catalyze the continuing efforts of Congress,

the Department of Justice, the Department of Transportation, and other government officials to find a workable solution to the Orbitz problem. We have called on

them to remove these anticompetitive clauses and require Orbitz to do what all

other travel retailers do everyday—compete on the merits of their technology, customer service and marketing ability—and not on contractual guarantees that insulate Orbitz from true competition and serve as a deterrent to airlines from offering

their lowest fares to a greater number of consumers. We have also called on the

DOT to update and modernize the CRS rules to address the Orbitz issues—for the

sole reason that the rules were last revised 10 years ago and therefore do not apply

to airline-owned online travel retailers, but only to traditional computer reservation

systems marketed to travel agents.

Mr. Chairman, this hearing before this subcommittee is critical, because it is consumers and their welfare that this debate is all about. We believe that much is at

stake for consumers now, and much more profound harm is in store for them if

Orbitz’ plan is executed without restraint. Consumers are increasingly being denied

a choice in travel agents, both online and offline, as they are being forced to go to

Orbitz, through the operation of Orbitz’ MFN and exclusivity provisions, for full access to the major carriers’ lowest fares. Consumers are required to pay an across

the board service fee on Orbitz that the major independent online sites do not currently charge, and this fee will almost certainly rise as Orbitz accounts for an ever

larger share of airline ticket sales. Orbitz and the Orbitz MFN are actually catalysts

for transferring the costs of distribution directly to consumers—although it is highly

unlikely that consumers will see equivalent reductions in airfares as Orbitz’ service

fees will undoubtedly increase. With the ascendancy of Orbitz, consumers are losing

23

1 Reuters Finance (Feb. 23, 2000) at <www.biz.yahoo.com>.

the benefits of airline competition that the independent travel web sites have until

now fostered both by forcing the major carriers to compete with each other and by

giving new entrant and low cost carriers—the major force for keeping airfares low—

a better opportunity to compete with the majors. Left unchecked, the operation of

the anti-competitive provisions of the Orbitz agreement will inevitably lead to less

consumer choice, less airline competition and higher consumer prices for air travel.

The online travel market in which Travelocity.com participates is growing at a

rapid pace and, according to the research firm PhoCusWright, ‘‘is the fastest growing e-commerce category.’’ With the rise of the Internet, independent travel retailers—both brick-and-mortar and online—are increasingly using this distribution

channel to expand the richness and reach of their product and service offerings to

the ultimate benefit of consumers, who benefit from the more robust airline competition the independents foster.

A key component to the continued growth and consumer gains in the Internet

travel market is fair access to information from travel suppliers and, in particular,

access to travel suppliers’ lowest fares and corresponding inventory. It is of no benefit to companies that distribute airline tickets if they develop the best low fare

search technologies but are denied access to the full range of airfare inventory. At

Travelocity, while we are focused on providing the best technology and customer

service, we are also focused on giving our customers—both business and leisure—

the most comprehensive access to the lowest fares and rates available. After all,

that is what consumers demand and rightly so.

You will hear from Orbitz that it offers the carriers lower distribution costs in exchange for the guaranteed contractual access to their inventory that Orbitz alone

enjoys. This is simply not true. Independent retailers, like Travelocity, have repeatedly offered to meet or beat Orbitz’s economics, and yet have been denied equal access to the low fare inventory Orbitz receives. On July 11, American Express stated

that for the last six months or so it had offered to pay a portion or all of the airlines’

distribution costs relating to certain fares and inventory only provided to Orbitz, but

thus far no airlines have accepted American Express’ proposal.

We strongly believe that the denial of fair and open access to travel information

to independent travel agents raises substantial public policy questions that Congress, the Department of Transportation, the Department of Justice and other government officials must address.

TRAVELOCITY.COM AND THE ONLINE TRAVEL DISTRIBUTION CHANNEL

Travelocity.com is an Internet commerce pioneer. Since our initial launch in

March 1996, our customer base has grown to more than 34 million members. We

have built this successful business and a solid brand by constantly innovating and

creating new products that take advantage of Internet technologies to bring benefits

to consumers and travel suppliers alike. We believe we are changing the way consumers can shop for and buy travel. Some of our web site’s innovations and features

include: (i) Alternate Airports—which provides alternative city fare information

(often bypassing hub airports) in response to a given fare request; (ii) ‘‘Dream

Maps’’—which offers leisure travelers on a limited budget the ability to view

‘‘theme’’ vacations (i.e., beach, ski or national park packages) that compare and select among the best fares for multiple destinations, and (iii) Best Fare Finder—a

revolutionary product that shows consumers calendar-based fare offerings, so that

they know precisely when advertised low fares are really offered.

While travel suppliers are understandably focused on maximizing the amount of

revenue they receive with each sale of inventory, at Travelocity.com we are focused

not only on giving travel suppliers an excellent, low-cost selling channel but perhaps

more importantly, on providing consumers with what they want, which, more often

than not, is the lowest available fare. We have invested heavily to improve the

speed and functionality of our site. As noted by one airline industry analyst, ‘‘the

philosophy [of independent travel web sites] is to push the price lower—a complete

reversal of the aims of an airline’s own yield management team.’’ 1

Travelocity.com creates a global storefront for consumers to see, experience, research and buy their travel in one place. As such, Travelocity is the ‘‘front-end’’ or

user interface through which consumers access a vast virtual warehouse of travel

information, such as supplier inventory, prices and schedules.

Just like any other travel agency in the world, Travelocity contracts with one of

four computer reservation systems (CRS) for access to this supplier information.

Travelocity’s agreement for these ‘‘back engine’’ services is with Sabre, the CRS

owned by Sabre Holdings Corporation, Travelocity’s parent. CRSs are closely reguVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6621 81955.TXT HCOM1 PsN: HCOM1
24

2The non-equity owning carriers can also apparently satisfy these requirements by providing

Orbitz with ‘‘passenger database information’’ and ‘‘competitive purchaser names’’ (e.g., e-mail

addresses of passengers who booked travel through another online agency).

lated by DOT (and also by DOT’s counterparts in Canada and the European Union).

One of the bedrock principles of these rules is the requirement that the airlines that

own CRS’s participate in the other CRS’s to the same extent they participate in the

systems they own, so long as the other CRS’s offer the airlines commercially reasonable terms. These are rules of fair play designed to protect competition and consumers and they have stood the test of time.

Currently, the CRS rules in the United States, unlike the rules in Canada and

the European Union, do not apply to the distribution of airline information directly

to consumers via the Internet. The CRS rules were last amended in any significant

way in 1992 (before the Internet became a major channel for e-commerce) and were

scheduled to sunset in December 1997. It was over five years ago that DOT first

solicited comments on how the rules should be updated to reflect the multitude of

changes in the travel distribution landscape that had already occurred since the regulations were revised in 1992.

Ten years ago, all CRSs were owned and controlled by large airlines. Today, two

of the four traditional CRSs, including Sabre, are free of all airline ownership. This

structural change has effected substantial modifications in the fundamental incentives and business goals of those independent CRS enterprises. Further, in 1992, the

Internet was in its embryonic stage as a tool for the distribution of airline products,

with only a handful of airline sales made online. At present, roughly 15% of all airline tickets are sold through the Internet and the percentage is growing rapidly. If

these rules are to remain in effect, these rules need to be modernized.

I understand that a draft of the rules has been completed and is under review

at the Office of Management and Budget. The revised rules must sufficiently and

appropriately address the most critical issues facing travel distributors today, including the ability of travel distributors to obtain access to the lowest fares of travel

suppliers that own competing travel agent sites, as exemplified by the airline-owned

site Orbitz (we are not seeking to have these rules apply to data that the carriers

put only on their proprietary single carrier web sites). In revising these rules, DOT

must strive for fairness. It makes no sense to have rules insuring fair competition

and consumer protection for the offline environment that are not applicable to the

online environment. For example, core antitrust principles are not solely applicable

in the offline environment, but govern all commerce. Either the rules should apply

to both, or not at all. Further, even after five years of delay, it makes no sense for

DOT to attempt to regulate until it receives critical inputs from the Commission

Congress chartered two years ago and DOT just recently formed to study the plight

of travel agents, and until the Inspector General completes the separate study on

Orbitz Congress required as part of last year’s Appropriations bill. These exercises

are directly relevant to how the rules should be modernized, as the DOT itself has

acknowledged. In short, DOT should not put the regulatory cart before the horse.

HOW ORBITZ OPERATES—THOUGH MFN AND EXCLUSIVITY

Evidence of how Orbitz operates in the online travel channel may be found in its

‘‘Airline Charter Associate Agreement.’’ Based on the most favored nations language

in this agreement, airline participants may not undercut the prices they post on

Orbitz, either by putting lower prices on their own web sites or by running promotions (even one day sales) with online competitors of Orbitz. The MFN specifically

requires that any published fare posted on the airline’s own web site or on any third

party site be given immediately to Orbitz. Under the agreement, ‘‘published fares’’

are broadly defined and include the overwhelming majority of fares in a given airline’s inventory.

In addition, the owners agreed among themselves to impose annual in-kind promotional support obligations on carriers, with one of the ways carriers could meet

this obligation being to offer their lowest fares exclusively through Orbitz. It works

this way: Each participating carrier is obligated to provide Orbitz with substantial

‘‘In-Kind Promotions,’’ which can run into the millions of dollars. Among other

things, these obligations can be satisfied by offering ‘‘exclusive promotions or fares

available only on’’ Orbitz or the participating airline’s own Internet travel site.

Orbitz can withhold certain rebates if the carrier and Orbitz fail to develop a mutually acceptable promotional plan and/or if the carrier fails to adhere to the terms

of that plan.2 Moreover, Orbitz’ requirement that all participants immediately provide to Orbitz all promotions and fares that are offered using alternative distribuVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6621 81955.TXT HCOM1 PsN: HCOM1
25

3DOT Letter at 4.

4DOT Report at 13.

5Of course, Travelocity welcomes low fares and the more the better. However, because the

largest carriers in the U.S. have withheld comparable low fares from any of the tens of thousands of offline and online travel agencies that compete with the agency they jointly own—

Orbitz—they have distorted competition in the field of airline ticket distribution and have also

injured those millions of consumers and businesses who, for all sorts of valid reasons, choose

to deal with travel agencies that are independent of the big carriers. 6See DOT Letter at 7.

tion methods will undercut any incentive by Orbitz to innovate by developing and

packaging special promotions from suppliers.

These very unusual contract provisions were the subject of much controversy in

2000 and early 2001 as the Department of Transportation and Department of Justice considered what safeguards might be required up front, before Orbitz’ launch.

DOT (and DOJ) nonetheless allowed Orbitz to launch without any limitations on its

ability to enforce the MFN clauses and exclusivity incentives. An analysis of that

DOT decision, and an examination of the events of the months since Orbitz began

operation, leads only to the conclusion that if there were ever a basis for permitting

Orbitz to enforce either of these provisions, it evaporated long ago.

In and of themselves, the terms of the Orbitz agreement with its participating

carriers have impaired the ability of consumers to have broader access to lower airline fares. This harm to the competitive airline process has materialized with even

more severe, long-term harm inevitable. In its April 13, 2001 letter to Orbitz, DOT

acknowledged that ‘‘critics argue that the MFN clause undermines the ability of individual airlines to make clandestine deals with other Internet travel sites—deals

that they rightly contend have a pro-competitive effect on pricing...Thus, there is

some potential impact on the market dynamic.’’ 3

While ‘‘under the radar’’ sales by airlines on independent travel agents have

slowed, the volume of immediately detectable web fares offered on Orbitz has exploded. Orbitz’s strict most favored nations requirement, which it strongly polices,

ensures that price discounts are immediately detectable by all carriers at the same

time every working day. To the detriment of consumers, this environment acts to

discourage discounting, because there is no way for carriers to create even a temporary advantage over competitors.

In its June 27, 2002 Report to Congress, DOT recited the concerns of those smaller low-fare carriers opposed to Orbitz because, among other things, ‘‘they do not

want to lose their ability to selectively engage in deals with other online agencies

and distribution channels without the obligation to also give these deals to Orbitz.’’

Even more telling, one such carrier stated the in-kind advertising commitment was

‘‘designed to burden small low-fare carriers with higher distribution costs.’’ 4

EXCLUSIVITY AND WEB FARES

In the April 13, 2001 letter, DOT expressed its rationale for allowing Orbitz to

launch with contractual incentives to provide content to Orbitz exclusively. The Department expressed strong misgivings, saying:

We have serious concerns about incentives toward exclusivity, however limited.

While we are prepared to reserve judgment until we see how this provision operates in the marketplace, we will monitor these developments closely. Allowing a

new entrant with no sales or market share to offer financial incentives to get exclusive access to a very limited portion of supplier inventory may be a legitimate

means of overcoming entry barriers. (emphasis added)

As predicted by many of its critics, in the months following its launch the owners

of Orbitz made available to Orbitz—and Orbitz alone—wave after wave of web fares,

often for discounts across all or much of their entire network of flights 5. The representations made by Orbitz to induce DOT to allow it to commence operations unfettered by standard rules of fair play—namely, that web fares would represent only

‘‘1/10th of one percent’’ of the fares offered 6—have proven to be completely false. To

the contrary, our research indicates that web fares account for at least 60% of

Orbitz’ total airfare sales, and those fares were generally unavailable for negotiation

(as American Express and others can attest) and therefore denied to other travel

retailers to the ultimate detriment of consumers.

Importantly, these Orbitz web fares are not simply last-minute weekend travel

fares on flights that have an unusually high number of empty seats; they are instead wide swaths of the airlines’ fares on flights and available for more advanced

booking. On February 26, 2002, Karl Peterson, CEO of Hotwire, a travel web site

owned by four of the five Orbitz owners succinctly described the transformation of

the uses of web fares by large airlines, noting:

26

7Orbitz claims that it does not have ‘‘exclusive’’ fares because most of these fares are also

available on the individual carriers’ web sites. While Orbitz engages in such semantic games,

this form of self-dealing is hardly the type of robust competition a free and fair marketplace

would demand.

‘‘[N]o longer are web fares surgical. They are closer to a published fare sale

than they’ve ever been . . .’’

Because of this guaranteed access to low web fares on the Big Five—and not because of any technological innovation or high level of customer service—Orbitz has

become one of the top three online sellers of airline tickets.7

In recent months, some of the Orbitz carriers have started to provide limited access to some web fares to some independent retailers. This has not, however, solved

the problems raised by the Orbitz MFN or leveled the playing field. For example,

Orbitz has now confirmed publicly that it has 10 year contracts with its owners that,

among other things, guarantee Orbitz access to all these web fares.

A key premise of the DOT’s decision allowing Orbitz to proceed was that a ‘‘very

limited portion of supplier inventory’’ would be made available to Orbitz on an exclusive basis. In other forums, Orbitz executives had asserted that these special web

fares to which it alone would have access would not account for any significant portion of the lowest fares it offered. In a May 22, 2001 speech to the Aero Club, Jeff

Katz said:

‘‘We estimate that about 99% of the time that Orbitz produces a lower fare, it

will be [sic]not be because we had access to a fare others did not, but because

we found a fare that everybody had access to, but not everybody could find. Or

not everyone chose to display.’’

As any observer of Orbitz will know, this statement has not proven to be accurate.

Instead, in the 13 months since Orbitz commenced operation it has offered numerous ‘‘web only’’ discounts that the five Orbitz owners made available on Orbitz, but

denied to all of Orbitz’s independent competitors, online and offline.

SMALLER CARRIERS HAVE CONSISTENTLY POORER SALES IN ORBITZ

There is more data that should concern consumers, evidence that has ominous

overtones for the future of airline competition and e-commerce. A number of concerned parties predicted in 2000 and early 2001 that Orbitz would be designed and

operated in ways that would neutralize the ability of the small, discount carriers

to achieve a premium share of ticket sales in the independent web sites. For example, Orbitz’s refusal to allow airline advertising in the airline displays was seen by

many as an attempt to deprive smaller airlines of a very useful, point-of-sale technique that touted their bargain fares. Through banner ads promoting their fare specials, smaller carriers had been able in the independent sites to overcome their lack

of name recognition and to attract needed incremental business.

In short, the data show that the small discount carriers do attract a substantially

higher share of sales in the independent sites and that in Orbitz the major airlines

have succeeded in nullifying that phenomenon.

As forecasted by many, the hard sales data for the months since Orbitz’s launch

show that smaller and low fare carriers do much more poorly in Orbitz than in the

two largest independent web sites. These low-fare carriers achieve a percentage of

total bookings that is 15% to more than 200% larger in the independent sites than

in Orbitz.

Simply put, the data concerning how smaller airlines do in Orbitz are a bad omen

of what the future holds for them and consumers. Moreover, they are a stark reminder of what the world was like for smaller carriers in traditional CRSs before

the Civil Aeronautics Board adopted rules in 1984 to governing the operation of airline-controlled CRSs.

In response to this uneven competitive playing field, many travel retailers have

responded by shifting their focus away from the sale of scheduled air, where they

have long been positive forces for airline competition, to the sale of other products,

such as hotels, package vacations and cruises. Lowestfares.com recently announced

that it was discontinuing selling airline tickets entirely. In contrast, Orbitz’s recently filed S-1 reveals that almost 90% of its 2001 revenues came from the sale

of air transportation. As Orbitz becomes a larger seller of air transportation, this

is not likely to be helpful for small and low-fare carriers (such as JetBlue and

Southwest, neither of which participate in Orbitz), nor for the consumers who look

to them to serve as a competitive spur for lower fares. As independents shift their

focus away from the sale of scheduled air service, consumers lose choice as well as

the competitive pressure that comes from agents who have historically provided

them with tools to help them find the best deals. Orbitz, as an airline joint venture,

27

has little incentive to provide or improve upon these tools particularly as competition from independent, non-airline owned sites diminishes.

SHOULD ORBITZ BE PERMITTED TO OPERATE?

Travelocity has never asked that Orbitz be blocked from operating. Instead, we

have expressed concern over the consumer harm and competitive implications of

DOT not taking action while Orbitz implements a business plan predicated on exclusive access to the lowest fares of the five largest carriers in the U.S. Orbitz did not

have to compete or negotiate for that access, but was simply given (and guaranteed)

that access—which is not indicative of a competitive marketplace. We have urged

the government to address this risk head-on, certainly allowing Orbitz to exist and

engage in competition with the rest of us, but to be mindful of the ‘‘rules of the

road’’ in any competitive marketplace and to consider the lessons learned from prior

airline owned distribution ventures. This simply means removing the anticompetitive contract clauses and modernizing the CRS rules. These are surgical actions that

can be taken and in no way constitute ‘‘regulating the Internet’’ as Orbitz has asserted.

WHAT SHOULD BE DONE?

We believe DOT or DOJ should act now to ban the use by Orbitz of the two contract provisions that require carriers to collectively provide ‘‘most-favored nations’’

treatment to Orbitz with respect to fares and inventory. The agencies should also

void the provisions of the Orbitz Agreement that collectively give carriers financial

incentives to confer fares and other content on Orbitz on an exclusive basis. DOT’s

June 27, 2002 Report to Congress raised concerns about Orbitz, but failed to reach

conclusions on what should be done, deferring instead to DOJ, which continues to

have open a long-standing investigation, which has no timetable for conclusion. If

the agencies fail to tackle these problems, it may be necessary for Congress to step

in and come up with a solution.

Unfortunately, DOT has not addressed the ‘‘sea changes’’ in the industry that

have occurred over the past ten years. The limited scope of the U.S. CRS rules,

which apply only to computer reservations systems to the extent these systems are

used by travel agents, may have made sense in 1992. However, at a time when tickets sold online directly to consumers are approaching 15% of all sales, it is nonsensical to say that stringent rules banning the withholding by airline owners of key

flight data are essential elements of public policy in the case of the four traditional

CRSs (two of which are no longer airline owned), but that a ticket distribution system like Orbitz that is backed by the combined strength of the five biggest airlines,

gets a free pass. This is bad public policy.

In fashioning the appropriate response to the competitive harm of Orbitz, DOT

should be mindful of the policy underpinnings of the rules. In 1984, the CAB found

that regulation of airline owned or marketed CRSs was necessary because, it concluded, airlines that owned the electronic distribution outlets for airline tickets had

both the means and the incentive to use that control to advance their fortunes as

airlines. DOT found a documented halo effect in terms of sale of tickets sold through

the systems that favored major carriers that owned distribution outlets at the expense of smaller carriers.

In 1992, DOT affirmed that view and also found that airlines had an inherent incentive and power to favor the distribution outlets they owned over all others. No

good reason exists today to believe that these fundamental dynamics in the airline

industry have changed. In the face of those facts, it is difficult to see how rules designed to prevent abuses by even a single carrier owning a traditional CRSs offered

to travel agencies are not applicable to this scenario where the five largest air suppliers form a joint venture to operate a distribution web site targeted at consumers.

DOT should promptly take the steps needed to apply with respect to Orbitz the

same regulatory safeguards that it found long ago were necessary to protect competition in the case of traditional airline-owned CRSs.

CONCLUSION

Based on its MFN and exclusivity provisions that lead to exclusive access to web

fares on the nation’s five largest airlines—fares that predominate its listings despite

its earlier representations to the contrary to DOT—Orbitz has gone from nowhere

to become the one of the largest Internet travel agencies, and has achieved this position without having to compete for this favored access to fares and inventory. This

is perhaps the most troubling aspect and key issue in supplier owned joint ventures—the danger of distorting competition and creating an uneven playing field

which ultimately harms consumers and competition.

28

Action is needed now to prevent Orbitz from continuing to benefit from its supplier-owned structure and favored access to inventory—which it did not obtain

through competition—and protect the competitive dynamic and promise of Internet

distribution to bring lower prices and more innovative technology and tools into the

reach of more consumers. If the MFN provisions were ever justifiable in April 2001

because Orbitz had ‘‘few sales and no market share’’ and if the exclusivity incentives

might have been defended as a legitimate means to ‘‘overcome entry barriers,’’ those

reasons for DOT or DOJ to stay its hand have disappeared completely.

The rise of Internet commerce has initiated a true revolution in the travel distribution industry, and holds the promise of greater efficiency and enhanced competition at all levels. As a policy matter, and as a legal matter, we do not believe

suppliers should be able to engage in collective action to withhold information from

independent distributors. This is an obstacle to e-commerce that this committee

should strive to remove.

In this country, laws and rules exist that prevent such boycotts from occurring—

and it’s time to enforce them now. Consumer choice, robust airline competition, and

access to low fares are at stake here; broader issues of e-commerce and consumer

harm hang in the balance as the Orbitz model is replicated by other suppliers in

other industries.

Thank you for the opportunity to testify and I look forward to answering your

questions.

Mr. STEARNS. Mr. Wolff, we welcome you.

STATEMENT OF BRUCE WOLFF

Mr. WOLFF. Chairman Stearns, thank you, too, for the opportunity to testify before this committee. First, in the interest of brevity, I have submitted a complete summary of this complex issue,

and an attachment which I would like to include for the record.

Mr. STEARNS. By unanimous consent, it is so ordered.

