1 UNITED STATES OF AMERICA BEFORE THE DEPARTMENT OF TRANSPORTATION

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Agreement Adopted by the Passenger ) Services Conference of the International ) Docket OST

- 2013

- 0048 Air Transport Association )

! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! COMMENT S OF THE AMERICAN ANTITRUST INSTITUTE
I. Introduction The AAI files these comment s in the above

- captioned proceeding regarding the application by the International Air Transport Assoc iation (IATA) for approval of the
ag reement, “Resolution 787 ” (Enhanced Airline Distribution). 1 The AA I’s interest in this

ma tter pertains to the competitive issues potentially raised by the IATA Resolution 787 proposal. The AAI is an independent and nonprofit edu cation, research, and advocacy

o rgani zation whose mission is to advance the role of competition in the economy, protect consumers, and sustain the vitality of the antitrust laws. 2 The A AI has extensive experience analyzing competition policy and regulatory issues in the commercial airline ind ustry , including frequent congressional testimony and white papers analyz ing the competitive effects of most major airline mergers. The AAI also has been active in!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 1 International Air Transport Association, Applica tion for Approval of an Agreement (Resolution 787) by the International Air Transport Association (IATA Application), U.S. Department of Transportation Docket OST

- 2013

- 0048, March 11, 2013 (hereinafter “Application” )

.
2 The AAI is managed by its Board of D irectors, with the guidance of an Advisory Board consisting of approximately 130 prominent antitrust lawyers, law professors, economists, and business experts. The AAI’s Board of Directors alone has approved this filing for AAI. The individual views of mem bers of the Advisory Board may differ from AAI positions.2 analyzing dynamic pricing , pric ing transparency, standard setting , and the competitive effec ts of agreements among competitors

. As a n independent competition advocacy organization with this history , the AAI is uniquely qualified to comment on the Resolution 787 matter. The AAI files these comment s to identify and address competitive concerns rai sed by Resolution 787, particularly insofar as Resolution 787 serves as an agreement among some of IATA’s largest member airlines to impose a new distribution standard in the commercial airline industry

. Section II provides background on the two symbiotic dimensions of Resolution 787

– the technical data exchange standard and the distribution standard. Section III asks what IATA is actually seeking approval for in submitting Resolution 787 to the Department of Transportation ( DOT )

. Section IV explores
compe titive issues potentially raised by Resolution 787, including (1) whether the process of crafting the technical standard was open and inclusive of all stakeholders and (2) whether the distribution standard constitutes a potentially anticompetitive agreemen t among competitors on the “rules” of competition. Section V concludes with recommendations for further DOT inquiry.
II. Resolution 787 Embeds a Technical Standard within a n Airline
- Mandated Distr ibution Standard in an Effort to Fully Embrace Dynamic Pric ing On March 11, 2013, IATA filed with the DOT an agreement (Resolution 787) adopted by its Passenger Service s Conference (PSC) i n October 2012 to become effective in June 2013

. IATA frames Resolution 787 as a req uest for the DOT’s approval of a technica l standard , upon which electronic data interchange (communications or messaging protocols ) between the airlines and other members of the industry would be3 based. For example, t he Application states that Resolution 787 “ establishes high

- level objectives for and a process for developing a new electronic data interchange st andard for airline distribution communications using Extensible Markup Language (XML), the modern programming language of the Internet. ” 3 The Application characterizes the current model of i nformation exchange involving airline products an d services as an outdated system while explaining that there have been some efforts to update messaging protocols

. 4 For example , the a irlines themselves currently use XML on their own websites when implement ing the “direct

- connect” model, and Global Distribution Systems ( G DSs) use a variety of protocols ( including XML ) for data exchange. The Application states that the purpose of Resolution 787 is to implement XML as the industry standard , whereby all price, quality, and availability information pushed by the airlines would be in a uniform data exchange format , to be used by industry participants and across distribution channels

. Resolut ion 787 explain s that the XML technical standard is essential for the
pu r pose of facilitating a new standard for the distribution of airline pricing and product information. Indeed, Resolution 787 tightly weaves together XML and what IATA identifies as the New Distribution Capability (NDC) . The Application acknowledges this

re lationship, explaining that “ NDC is an aspirational description of various improvements in distribution which, if adopted in the market, the new XML standard would be capable!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 3 IATA Application, supra note 1, at 1.