Mr. WOLFF. My name is Bruce Wolff, and I am Chairman of the

Board of Pegasus LLC, and I am also senior vice president of Marriott Intentional, and a member of the board of directors of Pegasus

Solutions, two of the founding members of TravelWeb.

Today I am testifying on behalf of the Chairman of Travelweb.

There is no doubt that TravelWeb sites can provide enormous benefit for American consumers. However, these websites should be

viewed as one option among many for consumers.

Some consumers will find them absolutely right for their needs,

and others will not. The increased use of travel websites and general customer satisfaction are evidence of the benefits that websites

provide to some of America’s busy and discerning customers.

In a few minutes, I would like to address the specific concerns

that might be raised about the fact that TravelWeb is owned by

hotel companies. For a moment, let me just say that owners of

TravelWeb go toe-to-toe in the market every day trying to out-market each other and outsell each other.

We compete on price, location, frequent stay programs, travel

agent incentive programs, and many other facets. TravelWeb will

not change that powerful dynamic. However, TravelWeb allows us

to achieve some economies of scale and some operational efficiencies for consumers without undermining in any way vigorous

competition among the owners of TravelWeb, which drive down

prices.

For that reason, we feel confident that TravelWeb is good for consumers. The initial owners of TravelWeb include five hotel chains;

Hilton Hotels, Hyatt Corporation, Marriott International, Six Continents, Starwood Hotels and Resorts, and Pegasus Solutions, the

leading technology provider to the hotel industry.

29

In the aggregate, these chains control only a small portion of

hotel properties that carry their brand name. They are affiliated

with many more properties that are independently owned, and although the hotel exchange and Pegasus are owners, TravelWeb is

an entirely separate company, with its own board of directors and

employees.

TravelWeb will specialize in on-line distribution of discount hotel

rooms; that is, hotel rooms that are sold through what the industry

calls their Merchant model. These rooms tend to be sold at prices

below regular rates, primarily because of excess capacity.

We also operate TravelWeb sites to consumers called

TravelWeb.com, which is accessible to the public. We view that as

an important part of our business, but our primary effort is offering

discounted rooms to TravelWeb site companies.

Let me now turn to some of the potential concerns about supplier-owned travel websites. I cannot address these concerns for

other websites, but I can discuss them specifically for TravelWeb.

First is privacy.

As with any website, concerns about privacy are legitimate and

important. Travelweb is strongly committed to protecting private

personal data collected in the process of a transaction, which may

include customer’s name, address, credit card information, and

other important information.

TravelWeb is fully committed to adhering to all applicable Federal and State laws protecting privacy, and we are very sensitive

to international laws on privacy. Now I would like to turn to the

competition issue. One question is whether competition or whether

competitors who own TravelWeb could collude to raise prices.

As I will discuss, this market makes it almost impossible to

collude, and TravelWeb is carefully structured to prevent even the

unlikely possibility of collusion. First, it is important to realize that

only about 4 percent of hotel rooms are sold on-line.

In distributing rooms on-line, we compete with every other way

of distributing hotel rooms. People can call directly, and they can

call their travel agent, and various other ways.

Although we don’t have hard numbers, we believe about 5 percent of rooms sold on-line are sold through the merchant model.

Companies that sell through this channel are also in competition

with rooms sold through other traditional channels.

On-line sales of rooms through the merchant model represent

less than 1 percent of the rooms sold. TravelWeb’s share of this

market is tiny. We currently hope to grow it over time, but

TravelWeb is really a latecomer to the market that is dominated

by other large companies.

Even if two were to achieve a 10 percent market share that

would mean that we would have less than one-tenth of 1 percent

of approximately the $108 billion annual hotel market, hardly a

prescription for market domination.

In addition, it is also important to focus on the structure of the

hotel industry. Individual hotel properties are overwhelmingly

independently owned. The combination or the combined share of all

hotel rooms in the U.S. which carry the brand names of our owners

is 29 percent.

30

However, about 80 percent of those properties that carry a national brand name are owned by franchisees, and therefore, they

make their own business and pricing decisions.

I see that my time is up, and allow me to summarize by saying

that we are an industry of very fierce competition. We are highly

fragmented and unconcentrated. We are a non-homogeneous product. We entered into this venture to add choice to the consumers

for on-line distribution of discount rooms.

We are very careful in structuring the organization so that care

would be taken that even the appearance of collusion would be

carefully monitored. I look forward to answering questions from all

of you.

[The prepared statement of Bruce Wolff follows:]

PREPARED STATEMENT OF BRUCE WOLFF, CHAIRMAN OF THE BOARD, TRAVELWEB

LLC

Mr. Chairman and members of the Subcommittee, thank you for holding this

hearing and for giving me the opportunity to testify on supplier-owned travel

websites. My name is Bruce Wolff, and I am Chairman of the Board of TravelWeb

LLC (‘‘TravelWeb’’), a joint venture of six companies in the hotel industry, which

distributes hotel room reservations online. I am also Senior Vice President of Marriott International and a Director of Pegasus Solutions, which are both founding

members of TravelWeb. Today, I am testifying in my capacity as Chairman of

TravelWeb.

There is no doubt that travel websites can provide enormous benefits for American consumers. However, these websites should be viewed as one option among

many for consumers. Some consumers will find them absolutely right for their

needs; others will not. But the fact that they have this choice is certainly a benefit.

Travel websites offer incredible convenience by allowing consumers to obtain a

wealth of travel-related information in minutes. They can see photos, learn about

the nearby attractions, and compare prices from the comfort of their homes in minutes, often saving hours of effort. In addition, by achieving efficiencies in distribution, websites reduce costs and allow consumers to benefit from some of the most

competitive rates available. The increasing use of travel websites and general customer satisfaction are evidence of the benefits that websites provide to some of

America’s busy, and discerning, consumers.

New, efficient methods of doing business sometimes mean that companies using

traditional methods lose customers. That is a painful process, but it is the hallmark

of a free enterprise system. The issue is not the effect of travel websites on other

businesses that compete in distributing hotel rooms, however. It is the effect on consumers. Thus, it is perfectly appropriate for this Subcommittee to examine whether

supplier ownership of TravelWebsites is good for consumers. In a few minutes, I

want to address the specific concerns that might be raised by the fact that

TravelWeb is owned by hotel companies. For the moment, let me just say that the

owners of TravelWeb go toe to toe in the market every day, trying to outmarket and

outsell each other. We compete on price, location, service, frequent stay programs,

travel agent programs and many other factors. TravelWeb will not change that powerful dynamic. However, TravelWeb allows us to achieve some operational efficiencies for consumers, without undermining in any way the vigorous competition

among the owners, which helps to drive down prices. For that reason, we feel very

confident that TravelWeb is good for consumers.

TRAVELWEB

TravelWeb is an independent company created in February 2002 to provide online

marketing of hotel rooms and is only now ramping up operations. The initial owners

of TravelWeb include five hotel chains—Hilton Hotels, Hyatt Corporation, Marriott

International, Six Continents Hotels, and Starwood Hotels and Resorts—and Pegasus Solutions, a leading technology provider to the hotel industry. In the aggregate

these chains own only a small portion of the hotel properties that carry their brand

name, and they are affiliated with many more properties that are independently

owned. Pegasus provides central reservation system and other services to many hotels in the U.S., and its Utell subsidiary provides marketing and reservation services to a network of hotel properties. I should note that, although these hotel chains

and Pegasus are owners, TravelWeb is an entirely separate company, with its own

31

board of directors and employees. While the board members set general policy, the

management of TravelWeb makes independent business decisions focused on achieving success for TravelWeb. Under the agreement governing TravelWeb, the hotel

company owners of TravelWeb, including myself, do not have access to certain information and cannot participate in certain decisions.

Hotel properties other than those of the founding members are invited to participate in TravelWeb by supplying room inventory for distribution. Many properties of

other chains already participate in TravelWeb, and we expect increased participation by additional chains and independent properties as we become more established. In the long run, our customers will primarily be other travel website companies, not consumers themselves. We will specialize in the online distribution of discounted hotel rooms, that is hotel rooms that are sold through what the industry

calls the ‘‘merchant channel.’’ These are rooms that tend to be sold at prices below

regular rates primarily because of excess capacity in the market.

TravelWeb will compensate participating hotels for inventory in an amount that

is based on market conditions and negotiations between TravelWeb and the hotel

property. TravelWeb in turn will add a markup to that base rate when it makes

inventory available to other travel websites. The room will be offered to consumers

at a rate determined by TravelWeb, and the travel website who ‘‘sells’’ the room will

receive a commission.

We also operate a travel website for consumers called TravelWeb.com, which is

accessible to the public. That site has been in operation for some time and provides

another choice for consumers alongside many other travel websites. Through that

website, TravelWeb operates as a retailer and deals directly with consumers. We

view that as an important part of our business, but our primary effort is offering

discounted rooms through other travel website companies.

POTENTIAL CONCERNS

Let me turn now to some of the potential concerns about supplier owned travel

websites. I cannot address these concerns for all websites, but I can discuss them

in connection with TravelWeb.

1. Consumer Privacy Protection

As with any website, consumers are legitimately concerned about privacy.

TravelWeb is strongly committed to protecting the private personal data collected

in processing a transaction, which may include a consumer’s name, address, credit

card information, and other important information. TravelWeb acts as both a

‘‘wholesaler,’’ by selling through other travel websites and as a ‘‘retailer.’’ Whenever

TravelWeb is furnished personal information by consumers, it transmits only the information necessary to complete a transaction. In addition, TravelWeb may use

other information voluntarily submitted by the consumer in order to evaluate his

or her travel preferences and to make better recommendations. TravelWeb may also

aggregate certain information, e.g., zip code data, for its own market research or for

advertisers. Other than these uses, TravelWeb does not sell, lease, or share personal

financial information with other parties and is fully committed to adhering to all

applicable federal and state laws protecting the privacy of consumers. We are also

sensitive to international privacy laws requirements.

2. Competition Issues

Now I want to turn to competition issues. Let me say at the outset that

TravelWeb provided background material to both the Department of Justice and the

Federal Trade Commission prior to our formation in February. We have offered to

meet with and brief appropriate officials in both agencies regarding our structure

and operations. We have not been contacted by either agency but we stand ready

to cooperate with them.

POSSIBILITY OF COLLUSION

One question is whether the competitors who own TravelWeb could collude to

raise prices. As I will discuss, the market makes it almost impossible to collude, and

TravelWeb is carefully structured to prevent even that unlikely possibility.

First, it is important to realize that only about 4% of hotel rooms are sold online.

In distributing rooms online, we compete with all other ways of distributing hotel

rooms—directly from the hotel, through 800 numbers, through travel agents, and

so on. Although we don’t have hard numbers, we believe about 5% of rooms sold

online are sold through the merchant channel. Companies that sell through this

channel are also in competition with rooms sold through traditional channels. Online sales of rooms through the merchant channel represent less than 1% of all

rooms sold.

32

1 Henry Harteveldt, New Portal Leader Won’t Dislodge Current Leaders, Forrester Consumer

Technographics North America Brief, Feb. 20, 2002.

TravelWeb’s share of online merchant channel sales is tiny. We certainly hope it

grows over time, but TravelWeb is really a ‘‘late-comer’’ to a market segment that

is dominated by other, large companies. A recent industry analysis stated: ‘‘The

hotel industry is too complex and unwieldy for [TravelWeb] to wrestle away the top

spot’’ from our competitors.1 But, even if we were to achieve 10% of this category,

that would mean that we will sell less than .1% of the approximately $108 billion

in annual hotel bookings in the U.S.—hardly a prescription for market domination.

In addition, it is also important to focus on the structure of the hotel industry.

Individual hotel properties are overwhelmingly independently-owned. The combined

share of all hotel rooms in the U.S. which carry the brand names of one of our owners is 29%. However, about 80% of the properties that carry a national brand name

are owned by franchisees that make their own, independent business decisions and

establishes its own prices. Neither TravelWeb nor our individual owners compel

these properties to participate in TravelWeb or to comply with any centralized pricesetting system. In other words, the hotel industry is highly fragmented, with literally thousands of independent actors. Even at the local level, there are usually

hundreds of independent hotel properties in any large metropolitan area and dozens

in small areas. Finally, hotel rooms are not homogeneous. Hotel rooms vary greatly

in size, quality, amenities, and location. Consumers shop around for the combination

of room rate, location, and amenities they want.

The combination of the highly unconcentrated industry structure, the large number of independent actors, and the lack of homogeneity make collusion extremely

unlikely. In order to guard against even a remote possibility of collusion, TravelWeb

was advised by antitrust counsel throughout the formation process and continues

to be advised on an ongoing basis. TravelWeb has adopted a number of restrictions

on our own operations to ensure its continuing compliance with the antitrust laws.

The management of TravelWeb does not share pricing information with any participating hotel or chain, including the owner chains. For example, even though I am

Chairman of the Board, TravelWeb does not provide me with the base rates charged

to TravelWeb by any individual property. We do not discuss rooms rates or any

other sensitive competitive terms offered by individual properties at any of our

meetings or in any documents. In short, TravelWeb believes that collusion in this

industry is exceedingly unlikely, and we have taken steps to ensure that it is impossible within the TravelWeb structure.

EXCLUSIVITY

Questions have been raised about the possibility that TravelWeb could have exclusive access to discounts offered by participating properties. That is not the case.

Each participating property is free to offer discounted rooms through other websites

or through any other channels. In fact, it is typically the case that the same room

is made available simultaneously through multiple websites and is removed from

the inventory only after it is sold. No independent property of a participating chain

is required to participate with TravelWeb, and participating properties are not required to offer any particular portion of their inventory—either rooms offered at regular rates or ‘‘discount’’ rooms—through TravelWeb.

‘‘MOST FAVORED NATIONS’’ CLAUSE

Another question concerns TravelWeb’s ‘‘most favored nations’’ (MFN) clause. We

have included a narrow MFN in our contracts with participating properties. Our

MFN provides that, if hotel properties offer inventory to be sold through TravelWeb,

they agree that they will make available to TravelWeb the lowest price that they

make available to any other independent travel website for comparable inventory.

However, hotel properties are free to offer even lower rates directly, through travel

agents, through their own websites, or through any another outlet. There are no incentives to properties to induce them to offer discounted rooms only through

TravelWeb or necessarily to offer their lowest rates through TravelWeb. Thus, the

MFN gives us some assurance that we are competitive with other independent travel websites, but it does not mean that we have any ‘‘corner’’ on the lowest rates offered by hotel properties.

CONCLUSION

TravelWeb is a new entrant in a market with vigorous competition. The hotel industry is composed of thousands of participants that compete every day for conVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6621 81955.TXT HCOM1 PsN: HCOM1
33

sumers. TravelWeb is a very small participant in that large market. We believe that

the merchant channel is a valuable part of this market because it adds yet another

way that rooms are sold. Frankly, we felt that the merchant segment of the market

was not as competitive as it could be, and that is the reason we, that is, the hotel

companies that own TravelWeb, decided to enter. We don’t have all the answers,

and no doubt we will learn better how to serve consumers over time. However, we

are confident that TravelWeb will be a valuable addition to the market, one which

promotes competition, rather than limits it. Thank you again for the opportunity to

testify and I would be pleased to answer any questions.

Mr. STEARNS. I thank the gentleman, and Mr. Zuck, we welcome

you and your opening statement.

STATEMENT OF JONATHAN ZUCK

Mr. ZUCK. Thank you. One sure sign that consumers are seeing

increased benefits is the presence of entrenched vendors on Capital

Hill claiming that consumers need to be protected.

Mr. Chairman, and members of the subcommittee, it is a pleasure to be here again to help tell the electronic commerce story on

behalf of the more than 3,000 members of ACT, including many

who do business online, and most of whom are small businesses.

Thank you for holding these proceedings, and I am optimistic

that the clear light of realism resulting from your efforts and scrutiny today will reveal the Whitford campaign for what it is, hypocritical, entrenched marketing incumbents looking for protection

from real competition.

Improvements in technology and specifically the Internet, have

proven a tremendous boon to consumers who are beginning to enjoy

greater convenience, better selection of goods and services, and

lower prices.

At the same time, these increased efficiencies represent a serious

threat to a large segment of our economy, middle management. It

is estimated that the cost to consumers of entrenched middle management is something close to $15 billion annually.

The situation as far as lobbying at the Federal and State level,

and business practices designed to stifle competition has become so

severe that the FTC has recently announced a workshop to look

into this problem.

We see inefficient middlemen attempting to stifle innovation and

consumer choice on the net from multiple sectors, including cars,

auctions, contact lenses, real estate, and of course air travel.

Something that is really important is let’s agree at the outset

that if consumer choice brought about the end of third-party travel

distribution that it wouldn’t be the end of the world. There is only

a market for distributors as long as there is value added to the

suppliers and consumers.

This is not a guaranteed marketplace. Nothing could be worse for

consumers or small businesses than a fourth distribution channel.

That said, it is far more likely that multiple channels of distribution will remain for a long time to come.

Power fliers will buy directly off of airline sites based on hub and

route knowledge. Knowledgeable fliers might use Orbitz, Expedia,

or Travelocity, and still others will continue to value the hand-holding that a travel agency is able to provide.

In fact, the recent Forrester report found that the majority of

travel booked through brick and mortar agencies is premium travVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 81955.TXT HCOM1 PsN: HCOM1
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el. Remember again that those bookings currently make up 70 percent of the market; whereas, Orbitz, by way of example, has 2 percent.

Value added travel agencies will be the No. 1 beneficiaries of the

elimination of valueless simple resellers and pressure on CRS

rates. The Department of Transportation has found that there is no

evidence that consumers can be herded into a single channel. The

switching costs are simply far too low.

Throughout the economy distribution channels have created a

secondary market with its own pitfalls, latencies, and costs to both

suppliers and consumers. The evolution of the Internet has provided an alternative to these inefficiencies and an opportunity for

suppliers to cut costs and to pass at least some of these savings on

to their customers.

The obvious at first blush is to sell direct and the second is to

combine suppliers and reintermediate in a more efficient manner.

This is pro-competitive activity for which specific guidelines exist

from the Department of Justice, and it has nothing to do with price

competition between suppliers.

Ironically, the No. 1 recommendation of consumer groups during

the fiasco brought about by the likes of Sabre before was that an

industry-wide CRS system be created, and perhaps one like Orbitz,

which serves over 40 airlines, is part of the answer.

Third-party distribution generally does not promote surprise

competition between suppliers, but instead simply increases costs

to consumers. That’s fine if there is additional value being provided, and silly if there isn’t.

The experiments with supplier initiated re-intermediation on the

web today are good for e-commerce and good for consumers, and

they will succeed or fail on their own merits.

Orbitz, like so many e-commerce sites before it, has delivered to

the consumer better information, better services and lower prices,

while at the same time saving the suppliers money, which in-turn

benefits consumers.

They went to the Department of Justice and the Department of

Transportation before even starting to get a review of their business plan. They have been under constant scrutiny by both agencies for the past 2 years, and in both chambers of the Congress,

and at no time has there been any hint of a problem with their

business model.

To the contrary, the Department of Transportation has concluded

that they have helped competition in the travel booking market by

following the DOJ guidelines. So-called web fares are now more

widely available and more competition exists in the distribution

channel.

The notion that the deals that exist are in fact exclusivity deals

is a ridiculous one as we see advertising from many sites now saying that they have web fares. I hope the question gets asked what

kind of deals are being cut to get them.

The notion that there has been any additional exclusive deals, or

fare bias, is ridiculous. Those were already in place with folks like

Travelocity, who were paid off to bias their listing.

Instead, there has been marketing increases and transparency

with the Orbitz entry. The presence of Orbitz in the marketplace

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has been a boon to consumers, period. As a local theater owner, I

am compelled to use a movie metaphor.

In the movie, Minority Report, we see the pitfalls associated with

preemptive enforcement, such as might be suggested by some of

the folks here at this table today, and it is very important that we

don’t engage in this kind of psychic behavior, but instead allow the

market to work itself out.

So while I may seem to be providing the minority report here at

this table, I, for sure, represent the majority view. Thank you, Mr.

Chairman, and I look forward to questions.

[The prepared statement of Jonathan Zuck follows:]

PREPARED STATEMENT OF JONATHAN ZUCK, PRESIDENT, ASSOCIATION FOR

COMPETITIVE TECHNOLOGY

The issue before this committee today transcends the air travel industry. The current situation in this industry is part of the natural struggle between entrenched

business models and the ongoing drive toward greater efficiencies and consumer

benefits through innovation in the marketplace and on the Internet. The Association

for Competitive Technology (ACT) has always supported the creation of innovative

e-commerce technologies and business models such as the one developed by its member company Orbitz. In the online travel space, Orbitz has created a new, lowercost technology platform that provides consumers with easy access to a broader selection of low fares in a guaranteed unbiased display. The fastest growing IT organization in Washington, ACT represents over 3,000 technology companies and professionals. The bulk of our membership is comprised of small and mid-size companies

and their executives

Following a worldwide trend, Orbitz represents a move away from inefficient proprietary networks toward more open and cost effective, open, Internet-based networks. Orbitz uses superior server-based technology to provide consumers with more

information about all available fares. Their technology is better than first generation search engines, thus it can search billions of flight-options to find more choices.

Moreover, the server technology can handle the huge volume needed to search billions of airline routings at a much lower cost, allowing Orbitz to charge the airlines

less to distribute their tickets.

Since the launch of Orbitz, consumers have been given a much larger set of

choices when searching for fares. In addition, there has been significant distribution

cost savings for airlines and other travel suppliers at a most critical time for them.

Orbitz is providing the first real downward pressure on one element of distribution

costs in particular; booking fees charged by the dominant Computer Reservation

Systems (CRS), which average nearly $14.00 per ticket. These CRS’s have thus far

refused to invest in Internet-based technologies that could help bring these costs

down.

BEYOND THE INVESTIGATIONS

It is time to move past the seemingly interminable investigative process. By way

of background, Orbitz has been scrutinized by more government agencies and congressional committees than any other online venture. Not one of these reviews has

asked for any change in the Orbitz business model. Moreover, each review has noted

the pro-competitive impact that Orbitz brings to travel consumers. The Department

of Transportation report released last month found Orbitz implementation has been

consistent with plans and that current evidence shows that no Orbitz charter associate airline has provided exclusive fares to Orbitz. The Department of Justice review has been ‘‘open’’ for more than two years. We are confident if there were any

problems with Orbitz structure or joint ownership, the DOJ would have acted. Despite the results of the investigations, the chorus of Orbitz detractors continues the

‘‘Most Favored Nation (MFN) Indignation’’ refrain. Simply put, the MFN is a necessary part of the Orbitz business model that benefits consumers. James DeLong,

senior fellow with the Competitive Enterprise Institute’s Project on Technology and

Innovation, noted in a paper prepared for the CATO Institute, that:

‘‘if good information [regarding airfares] is to exist, each participant must bind

itself to provide Orbitz with its lowest fare. That is why the Orbitz charter conVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6621 81955.TXT HCOM1 PsN: HCOM1
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1 James V. DeLong,, ‘‘Online Travel Services: The Antitrust Assault on Orbitz—and on Consumers, CATO Policy Analysis, June 6, 2002 at p.10. The full paper is attached to this testimony

as Appendix A. 2Department of Justice, ‘‘Antitrust Guidelines for Collaborations Among Competitors.’’ April,

2000. 3 Robert D. Atkinson, ‘‘Revenge of the Disintermediated: How the Middleman is Fighting ECommerce and Hurting Consumers.,’’ Progressive Policy Institute Policy Paper, January 2001.

This paper is attached to this testimony as Appendix B.

tains, and must contain, a [MFN] clause whereby each participant makes available to Orbitz all fares that are made to the general public.’’ 1

Despite this logic and without regard to the fact that Orbitz charter is consistent

with the DOJ collaboration guidelines,2 some of Orbitz’s protectionist competitors

continue to insist that the DOT and DOJ pursue investigations without demonstrating in any way that competition would be hindered or that consumers would

not benefit. Indeed, these same competitors continue to complain about their lack

of access to special deals and fares while making public announcements about airline fare deals they havle negotiated, including deals for web-only fares, and specially negotiated fares that give those two sites exclusive fares that Orbitz does not

have.

STATE OF COMPETITION IN THE ONLINE TRAVEL SPACE

Despite the wild claims that Orbitz means the end of all other online travel services, the industry is healthy and competition alive and well. The travel market is

$140 billion annually. Online travel bookings are on the rise. Online bookings comprise 13% of total bookings. Forrester Research estimates that online travel spending will grow to $60 billion in 2006. Currently, there are over 25 independent online

travel sites vying for consumer dollars and eyeballs.

It is difficult to overestimate the challenges facing the travel market. Forrester

estimates that 60% of consumers have no loyalty to any one travel site and often

choose among several. Clearly it’s a case of ‘‘what have you done for me lately?’’ This

fact means that the online travel space can, and does, support multiple competitors

with varying business models and value propositions. Indeed, Neilsen/Net Ratings

noted that the consumer’s ability to easily comparison shop for fares means that

there can be several tiers of contenders.

Turning to the stories of these ‘‘contenders,’’ you can see the promise of the online

travel market for producing consumer value. SideStep.com, a Santa Clara, California company has produced a web application that is devoid of graphics and rich

content. The premise is that SideStep.com can deliver a consumer a list of fares

faster than Orbitz or the individual airline web site. Consumers with dial-up Internet access would be particularly well served by this approach. SideStep.com was

launched in 2000 and produced a profit in April of 2002. Following the natural evolution of e-commerce, Qixo, a San Francisco company, has developed an application

that searches across numerous sites including online travel, carrier and specialty

sites. This application takes advantage of the fact that the carriers time to send the

data to sites like Orbitz from their servers. This data can be mined before it can

be posted to Orbitz. The goal is to find the cheapest fare no matter where it may

be hiding. Finally, AgentWare, based in Atlanta, provides travel agents with all

fares from online and offline sties. AgentWare is a $40 per month alternative to

Sabre. At a recent meeting of the National Commission to Ensure Consumer Information and Choice in the Airline Industry in San Francisco, Commissioner Patrick

Murphy stated that government intervention, in the face of technological innovation,

is ‘‘very challenging indeed.’’ Without question, this level of innovation and competition has produced manifold benefits for consumers.

THE CONSUMER’S ENDGAME: EFFICIENT INTERMEDIATION

The Orbitz machinations are part of a larger issue. This is what is to become of

intermediaries or ‘‘middlemen’’ who provide little or no added value. The Progressive

Policy Institute (PPI) has studied this issue and published the seminal paper in this

field.’’ 3 In the paper, PPI estimates that American consumers pay a minimum of $15 billion more annually for goods and services as a result of such e-commerce protectionism by middlemen. The CRS’s and many of the ‘‘brick and mortar’’ travel

agents fall squarely into this category. Rather than adapting to a changing marketplace, they have mounted a campaign to stifle the growth of online travel services.

Without a doubt, traditional travel agents have provided consumers value by serving as a buffer between them and the airlines. However, as more and more consumers book their travel through online travel sites and directly through the carriers’ sites, travel agents fear the elimination of their business model. For online

37

4Freeing Public Policy from the Deregulation Debate: The Airline Industry Comes of Age (and

should be held accountable for its anticompetitive behavior), at p.7. Http://www.consumerfed.org/

abaair1.pdf.

buyers, it’s not just about saving a few dollars per ticket. It’s more about the control,

information, and convenience consumers get by online searches for schedules,

routes, and fares, then buying an e-ticket—in the middle of the night, when all the

travel agents are asleep.

Technology has repeatedly enabled new information distribution that takes market power away from existing middlemen. (e.g., real estate, books, stock brokers,

and car dealers).

‘‘Survival of the fittest’’ favors those travel agents who find ways to charge consumers for the value they provide in counseling consumers and booking their travel.

And many travel agents are learning how to survive—even thrive. In 2001, travel

agents accounted for $63 billion in sales an increase of 40%. These travel agents

account for nearly 70% of all airfares, as compared to 2% for Orbitz. This does not

take into account the fact that traditional travel agents still process 90% of cruises

and 95% of tours. The American Society of Travel Agents has acknowledged that

while consolidation has taken place, the total amount of business remains constant.

Arguments of mass unemployment are specious indeed.

More important than the absence of erosion, travel agents who do embrace technological change can still add value to a consumers travel experience. For example,

in areas underserved by the Internet, these agents could offer to search fares, research and build customized vacation packages, add some mark-up and hire a delivery person to bring a person their e-ticket print out (while including brochures on

activities to do while on the trip). The possibilities are endless.

Traditional travel agents make baseless claims that the online distribution models

are ‘‘anti-consumer’’ because they take away ‘‘truly independent choice.’’ This completely misses the point. The fact of the matter is that airlines pay between $22 and

$32 per ticket in distribution fees to travel agents. In 2001, this totaled $380 million. This cost is passed through to consumers. Online distribution models can cut

this cost to $6-$8 per ticket. A simple equation follows: A cheaper distribution model

equals a cheaper ticket. The disruption of costly and inefficient distribution channels is part of the ‘‘creative destruction’’ process of technology-driven innovation and

must be acknowledged. It is now being applied to the travel space. Traditional travel agents who do not incorporate Internet distribution models risk being held hostage by the CRS. The CRS distribution model supported biased display and kept information away consumer. In fact, a Consumer Federation of America paper from

1999 complained that: ‘‘Traffic is diverted to the dominant incumbents through a

number of marketing mechanisms that extends market power over travelers:... deals with travel agents to divert traffic,... and manipulation of computerized reservation systems.’’ 4 This era is over. It is irrefutable that consumers enjoy

the control, information and convenience achieved through booking online. Travel

agents should shed the CRS shackle or they will sit idly by while consumers move

further and further toward the near perfect choice model provided by the Internet.

CONCLUSION

ACT vigorously supports any competitor that invests in information technology to

serve consumers better, faster, and cheaper. ACT is just as vigorous in opposing the

use of government regulation to prohibit competition on the merits of investment

and innovation. As you contemplate the issue of Internet-based distribution, I urge

you to focus on promoting robust competition and meeting the needs of consumers,

not the protection of business models that are threatened by new technology and

changing consumer preferences.

Mr. STEARNS. I thank the gentleman.

Dr. Cooper, welcome.

STATEMENT OF MARK N. COOPER

Mr. COOPER. Thank you, Mr. Chairman. In my testimony, I describe two clear examples of what we consider to be restraints on

trade in cyberspace. One deals with the sale of cheap seats on airlines, and the other with expensive products, new automobiles.

Now, I choose these two examples from the ends of the spectrum

of what can be sold in cyberspace to underscore an important point,

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and one that is the theme of this hearing. Anti-competitive practices from the old economy can rob consumers of the benefits of the

Internet, just as surely as closed platforms and incompatible operating systems, and balkanized applications that we so frequently

hear about.

We believe that Orbitz reduces the supply of cheap seats to independent merchants, a good word. It imposes and facilitates uniformity and diminishes the tendency to undercut price leadership,

which is so clear in this oligopolistic industry.

There is a reason for that the cyber auction has become sort of

the essential symbol of the Internet. The essence of the pro-competitive, consumer friendly, Internet is the ability to conduct many

to many transactions. Many people interacting with many suppliers

increases efficiency, and drives prices down.

When the five largest suppliers jointly commit to guaranteeing

the lowest price on their website and nowhere else, they interdict

that many-to-many characteristic. They drive the Internet back toward the few-to-many, which is the old economy model.

Two years ago, at an FTC roundtable, we identified a series of

characteristics that we said should sound the alarm about potential

anti-competitive effects. Orbitz trips every one of those wires. It

has a large market share, 80 percent of the main suppliers; direct

ownership, restriction on supply; coercive participation rules, and

clear information exchange that creates uniformity.

These are characteristics that frustrate the Internet’s ability, and

I might briefly mention the other industry to Mr. Boucher, who

said that there ought to be a law. As we pointed out in our testimony, it is illegal to sell cars directly to the public in virtually

every State in this country, including Virginia.

It is illegal to sell comparison shopping even in some States, but

that is considered a dealer function. It is illegal for auto manufacturers to use website hits to direct customers to their best dealers.

So unfortunately we have laws. We have State laws that are

frustrating the benefits that the consumer could get from the Internet. The Internet is a revolutionary means of communications in

commerce that can direct dramatically and directly enhance consumer soverignity and empower citizens, but only if public policy

keeps it open.

A decade-and-a-half of our experience in the Internet and hi-tech

software industries leads us to believe that the consumer and the

economy are best served by open standards and unfettered commerce.

These afford consumers maximum choice and citizens maximum

voice. They stimulate audacious competition, and encourage use

and expression, and promote unfettered innovation.

The Internet is a disruptive technology and entrenched interests

will seek to preserve their market niches and market power, no

matter how high the cost to consumers. The most important antitrust case of the Internet century has its origins in the observation

of a CEO that the Internet threatened to commoditize his product,

the PC operating system.

Commoditization is the consumer’s best friend, and empowerment with information and the ability to execute transactions directly turns products into commodities. Producers will resist by fair

39

means or foul. I applaud you for holding these hearings that highlight this important aspect of the Internet that is so frequently

overlooked here in Washington. Thank you.

[The prepared statement of Mark N. Cooper follows:]

PREPARED STATEMENT OF MARK COOPER ON BEHALF OF THE CONSUMER FEDERATION

OF AMERICA

Mr. Chairman and Members of the Committee, ny name is Dr. Mark Cooper. I

am Director of Research of the Consumer Federation of America. The Consumer

Federation of America (CFA) is the nation’s largest consumer advocacy group, composed of two hundred and eighty state and local affiliates representing consumer,

senior, citizen, low-income, labor, farm, public power and cooperative organizations,

with more than fifty million individual members. CFA is online at www.

consumerfed.org.

I appreciate the opportunity to appear before you today to share our thoughts on

the potential anticompetitive effects of joint ventures and other producer restraints

on trade on the Internet. The Consumer Federation of America, founded over 30

years ago, was one of the first consumer groups to become involved in public policy

affecting high-tech, consumer-oriented industries.

The Internet is a revolutionary means of communications and commerce that can

dramatically enhance consumer sovereignty and empower citizens, but only if public

policy keeps it open. A decade and a-half of experience in Internet and software industry policy reaffirms our belief that consumers and the economy are best served

by open standards and networks. These afford the consumer maximum choice and

the citizen maximum voice, stimulate audacious competition, encourage use and expression, and promote unfettered innovation by both consumers and producers.

A TECHNICAL AND CONSUMER POLICY MAP OF CYBERSPACE

I believe that the Internet can best be understood by seeing it as a communications platform consisting of four layers—the physical layer, the logic layer, the applications layer and the content layer. It is a platform because the layers are strong

complements; they need to be tightly integrated and coordinated. In each layer there

are ‘‘digital economy’’ issues that stem from its unique characteristics.

We hear a great deal about the physical layer, which is the medium over which

Internet messages are transmitted. In this layer the primary concern is with owners

of facilities—like cable operators and telephone companies—who refuse to allow

service to have nondiscriminatory access to their telecommunications networks.

We hear a great deal about the logic layer, which is where code and protocols

allow communications equipment, computers and display devices to interconnect

and interoperate. In this layer the concern is with dominant software firms—like

Microsoft—who can undermine the compatibility of competing code and lock out

competition.

We hear a lot about the applications layer, where programs execute a sequence

of steps to solve a problem or perform a task for the user. Here the concern is with

applications—like instant messaging or identity verification—that refuse to interoperate, undermining universal availability and creating walls in cyberspace.

The issue before the Committee today deals with the content layer—the specific

products or services delivered through the platform—but it is not the usual content

debate we hear about. We frequently hear about this layer as a debate over digital

content—digital rights management demands by content owners, on one side, who

treat all consumers as thieves and want to hardwire antitheft devices into the fabric

of cyberspace, and consumers on the other side, who demand fair use rights to enjoy

the content they purchase when, where and how they desire.

The issue the Committee raises today is different.

OLD ECONOMY PROBLEMS MIGRATING INTO CYBERSPACE

This hearing highlights a very familiar old economy problem with very real implications for the new economy of the Internet. Traditional commercial restraints on

trade can rob consumers of the benefits of the Internet, just as surely as do closed

proprietary networks, incompatible operating systems, or balkanized applications.

Classic restraints on trade, unilateral or collusive, can limit the availability of products, restrain price competition, or negate the beneficial effects of the Internet in

enhancing consumer search.

The ability to gather and process information that is greatly facilitated by the

Internet is a two edged sword. It can strengthen the ability of producers to control

40

and manipulate the markets, just as easily as it can enhance the ability of consumers to shop and open distribution channels that increase competition.

This hearing makes it clear that we must be vigilant to prevent plain old dirty

business practices from migrating into cyberspace, if we are to preserve the procompetitive, consumer-friendly promise of the Internet. To demonstrate how important

this view of the content layer is, I will make the point with reference to two very

different examples. The first involves highly perishable, low costs services—cheap

seats on airplanes. The second involves very durable, expensive products—new automobiles.

CHEAP SEATS

A couple of years ago, the airlines showed a willingness to make low value, high

margin seats available to online discounters. These are low value seats in the sense

that they involve unsold seats close to the time of departure. They are like overripe

fruit on the grocery shelf that cannot be sold at full price. Since the incremental

cost of that unsold seat is virtually zero, any incremental revenue is pure profit.

Acting independently, the airlines cannot resist making them available at a low,

‘‘name your own price’’ level. The information exchange about these tickets in a

cyber auction increases the likelihood of their being sold and allows supply to meet

demand in a more efficient manner. Only the Internet (or an equally ubiquitous. accessible information environment) could bring this immense real time market into

existence on a massive scale for consumers to directly choose what to buy in the

way of discount tickets.

The side effects were not to the liking of the airlines collectively, however. As long

as William Shatner was able to make people think they could name their own price,

he was creating price resistance on the demand-side. As long as these tickets pop

up in the chaos of this new cyberspace type of auction, he creates uncertainty on

the supply-side. It is more difficult for airlines to know how many seats are being

offered at what prices with this sort of arrangement. It is easy to make secret deals

with the discounters to fill your planes at the expense of rivals. In an oligopolistic

industry that has developed the most precise mechanisms of price discrimination in

memory and an intricate systems of fortress hubs to exercise market power over increasingly captive traffic, this web-based discounting sound suspiciously like competition.

The response by the industry as a whole is to try to control this unruly behavior.

By organizing their own online broker over which they have greater control, they

may still sell many of the seats, but eliminate the price disciplining effect of unaffiliated discounters. At a minimum, they could reduce the supply of discount seats the

discounter can offer. Diminishing their ability to make the ‘‘name your own price’’

promise, or even the lowest price available claim, will eventually degrade their ability to discipline price.

Depending on how they organize the site, the airlines can guarantee a reduction

in supply of discounted seats by requiring members to make seats available. Airlines may have better information about the availability and price of seats when

they control their own site.

They may also have rules—formal, or more likely informal—about making seats

available on multiple sites.

I use the ‘‘name your own price’’ model as an example, because it exploits the information environment most intensively and has the cheapest seats. Orbitz may not

be directly targeted at it, but it is certainly targeted at the next tier of cheap seats

that are offered by Travelocity, Expedia and travel agents and it certainly has an

effect on all discounters.

Obviously, we are skeptical of the proconsumer intent and impact of this sort of

coordinated industry activity, especially when an independent undertaking came

first. In more general terms, these types of producer joint ventures raise the fundamental problems of horizontal concentration and vertical integration disguised as

consumer friendly e-commerce applications.

• Every time firms that are supposed to compete in the marketplaces have a meeting in cyberspace or physical space, it enhances the chances of collusion.

• Every time firms exchange information about input prices or the price and quality

mix of their product line, they can increase the likelihood of anticompetitive

parallelism.

• Every time they create ventures that diminish the availability of inputs, they may

raise barriers to entry for potential competitors and raise the costs of the actual

rivals.

• Every time they create ventures that coordinate their sales to the public, they reduce the likelihood that independent action will lower prices.

41

In other words, the efficiency that these ventures promise by lowering input costs

is only in the public interest if it does not have any of these anticompetitive side

effects. Of course, the industry insists this is not the purpose, nor would it engage

in such activity, but it is the job of the antitrust and consumer protection agencies

to prevent the anticompetitive outcomes. The problem could be massive in cyberspace and the ability of enforcement authorities to detect and prevent it is limited.

As the chances of being caught are diminished, the likelihood of the violation increases.

One possibility is to have a huge increase in the funding for the regulatory agencies charged with policing this type of potentially anticompetitive activity. There is

little chance that will happen. In the alternative, we need clear measures to prevent

anticompetitive arrangements before they are executed. An ounce of prevention is

worth a pound of cure. The antitrust authorities are familiar with such mechanisms.

A rule of reason should apply with heightened scrutiny and consent decrees that

ban specific practices.

Market Share thresholds: Arrangements that account for a significant share of

the suppliers in a market should be subject to specific investigation.

Ownership Matters: Profit sharing between firms should be discouraged, since

this diminishes the incentive to compete. Firms should not generally appear on both

sides of a transaction, since this aids in the manipulation of the availability of a

product or its price.

Restriction of supply: Restriction of supply either by requiring certain quantities to be offered or preventing participants from selling outside of the arrangement at attractive prices may restrict supply to the market and have the effect of

undermining rivals or reducing competition for consumers. Such arrangements

should not be allowed.

Participation Rules: If the ventures that invite the public to participate as buyers or sellers, then rules about who can make product available to or purchase product from the venture should not be unduly discriminatory or exclusionary.

Information exchange: Joint venture participants should not gain access to information on competitors’ costs (of inputs) or quantities and prices of output sold

through the venture. This requires anonymous transactions executed by a site administrator.

Oversight of informal behavior and compliance with conditions: Joint venture operations provide significant opportunity for exchange of competitively sensitive information in informal ways. These joint ventures should be required to have

an Ombudsman to be present at all official functions and to monitor operations. A

finding by the Ombudsman that anticompetitive activity has occurred should become a rebuttable presumption of a violation of the antitrust law.

EXPENSIVE PRODUCTS

At the start of what has been called the ‘‘Internet Century,’’ there can be no better

symbol of the transformation of the economy than a battle over automobile sales on

the Internet. The automobile is not only the quintessential symbol of the industrial

economy of the twentieth century; it is also the second largest expense on a consumer durable that most households make. Moreover, the distribution network that

typifies the industry has important and unique elements that make it a potentially

intense battleground when the new economy meets the old. The automobile is an

expensive, long-lived commodity that requires post-purchase maintenance. Historically, this created a unique relationship between the dealer and the consumer. The

dealerships have traditionally involved substantial investment. Automobile dealers

are the quintessential old economy middlemen.

Some believed that these unique characteristics would prevent or slow Internetbased transactions from penetrating the distribution chain. The automobile was believed to be a type of commodity that is not well suited to Internet sales. Cars were

not considered a good candidate because consumers needed to ‘‘kick the tires’’ before

buying a car.

In fact it was not consumers who resisted the Internet when it comes to new auto

sales. Consumers are perfectly willing to turn to the Internet for information about

autos and tell the salesman exactly what they want based on online research. They

would probably buy direct over the Internet, without going to a show room in many

cases, if they could. Unfortunately, they have not been able to test this distribution

chain because state laws protecting dealers will not let them. Direct sales over the

Internet are illegal in virtually all states.

The cost of distribution of new automobiles approaches $100 billion per year. The

distribution chain is ripe with inefficiencies and local monopolies that are perpetuated by state laws. Instead of the build-to-inventory system of the 20th century,

42

which causes new cars to sit on lots for two or three months, a 21st century buildto-order system could get exactly the car the consumer wants into his or her driveway in two or three weeks. The savings for consumers and the economy would be

immense. But this would dramatically reduce the role of the dealers as middlemen.

The acres and acres of inventory by which they defined their very being would be

irrelevant and uneconomic.

As the capability to deliver information expands and access to multimedia, interactive information applications improves, an environment in which producers and

consumers can interact directly for automobiles could be created, just as it was for

the ‘‘name your own price tickets.’’ These changes would result in more effective

shopping by consumers, better targeting of marketing efforts, personalized design of

products, and reduced inventory/holding times for the delivery of goods.

• Higher and higher quality visual and video images that can be tailored and modified during the transaction, promise a quantum leap in the quality of marketing

and consumer information gathering. • Increasing integration of production with consumer preferences identified through

on-line transactions can both dramatically reduce marketing and inventory

costs and increase customer satisfaction. • Personalized selling and flexible production can combine with interactive scheduling to reduce the amount of time that goods must be held in storage or spend

in transit, sharply reducing delivered costs on big ticket items like automobiles.

To achieve these potential gains, however, major institutional changes must come

about. Not only is it illegal to sell a car on the Internet, it is even illegal for manufacturers to distribute the hits on their home pages to the best dealers in the consumers’ area. In some states it is illegal to sell comparison-shopping information to

the public. These anticompetitive barriers to use of the Internet may be costing consumers $20 to $40 billion in the cost of new autos. Moreover, once the sale of autos

is pulled out of the showroom and put into the competitive context of the Internet,

financing, warranty work, and after market services would become much more competitive, potentially saving consumers tens of billions of dollars more.

Congress was quick to prevent the states from taxing the Internet, but much more

harm is being done to consumers by these anticompetitive statutes that prevent

them from utilizing the Internet for full effect. Congress needs to require states to

allow the direct sale of cars over the Internet.

CONCLUSION

These two examples from the opposite ends of the spectrum of consumer goods

and services that could be sold over the Internet remind us how vigilant we must

be if we are to ensure that the Internet continues to operate in a procompetitive,

consumer-friendly fashion. The Internet is a disruptive technology and entrenched

interests will seek to preserve their market niches and market power, no matter

how high a cost that imposes on the public. I applaud you for holding these hearings

that highlight this important but overlooked aspect of public policy for the Internet.

Mr. STEARNS. I thank the gentleman.

Mr. Ruden.

STATEMENT OF PAUL M. RUDEN

Mr. RUDEN. Thank you, Mr. Chairman. The short answer to the

question posed in the title of this hearing is no. E-commerce in fact

in travel is in grave danger of being dominated by the joint market

power of the largest airlines.