4 Another data exchange system is “ EDIFACT ” ( Electronic Data Interchange For Administ ration, Commerce and Transport).4 of supporting.” 5 NDC r epresents a fundamental change in how consumers will be abl e to shop for airfares by using the concept of “ authentication ,” which is essentially the development of tailored/targeted offers based on the collection of extensive consumer information. 6 Under NDC, a irline o ffers would consider price, but also potential ly bundle in a variety of additional ancillary products and services (e.g., more legroom, lie

- flat
seats , etc.) that airlines have come to offer in recent years. The new XML

- NDC standard would cover the range of curr ent distribution channels. These include t he airlines ’ own websites , the GDSs , and third party data aggregators that are the source of fare and availability information for both online and offline retail and corporate travel agencies. The intent of Resolution 787 is relatively easy to decipher . Namely, it establishes a technical standard embedded in a new airline

- mandated distribution model

. The overarching propos al seems designed to more fully embrace dynamic airline pricing by linking the collection of personal consumer data to the provision of tailored information on fares and ancillary services. Such tailored offers are generally considered a sophisticated form of price discrimination. Dynamic pricing, as practiced in a number of industries, is powered by detailed information on consumer cha racteristics. T he IATA Application clearly embraces this goal in “ describ[ ing ] one anticipated business model [NDC] in which the pricing and product offer is assembled dynamically by the airline upon request

. . . ”

. 7!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 5 IATA Application, supra note 1, at 3

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6 While the AAI does not intend to comment on consumer protection issues r aised by Resolution 787 (NDC in particular), we note that a number of commenters in this proceeding have raised consumer privacy concerns about the nature of consumer information proposed to be collected.

7 IATA Application, supra note 1, at 8

.5 The dynamic pricing concept that und erlies NDC is fundamentally different than the current industry approach

– so - called “drip pricing”

– where consumers search primarily on price and availability but are subjected to additional fees for services at the end of their shopping experience . Unde r drip pricing, consumers only see add

- on fees after they have incurred substantial search costs and are thus less likely to initiate new searches. The Resolution 787 agreement cannot achieve its objective of moving the industry off of drip pricing and ont o a dynamic pricing platform without packaging the technical XML standard with a standardized distribution platform (NDC)

. III. The Applic ation Begs the Fundamental Question

– For What Is IATA Seeking Approval ? Despite the symbiotic relationship between XML and NDC, IATA asserts that the current Application pertains only to the matter of the technical standard and that IATA seeks approval of Resolution 787 “ only insofar as it describes a means to modernize distribution communications technology with a ne w XML standard

. . . [;] IATA is not seeking an endorsement of the stated business requirements or marketplace aspirations of
NDC .” 8 Yet by IATA’s own admission, DOT approval for the XML technical standard is not necessary. T he Application explains that Re solution 787 could have been filed for

“ information only ” und er DOT Order 2012

- 4

- 18 (Tier 1). 9 Indeed, IATA emphasizes that
R esolution 787 is “ principally an articulation of goals and a template for future work and has no immediate effect on airline distri bution practices, competition or passengers. ” 10!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 8 Id. , at 2.

9 Id. , at 17.

10 Id.6 The most obvious interpretation of IATA’s filing an application with the DOT that does not require the agency’s appro val is that it has some trepidation about whether the DOT will accept the NDC proposal , wh ich has generated significant controversy . The Application confirms this interpretation :

“ Nevertheless, IATA recognizes that movement toward any significant coordinated change in the technical standards for selling airline services is likely to warrant fu l ler scrutiny by the Department

. . . and recognizes that any additional conference agreements on standardization of distribution practices would need to be filed with DOT before becoming effective. ” 11 While this filing approach allows IATA to provide the D OT with a “sneak peek” at the NDC, the filing itself is its own best argument against DOT approval, particularly where the applicant a ttests that it is not obligated to obtain the only approval it purports to seek