Perhaps uniquely the Internet has penetrated and influences the

travel market place more than any other line of commerce. The potentials of this technology has been actively exploited by several

non-airline entities, the most prominent of which are Travelocity

and Expedia, but there are many others.

These firms are examples of the much maligned middleman, a

firm that operates between the producer and the end-consumer, living off the value delivered to both the ultimate seller and the ultimate user of the product or service.

Many smaller firms have also entered the Internet space, using

it to transmit information and to communicate with consumers.

43

The variety of approaches by retailers to the use of the Internet is

imposing. The latest buzz word is convergence, signifying the merging of Internet and traditional business methods by parties at all

points along the spectrum between what were once seen as pure

Internet firms, and pure brick and mortar business models.

We refer to the middleman as much maligned because it is an

article of faith among Internet proponents that the technology as

Dr. Cooper said is disruptive, a disruptive force that eliminates

what are described as wasteful middlemen by enabling more efficient transactions directly between producers and consumers.

The premise is that e-commerce meets all relevant consumer

needs for access to information, and enables consumers to make decisions and act on them without assistance from anyone.

While there is no doubt that technology works fine for many consumers, the inference that it can meet all needs simply is not supported by the available facts. The truth is that for most consumers

most of the time direct contact with a human being, with knowledge and expertise in travel, remains essential.

The consumer either lacks the credit or the information, or the

wherewithal, or the comfort, to do his business on the Internet.

You have heard about Orbitz, and I am not going to go on at great

length about Orbitz.

They claim to have the greatest array of low fares available anywhere. They can make that claim because of preferential arrangements with the five largest airlines in the world, and 38 other airlines that give them preferential access to fares that other competitors on-line and off-line do not receive.

When Orbitz testified before a Congressional committee not long

ago, they described themselves as just another startup travel agency. That, of course, was just testimonial snake oil. In reality, Orbitz

was given a promotion budget unmatched in the history of retailing.

The Orbitz campaign reinforced in the minds of many consumers

the concept that the Internet always delivers lower prices. Yet, virtually everyone who has tested Orbitz’s actual performance in a

systematic way, including Consumer Report’s travel letter, has

found that a substantial part of the time the on-line agencies

produce better prices.

And the so-called traditional agents are still out there, showing

consumers how to get better value for their money through alternate routings and other tactics known only to the professionals,

and overlooked entirely by consumers working on their own.

Information and knowledge are very different concepts, and the

information delivery potential of the Internet, while great, cannot

replace the knowledge and experience of humans acquainted with

the tricks and traps oft his complicated network.

The airlines would have the consumer believe that the on-line

marketplace, through that marketplace, they mean to give consumers the lowest possible prices for air travel. Can that be so? Are

the airlines, which constantly remind us of their slim to none profit

margins over the years, and their staggering current losses, really

in the business of selling their service for the lowest possible price.

We think not.

44

The goal and the strategy of the airlines on the Internet is to

dominate that space to such an extent that the flow of information

will essentially be in their control, rather than under the control

of the independent firms, and in that way their yield management

systems will cease to run interference from neutral third-party retailers, whose first priority must always be to serve their customers.

Then the price discounts that Orbitz touts today will be entirely

in the airlines’ control, and largely non-existent. Orbitz’s offer to be

the next computer reservation system for travel agents, jointly

owned and jointly managed by airlines, but uncontrolled by government regulation, is like a dinner invitation from Don Corleone, an

offer everyone should refuse.

The small travel agencies of this country, on whose services the

airlines relied for decades, and upon whom the majority of air travelers still depend, are being crushed by the market power of the

airlines. Orbitz is the fighting ship that they are using to lead that

charge.

The Federal Government, Mr. Chairman, bears a large part of

the responsibility for the problem the agency industry now faces.

Travel agents are still largely locked into long term contracts with

severe penalties for failing to achieve book air segment thresholds.

Their ability to efficiently adapt to Internet technology is impaired by those contracts, and those contracts are permitted by the

CRS regulations last adopted in 1992, and scheduled for review 5

years thereafter.

For 5 more years, the Department of Transportation has failed

to address those regulations, leaving agents trapped between the

CRS vendors and the airlines, the CRS’s former and present owners, and the owners of Orbitz.

In addition to the elimination of commissions, the launch of

Orbitz, the withholding of Internet fares from CRS displays, there

is now even talk of the shifting of segment booking fees to travel

agents, as well as credit card merchant fees.

The Internet could have and perhaps still can be a vibrant place

in which all manner of travel commerce is conducted by firms large

and small, as opposed to the path which the airlines have set out.

But that result will not emerge by itself. The government is

going to have to take some swift and strong action to stop the trend

toward airline domination of this space. So the question then of

whether airline ownership of all on-line travel sites is in the interest of consumers, ASTA says no, not when the airlines are permitted to collectively own and control sites, such as Orbitz.

And do not be mislead by the effort Orbitz has put forth to have

a public offering. If you read the public offering statement, it

makes absolutely clear that the five airline owners intend to indefinitely maintain complete, 100 percent control of the management

of Orbitz.

We have no objection, no objection, to individual airlines operating independently of each other, and doing on their own websites

what their marketing philosophies and attitudes warrant.

Traditional travel agents and the new on-line agents, and all of

the hybrids in between will find their way with consumers, in a

45

1The presenter, Paul M. Ruden, is a Commissioner on the National Commission to Ensure

Consumer Information and Choice in the Airline Industry, created by HR 1000 in the 106th

Congress. This testimony is presented in his capacity as a representative of the American Society of Travel Agents and not in his capacity as Commissioner. This testimony does not reflect

any position of the Commission which is still holding public hearings and will file its report in

November, 2002. 2 A major qualification to that point is that travel agents have for some time been buying air

travel on the Internet for their clients. We are aware of no reliable way to measure the extent

to which Internet sales growth is a product of that shift of booking from traditional computer

reservations systems by travel agents.

marketplace where each firm is making independent decisions

about how and where to sell its services.

Orbitz is the antithesis of independent decisionmaking, and consumers, like travel agents, can expect no good to come of it. Thank

you very much.

[The prepared statement of Paul M. Ruden follows:]

PREPARED STATEMENT OF PAUL M. RUDEN, SENIOR VICE PRESIDENT FOR LEGAL &

INDUSTRY AFFAIRS, AMERICAN SOCIETY OF TRAVEL AGENTS, INC.

The American Society of Travel Agents (‘‘ASTA’’) offers this testimony on the Subcommittee’s deliberations on the question whether all supplier-owned online travel

sites are good for the consumer.1

The short answer is ‘‘no.’’ ASTA believes that e-commerce in travel is in grave

danger of being dominated by the joint market power of the largest airlines, with

the result that the short term ‘‘deals’’ and so-called unbiased information that are

now promised to consumers will be replaced with higher prices and restricted or distorted information that will make it more difficult for consumers to make optimum

purchases of travel either online and offline.

Perhaps uniquely, the Internet has penetrated and influences the travel marketplace more than any other line of commerce. By expanding drastically and at low

unit cost the ‘‘reach’’ of any information provider or seller, the Internet creates the

potential for significant market expansion by many players of all sizes and configurations. By enabling consumers to cheaply and relatively quickly find and compare

information, the Internet potentially increases the competitiveness of the marketplace along with possible stimulation of demand.

The potential of this technology has been actively exploited by several non-airline

entities, the most prominent of which are Travelocity and Expedia. These firms are

examples of the much maligned ‘‘middleman,’’ a firm that operates between the producer and the end-consumer, living off the value delivered to both the ultimate seller and the ultimate user of the product or service.

Many firms that did not have the investment capital available to the major name

players have also entered the Internet space, using it to transmit information and

to communicate with consumers. Typically these firms do not provide transaction capability on their Internet sites, but use them as advertisement, information and

communication tools.

The variety of approaches by retailers to the use of Internet technology is imposing and defies most attempts to categorize. The latest buzz word is ‘‘convergence,’’

signifying the merging of Internet and traditional business methods by parties at

points all along the spectrum between what were once seen as ‘‘pure Internet’’ firms

and ‘‘pure brick-and-mortar’’ business models.

We refer to the middleman as ‘‘much maligned’’ because it is an article of faith

among Internet proponents that the technology is a ‘‘disruptive’’ and

‘‘disintermediating’’ force that eliminates ‘‘wasteful’’ middlemen by enabling more efficient communication and business transactions directly between producers and

consumers. The premise of this view is that e-commerce meets all relevant consumer needs for access to information and enables consumers to make decisions,

and act on them, without assistance from anyone.

There can be no argument for that some consumers, some of the time, this is true.

There is no denying the rapid growth of travel purchasing on the Internet. ASTA

believes that virtually all of the growth in air travel sales by travel agencies nationwide is accounted for by sales on the Internet. Air travel sales by travel agencies,

collectively considered, have been essentially flat for several years and no change

in that pattern can be foreseen. To that extent, consumers are speaking with their

hands, choosing the Internet to buy a substantial amount of air travel through direct access to the producer or through an online travel agency.2 Recent reports indiVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 81955.TXT HCOM1 PsN: HCOM1
46

3 ASTA has detailed its views on this process in numerous fora, including testimony before

the National Commission to Ensure Consumer Information and Choice in the Airline Industry.

With the Subcommittee’s approval, we will submit a copy of that document for the record in

these hearings

cate that airline websites are now growing even more rapidly than the online agencies.

The problem is that the foregoing facts lead many observers to conclude that the

Internet is the complete answer to virtually all travel consumers’ needs for convenient, low cost, trustworthy access to the national air transportation system. While

there is no doubt that the technology works fine for many consumers, the inference

that it can meet all needs simply is not supported by the available facts.

The truth is that for most consumers, most of the time, direct contact with a

human being with knowledge and expertise in travel remains essential. Many air

travel transactions are simply too complex for a consumer to successfully negotiate

them over the Internet. Some transactions that seem simple on their face have complex aspects in the fare conditions and in the existence of alternative purchasing

choices that will not be known to the average buyer. Many consumers of air travel

do not have practical access to the Internet, do not have credit cards that are essential to buying online, or simply lack the wherewithal or comfort level necessary to

buy online successfully. These people either need or strongly desire to continue

using traditional travel retailers for the purchase of air tickets and ancillary travel

services.

Normally, one might say this is a fine and proper division of supply and demand.

The Internet, one might say, has simply added a new alternative for consumers and

now each consumer can decide for himself which channel he wants to use.

But that is not what is happening. In ASTA’s view the e-commerce marketplace

for travel services is being distorted and misused by airlines who seek collectively

to dominate the Internet space, and indeed all distribution channels, while throwing

roadblocks in the way of competitors, actual and potential, who would challenge

their hegemony.3 The airlines have seen the power of retailers on the Internet, in

contravention of the conventional wisdom, and now seek to lock them out of that

competitive space with collective action that can only harm consumers in the long

run.

We speak, of course, of Orbitz, the joint airline-owned website, owned by five of

the largest airlines in the world. Orbitz claims to display the largest array of the

lowest fares available anywhere, a claim they make because of preferential arrangements with the five owners and thirty-eight other airlines that give Orbitz access

to low Internet fares that are denied to other retailers through the computer reservation systems on which they are dependent for access to fare and schedule information. That dependency was fostered, indeed virtually insisted upon by the very

airlines that now own and control Orbitz.

When Orbitz first testified before a Congressional committee not too long ago, its

president described it as Ajust another travel agency.’’ But of course that humility

was just testimonial snake oil.

In reality Orbitz was given a promotion budget probably unmatched in the history

of travel retailing. It managed to lose $153 million in its first year and a half of

operations but rose in less time than that to a very close third in business volume

behind the two larger and theretofore better known online agencies.

The Orbitz campaign reinforced in the minds of many consumers the concept that

the Internet always delivers lower prices. It also reinforced the idea that buying air

travel is as simple as inputting a few simple pieces of information and getting a

result that is always right, always the best price. Yet virtually everyone who has

tested Orbitz’ actual performance in a systematic way, including Consumer Reports

Travel Letter, has found that a substantial part of the time, the online agencies

produce better prices. In reality, no one firm has a monopoly, yet, on the distribution of low priced air travel. Indeed some firms, among them Southwest Airlines,

have refused to allow Orbitz to publish or use their schedules. The Department of

Transportation, while giving Orbitz pretty much everything it wants in every other

way, has admonished Orbitz that it cannot claim to have all the lowest fares.

And of course the so-called traditional travel agents are still out there, albeit in

reduced numbers, showing consumers how to get better value for their money

through alternative routings and other tactics known largely to the professionals

and often overlooked by the consumer working on his own. Traditional travel agents

often produce the lowest price for a consumer by applying knowledge of travel opportunities that consumers often never consider. Information and knowledge are two

very different concepts and the information delivery potential of the Internet, while

47

very great indeed, cannot replace the knowledge and experience of humans well acquainted with the rules, tricks and traps of our very complicated air travel network.

The airlines would have the consumer believe that through the online marketplace they mean to give consumers the lowest possible prices for air travel. Can this

be so? Are the airlines, which constantly remind this august body of their slim-tonone profit margins over the years and their staggering current losses, really in the

business of selling their service for the lowest possible price? We think not.

The goal of the airlines’ strategy on the Internet is to dominate that space to such

an extent that the flow of information will essentially be in their control rather than

the control of independent firms. In this way their yield management systems will

cease to run into interference from neutral third party retailers whose absolutely

mandatory first priority must be to serve their customers. Then the price discounts

that Orbitz touts will be entirely in the airlines’ control and largely non-existent.

Orbitz will tell you, of course, that it is actually the friend of travel agents and

consumers. It will say that travel agents are free to book on Orbitz today and to

charge a fee to their client for the service of finding them what Orbitz says is the

lowest possible fare. And that statement would be true in one limited sense but

false in most ways that matter. It is certainly the case that a travel agent can book

on Orbitz, masquerading as his client. But the complete reality is that the agent

then gives up management of the transaction thereafter, which is often one of the

main reasons the client used the agent in the first place. To create a manageable

record in his own back-office accounting system, all the data has to be reentered.

Moreover, almost all travel agents have in their computer reservations systems contracts a clause specifying a minimum monthly air segment count that must be

booked. Failure to achieve that booking level results in a financial penalty. Bookings

on Orbitz do not count toward CRS segment count thresholds.

Orbitz goes one better, however. It has now announced that it intends to become

a CRS in its own right, offering its services to travel agencies in a more robust, but

unspecified, manner, provided, of course, that it is freed of the DOT regulations that

apply to the four existing CRS’s. Thus, Orbitz, owned by five airlines, all former

owners of CRS’s and three of whom own another CRS now (Worldspan), portends

a return to the times prior to 1984 when there were no CRS regulations. In that

environment the airlines biased the CRS displays to benefit the owners and their

co-host partners and otherwise distorted air transportation competition so badly

that the Civil Aeronautics Board, in the final throes of deregulation, was forced to

enact regulations.

It is, we respectfully suggest, simply not plausible to believe that the joint operation of websites by the airlines are going to produce consumer benefits for the long

run. The Orbitz offer to be the next CRS, jointly owned and managed by airlines

but uncontrolled by government regulation, is, like a dinner invitation from Don

Corleone, an offer everyone should decline.

The small travel agencies of this country, on whose services the airlines relied for

decades, and upon whom the majority of air travelers still depend, are being

crushed by the market power of the big airlines. In the space of seven years those

airlines have eliminated travel agent base commissions and are clearly committed

to diverting as many of the agency customer base as possible to their websites.

Orbitz is the fighting ship they are using to lead the charge. Keep in mind that,

among its other blessings, Orbitz is favored by the 43 participating airlines with

guaranteed compensation that insulated Orbitz from the final rounds of airline commission cuts faced by Orbitz’ competitors.

The federal government bears a large part of the responsibility for the problem

that the travel agency industry now faces. Travel agents are largely still locked into

long term contracts, with severe penalties for failing to achieve booked air segment

thresholds. Their ability to efficiently adapt to Internet technology is impaired by

those contracts that are permitted by the CRS regulations last adopted in 1992 and

scheduled for review five years thereafter. For five more years the Department of

Transportation has failed to address those regulations, leaving the agents trapped

between the CRS vendors and the airlines (the CRS’s former and/or present owners

and the owners of Orbitz). In addition to the elimination of commissions, the launch

of Orbitz, and the withholding of Internet fares from CRS displays agents need to

conduct their businesses, there is now talk of the CRS’s shifting segment booking

fees to travel agents, as well as credit card merchant fees.

The Internet could have, and still could be, a vibrant place in which all manner

of travel commerce is conducted by firms large and small, as opposed to the path

on which the airlines have set out, which, if not halted, will leave the Internet, and

all other retail air travel distribution, dominated by a handful of powerful producers. But that result will not emerge by itself. The government is going to have

48

to take some swift and strong action to stop the trend toward airline domination

of this space.

To the question, then, of whether all airline ownership of online travel sites is in

the interest of consumers, ASTA says ‘‘no, not when the airlines are permitted to

collectively own and control such sites as Orbitz.’’ We have no objection to airlines’

operating their own sites as extensions of whatever marketing policies they individually develop. Traditional and online agencies will find their way with consumers

in a marketplace in which each firm, including each airline firm, is making independent decisions about how and where to sell its services. Orbitz is the antithesis

of independent decision making and consumers, like travel agents, can expect no

good to come of it.

There is another issue before the Subcommittee: the question is essentially whether the joint hotel website, now called Travelweb, is materially different than Orbitz

in terms of issues raised for e-commerce. As it functions today, travelweb.com appears to operate quite differently from Orbitz. We have very little hard information

about the internal arrangements, but viewing the website, there is little similarity.

The only function that seems to work simply gives the inquirer a list of hotel chains

to whose individual websites the inquirer must go, one at a time, to seek rates and

dates. The ‘‘Click-It’’ function that claims to offer comparative prices for weekend

stays does not seem to do anything. Hotels.com is a principal competitor of

travelweb.com. We were unable to understand the manner in which this site displays properties and rates.

But in neither case are we aware that there is a ‘‘most favored nation’’ clause that

entitles the websites to all the rates that the hotels publish elsewhere. If such arrangements exist, we are entirely opposed to them. We are also concerned about any

situation in which large competitors engage in cooperative marketing that includes

price setting. While the neutral operation of a ‘‘posting board’’ for hotel rates from

different properties is unobjectionable in general, it would be far better for e-commerce, indeed for all commerce, and consumers if the opportunities for abuse in

these sites were eliminated by having them operated by independent third parties.

ASTA appreciates the opportunity to have presented its views, and remains at the

Subcommittee’s disposal to assist in any way it can.

Mr. STEARNS. I thank the gentleman. I will start the questioning

to the panel, and let me just say as an overview that as Mr. Boucher, from Virginia, mentioned that this is a broad understanding

of what happens, and the implications for the consumers, and that

our role in this Commerce, Trade, and Consumer Protection Subcommittee is to determine what nuances, what problems, would

exist if five airlines, for example—you have United, American,

Delta, Continental, and Northwestern—who own an online site

such as Orbitz.

But then you have TravelWeb, which is Marriott, Hilton, Hyatt,

Sheraton, and Holiday Inn. Now, they might have some holding

company names, but those are the major chains. And when these

five large companies get together and have a website, do they provide efficiency that benefits the consumer, or do they thwart competition, and that is what we are looking at in terms of this hearing, and trying to see whether this model is also applicable to other

industries.

But I would like to start with Mr. Gilliland. The Department of

Transportation reported last month that they did an investigation,

and they found no Orbitz charter airline has provided exclusive

fares to Orbitz. Please comment.

In other words, that report would collaborate what Orbitz is saying, which is that basically they are competitive, and they are providing a good service, and they are not doing anything wrong. So

the Department of Transportation said that, and so the question

would be to you to say why is the Department of Transportation

wrong.

49

Mr. GILLILAND. Well, I think it comes back to the basic question

of what we have been talking about here, which is this Orbitz

MFN, or most favored nations, clause. And I might just describe

that here briefly.

There are two important components of that MFN. First, the

third-party MFN, where every fare given to a third-party site, like

Travelocity, by an airline must also be given to Orbitz.

And then the airline website component of that MFN, where ever

fare on the airlines’ website must be given to Orbitz. Now, you

must ask, okay, so what is the implication of that. Well, it is a serious deterrent to airlines offering price discounts to independent

distributors like Travelocity.

And so prior to Orbitz’s launch, airlines could and did post exclusive fares on their own websites and occasionally gave those same

web fares——

Mr. STEARNS. But, Mr. Gilliland, would not the Department of

Transportation in their study take that into account and actually

look at that? I mean, they understand the clause just as well as

you do, and not as well as I do, but it would seem that they looked

at it and found that there wasn’t a problem.

Mr. GILLILAND. I would suggest that they give it further and

deeper examination.

Mr. STEARNS. Okay. Mr. Wolff, you stated that this most favored

nations clause, ‘‘ensures that we are competitive with other independent travel websites.’’ How is this intended to keep you competitive with others—you might explain that—with other independent travel sites.

And do other independent websites have such agreements with

the member companies of TravelWeb? For example, as I understand it, Hilton has their own site, and Marriott has their own site.

And you have these other hotel companies having their own

sites. So I could go to those websites, and for example, Marriott,

and get a fare, or I could go to TravelWeb. So you might provide

how that——

Mr. WOLFF. Okay. This is complex and I will try to be very careful in the answer. First of all——

Mr. STEARNS. Make it simple.

Mr. WOLFF. We all compete very fierciously, and we all have our

own independent websites where we try to attract——

Mr. STEARNS. The obvious question for the consumers is that if

Marriott has their own site, why do you have to have a site like

TravelWeb, and it is just those five?

Mr. WOLFF. And on behalf of Marriott, we would like the consumer to go to Marriott.Com.

Mr. STEARNS. Okay.

Mr. WOLFF. However, what we have noticed is that there are

consumers who would like to go to sites with multiple brands on

it. That’s why Travelocity, and that’s why there are several sites—

HRN, Hotels.com, et cetera.

So we are creating a site with various hotels on it, TravelWeb.

Now, is it a site that will have a lot of hotels? I was very interested

in Gentlewoman DeGette’s concern about competitors.

Mr. STEARNS. Frontier Airlines.

50

Mr. WOLFF. Frontier Airlines, and having run a sales marketing

customer service for a small startup airline competing through the

CRS’s and everything, I am very sensitive to that issue.

TravelWeb’s position is that we are inviting all hotel companies

to participate, and while we are founded by the TravelWeb members that you have mentioned, we are going to other hotel chains

and independents, and encouraging them to participate in our

website also, which will just be one additional manner in which a

customer can get a fare.

They can go to Marriott.com, and if they feel more comfortable

going to a site with multiple brands, they can go to this site, and

they can go to Travelocity, Hotels.com, a variety of sites.

Mr. STEARNS. Thank you. My time has expired. The ranking

member, Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman. Let me begin

with you, Mr. Ruden. In the early 1980’s, the Department of Transportation wrote CRS rules, forcing the carriers to produce the same

low fares to travel agents that gave to customers who called the

airlines directly.

I have heard that applying these rules to the on-line world is

technically not feasible as a business model. Is this true, and

should the rules be rewritten to apply to the on-line world, as well

as the off-line world?

Mr. RUDEN. Well, Congressman, I don’t think that the CRS regulations had anything to do with which prices airlines charge. The

CRS regulations were a response to practices that the airlines

jointly owned computer systems, an analogy somewhat to the current situation of an on-line market place where they jointly own

Orbitz.

Their jointly owned information distribution systems, which were

placed in the hands of travel agents, had displays which were designed through bias and programming tricks to favor the owners of

those systems and other companies which entered into partnerships with them.

And the judgment of the government, which was in the throws

of deregulation, of finishing the process of deregulation, and shifting the residual authority of CAB to DOT, and putting the CAB

completely out of business at that moment in history, the problem

was judged so severe for airline competition that the government

was compelled to regulate those practices to eliminate the propensity of these airlines working together to bias the displays in favor

of themselves and against their competition.

And that is the fundamental principle to which those rules were

directed, a lesson we are suggesting that we should keep in mind

now that Orbitz has acknowledged publicly and in its filing with

the Securities Exchange Commission, that it wants to be ultimately

the fifth CRS, but without being subjected to those same regulations.

There is nothing in the regulations that I am aware of that

would inherently prevent their application to airline jointly owned

on-line operations.

Mr. TOWNS. Thank you very much. I guess a question to Mr.

Zuck and Mr. Gilliland, this morning I decided to do a little on-line

homework, and went to Orbitz and looked up what a flight would

51

be from National Airport to LaGuardia, because I go home a couple

of times a week, and sometimes three times.

And I then went to Travelocity, and typed in the same details.

Do you have any guesses to what I found? And being you can’t

guess, let me tell you. I found a flight on either U.S. Airways or

Delta Shuttle, on Orbitz where it was $290. The same flight on

Travelocity was $412.50. Could I get a response, Mr. Zuck, and Mr.

Gilliland?

Mr. ZUCK. Sure, I will take first shot at that. I mean, obviously,

speaking on behalf of the airlines is way above my pay grade, but

it is amazing that some of the things that people are allowed to get

away with saying up here.

For example, one of the things that is going unsaid is that the

airlines are in fact customers, too, to the CRS system that sell their

tickets. They are in fact paying those——

Mr. STEARNS. Mr. Zuck, do you have your microphone on?

Mr. ZUCK. No. Now it is. Okay. Thanks. The airlines in fact pay

companies like Travelocity’s owner, Sabre, in order to sell tickets,

and those rates, as Congressman Deal mentioned, have gone up,

and up, and up. In fact, airlines are losing business, and losing

money, and the CRS is making money, which might be some indication of why the CRSs have time to be here today.

I don’t know if that is an answer to that question which has been

raised, but the bottom line is this. Orbitz put something in their

contracts that said we are willing to discount the money you spend

on us to book this travel in return for giving us these cheaper fares

that obviously you make less money on.

The ones that were previously offered on their on-line sites are

ones that they have a lower profit margin on, and therefore don’t

want to spend the exorbitant booking fees that are being paid to

CRS systems. These nonexclusive parts of the so-call MFN agreement is just an inventory availability agreement that is the result

of discounts that Orbitz offers to suppliers on those booking fees.

So they make it cheaper for airlines to sell their cheaper flights,

and it is really that simple. What companies like Travelocity and

Sabre, and other CRS systems would like you to propose is that

they be granted access to those cheaper fares, while still charging

the exorbitant booking fees that they charge for the more expensive

fares.

What is happening today in the market place is that we are seeing web fares beginning to appear on Expedia and on other on-line

sites, and the reason or the way that is happening is probably

through price negotiation, although while the Orbitz system is totally transparent, negotiations between airlines and Travelocity

and Expedia remain confidential.

So in fact some kind of competition is taking place, where before

there was none, and I think you will start to see the same fares

appear on both sites very shortly as the RS systems begin to give

way on their monopolistic ways.

Mr. TOWNS. Mr. Chairman, I know that my time has expired, but

I sure would like to hear Mr. Gilliland’s answer as well.

Mr. STEARNS. Mr. Gilliland.

Mr. GILLILAND. I appreciate that, Chairman Stearns. First of all,

let me answer your question directly and then I will come to the

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points that were raised in the answer before me. On the question

of these fares that you looked at, it is very likely that we simply

at Travelocity didn’t have access to the same fares that were being

made available to Orbitz, and again this is my point earlier.

If an airline puts a web fare on its own site, it is obligated to

provide it to Orbitz. If it provides a special fare to Travelocity, it

is obligated to provide it to Orbitz. And that is irrespective of any

price competition that the other panelists talked about.

We have gone into the airlines time and time again, and asked

to get the same fares at reduced costs. We provide the booking fees

at lower costs to those airlines. American Express mentioned last

month that they have gone in and done the same thing, and in fact

they said that we will offer up free distribution.

We will pay all of those fees that you typically pay to the CRSs.

And did they get access to the fares? No. So the question is whether is it a competitive marketplace or an anti-competitive marketplace, and I think that this really gets back to the crux of the issue

for us.

We have competed at Travelocity in the past by getting the best

fares that we could for consumers. We would get exclusive fare

sales from those airlines, a very competitive market to get at those

fares.

If we enter into an agreement like that today, automatically

those fares are given to Orbitz. So we have no leg up, and we have

no competitive benefit, and there is no motivation for the airlines

to do a deal with us. So we are left in a position where our sales

force is busting its hump engaging with airlines trying to do those

deals at lower distribution costs to those airlines.

And when we get them done, the Maytag repair man in Chicago

at the Orbitz headquarters gets those same fares. It doesn’t seem

like competition to me.

Mr. STEARNS. The gentleman’s time has expired. The gentleman

from Georgia, Mr. Deal.

Mr. DEAL. Thank you, Mr. Chairman. It seems rather inconsistent to me on the one hand that people are arguing that things

are anti-competitive and the reason that they are anti-competitive

is because the cost to consumers is going down.

That seems to be what competition is supposed to do, is to bring

the costs down. The heart of this whole issue is as Mr. Zuck indicates, is the booking fees that are charged by the CRSs. Now,

Travelocity is wholly owned by the largest CRS, Sabre.

Seventy-five percent of Sabre’s revenues come from booking fees.

Booking fees are the third largest expense, that is, distribution

costs, and booking fees is the largest part of booking costs or distribution costs.

They are the third largest cost to airlines behind labor and fuel,

and so we are talking about something here of protecting—if you

want to talk about protecting the old mechanism, Dr. Cooper, it is

designed to protect the old mechanism of preserving booking fees.

What Orbitz has done is to say to these airlines that if you will

enter into agreements with us, we will rebate up to a third of the

booking costs as an incentive to do that, and they promised over

a series of years to continue to lower the booking fees.

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Now, I can understand, Mr. Gilliland, why Travelocity, being

owned by a CRS, doesn’t like that. But you, your own company, has

entered into agreements with Delta and other companies to do exactly that have you not?

Mr. GILLILAND. We have provided them with lower distribution

costs in exchange for web fares, and in fact, we get dribs and drabs

of web fares from those deals, and we do not get the contractual

guarantees that are provided to Orbitz through this most favored

nations clause.

Mr. DEAL. But you and Expedia have both entered into agreements for web fares from Delta if you would agree to cut some of

your booking fee costs aren’t you?

Mr. GILLILAND. And in fact we would like to see that same type

of competition occur in the future. We enter into agreements with

a single airline to distribute their fares at a low distribution cost.

We don’t enter into an agreement with five airlines all at once

on the same exact economic deal, a price that has been set by the

airline owners of Orbitz and Orbitz itself.

Mr. DEAL. And part of that is that your system has a built-in

bias if people will pay you for that bias, something that was alluded to by some of the others, and I believe you call it a preferred

carrier.

In other words, if you have a preferred carrier who pays you a

fee to be a preferred carrier, when someone uses your website, you

give them preference, in terms of the pull-up of that site, do you

not?

Mr. GILLILAND. In fact, a consumer can make a choice to show

a preferred airline, and a preferred airline display, or they can

choose not to.

Mr. DEAL. And you get paid a fee if the airline will pay you to

put a preferred status on your website?

Mr. GILLILAND. We have promotional deals with the airlines.

That’s competition in this marketplace.

Mr. DEAL. And that is what Orbitz doesn’t have isn’t it?

Mr. GILLILAND. Our site is not biased. Let me explain.

Mr. DEAL. Okay. Go ahead.

Mr. GILLILAND. Our site is not biased. If you look at our slight

displays today, you will see that Travelocity has adopted the same

display ordering as the Sabre CRSs, and the Sabre CRSs whose

displays are governed by the CRS rules. Do we offer special promotional fares on some airlines? You bet we do.

When we can get deals with those airlines, we offer special promotions, and we will sometimes send promotional e-mails to promote those deals. You will not, however, see inferior service presented before better service.

Mr. DEAL. Mr. Chairman, I am reclaiming my time. I think you

have answered the question. Let me ask you this though. Isn’t it

true that you refused to enter into some of these agreements for

cheaper fares because of your exclusive agreements?

In fact, it was reported in May of this year in Aviation Daily that

Travelocity and Expedia both turned down a special offer of an online fare from Northwest Airlines from the U.S. to Frankfurt,

which they offered lower rates, and the reason that you turned it

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down was because it would interfere with an already exclusive

agreement that you had with another airline; isn’t that correct?

Mr. GILLILAND. We promote Northwest fares when we do promotional deals with Northwest.

Mr. DEAL. And that is assuming that they don’t interfere with

these preferred contracts that you already have with somebody else

that you are already getting paid for?

Mr. GILLILAND. Sir, competition in this business—and in competition in many marketplaces, and supermarkets as an example—

is to go out and get the best supplier deal that you can get one at

a time, and that is what I am talking about here.

We are going out one at a time and getting promotional deals

and we are offering those deals in our supermarket. It sounds like

commerce to me, and it sounds like e-commerce to me.

Mr. DEAL. And you pay those booking fees back to your parent

company, Sabre; is that correct?

Mr. GILLILAND. No, we don’t pay booking fees back to the parent

company.

Mr. DEAL. You don’t pay booking fees?

Mr. GILLILAND. That is incorrect. We don’t have a booking fee relationship with our parent company.

Mr. DEAL. You do not have any booking fee arrangements? Are

you saying that you are not charging any booking fees at all in

your——

Mr. GILLILAND. We don’t charge booking fees. We charge distribution fees to the airlines that we have relationships with. They

are not booking fees.

Mr. DEAL. Well, it is the same thing, but just called by a different name isn’t it?

Mr. GILLILAND. No.

Mr. DEAL. All right. Let me ask you this. If this arrangement

that you accuse Orbitz of being involved in is so bad, can you explain to me why you are entering into an arrangement in Asia, and

I believe it is called Zugi, along with 18 major airlines there in

which you are the exclusive booking agency for them?

Mr. GILLILAND. Yes, I can explain that. We are a technology

service provider to them, and we have licensed our technology, and

those airlines are running that business, and we simply provide the

technology, similar to the technology that Orbitz has contracted

with a company named ITH to provide to them.

Mr. DEAL. So what you have done then in Asia is to duplicate

what you are complaining about somebody else doing in the United

States?

Mr. GILLILAND. No, and in fact it is very different. It is a technology services relationship.

Mr. DEAL. I see.

Mr. GILLILAND. And we perform technology services with many

different companies on the Internet today, and as an example,

Yahoo and AOL.

Mr. DEAL. And when you talk about wanting regulatory parity,

are you asking this committee to recommend that we regulate the

Internet in terms of online travel services?

Mr. GILLILAND. What I am simply suggesting is that we apply a

very common sense approach to the Internet. If I go down to the

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corner drug store and get a prescription, and get drugs, I need a

prescription. If I go to Drug Store.com, I need a prescription.

And I am simply asking that we apply similar types of rules to

the Internet, and it is not about new rules. It is simply about ensuring that there is effective competition, just as that same competition was affected by in the mid-1980’s, and in 1992 with the

CRS rule.

Mr. DEAL. Mr. Chairman, I would ask—I realize my time is up,

but I would ask for unanimous consent to include in the record a

statement by Mr. Scott Yohe, the Senior Vice President of Government Affairs for Delta Airlines, which was his testimony on June

26 of this year before the National Commission to Ensure Consumer Information Choice of Airline Industry.

Mr. STEARNS. By unanimous consent, it is so ordered.

[The statement follows:]

PREPARED STATEMENT OF D. SCOTT YOHE, SENIOR VICE PRESIDENT—GOVERNMENT

AFFAIRS, DELTA AIR LINES, INC.

Members of the Commission: On behalf of Delta Air Lines, I would like to thank

you all for the opportunity to provide testimony on the important issues being addressed by this Commission.

I am Senior Vice President—Government Affairs for Delta Air Lines. I have

worked for Delta for 24 years. During this period, I have seen a number of changes

in the airline-travel agent relationship, particularly in recent years as the e-commerce revolution has transformed our industry.

This Commission has been charged with considering two important questions:

first, whether the financial condition of travel agents is declining, and if so, what

effect that decline will have on consumers; and second, whether there are impediments to information regarding the services and products offered by the airline industry.

Delta appreciates the opportunity to submit our views to the Commission. Ensuring that consumers have full and complete access to information about our services

is a goal that benefits Delta and our customers, and travel agents remain an important part of Delta’s distribution network.

In answer to the first question the Commission has been charged with considering, Delta has always distributed its tickets in many different ways and it is critical to our success that we provide our tickets through each distribution channel

that our customers want to use. Many customers prefer to use the services of traditional travel agencies, and therefore traditional travel agencies remain an important

part of Delta’s ticket distribution network. On the other band, the e-commerce revolution has created new alternatives to traditional travel agencies that, in many

cases, offer less expensive means to deliver airline services to the public—and many

customers prefer the convenience and flexibility of these new low cost channels.

These new online alternatives to the traditional travel agency have created both

challenges and opportunities for traditional agents. Many travel agencies have successfully adapted to these changes, finding new ways to deliver added value either

to their customers or to airlines, or both. These agencies will continue to thrive and

to play a critical role in Delta’s ticket distribution system. On the other band, some

agencies have resisted change, and have failed to develop business models that deliver added value that consumers or airlines are willing to pay a premium for. Like

any business that fails to adapt to change, such travel agencies are not likely to

succeed.

It is absolutely clear, however, that the e-commerce revolution that is driving

these changes will benefit consumers. E-commerce is making it much easier than

ever before for consumers to get information about Delta’s services, and it is driving

the price of airline ticket distribution down. These changes are forcing airlines and

travel agencies alike to find new ways to deliver value to consumers at a lower and

lower cost. Competition can be hard for competitors who fail to meet the competitive

challenge, but competition is good for consumers. Any regulatory intervention that

blocks these changes or restricts this competition will inevitably result in less choice

and higher prices for consumers.

The answer to the second question the Commission has been charged with considering is simple. The answer is ‘‘No.’’ There are no significant impediments to the

56

dissemination of information about air travel products—to the contrary, the e-commerce revolution has made air travel information more available to consumers than

ever before.

I. THE DOMESTIC AVIATION INDUSTRY IS FACING A FINANCIAL CRISIS THAT IS FORCING

DELTA TO FIND WAYS TO CUT COSTS AND IMPROVE THE EFFICIENCY OF OUR OPER- ATIONS

Before I address in detail the specific questions the panel has been charged with

considering, it is important to review the current financial conditions facing the airline industry. Even in the best of times, the economics of the airline industry are

fragile—over the last fifty years, the industry’s net profit margin has been one-half

of one percent, compared to the average for all industries of approximately six percent. But today, our industry is facing one of the most serious economic crises in

its history—largely as a result of the terrorist attacks of September 11 and their

aftermath.

Last year, U.S. airlines collectively lost $7.7 billion—despite the federal emergency package enacted by Congress to prevent an industry collapse in the immediate aftermath of the attacks. Delta alone reported a financial loss of $1 billion in

2001. The total aid package covered only a few short weeks of the tremendous losses

that the airlines continue to sustain.

In the first quarter of this year, industry losses have continued to climb by an

additional $2.4 billion. The industry is carrying an on-balance-sheet debt burden of

nearly $110 billion, with debt-to-capital ratios more than double those of other industries. Early predictions of a return to profitability in 2003 now appear increasingly unlikely, with 2004 offering the first ray of hope. Industry revenues are down

20 percent from where they were a year earlier—and that revenue shows little sign

of returning any time soon.

A major cause of this financial crisis is the huge cost of complying with the waves

of new taxes, government mandates, and other new costs that have been imposed

on air travel since September 11. For Delta alone, the annualized impact of these

new costs includes:

• Post 9/11 passenger security taxes: $266 million.

• Increased terrorism insurance premiums, assuming FAA support ends, and the

airlines have to rely on the commercial market: $250 million.

• Security-related revenue losses from postal service and cargo restrictions, as well

as unreimbursed security costs for cockpit door fortifications, ramp security,

checkpoint document verification, screening of catering supplies and material,

airport space occupied by TSA, security equipment, personnel training, and airline seating for Federal Air Marshals: $175 million.

• And revenue losses due to customers deterred from air travel by the hassle factor:

an estimated $600 million.

Added together, these numbers would total approximately $1.3 billion in pretax

profit impact to Delta.

With all of the ticket taxes and fees that apply to airline ticket purchases, airline

tax rates are now among the highest federal consumption taxes on any industry.

To put this in perspective, the consumption taxes on a $100 round-trip airline now

exceed 44 percent. On a $200 ticket they are over 25 percent; and on a $300 ticket,

over 19 percent. Those figures exceed even the intentionally high federal tax rate

of 18.2 percent on cigarettes—imposed, in part, to discourage consumption. Taxes

on airline ticket purchases are nearly triple what they were in 1991.

In addition to these increased costs, the current economic conditions have forced

down average ticket prices. Today, Delta’s average domestic round trip fare is $45

lower than it was during the same period last year. Delta effectively has no ability

to pass these new costs on to consumers, which means these new costs have directly

impacted Delta’s bottom line.

For all of these reasons, the current financial crisis has forced Delta to seek ways

to cut costs in almost every aspect of our operations. We have undergone the agonizing process of reducing our workforce by approximately 13,000 positions. Industry

wide, some 100,000 airline employees have lost their jobs. Delta has cut its flight

schedule back by approximately 15% from pre-September 11 levels, and many other

U.S. carriers have similarly reduced their own networks. U.S. airlines parked or retired some 350 aircraft. Hundreds of aircraft orders have been canceled or reduced.

The financial crisis is placing even greater pressure than ever on Delta to find

ways to reduce cost and improve the efficiency of operations—including the costs of

distributing tickets to our customers. Like any business, we must constantly find

new and more efficient ways to deliver our products to our customers. But in the

current context, this has become a matter of economic survival.

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II. THE INFORMATION AGE HAS DRAMATICALLY IMPROVED CONSUMER ACCESS TO AIR

TRAVEL INFORMATION AND CONSUMER CHOICE

With that context as background, let me address the specific questions the Commission is considering, beginning with the question of consumer access to information.

The e-commerce revolution has dramatically improved the access of every consumer to air travel information. Just a few years ago, consumers seeking airline

fare and schedule information had little choice but to call individual airline reservations departments or to consult a travel agency that subscribed to one of the complex Global Distribution System (GDS) databases to obtain this information. Those

two traditional options are still available to any consumer who chooses to use them,

but they are no longer the only options available.

Today, anyone with a connection to the Internet has direct access to every airline’s schedule and published fares—information that is as sophisticated and complete as that delivered through the old GDS computer systems. Since almost any

public library offers its patrons free Internet access, this wealth of travel information is available at little or no cost to any consumer who chooses to take advantage

of it. Of course, many consumers have Internet access from their home or office, and

many prefer the convenience and control that these new Internet tools make possible.

Online travel information takes several different forms. For example, virtually

every major airline has developed an Internet website through which it provides detailed information about its own services directly to consumers. On delta.com, for

instance, with the click of a mouse, customers can search for Delta fare and schedule information, purchase tickets, make or change seat selections, check on the status of flights or airport wait times, check in for a flight and print a boarding pass,

request notification of flight delays, request and receive e-mail notices of special promotions, manage their SkyMiles accounts, redeem miles for free tickets, and so on.

In addition to airline websites like delta.com, several major online travel agencies

operate websites that provide comprehensive travel information from a single online

source. The largest of these are Travelocity, Expedia and Orbitz, each of which provides quick and easy access to schedule and fare information from as many as 450

different airlines—enabling consumer searches for airline fare and schedule information, plus the ability to easily purchase airline tickets and a variety of other travel-related goods and services with the click of a mouse.

But airline websites and the largest online travel agencies are only the beginning

of the wealth of consumer information the Internet provides at virtually no cost to

the public. The entire Official Airline Guide, for example, is available in searchable

format for free on the Internet. Many traditional ‘‘off-line’’ travel agencies have also

launched their own Internet web sites. A recent search for ‘‘airline ticket information’’ on the Google Internet search engine returned some 290,000 websites offering

air travel information to the public.

Of course, not all consumers take advantage of the travel resources the Internet

makes available. Some consumers prefer to deal directly with an airline reservations

representative, because they are more comfortable talking to a live sales representative than interacting with the airline via online channels. Many other consumers

prefer to use the services of a traditional travel agent for a variety of different reasons—for example, because they want to take advantage of their travel agent’s special expertise and experience, or simply because they do not want to spend the time

or effort doing their own travel research. Consumers who value the services of a

travel agent remain free to hire a travel agent to provide these services, and there

are tens of thousands of independent travel agents willing to compete to provide

consumers with these services.

In other words, there is no impediment to the dissemination of air travel information to consumers in the information age. To the contrary, the e-commerce revolution has made air travel information more available to consumers than ever before.

III. THE E-COMMERCE REVOLUTION HAS CREATED NEW COMPETITIVE PRESSURES THAT

BENEFIT CONSUMERS

As to the financial condition of traditional travel agents, it is clear that the e-commerce revolution is profoundly changing the airline ticket distribution system. It is

creating new competitive alternatives to the expensive, legacy GDS ticket distribution systems and traditional travel agencies that rely upon these systems. Like any

business in any competitive marketplace, traditional travel agencies must adapt to

change and competition. But while competition can be difficult for competitors who

fail to meet the challenge, competition is always good for consumers.

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A. Traditional Offline Travel Agencies Are A Critical Part of Delta’s Distribution

Network

Professional travel agents remain important to Delta’s success as an airline. Traditional offline travel agents currently sell approximately 47% of all tickets for travel on Delta, and they generate approximately 64% of the revenue from Delta ticket

sales. In other words, travel agents sell a disproportionate percentage of Delta’s

higher value tickets. These sales are critical to Delta’s success, and Delta has thousands of valued business relationships with travel agencies across the United

States.

For this reason, Delta continues to invest heavily in the sales efforts of traditional

travel agencies. Claims by some that airlines like Delta now pay ‘‘nothing’’ for the

distribution services of traditional travel agents are simply misrepresenting the

facts. While it is true that Delta no longer pays a flat fixed ‘‘base’’ commission to

every travel agent on every ticket sale, Delta still pays millions of dollars every year

to subsidize airline ticket sales by traditional travel agencies.

Most notably, nearly all traditional travel agencies rely upon the expensive legacy

GDS booking systems to book tickets for their clients. These GDS systems charge

Delta high booking fees for each travel agency booking—but they are typically costfree to the travel agency that benefits from the use of the system. Delta’s expenditures for GDS booking fees totaled over $350 million in 2001, and these booking fees

have increased from 4-7% every year since 1999, despite the falling cost of information processing and computer systems.

In addition, unlike most store front retailers in other industries, travel agents are

not required to enter into merchant agreements with the major credit card vendors

to sell airline tickets. Instead, they are authorized to accept credit card payments

as an agent on behalf of the airline whose ticket they are selling. In this way, Delta

subsidizes the operations of each agency in every credit card transaction, because

credit card companies charge the merchant accepting these cards up to 3% of the

charged amount as fees for the transaction. Delta spent approximately $190 million

paying these credit card merchant fees on behalf of travel agents in 2001.

Delta also enters into contracts with individual travel agencies to pay a sales commission—known as an ‘‘Incentive commission’’—designed to reward agents who

meet sales goals for promoting Delta services. Incentive commissions reward those

travel agencies who are most valuable to Delta’s sales efforts. These contracts implement a ‘‘pay for performance’’ system in Delta’s travel agency sales network. They

set specific sales goals for key travel agencies that are most important to Delta’s

distribution efforts, and reward those agencies based upon the sales performance

they actually deliver to Delta.

The bottom line is that Delta wants to be able to sell tickets through any distribution channel that its customers want to use to buy Delta tickets. Because many

Delta customers prefer to use the services of a travel agent, Delta fully expects traditional travel agents to remain an important part of Delta’s ticket distribution network for the foreseeable future.

B. E-Commerce Is Creating New Competitive Alternatives to Traditional Travel

Agencies

While traditional travel agencies remain an essential part of Delta’s distribution

network, the e-commerce revolution has created new choices for consumers. It has

made it possible for customers to choose to take control of their own travel needs

in ways that were never possible before—by interacting directly with Delta via

delta.com; by using the comprehensive online travel agency websites such as

Travelocity, Expedia and Orbitz; by bidding for special deals at ‘‘name-your-own

price’’ websites such as Priceline.com; or by taking advantage of the thousands of

other online ticket distribution outlets that offer many other unique consumer benefits. As with any other technological and competitive developments that create lower

cost alternatives to existing competitors, the e-commerce revolution has created

challenges that traditional agencies must meet if they are to succeed in the new

competitive environment.

Many consumers have made clear—by voting with their wallets when they buy

airline tickets—that they prefer the convenience, control, and flexibility that these

new online channels provide. Delta ticket sales through delta.com generated $1.1

billion in revenue for Delta in 2001, a 45% ]increase from 2000. Major online agency

transactions also continue rapid growth. Sales via Expedia grew 54% from 2000 to

2001. Sales via Travelocity grew 18% during the same period. Delta currently sells

approximately 24% of its tickets either through delta.com or online travel agencies.

These e-commerce alternatives provide a means of distributing airline tickets to

the public that costs less than the traditional travel agency distribution channel.

The Internet is a highly efficient means of selling airline tickets, just like it provides

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a highly efficient way to sell many other services. Perhaps the most direct analogy

is online financial and investment services websites—where major financial services

providers have given consumers the power to use the Internet to take control of

their own finances. Consumers who prefer this convenience and control can now

make their own stock trades on the Internet for less than $10 rather than paying

the hundreds of dollars in commissions that traditional stock brokers charge.

The Internet is bringing similar benefits to consumers who want to purchase travel services. Like the sale of financial services, airline tickets and other travel services are uniquely suited to Internet distribution, because electronic ticketing eliminates the need for any delivery costs. Travel suppliers who sell their services on the

Internet—either directly or through online travel agencies—can easily deliver their

product to any consumer anywhere because there is no longer any physical ticket

that must be delivered in most cases. Electronic ticketing eliminates the need for

even the minimal cost of mailing a paper ticket. All a consumer needs is the confirmation that their electronic ticket has been issued.

In addition to this efficiency, online distribution channel alternatives reduce airline distribution costs because these online alternatives have created competition for

the dominant GDS systems that traditionally controlled the distribution of information on airline schedules and published fares. Direct sales through delta.com, for example, avoid these high GDS booking costs altogether. These direct sales via

delta.com are Delta’s lowest cost distribution outlet—it costs Delta roughly 75% less

to sell a ticket via delta.com than through a traditional travel agency using the expensive GDS booking engines. The savings through other online channels are also

significant. Because Delta has negotiated significant rebates of the GDS booking

fees from the major online travel agencies, it costs Delta roughly 50% less to sell

a ticket through these online agencies as through traditional travel agencies.

C. Delta Web Fares Have Benefited Consumers

Like any other cost savings, these developments are good for consumers. They

make it possible for airlines to offer lower fares and increased services. The lower

costs associated with direct distribution via the Internet have led Delta and other

airlines to offer lower prices to consumers in the form of ‘‘web fares’’—special discounted fares that an airline offers on the Internet but does not publish through

the traditional GDS system.

Some traditional travel agents have complained that an airline’s decision to offer

these special fares only on the Internet is ‘‘unfair’’ to traditional travel agents and

to consumers who choose not to take advantage of the new online channels. These

complaints distort the facts:

First, any traditional travel agent can sell Delta web fares to its customers. Delta

has created a special travel agency-only website—Delta’s ‘‘Online Agency Service

Center’’—that allows any Delta-accredited travel agency to book any published

Delta fare (including any discounted web fare) without using the GDS system that

results in high booking costs to Delta. Some travel agents may choose not to take

advantage of this opportunity because they prefer to rely on the high cost GDS computer system for booking tickets. The fact that travel agencies choose not to take

advantage of the tools that Delta has created for them to better serve their customers, however, is purely a matter of business judgment on the part of each agency.

Second, there is nothing unique about web fares. Delta (and many other airlines)

have for many years sold their tickets in many different ways. In addition to the

published fares in GDS systems that any travel agent can sell, Delta has traditionally offered many different special prices through privately negotiated arrangements—for example, to government agencies, corporate clients, tour and cruise operators, ticket consolidators, and so on. Web fares simply represent one more way for

airlines to market their products.

Finally, the bottom line is that low fares benefit the consumers who choose to take

advantage of them. Any regulatory attempt to interfere with the free market by prohibiting airlines from offering special discounts on the Internet would harm these

consumers. The fact that some consumers may choose not to shop online does not

make it ‘‘unfair’’ to offer discounts to those who do. Many businesses offer discounts

to consumers who shop through less expensive distribution channels, whether that

is an Internet web site, a warehouse superstore, or a rural factory outlet. Airlines

are no different. It is no more ‘‘unfair’’ to offer discount airline tickets on the Internet than it is to offer discount commissions for online stock trades or discount prices

for consumer products in a warehouse superstore.

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D. Orbitz Has Benefited Consumers

Many travel agencies—both traditional and online agencies—have also complained about Orbitz, the new online travel agency launched by five major airlines.

Like the complaints about web fares, these attacks on Orbitz by its competitors have

seriously distorted the facts:

Orbitz is a success with customers because it offers a superior web site that consumers want to use. The site uses state of the art technology to provide consumers

with an online tool that instantly searches the fares and schedules of some 450 different airlines and displays those fares for consumers in a balanced, unbiased and

easy-to-read format. Orbitz is unique among the major online travel agencies in that

it is a truly unbiased source of travel information.

Orbitz has also benefited consumers by creating new competition for online travel

agencies. Most of the distorted criticism of Orbitz is really an attempt by its competitors to shield themselves from this competition. Prior to the launch of Orbitz,

the online agency business was dominated by two companies—Travelocity and

Expedia—that controlled as much as 75% of the agency online market. These two

travel agencies both continue to enjoy almost twice as much Internet traffic as

Orbitz:

Top Three Travel Web Sites

(based on the number of visits made in March 2002)

Expedia ..................................................................................................................................................................... 11.6 million

Travelocity ................................................................................................................................................................. 10.2 million

Orbitz ........................................................................................................................................................................ 6.6 million

Source: Nielson/Net Ratings

Most of the criticism of Orbitz has centered around the myth that carriers like

Delta have given Orbitz an unfair advantage by offering Orbitz ‘‘exclusive’’ access

to their web fares. Delta’s contract with Orbitz is not exclusive and Orbitz has no

unique access to Delta web fares. To the contrary, any travel agent can book any

Delta web fare via the Delta Online Agency Service Center, as I just described.

Orbitz earned the right to sell Delta’s web fares on the Orbitz website by offering

Delta (and any other airline who chose to participate, whether or not the airline was

an Orbitz owner) significant rebates of the expensive GDS booking fees. Delta has

recently signed deals with Travelocity and Expedia that allow these agency—like

Orbitz—to sell Delta web fares on their websites in exchange for rebates on GDS

booking fees. The beneficiary in all of these arrangements is the consumer who is

willing to shop in these low cost channels.

E. New Competitive Alternatives & Economic Crisis Led Delta to Eliminate ‘‘Base’’

Commissions For Traveling Agents, Allowing Consumers To Choose Whether

They Want to Pay for A Travel Agent’s Services

Finally, many travel agents have criticized Delta for one of the many cost-cutting

moves that Delta took in its efforts to deal with the current economic crisis facing

the airline industry -the decision that effective March 14, 2002, Delta would no

longer pay a ‘‘base’’ commission on travel agency ticket sales in the United States.

This ‘‘base’’ commission—a fixed amount paid to any agency who sells a Delta ticket,

regardless of the value actually delivered by the agency to Delta in the ticket sale—

was a vestige of the days of airline regulation by the Civil Aeronautics Board, which

bad mandated a fixed industry-wide commission payment. After deregulation, airlines were free to offer whatever commission payment they chose to travel agencies.

One result of this was the creation of the ‘‘Incentive commission’’ that Delta continues to pay to key agencies—individually negotiated commissions that tie payment

directly to the agency’s sales performance, rather than a flat commission paid regardless of the agency’s actual value as a part of the Delta sales network. A second

result was that, market forces began to drive down the amount of fixed ‘‘base’’ commissions paid to travel agencies.

Delta’s elimination of ‘‘base commission’’ in March 2002 recognized the fact that

travel agents function as middlemen in the airline ticket sale transaction. The provide services both to the airline and to the agency’s customer. Because travel agency

ticket sales benefit Delta, Delta continues to invest heavily in supporting the travel

agency distribution system, both by paying the expensive GDS booking fees that

subsidize the GDS booking engines travel agents use to sell their services, and by

paying the merchant fees that allow travel agencies to accept credit cards for airline

ticket sales at no cost to themselves. Delta also continues to reward key travel agenVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6621 81955.TXT HCOM1 PsN: HCOM1
61

cies with targeted incentive commission contracts that reward agencies for excellent

sales performance on Delta’s behalf.

Much of the value that travel agents provide, however, are provided not to the

airline, but to the travel agency’s clients. Researching air fare alternatives, planning

travel itineraries, providing travel management services, and offering the benefit of

special travel expertise and experience, for example, are all services rendered by the

travel agent to their customer—not to the airline. Consumers who value these services are willing to pay the travel agency for them. Like any business, travel agents

can and should charge their customers for the services they provide. Most U.S. travel agencies have begun doing so, and agencies who deliver value to their customers

have found that their customers are more than willing to pay for it.

Many consumers, however, do not need or want the services provided by a traditional full service travel agent. They prefer to take control of their own travel planning, and the e-commerce revolution has empowered them to do so. These consumers should not have to pay for the services of a full services travel agent—any

more than an investor who does not need the services of a full service stockbroker

should be required to pay hundreds of dollars in commission for a stock trade. When

an airline chooses to pay a flat ‘‘base’’ commission to every travel agent on every

ticket sale, this ‘‘base’’ commission is necessarily built in to the price of every ticket.

In other words, every customer ends up paying this commission—regardless of

whether the customer needs or wants a travel agency’s assistance. The elimination

of base commissions from the ticket price allows each customer to make his or her

own choice. Those customers who value and want the assistance of a travel agent,

can choose to pay for it (in the form of travel agency service fees). Those who do

not want or need that assistance.can take control over their own travel needs, and

save. Either way, the consumer is the ultimate winner.

CONCLUSION

Delta recognizes the valuable contribution travel agents make to the travel industry. We have thousands of valued business relationships with travel agencies across

the United States. We understand that travel agents—like airlines—are suffering

from reduced revenues in the present business environment. But like all businesses,

travel agencies must compete and deliver value to succeed in a competitive marketplace.

Delta is committed to extending our reach to all consumers, including both those

chose to use the Internet and those who prefer to use the services of traditional

agencies. The success of all of our distribution partners, whether traditional or online, are key components of Delta’s overall distribution strategy. The e-commerce

revolution has increased the amount of information about airline fares and services

to the public. It has increased consumer choice in airline ticket purchases. These

developments are good for consumers. Many customers still prefer the services provided by traditional travel agents, however, and Delta believes that traditional

agents who provide a level of service that consumers want and are willing to pay

for will continue to serve an essential role in the sale and distribution of Delta tickets for the foreseeable future.

Mr. STEARNS. And I would say to all of the members that we will

have a second round. I don’t think we are going to have votes until

one o’clock. So we have the unique privilege of listening to our panelists without interruptions. The gentlelady from California, Ms.

Eshoo, is recognized.

Ms. ESHOO. Thank you, Mr. Chairman. I really appreciate you

holding this hearing, because I think that there are really a plethora of issues for us to examine. As each person at the table states

their case to each one of us up here, you are looking at the ultimate

commuters in the country, I think.

Each one of us is tied to the airlines and reservations in some

way, shape, or form, regardless of where our district is. I mean, in

my case, I commute to California every single week, and I have almost without exception for 91⁄2 years.

So in my case, it is United Airlines. They are terrific to me. They

are wonderful for my staff to work with, and the crews are terrific,

and the reservation people take very good care of us.

62

We travel on what I think is called a Y-rate. It is a government

rate, and for those of you that are listening in, yes, we get mileage,

but I have to tell you that the last thing I feel like doing is getting

on an airplane when I don’t have to commute, in terms of earning

any kind of mileage.

We don’t get anything that anyone else doesn’t get, but I guess

it is good to have it because it helps us get some tickets that we

don’t have to pay for out of our budget. I don’t—I say this not so

much to state the obvious, whether it is United Airlines or Delta

Airlines, whomever the airlines are that are involved in this, make

no mistake about it.

The Congress in the wake of September 11, one of the first steps it took was to put up $20 billion for the airlines. We recognized

that we had grounded them, and we recognized that we needed to

step up to home plate.

We understand what they mean in terms of our Nation’s economy, commerce, all of it. So it is not whether I fly United, or the

next person has Delta in their district, or the next person has

whatever airline.

It is how business is conducted. I am not a lawyer, but I have

to tell you that I think that some of this really bumps up against

some anti-trust. It is just my initial take on it.

Why? Because when you put major airlines together, in terms of

a service that others cannot get, and that you are not only stepping

on the consumer, but that you are essentially cutting them out, in

terms of getting the best price.

So I recognize that computerization and computerization of reservation services are very important, but you know, if you can’t get

the list in order to put it out there for people to take advantage,

you are putting a world of hurt on them. I am very curious about

why Orbitz is not here today. They were invited, Mr. Chairman?

Mr. STEARNS. Absolutely. They were invited and the airlines

were invited, too. And there has been other hearings on this in the

Senate Commerce Committee.

Mr. DEAL. Would the gentlelady yield on that issue?

Ms. ESHOO. Well, I am not finished yet, and if I have time, I

would be more than glad to, to my colleagues. I am troubled about

what the current state of affairs is, and it is rooted in some other

things that have troubled me, in terms of what has happened with

travel agents.

You have the airlines saying—you know, I have never really understood why the airlines are always hanging on by a thread. I

mean, management and whatever, and it may be very well a business that doesn’t produce a lot of profit.

But having said that, I think that they have the right to have

a service where they get a crack at reservations and the profits

that come from that. But do I think they should be the elephant

with the big hoof and consider everyone else an ant under that

hoof?

Well, you don’t have too much of a chance if you are in that position. So let me ask a question and whomever would like to take a

stab at it. What is the niche that Orbitz in your view is trying to

fill? When they decided to enter the market there were already a

few big players, and many little ones providing on-line travel servVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00066 Fmt 6633 Sfmt 6602 81955.TXT HCOM1 PsN: HCOM1
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ices. All of the airlines had and still have websites where a customer can buy tickets on-line.

It doesn’t appear, at least to me, that there are cost savings, because it is my understanding that Orbitz is losing money overall.

I mean, I am playing a little devil’s advocate, but I think that given

who is here today, and they are not, that maybe you take a stab

at that, and whomever wishes to.

Mr. GILLILAND. If I might, I won’t speak on behalf of Orbitz and

would prefer that they, too——

Ms. ESHOO. Well, you can’t.

Mr. GILLILAND. [continuing] could be here as well to speak their

mind.

Ms. ESHOO. Yes. I think they are missing a real opportunity.

Mr. GILLILAND. Yes. However, I can say that I can talk a little

bit to the broader market, and the broader market that we compete

in. And that is to provide very low priced trips, whether that includes air, car, hotel, vacation cruise, to consumers.

And this part of the market is very, very price sensitive, and in fact a $5 or $10 change in price can often mean the difference between making a sale and losing the sale to someone else.

Ms. ESHOO. Sure.

Mr. GILLILAND. Simply because they are a mouse click away.

Competitors are but a mouse click away. So the importance of what

we are describing here is that we need to, because of that price

sensitivity, have the opportunity to get at promotional fares.

And when we do, when we strike deals with airlines, and we

have done that historically, that is what Expedia, and Travelocity,

and a number of other independent sites were based upon, was

competing to provide the consumer with that best deal.

When we get those deals, we would rather they not automatically

then go to Orbitz.

Ms. ESHOO. I see.

Mr. GILLILAND. And we think, and we also think that it is not

good for consumers, because Orbitz charges a $5 service fee, which

the other independent sites do not charge.

Ms. ESHOO. That’s interesting.

Mr. GILLILAND. And in addition to that, we think it is not good

for the airlines, and when it ends up not being good for the airlines, it is not good for the industry. They are in fact——

Ms. ESHOO. Well, I don’t know if they are going to pay attention

to what you think is good for them or not, but I appreciate you answering the question. What is the purpose of—let me just ask this,

because I don’t think I have too much time left. What is the purpose of the most favored nations clause?

Mr. STEARNS. Your time has expired.

Ms. ESHOO. Can they answer that, Mr. Chairman?

Mr. STEARNS. Okay. Go ahead. Sure.

Ms. ESHOO. Because it might be constructive.

Mr. STEARNS. We are going to have a second round here, and so

you are welcome to go ahead.

Ms. ESHOO. The most favored nations clause; can they just tell

us what that is?

Mr. STEARNS. Yes.

Ms. ESHOO. What is the purpose of that?

64

Mr. ZUCK. Well, I think one way to address that question is to

segue from your first question. I mean, as Congressman Deal mentioned, the third highest cost to airlines is distribution, and a lot

of this is these booking fees, which were over $2 billion generally

annually.

So when asked what their purpose was for trying to construct

Orbitz, it was to cut down their distribution costs. So it has a builtin model that rebates back booking fees, and makes that distribution cost less so that they save money.

I mean, it is not—there was not an alteristic motive or anything

like that. but that they were simply trying to cut distribution costs

to getting tickets out to consumers. That most favored nation status was something that again is a bit of a misnomer—it is just sort

of an inventory availability clause—was simply a guarantee that

came as a result of those reduced booking fees.

I mean, in other words, Orbitz was taking a risk by taking less

money for booking travel and in return asked to get the best fares.

Those options are available, and we are seeing plenty of other sites

making use of web fares, et cetera, and Orbitz is contractually obligated to show all fares, and not just some subset that a mainframe

returned.

And it is contractually obligated to show them in an unbiased

way. We get mislead a lot by talking about different kinds of fees.

Well, there is a booking fee that they charge, and that another

company doesn’t, but at the same time, companies like Travelocity

get paid volume booking rewards and things like that.

Everyone finds a way to get paid, and I think it is important that

we keep that in mind as well. But the problem is that if the way

that you are finding to get paid involves essentially biasing your

display, or promoting one fare over another, that is less pro-consumer than actually just getting paid a flat fee.

Let’s make sure that we talk about things in the same terms. Everybody is getting paid in this, and the airlines are simply trying

to pay less to sell airline tickets, and in an environment in which

they are losing money.

Mr. COOPER. Let me try the reverse of that. Jonathan and I have

been on opposite sides on a lot of issues. The essential threat to

cartel behavior is cheating, and now you have a guaranteed flaw

that it disenchants cheating.

And you can tell me why you were doing this to induce people

to put your tickets there, but the effect is to disenchant people from

cheating, from cutting that individual one-on-one deal that gets

somebody a better price.

And that leads me to your first question, which is why do they

come to this? They came to this for a simple reason. All hell was

breaking loose out there. I mean, people thought they could name

their own price.

They were getting resistance, alternative means of distribution,

and this is an industry that clearly engages in cartel behavior. And

cartels need to discipline, and so the answer is that you discipline

by establishing a joint venture, and that dampens down the ability

of all these people popping up in cyberspace to cut a side deal and

offer a lower price.

65

And I will tell you that the 12 bucks difference between the CRS and what Orbitz is charging is peanuts compared to the $200 and

$300 differences that you heard here. So you are disciplining the

hundreds of dollars by diminishing the likelihood for deals to pop

up in cyberspace.

Mr. STEARNS. Mr. Wolff, you might want to reply to that and

then we will close up the debate and go on to Mr. Terry. Mr. Wolff,

you will get the last word here.

Mr. WOLFF. Okay. Since this subject is supplier owned on-line

sites, and the hotel site is an important entity, when words like

cartel are distributed out, I want to make sure that there is no

misunderstanding about how we operate.

First of all, we have a very narrow MFN, and it only says that

if you are going to deal on TravelWeb and give us a rate, we would

like to make sure that our big competitors don’t get a better rate.

It does not restrict them in any way from giving better rates on

their own site, or through other channels. It is a very narrow MFN.

And so that this does not discourage competition through any

other channel, and we want to make sure that our process here is

very clear to everyone, and that we don’t see ourselves operating

as a cartel in any way, shape, or form. This is just handling one

small segment of distribution, less than 1 percent of our business.

Mr. STEARNS. Thank you, Mr. Wolff. The gentleman from Nebraska, Mr. Terry, is recognized.

Mr. TERRY. Thank you, Mr. Chairman. I will follow up on these

comments though. Let me just quickly outline why I think this

smacks or smells of anti-competitive behavior here. First of all, you

have an entity that is started up by the airlines. Right away, that

will catch my attention.

Then they agree amongst themselves that on this website,

through this most favored nation clause, that they will make sure

that on this site is the lowest fare. This ensures though as they

market Orbitz that we as consumers are then trained to automatically go to Orbitz because that will automatically have the lowest

fare.

Now, we can say in the immediate sense that that is good for

consumers, because that means that they will have the $290 fare,

and you are guarantee this cheap seat on the airlines, but then

what happens when they become the 800 pound gorilla and there

is no more Travelocity or others?

Then the only thing on Orbitz is the $490 seat or the $415 seat.

That’s why you have to be on top of this type of anti-competitive

behavior at the beginning. At the beginning, it looks pro-consumer,

but you have to look down the line.

So first of all, I want to ask Mr. Zuck. I am very curious about

what the Association for Competitive Technology is, but I will ask

it another time, because your passion for Orbitz makes you look

less independent than the name of the organization.

Mr. ZUCK. Well, now I feel compelled to answer.

Mr. TERRY. Well, don’t talk, because I am speaking, please, and

I have only a few minutes here. In your industry speech that I was

trying to interpret, and in Mr. Towns’ great question and research

between Travelocity’s price and Orbitz’s price, there is a difference

of $122.50 that you—that I interpreted from your answer as blamVerDate 11-MAY-2000 09:28 Mar 24, 2003 Jkt 000000 PO 00000 Frm 00069 Fmt 6633 Sfmt 6602 81955.TXT HCOM1 PsN: HCOM1
66

ing on the CRS, the computer reservation system, and their pricing. Are you saying that there is $122.50 difference simply because of the type of reservation technology that they use, and their $5 or

whatever, their $17 fee that they put on? I am at a loss of what

you are really trying to tell us. So if you could further explain the

$122.50 in layman’s words?

Mr. ZUCK. Sure. Thank you, Congressman, and I look forward to

the opportunity to talk to you about the Association for Competitive Technology, that is mostly made up of small businesses, who

would like nothing worse than to see imposed distribution channels

put in place where they are not necessary.

So I would love to have that conversation, but to try and clarify

this issue. First of all, we hear all the time that you don’t always

find the cheapest fares on Orbitz. So to some extent, what Congressman Towns found could be an anomaly, and I can’t seek to explain a single fare, or where that anomaly comes from.

And there is a number of different possible reasons that that occurred, but taking the worst case scenario, which is in fact that

there was a fare that was offered to Orbitz that wasn’t offered to

Travelocity, if that is where the site was.

Let’s say that it is that worst case scenario and how would I explain that. What I was trying to say is that the reason that the airlines started offering these so-called web fares, fares that they only

offer on their sites, is that they had distress inventory that they

were offering at reduced prices.

In other words, cutting their profit out of that seat in order to

simply fill seats on an airplane. They wanted to try and eliminate

the distribution costs or minimize the distribution costs of those

cheaper seats.

Orbitz’s business model is about lowering those distribution costs. It is not comparing $12 to $120. It is comparing what the

profit on that seat would have been, and if that profit has gone

away, and that $12, which adds up to $2 billion, makes an awful

lot of difference.

So Orbitz’s business model is about selling airline seats more

cheaply, and that is why they are getting some of these lower fares.

To address your other comment about our sort of psychic predictions about anti-competitive conduct, I would remind you that

the Department of Justice has guidelines for companies to get together to create distribution competition that Orbitz has followed

and is under perpetual scrutiny from both the Department of Justice and the Department of Transportation.

And I can’t for a moment imagine that Dr. Cooper would stand

silent the minute that suddenly they were raising fares because

they were the only on-line travel site, which seems very unlikely

to begin with.

Mr. STEARNS. The gentleman’s time has expired. Mr. Rush is recognized for questions.

Mr. RUSH. Thank you so much, Mr. Chairman. Mr. Gilliland,

from the standborne of size and market penetration, Sabre and the

other computer reservation system companies are much larger and

far more profitable than Orbitz. Do you share that conclusion?

Mr. GILLILAND. That is correct. Orbitz is unprofitable.

67

Mr. RUSH. In fact, Mr. Deal said in his opening statement that

Orbitz sold only 2 percent of all tickets last year, why Sabre and

the other computer reservation systems sold 70 percent of all tickets. Do you agree with Mr. Deal’s figures?

Mr. GILLILAND. I don’t know if that is the exact math. I would

say that largely speaking most tickets are sold through computer

reservation systems, and even Orbitz uses the computer reservation system for much of the work that it has to do in the booking

process on behalf of the consumer.

Orbitz is, although it wants to be in the CRS business, and

therefore we think, great, let them come into the CRS business,

and let them be governed by the same rules that the CRSs are.

They are relatively small compared to the CRSs. They have only

been in operation for 6 months, and CRSs have been in business

for 20 years.

So it is kind of a striking comparison, both in terms of time, and

time in market, and capabilities.

Mr. RUSH. Well, now I am trying to understand what the—well,

who is the elephant and who is the ant here? Is the Elephant

Orbitz or is the elephant Sabre? Who is the elephant and who is

the ant here?

Mr. GILLILAND. Well, I think the issue, and what we are laying

out here for you, is that we are concerned about maybe not step

No. 1 of what has occurred here, but step two. What does this

mean in terms of the consumer, and what will happen to consumer

pricing if all of these fares are available in one place.

It seems to me that in fact if all of these fares are available in

one place, it will discourage airlines from actually discounting as

they have in the past. They are in the business of doing selective

discounting, promotional fares, and that is how they compete. That

is how they attract and stimulate demand.

They can’t do that across the broader market and if in fact

Orbitz continues with the success that it has seen and in fact it is

depending on what stats you see, the No. 2 or the No. 3 on-line

travel agency in just 6 months, our concern is that over time the

same discounts that you see today may simply not be available,

and again, not good for the consumer.

Mr. RUSH. Should we use another kind of standard, or another

type of measurement stick other than—well, let’s look at the employees. I mean, Orbitz has less than 200 employees, and Sabre

has about 11,000 employees.

Mr. GILLILAND. Yes.

Mr. RUSH. Is that wrong for us to draw some conclusions based

on those kind of measurement sticks?

Mr. GILLILAND. Well, Orbitz operates in one country and Sabre

operates in 112 countries, and so again I don’t really see the comparison there. If you are going to make comparisons between

Orbitz, you might talk about its direct competitors today, which are

Travelocity and Expedia, which have very similar numbers of employees working there today.

Again, you know, if Orbitz—and certainly it is indicated that it

wants to be in the CRS business, would like to compete in that

business, we welcome them. We welcome them under the jurisdiction of the CRS rules, which we have to comply with and have for

68

many years, simply because we found, and the government found

back in the mid-1980’s, and early 1990’s, that it made sense to ensure that there was effective competition between the large carriers

and the small carriers; small carriers being disadvantaged back in

that time by the airline-owned CRSs.

Mr. RUSH. Let me ask you another question. What about the—

well, we have gotten a report that Orbitz had a large operating loss

last year, and expects to lose money for several years to come.

And on the other hand, Sabre had a large profit increase in their

first quarter of this year, compared to the first quarter of last year.

And Sabre’s first operating profit increase this year, compared to

last year’s, was about 25 percent of an increase.

Mr. GILLILAND. Yes.

Mr. RUSH. So where is the problem at?

Mr. GILLILAND. Well, let me first talk to Travelocity, who we

posted our earnings today at Sabre and Travelocity, and

Travelocity posted a loss this quarter. So things aren’t going really

as they should be for Travelocity.

Sabre, I am not going to apologize for as well-managed business.

We have seen our revenues decline. If you look at the first quarter,

our revenues declined by almost 6 percent. Our expenses, we took

expenses out, and it is a very painful process that involves our employees, and we took over 20 percent of our expenses out.

It is about managing the business and managing the business in

the technology sector. Technology companies—and we have done

the studies—typically get better margins than airlines. And again

that is not something that we are going to apologize about.

I want the airlines to do well. They have to do well for our business to do well.

Mr. RUSH. Thank you, and I yield back the balance of my time.

Mr. STEARNS. The gentleman’s time has expired, and the gentleman from New Hampshire, Mr. Bass, is recognized.

Mr. BASS. Thank you, Mr. Chairman, and I don’t have a dog in

this fight. I have been listening with interest to this testimony, and

there are clearly some inconsistencies of logic.

I think it would be helpful if Mr. Towns sent the printouts of his

inquiry to the Internet to Orbitz and asked them for an explanation so we could make it a part of the record.

Mr. TOWNS. Would the gentleman yield?

Mr. BASS. Yes, sir.

Mr. TOWNS. I think it would be more important if Orbitz would

come here and become a witness, and I think they should come

here. That would be the real way to do this.

Mr. BASS. Well, reclaiming my time, it is my understanding from

the opening statement of Mr. Deal——

Mr. TERRY. Would the gentleman yield for a minute?

Mr. BASS. Certainly.

Mr. TERRY. I will submit what Mr. Towns provided me for the

record, which is just a printout from Travelocity and Orbitz.

Mr. STEARNS. With unanimous consent, it is so ordered.

[The information referred to follows:]

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INSERT OFFSET FOLIOS 1 TO 12 HERE

81

Mr. BASS. It is my understanding that there may be an opportunity for Orbitz to appear here today. I understand from Mr.

Deal’s opening statement that perhaps they did not have adequate

time from the point when they were invited to prepare.

Second, if I can continue here, I understand that the Travelocity

website boasts of them having the lowest fares on the one hand,

and then apparently that is not the case according to the testimony

today.

Third, Mr. Deal asked Mr. Gilliland about the Zugi question, and

instead of answering it, he said, well, we aren’t really partners,

even though their own website says that they are a proud and full

participant in this joint venture.

And it is clear that Zugi is doing exactly what apparently you,

Mr. Gilliland, are objecting to Orbitz doing. Third, it is my understanding that Orbitz is going to have an initial public offering, and

although it is alleged that the management of Orbitz will continue

to act in the alleged anti-competitive fashion, an IPO is an IPO.

And other people get involved in the management of the business, and you can’t say for sure what will happen. I could ask these

three questions, these questions of the witnesses here, but I think

instead that I will yield the balance of my time to Mr. Deal.

Mr. DEAL. I thank the gentleman for yielding. If I could just follow up briefly with the comments of Ms. Eshoo with regard to why

is all of this happening. There seems to be a presumption on the

part of some people that airlines don’t want to sell tickets on their

aircraft.

I think quite the opposite is true for an industry that has lost

almost $7.7 billion last year, and they want to sell every seat they

can. I realize that this use of most favored nation terminology is

difficult to understand, but as I understand it, what it simply says

is that if you enter into an agreement with us, you agree that you

will offer to us the same low fares that you offer in any other

venue.

Now what that simply does is it makes the lowest fares available

in more venue sites, and that is the whole concept behind trade

when we use the most favored nations status in the international

trade atmosphere. It is a technique to bring down the cost to the

consumer.

It is also the technique that is designed to bring down in this instance the cost to the airline consumer. But I still think that there

is a huge problem here, and that is with regard to these booking

fees of the CRS.

And, Mr. Ruden, I would ask you, and my information is, that

you and your industry have advocated that there needs to be some

rules to strengthen the role of travel agents, and to get them out

from under some of these binding agreements and contracts they

have with these CRSs. Is that correct?

Mr. RUDEN. Yes, sir. We have been advocating to the Department

of Transportation for more than 5 years that they do the job that

they originally were assigned to do by themselves, to review those

regulations, which were set to expire in 1997, and which are still

in place, to give travel agents the freedom from those restrictions

so that they could be more adaptive rather than less adaptive to

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changes in the marketplace, among the major ones of which is the

Internet.

Mr. DEAL. And the cost of these booking fees is part of what

makes the travel agent less competitive is it not?

Mr. RUDEN. Well, we hear Orbitz talking about that, and I think

that the entire debate on this subject of booking fees is guilty of

a gross oversimplification. One of the things that is not brought out

about booking fees is that the booking fee is charged only on the

final transaction, and the process leading up to that, of loading

fares and doing all the things that have to be done in order to

make a transaction possible, are not charged for separately.

I don’t know that the airlines want to face the day when the

CRSs are unbundling their prices the way that the airlines are trying to unbundle their prices to consumers. So it is a very complicated subject, and it is not at all clear I think that the pricing

problems that Orbitz presents have anything to do with costs.

Mr. DEAL. Well, isn’t it true that 46 percent of the travel agents

in this country are under contract with Sabre as their CRS, the

parent company of Travelocity?

Mr. RUDEN. That may be. I wouldn’t argue with that percentage.

It is a significant number.

Mr. DEAL. And isn’t it true that booking fees through the CRSs

have gone up at an average of 4 to 7 percent over the last 10 years?

Mr. RUDEN. Within that range, that is probably right.

Mr. DEAL. Yes, sir, and that has got to play a part in making

somebody competitive and somebody non-competitive does it not?

Mr. RUDEN. Well, it is a relevant consideration, but there are

many, many other considerations, and you cannot explain, I suggest, this issue about this fair comparison, for example.

There are documented cases in the Department of Transportation

records, countless cases, in which the fair disparity is hundreds

and hundreds of dollars, and those cannot be explained on any cost

factor, especially not CRS booking fees. There is another explanation for what the airlines are doing, and it has nothing to do

with costs of distribution.

Mr. STEARNS. The gentleman’s time has expired. The gentleman

from Massachusetts is recognized, Mr. Markey.

Mr. MARKEY. Thank you, Mr. Chairman, very much. I wish that

Orbitz was here today, the five airline consortium, but they said

they had travel problems and they couldn’t figure out how to get

here. They only had 2 weeks notice, and it was hard for them to

figure out how to get anybody from Orbitz, anybody, anybody from

Orbitz, to come here and to testify today.

And that is not good, Mr. Zuck, you know. They should be able

to figure out how to do that, and I know that you are sitting here

saying that you can’t really represent them. So there is no point

in asking you any questions since you are not qualified to answer

questions about them, not that that was your job anyway.

So we are left here without anybody from the organization that

is causing this problem; that is, the concentration of power in one

place.

Mr. STEARNS. Would the gentleman yield for just a statement?

Mr. MARKEY. I would be glad to.

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Mr. STEARNS. Mr. Wolff is here from TravelWeb, which is—he

represents—there is five hotels, Marriott, Hilton, Hyatt, Sheraton,

and Holiday Inn, have formed this website. and as we pointed out

earlier in the committee, we are thinking not just in terms of

Orbitz, or even TravelWeb for the hotels.

But in general what is the implications when large companies

get together to have a website? Does it benefit the consumers because there is better pricing, or is it in the long term to the disadvantage of the consumers. So why Orbitz is not here, Mr. Wolff

has been kind enough to step up to the plate and argue for the concept and the nuances here.

So in the broader question, Mr. Wolff is here to help solve some

of these questions.

Mr. MARKEY. Well, the beauty, and we appreciate that, Mr.

Wolff, and I am sure that you would have helped Orbitz, the airlines find, a low cost room here in DC if they had been willing to

fly in.

So it probably wasn’t the fact that they couldn’t find a low price

airline fare, or a low price room in Washington, that kept them

from being here. It was that no one who works for Orbitz could

make it on 2 weeks notice, because we told them that they could

come this week, or we would even put the hearing——

Mr. STEARNS. Would the gentleman yield once again?

Mr. MARKEY. Yes.

Mr. STEARNS. They really had just a 1-week notice. and that——

Mr. MARKEY. But we could have had the hearing next week for

them.

Mr. STEARNS. We were willing for the airlines to delay it a week,

but in all fairness, your statement that Orbitz had 2 weeks notice

is not true. They had perhaps—it was just under a week.

So in fairness I have to correct that, and I wish I could have

given them more notice. I think if they had contacted us, we would

have delayed it 1 week.

Mr. MARKEY. You would have had it 1 week later.

Mr. STEARNS. One week, next week, and obviously our communication with Orbitz was not fluid.

Mr. MARKEY. You know what is interesting though, Mr. Chairman, is that when the airlines wanted $20 billion out of us last

September, the chairman of every airline was willing to show up

any day of the week at any time for as long as it took to get the

$20 billion.

And now just the chairman of each airline, but every other employee of the airline was willing to walk up and down the corridors

of the Rayburn Building for as long as it took to get the $20 billion

for those corporations.

Now what we are talking about is explaining what the benefits

are for the passengers of those airlines, and none of their employees are available on 1 weeks notice, or 2 weeks notice, to testify

before this committee. And I find that to be troubling.

Mr. WOLFF. Does that mean that I get the $20 billion?

Mr. MARKEY. Well, in fact, one of the things that we never did

address was what happens to the tourism industry after September

11. That was a question that many people said we should be discussing simultaneously.

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Mr. WOLFF. Well, I am also on the board of Travel Industry of

America, whose primary concern is the impact of tourism on America.

Mr. MARKEY. But there was no money for you.

Mr. WOLFF. I know that.

Mr. MARKEY. It went to the airlines. So, I guess part of what the

promise of the Internet was, was a word—it is a complicated word.

It is a difficult word to say. It is called disintermediation.

Put simply and in terms that I heard in my house from age 9,

10, or 11 on, was getting rid of the middleman. That is what it is

all about, getting rid of the middleman. And what happens here it

seems to me is that as the Internet makes it possible to get rid of

the middleman so that you can start to cut your own deals, all of

the big companies say wait a minute. We don’t want to get rid of

the middleman. Let’s all band together and make them all come to

us.

So that 80 percent of any one industry is now consolidating the

website so that you have got to go to them, and make it tough for

anyone to get around the fact that the Internet makes it possible

to get around the middleman. Now, I understand that from a big

company’s perspective. Now they say on the one hand that——

Mr. STEARNS. The gentleman’s time has expired. We are going to

do a second round of questions here.

Mr. MARKEY. Well, half of my time was having a conversation

with you, Mr. Chairman. So if you don’t—I mean, I am not trying

to be a wise guy there, but you did help to explain why it is that

we don’t have anyone here that I can ask a question from.

Mr. STEARNS. Well, would the gentleman like for unanimous consent for an additional 1 minute?

Mr. MARKEY. Well, actually, I think we had about a 21⁄2 minute

conversation, and I am only beginning now to ask my question.

Mr. STEARNS. Well, historically I have been in many hearings

with you.

Mr. MARKEY. Well, how about we negotiate, because we don’t

need any middleman in this, but how about we negotiate like 2

minutes?

Mr. STEARNS. Two minutes. What is your booking fee? By unanimous consent, 2 minutes.

Mr. MARKEY. I thank you. So, Mr. Cooper, if you could, because

you represent the consumer here, what is the long term implication

of having these huge corporations now use the Internet not as a

way for consumers to bargain for themselves, but to only go to an

oligopoly approved website.

And somehow or another that is going to lead to lower prices for

consumers and the consumers are beginning to cap arched eyebrows toward the very companies who they thought they were

going to be able to use the Internet to play one off against the

other.

Mr. COOPER. Well, the fundamental proposition here is that as

I said, we loved the many to many of the Internet.

Mr. MARKEY. The many to many, what does that mean?

Mr. COOPER. Well, it means that in a sense that if you think

about there is many people on this side of the transaction, and

many people on that side of the transaction.

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Mr. MARKEY. You are saying that we liked the idea that every

consumer has a chance of going to every airline and figuring out

amongst——

Mr. COOPER. Or every producer has a chance to go to every consumer. Every producer.

Mr. MARKEY. And who is the producer?

Mr. COOPER. The airlines apparently.

Mr. MARKEY. So you mean every airline.

Mr. COOPER. And I like the thought of, and Mr. Zuck said, well,

the airlines have got distress seats, and he wants to see sell them,

and the answer was it is really neat when each individual airline

tries as hard as heck to sell those seats to each individual consumer, instead of making a deal that says when I cut a price, I

have got to put it on this joint venture website.

That chills the willingness to cheat, to try and find with

emotion——

Mr. MARKEY. But I thought, Mr. Cooper, that putting up

websites were a very inexpensive thing to do. Why would the airlines have to band together on the least expensive thing?

Mr. COOPER. The interesting thing is that if there had not been

websites developing independently beforehand, then it would be an

interesting proposition. That here is a new efficiency we are introducing, but they were the last guys in the market.

The other folks had already come up with their websites, and so

people knew how to exploit the efficiencies of the Internet, and

then along comes the airlines that say, wait a minute, we are going

to have ours, too, and lo and behold, supply is going to start to dry

up on the other guy’s website. So there was not a market failure

here.

Mr. MARKEY. Every kid in America, Mr. Cooper, can set up their

own website. So it is not that expensive for each airline to have

their own website. Why do they have to band together on the least

expensive thing that actually occurs in America?

Mr. STEARNS. The gentleman’s time has expired.

Mr. COOPER. And the answer was that I believe that they were

trying to discipline the chaos of cyberspace by restricting supply.

Mr. MARKEY. You are saying don’t let the consumer get lower

prices; is that what you mean, in disciplining the chaos of cyberspace?

Mr. COOPER. No, look, let me be clear. The prices might be lower,

but they are not nearly as low as they could have been——

Mr. STEARNS. The gentleman’s time has expired.

Mr. MARKEY. Okay. Thank you.

Mr. STEARNS. And I urge him to stay around for a second round.

Mr. Zuck, let me see if I can get some more nitty-gritty here, and

you can help on this matter. I beg your pardon. Mr. Boucher is recognized.

Mr. BOUCHER. Thank you very much, Mr. Chairman. I want to

commend each of these witnesses for the careful preparation of

their testimony and for taking time here to discuss these important

matters with us. Mr. Gilliland, I would like to get from you a description, please, of how the most favored nation clause that is in

the contract between Orbitz and the carriers that originated Orbitz

disadvantages Travelocity.com.

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And by disadvantaging you, also disadvantages the public that is

consuming Internet-based air fares?

Mr. GILLILAND. Well, thank you for the opportunity. Let me just

describe again the Orbitz MFN. There are really two important

components of that MFN, one in which is called, and which we

term the third-party MFN component, where every fare given to a

third-party site like Travelocity, or Expedia, must also be given to

Orbitz.

The second element or component of that MFN is what we call

the airline website MFN, where every fare on the airlines’ website

must be given to Orbitz. And this becomes a serious deterrent in

my view to airlines offering price discounts to other distributors,

and let me tell you the marketplace dynamic.

Before Orbitz had launched, airlines could and did very—and

similar to what you see in other types of supermarkets on-line or

off-line—they would post exclusive fares on their own websites and

occasionally gave short term exclusive fares or promotional fares to

third-party sites, really as a way of competing.

It drove the market dynamic for discounting. They would try to

acquire new customers, and try to take share away from their competitors, and a very competitive dynamic. Those tactics might tend

to lead to larger fare initiatives, or fare wars, across the airlines,

thereby reducing prices to consumers.

But discounts I think as we all have seen in the events after September 11 can be costly to air carriers if they can’t limit their

reach. It becomes very dilative, and they can’t make a profit.

When airlines decide to do fare sales, they weigh the stimulative

effects of those fare sales against the revenue dilution, and it

doesn’t want promotional discounts to be readily available everywhere, because it dilutes selling opportunities for higher priced

tickets.

Orbitz precludes this type of selective price discounting. So they

are not motivated as they were before to promote price competition

that I described, because all fares and all inventory, regardless of

the deals that we strike, and what we think is a clandestine fashion with the airlines, are then made available to Orbitz.

So the airlines become less motivated to do these types of deals

with the independent travel sites, and less motivated to make

those discounts available because they are proliferated in many respects much further than they had ever intended them to go.

Mr. BOUCHER. When you and your sales staff talk to the airline

carriers that participate in Orbitz, and you ask them about the possibility of entering into special promotions with you that would

benefit the traveling public, what kind of response do you get? To

what extent are you even able to have these negotiations with

those carriers today?

Mr. GILLILAND. Well, we negotiate, and we negotiate vigorously,

and in fact a part of that is how do we drive down their distribution costs as a part of that, and also how do we get access to fares

that might not be distributed across multiple distributors, and

therefore go to Orbitz.

With some airlines, we have very productive discussions and

even relationships. I think the concern again that we have is that

we typically don’t get guarantees as to the quantity of fares that

87

they make available to us; whereas, contractual obligations are

within this Orbitz’s MFN that they get these quantities, these

large quantities of fares that we simply don’t have access to.

So we get dribs and drabs. We get crumbs, and not a slice of the

cake, and not the cake. And it makes it very difficult for us to compete in that environment when it is a very price sensitive shopper

on the Internet.

Mr. BOUCHER. The Department of Transportation as a rule that

says that in the off-line world with regard to companies that have

an ownership interest in computer reservation systems, when they

give a fare to the computer reservation system in which they have

an ownership interest, they also under this Department of Transportation rule have to give that same fare to the other computer

reservation systems.

Now, this strikes me as a sensible rule that promotes competition

and makes sure that all of the computer reservation systems have

an opportunity to have a roughly equal place in the market, and

to attract business. Why wouldn’t that kind of rulemake sense in

the Internet world also, and if we have that kind of rule in place,

would that resolve most of the concerns that you are addressing

here today?

Mr. GILLILAND. I think it would solve a lot of the concerns. I do

think that we would solve a lot simply by removing the same as

them language. However, I think that applying some of these same

regulatory actions to this case on the Internet makes a lot of sense.

And really I think the intent there again would be that if they

make fares available in one system, one distribution system,

whether it is on-line or whether it is through the traditional CRSs,

that it be made available in other places.

I think though that we have to—and if you think back to the history behind those rules, you had an airline industry that was very

quickly expanding, and building hubs, and building distribution

hubs as well. Distribution through these CRSs.

And I think that what we found and why the government chose

to implement the CRS rules is that they became an anti-competitive type of—they had an anti-competitive effect, particularly with

the smaller airlines.

Mr. BOUCHER. Mr. Gilliland, thank you. Mr. Cooper, let me just

ask you to comment if you would on that same question. I know

that you——

Mr. COOPER. The gentleman’s time has expired, and I welcome

him for another round if he wants.

Mr. BOUCHER. Could I get a short comment from Dr. Cooper?

Mr. STEARNS. Sure, go ahead.

Mr. BOUCHER. Very briefly, Dr. Cooper.

Mr. COOPER. What was the question again?

Mr. BOUCHER. On the Department of Transportation rule that requires that the air carriers that have an ownership in computer

reservation systems and make a fare available to that system,

make the same fare available to the other computer reservation

systems, would this be a good rule to apply in principal to Internet

transactions as well?

Mr. COOPER. Well, you want to take out the vertical leverage

that the airline is seeking to obtain. So if that removes—and it has

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been described to me, but if that removes the disincentive to discount, and levels the playing field, that is more of a long term

question, and that if we lose the independent sites, then we will

watch the floor rise very quickly.

So we think that it is important to worry about that leverage,

and obviously the interesting thing is that the elephant and the

ant analogy is not quite right. I think the way that we need to

think about it is that because Orbitz is connected to the rest of the

elephant, we ought to see it as the tusk of the elephant.

And it is small, and it is growing, but when it gets big, it can

in fact destroy everything around it. So it would be different if it

were a separate beast, but it is not. It is part of the elephant, and

that is what is important.

Mr. BOUCHER. Thank you very much, Mr. Chairman.

Mr. STEARNS. I thank my colleague, and I will start this second

round of questioning. Mr. Wolff, you seem to want to anticipate Mr.

Boucher’s question. Perhaps you want to speak after Dr. Cooper,

and so I will give you fair game here.

Is there anything that you want to add after hearing Dr. Cooper?

Because he is pretty much saying what is true for Orbitz is true

for yours, too.

Mr. WOLFF. I’m sorry, but I don’t believe we should be painted

with the same brush because we are different industries, and I

think that this is a very important issue. People think of travel because it affects you. You travel, you fly, you stay in a hotel, and

you rent a car.

So they think of it as one industry, but we are vastly different

industries, and that the hotel industry is a highly unconcentrated

industry, with thousands of independent players, making independent business and pricing decisions, with not a very

inhomogeneous product.

This morning, like all of us, it appears that we did our little

homework on the web, and on my way here I stopped with someone

who was completely unfamiliar with the web or making reservations, and in a matter of 2 minutes, she went on-line.

And she went to one of the sites that we have been discussing,

and she found 198 hotels within 10 miles of Reagan Airport that

are available today to check in, 198 hotels.

So this is not a concentrated industry. This is a very diffuse industry, and it is different in its nature. So a few hotel companies

getting together does not provide any issues that we see with respect to the very important issue here of antitrust.

I understand how important antitrust is, and now in light of the

concerns over accounting issues, et cetera, it should be of concern

to all of us. And Mr. Chairman, and Congressman Terry, and Congressman Boucher, and other people have mentioned that when

suppliers get together, it raises bells.

And it should raise bells, and we understand that. So if you just

grant me 1 minute, let me share why I think in addition to an industry that is not ripe for collusion, the steps that TravelWeb has

taken to ensure that collusion isn’t and won’t take place.

First of all, before we met, each of us met with our individual

counsels, and got instructions to make sure that we were careful

with respect to antitrust concerns, legitimate antitrust concerns.

89

Second, the very first action of the entity was to hire outside counsel to attend every meeting and every conference call to make sure

that nothing was ever said or contemplated.

They gave us instructions and they made sure that nothing was

said or contemplated that would be of an antitrust nature. Now you

can imagine the early meetings where every member of the parties

had their own personal lawyer and the entity had a lawyer, to

make sure that nothing was said out of bounds and no actions were

taken.

We established rules of engagements and rules of the operation

so that, for example, even as chairman of the organization, I am

not privy to certain information about what other’s rates are, or

what those deals are. So we have very strict rules and guidelines.

We have made our offering available to all competitors. So that

while we offer—and Congressman Boucher legitimately said that

he is concerned about creating something and then not making it

available, rates available to others.

We have addressed that, and we have eliminated exclusivity, and

we have made sure that competitors can come in and participate

in this. So we have given our entire brief to the Federal Trade

Commission and to the Department of Justice before our launch.

And that’s why I am here today, and frankly at a lot of personal

distress, but we have gone every step to make sure that legitimate

concerns about antitrust are addressed.

Mr. STEARNS. Well, that’s fine, Mr. Wolff, and I wanted to give

you a lot of my time after Dr. Cooper.

Mr. WOLFF. Than you.

Mr. STEARNS. And let me continue, Dr. Cooper. I wanted to make

sure that you had every ample opportunity, because what was implied here, I think you have made clear and correct from your

standpoint.

Mr. COOPER. Right.

Mr. STEARNS. But, Mr. Zuck, let’s say, for example, that Orbitz

has some unique technology that gives it a special advantage, and

is it true, or isn’t it true, that Orbitz has a technology different

from its competitors, and that this comparative advantage would

give advantages to the consumer?

I mean, is that possible, and maybe you want to explore that.

Mr. ZUCK. Well, I mean, it sure is. I wish I could shop for turbans the same place that Mr. Cooper and Mr. Markey do. It is

probably where Johnnie Carson shops, but I can’t predict whether

or not there will be lower prices as a result of new technology.

I can only hope that that new technology is allowed to exist, and

is allowed to flourish in the marketplace to see if it ends up delivering benefits to consumers. What we are seeing in the short term

is lower prices for consumers, and so our only indicators that we

have thus far are pro-competitive and pro-consumer.

There is a new search technology that Orbitz is using and in a

more efficient sort of server base technology, that allows them to

bring up more fares at once. The CRS system is based on their own

mainframe software, and brings up a subset of fares at once, and

can’t actually search the entire universe of fares with each search.

It is cost insufficient for them to do so.

90

So certainly in theory this new technology contains the potential

to deliver additional value to consumers, and so all we ask in the

IT industry is that new technologies be allowed to attempt to deliver value to consumers, and see what happens.

Mr. STEARNS. My time has expired. The ranking member, Mr.

Towns, is recognized.

Mr. TOWNS. Thank you very much, Mr. Chairman. Mr. Ruden,

let me sort of reverse the situations here. This is really an unfair

mess that we have here. What can we do to correct it?

What advice do you have to us as to what we might do to correct

this?

Mr. RUDEN. Well, if the Department of Justice does not act soon,

it would be our view, and it has been our view for some time that

Congress needs to step in, and to address this aggregation of market power, which I think is probably unprecedented in American

history, certainly in modern times.

And we have advocated legislation, for example, that would buy

on its face and assure consumers the ability to choose the channel

they want to buy through, and having chosen that channel, to find

there all of the fares that are available from the airline.

That is a drastic remedy without question, but if we don’t do

something, then what Dr. Cooper correctly described as the tusk

will become an instrument for the destruction of most of the thirdparty distribution system that is out there.

And I have to say, Congressman, that there is a lot of talk about

low fares and discount fares, as if that were independently a value

that should be sought here as a matter of government policy.

And I would suggest that the value is a competitive system.

Prices are supposed to be set by competition, and those prices end

up bearing a relationship to costs, and provide a reasonable return

on profit when they are the product of competition.

And you may look at a set of prices that come from that process

and say, gee, those are kind of high prices. But if they are properly

related to costs, and provide a reasonable return on investment,

they are the correct prices.

And you want a system that allows firms in that marketplace to

strive for opportunities with what Dr. Cooper would call cheating,

and I would simply say taking the initiative to try to capture some

more business by finding price initiatives, ways to reduce costs further, ways to repackage and rebundle.

Those are the things that you are looking for, and the problem

that Orbitz is addressing has nothing to do with costs as I said before. If you look at their S-1 registration statement, the return to

the airlines, the five founders, in return booking feels for the first

year was $6 million on 6 million transactions.

Those are their numbers and not mine. That is a dollar a transaction. That is what the airlines got back, and surely this $200 million investment, of which $153 million has been lost, is not about

getting $6 million back, or even $12 million back.

It is about displacing the independent distributors. That’s why

these multi-brand sites that Mr. Wolff correctly stated, and I don’t

know enough frankly about the hotel site to comment directly

about it.

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But to the question of why these multi-brand sites are so important to the producers all of a sudden, it is precisely because they

saw the independent people moving into the Internet space, and

making creative, pro-consumer use of it, and they decided that we

don’t want that to happen. We are losing control.

And so we are going to take control back, and they formed Orbitz

to get that done.

Mr. TOWNS. Thank you very much. Mr. Wolff, I would like for

you to just sort of clear up something. You know, you used or you

started out by saying that you felt that privacy was extremely important.

And then in your last statement the last time around, you said

that you make everything available to your competition. Now, how

do you do both?

Mr. WOLFF. Oh, I’m sorry. For clarity, privacy is important, and

we protect the data that we create very carefully, and we make

sure that we only accept data that is necessary, and only transmit

it to people who are important.

What I said about the competition is we are going to make available to the competition the opportunity to participate on this

website. So choice hotels and other hotels can be on the website,

and can be sold through our website. But we are not going to be

giving them information that isn’t appropriate to them.

Mr. TOWNS. Thank you for clearing that up. I must admit that

I was troubled by that. Thank you very much, Mr. Chairman, and

I yield back.

Mr. STEARNS. The gentleman yields back. The gentleman from

Georgia, Mr. Deal, is recognized.

Mr. DEAL. Thank you, Mr. Chairman. Mr. Ruden, did I understand you to say that you were not familiar with the website that

Mr. Wolff is here representing in the hotel area?

Mr. RUDEN. I am aware of it, but I am not familiar with the internal contractual relations that they have developed in the same

way that I am familiar with the Orbitz website.

Mr. DEAL. So you prepared yourself to focus on Orbitz for this

testimony today; is that right?

Mr. RUDEN. Well, yes, my testimony does address their website,

the written testimony.

Ms. ESHOO. Mr. Chairman, excuse me, but can you turn your

mike on? It is hard for me to hear your answer. I can hear the

question, but not the answer.

Mr. STEARNS. Do you have your mike on?

Mr. RUDEN. It is on now, and what I said essentially was that

my written testimony did address briefly the hotel website issue,

but we do not have and have not had the access to the contractual

information about how that thing works, and I will tell you that

I am concerned every time I hear about most favored nation

clauses. And we will be taking another look at that issue.

Mr. DEAL. I just thought it strange that someone representing

the travel agents weren’t familiar with the issue relating to hotel

websites.

Mr. RUDEN. Well, perhaps I spoke too broadly in saying not familiar. I am not familiar as I said with the contractual details of

it.

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Mr. DEAL. Mr. Gilliland, let me ask you just a few straightforward questions to see if you can clarify in my mind where we

stand here. Do I understand that you are contending that you as

Travelocity could not set up a website that operates exactly like

Orbitz, with most favored-nation clauses in it?

Mr. GILLILAND. What I am saying is that—and this is kind of a

peculiarity of the agreements that have been set up, is that——

Mr. DEAL. Which agreements?

Mr. GILLILAND. The Orbitz agreements, and so the question you

are asking me is could we set up agreements that are similar to

what Orbitz has done. The peculiarity that I find in it is simply

that those agreements were put in place with a company that had

no bookings, and had no share of the market, and had no presence.

Mr. DEAL. And that is the CRS that they used that you are

speaking of?

Mr. GILLILAND. No, no, I am talking about Orbitz. When they

were setting up the agreements, you had a company that was getting these very favorable types of agreements set up with particularly these five airlines, and that was happening in an environment

where thy had no bookings. They had no share.

Typically when you are competing in this market, and you are

attempting to get those types of agreements, and put those types

of agreements in place, they are generally given to those—those aggressive types of agreements are given to those distributors that

are providing lots of volume to those suppliers, and very similar to

what you would see really in any industry.

So that is what I am calling out, is that first of all, is that peculiarity. And I think again this point that says that we have no problem with Orbitz operating, and we have no problem with the Orbitz

ownership. We do have a problem with the fact that we have these

agreements in place.

Mr. DEAL. Well, to specifically try to answer my question, is

there anything that prohibits you from going to the five major airlines, or the 37 smaller airlines that are associates with them, and

say if you will enter into an agreement with Travelocity, we will

employ the same most favor nation language. Is there anything

that prohibits you from doing that?

Mr. GILLILAND. Nothing that prohibits me. Unfortunately, no

progress, as we have attempted to provide lower distribution costs

to them through our site.

Mr. DEAL. Have you ever made that offer to any of these airlines?

Mr. GILLILAND. We have made those types of offers, and I think

it is in the record, that American Express has made the offers to

provide for free distribution of those same types of fares for which

they got a no answer at least so far.

Mr. DEAL. But you are not willing at the same time to give up

your payment system for someone who would pay you to give them

a biased or preferred customer status; isn’t that correct?

Mr. GILLILAND. We have been extremely aggressive to try and go

out and get the same types of deals that Orbitz has. The very issue

here I think is that we do that one by one, we compete in the marketplace, and we have this singular agreement, this MFN agreement, which provides all of that to Orbitz at one time.

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And as a part of that, you have the owner airlines and Orbitz

setting the price for distribution, and setting the price for distribution collectively.

Mr. DEAL. And what do you mean by that?

Mr. GILLILAND. They had agreed to what the price of distribution

would be through Orbitz for the next—for what I understand are

10 year agreements.

Mr. DEAL. That is the declining fee schedule?

Mr. GILLILAND. It is a declining fee schedule.

Mr. DEAL. Well, Sabre is the largest CRS and it also fixes the

costs, and there is no incentive to decrease your costs over the next

10 years. In fact, to follow your 10 year history, it would go up 5

percent a year; isn’t that right?

Mr. GILLILAND. In fact, it has gone up 4.8 percent over the last

10 years, while air fares have gone up 5 percent, 5.1 percent over

that same period on an annual basis. Now, let me just talk to the

costs for just a minute.

The airlines have taken commissions to zero as you know for all

travel agencies, and therefore, through that process the cost of distribution through a mom and pop travel agency connected to a

CRS, Sabre or otherwise, on average costs $11.

That is every element of cost that an airline pays for distribution for that mom and pop agency connected to a CRS, is about $11 on

average.

That same comparison made through Orbitz today on that fee schedule is $14. It just does not make any sense, and I think that

we are competing on distribution costs, and we are in with those

airlines every day, and we want to continue to engage in those

types of competitive activities with the airlines.

Mr. DEAL. I just have trouble understanding how somebody can

complain about a provision of a plan that continues to reduce the

costs of booking fees, and at the same time holding their own and

increasing theirs every year, and complain and point the finger at

the one who is reducing the costs. That doesn’t make any sense to

me in a competitive environment.

Mr. GILLILAND. Yes, and let me just describe what doesn’t make

any sense to me, and that is that you have a set of competitors

coming together to set distribution price. That just doesn’t sound

right to me.

Mr. DEAL. And that distribution price has to be the lowest price

that is offered anywhere in the marketplace, which can’t be harmful to the consumer.

Mr. GILLILAND. The lowest price for an unprofitable company,

and in the end the consumer issue comes back to the availability

of the fares. It has nothing to do as Mr. Ruden said with the distribution costs. It has to do with the competition that needs to——

Mr. DEAL. Are you saying that in your capacity for Travelocity

or in your capacity for your parent company, Sabre?

Mr. GILLILAND. Well, I am representing both Travelocity and

Sabre.

Mr. DEAL. Oh, so they are both represented in your testimony

today?

Mr. GILLILAND. They are.

Mr. DEAL. Thank you, sir. Thank you, Mr. Chairman.

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Mr. STEARNS. I thank the gentleman. The gentlelady from California, Ms. Eshoo, is recognized.

Ms. ESHOO. Thank you, Mr. Chairman. One of the advantages of

going around from member to member is that you get to listen to

not only the questions that are asked, but the answers that are

given, or the responses that are given, and in my view, there is a

big difference between an answer and a response.

I have heard both, and I would like to compliment you on the

professionalism of your testimony. You helped to answer questions

when you speak.

Mr. GILLILAND. Thank you, Congresswoman.

Ms. ESHOO. Each one of us here on the subcommittee represents

about 650,000 people, and so we have a lot of customers, too. We

call them constituents, but they are our customers.

There has been a lot of talk about booking fees, and what these

various organizations—small, medium, large, consortium, bumping

up against the antitrust organization in my view. I mean, the more

I listen, the more I am convinced of it. So you have not unraveled

this thing. You have convinced me that this is an elephant’s hoof

in terms of Orbitz.

My constituents look at—and so do I, and so do my kids, my

young adult children, they look at the basic price. I know that

there is a booking fee that is attached to the ticket, but that is not

what they go to first.

They look at the lowest and the best price, and then the schedule, the time, in terms of travel. And let me say something else

about travel. Since our country was attacked, whether they are

people of means, and I have plenty of them in my district in the

heart of Silicon Valley, and throughout our region in the Bay Area,

as well as the most extraordinary ordinary family, they are not

looking to go abroad.

They are nervous about it. They want to stay either within our

State, which is the Nation’s State of California, or see and take advantage of those things that our country has to give.

And so what you are doing speaks to our time, and I think the

cost of those tickets and the best bang for the buck, and who can

bring it to them, is central to what we are doing here today.

Now, I am not asking a question. I am giving my observations

based on what each one of you have said, and in cases what the

responses are. I know that there are many intricacies to this, but

really as I pull the lens back, it is what this thing is about.

I really believe, Mr. Chairman, that we should be taking a look

at writing legislation to correct this. I don’t think the consumer is

getting the benefit of the doubt when the five largest outfits, and

in this case they are airlines, come together. There is a squeeze

going on here.

And I wasn’t a travel agent in my past life, and I probably won’t

be one in my future life, but I will be a consumer all of my life.

Take a look at my credit cards and yo can see that.

But when I go to consume, I want the best price and so do my

constituents. I think there is an effort here in terms of the squeeze

of the market, and I think there really is an adherent danger in

having the entity or the entities that control the inventory also in

charge of distribution.

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And I think that is what this thing is about. I really think that

is what this thing is all about. So, hats off to the big five. You

thought of something, but I don’t think it is fair. I don’t think it

is fair, and I don’t think the consumer is getting the best of what

they should get.

Many years ago, and it was before I came to the Congress, and

it was in this committee, there was an issue about controlling inventory and being in charge of the distribution. It was Medicare,

but there was also Medicare Gap policies.

Well, you know what? They used the coin of the realm, which is

the word Medicare. But you know what? They all didn’t offer the

same thing, but people went to them because they thought they

were.

Congress stepped in, and I remember my father saying, or I chided my father, and I said why are you buying that Medicare or

Medi-gap policy, and he said, well, god rest his soul, both of them,

both my father and Danny Thomas, he said, do you think that

Danny Thomas is going to lie to me?

So the Congress stepped in and it was this committee that did

it first, and said, look, you have got to be fair to people. You offer

these prices, and in your case, it is the cost of an airline ticket for

travel, then everybody has to have access to this, and you compete.

So while some may not like the analogy, I don’t think it is such

a bad one. I remember it from many years ago. So I am not going

to ask any questions. You have just heard my observations, and I

think that our ranking member has stated it well in a very brief

sentence.

This is a mess, and I think that we have the responsibility on

behalf of our constituents who do travel. You know, my constituents come to Washington, DC, and it is a pretty costly ticket. They

are looking for the best deal.

The teachers and the schools that are trying to bring the students here so they can see how democracy works, even though it

is kind of messy, they need the best price for those tickets. Otherwise, they can’t come here.

They are average families, and these are not easy things for

them to do. So if I pull back from all of the complications and the

sophisticated language that has been used here, I really think that

is what the issue is, Mr. Chairman.

I think you have brought us a long distance today in a short period of time by having this hearing, because I have learned a lot,

and the witnesses, whether they intended it to be the case or not,

have really been highly instructive in terms of my forming my

opinion here.

So I think we need to take a look a legislation to fix this and

clean it up, and make it better for the consumer and for our constituents. Thank you.

Mr. STEARNS. I thank the gentlelady, and we have completed our

hearing. And let me thank the witnesses for their attendance. Most

of you got a notice—it was less than a week, and so you were kind

enough to come and we want to thank you.

I think the hearing has brought out that it is a lot more complicated issue. I think we start to understand most favored nation

status, and some of these clauses, that we didn’t have any inkling

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or understanding before. So you have done a lot to educate us as

the gentlelady from California has mentioned.

And, of course, we will continue to follow this. I think it is complicated. Mr. Wolff, we appreciate you coming here and some of

your comments, and we have to look at this at the macro level. I

mean, it is not just the airline industry and it is not just the hotel

industry.

There is a possibility of the music industry doing this, and the

movie industry, and the currency exchange industry is doing this.

So when you look from a macro standpoint, there is much larger

issues than just Orbitz, or just one particular site, or one particular

industry.

It is a larger issue that we as members should be cognizant of,

and so I think this hearing went a long ways to doing that, and

again we thank you for your support, and your attention, and your

participation, and the subcommittee is adjourned.

[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]