. Under the circumstances, the filing invit es obvious confusion about w hether DOT approval of Resolution 787 can be construed as a pproval of the NDC model , or a ny

a spects of the NDC model

. In light of the above, the AAI respectfully submits that solely as a matter of jurisdiction and statutory co mpliance, there is confusion over exactly what is being
soug ht from the DOT in regard to IATA’s Application for a pproval of Re solution 787. If the intent

– as the Application states

– is limited to implementing a new technical standard governing data inter change, then IATA should withdraw its Application and issue such a standard w ithout requesting DOT approval. If IATA does not withdraw its
A pplication , the DOT should not assume the risk of accidentally “smuggl ing in ” any aspect s of the NDC model by granti ng unne eded approval for the XML standard.!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 11 Id.7 Approval of the NDC standard is a separate matter for purposes of regulatory oversight and should be presented to the agency at another time, subjected to separate notice requirements, and open ed up for comment

. Anything less than a separation of dockets serves to muddy the waters around the R esolution 787 proposal, risks confusing the public on the scope and breadth of the competitive issues surrounding NDC, and seriously threatens to short circuit full DOT revi ew. The AAI submits, therefore, that the
DOT can not approve Resolution 787 in its current form . The DOT should place the burden on IATA to resolve the tension between Resolution 787 and the language in
IATA’s A pplication for which it seeks a pproval

. Specif ically, IATA must take the necessary steps to eliminate confusion as to whether it now seeks approval of the XML standard (which it believes it does not need), the NDC standard (which it believes it does not currently seek) , neither, or both

. IV . Resoluti on 787 Raises I mportant Policy Issues Relating to Potential Anticompetitive Coordination Among Rivals As a standalone technical standard

- setting exercise, adopting XML may well generate efficiencies and benefits to consumers

. By embedding the XML standar d in a

new distribution standard (NDC) for the industry, however, Resolution 787 strays outside
a t echnical standard

- setting exercise

. Resolution 787 raises important policy issues relating to IATA as a standard

- sett ing trade association versus a group of competitors that have agreed on a new distribution model for the ir industry. Taken together, the XML and NDC proposals could potentially affect two impor tant forms of competition: head

- to

head competition between airlines and inter

- distribution channel com petition

. Given the apparent lack of public interest benefits associated with transitioni ng to a technical8 standard together with the rollout of a new distribution standard , the AAI suggests that the DOT further probe into a number of important competitive issues

. A. The DOT Should Ensure that the Stakeholder Process for Developing Resolution 787 Was Open, Transparent, and Inclusive Technical standard setting is important in any industry that depends on physical or electronic networks to facilitate tech nical coordination among market participants to facilitate commerce . Examples of such industries include electricity, financial networks, telecommunications, and airlines

. Standards affect key parameters such as interoperability, compatibility, reliability , and efficiency. Industry efforts to set new technical standards and develop frameworks for the transition to such platforms are thus typically inclusive of all industry stakeholders. This includes manufacturers , distributors, retailers, consumer groups, and trade groups. Regulatory authorities are rout inely called upon to participate in and/or approve standard setting processes. For example, the Federal Energy Regulatory Commission has played an integral role in the development of standards for Smart Grid technologies. 12 The AAI suggests th at in its review, the DOT should ensure t hat IATA’s crafting and adoption of Resolution 787 reflected an open and inclusive industry stakeholder
process. If not, the Application raises fundamental concerns about the in tent of the XML

NDC proposal as a competition

- neutral or competition

- enhancing process. The record evidence indicates that IATA’s adoption of Resolution 787 may not reflect an open and inclusive stakeholder process. IATA ’s Passenger Distribution Group (PDG ), within its PSC, began the process for crafting and adopting Resolution 787 in July 2011

. The PSC!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 12 See, e.g., Federal Energy Regulatory Commission, Smart Grid, ferc.gov, http://www.ferc.gov/industries /electric/indus

- act/smart

- grid.asp#sk ipnav

.9 has historically taken responsibility for developing communications standards for the industry

. The PDG

– which endorsed the NDC standard

– is made up of re presentatives from 11 of the largest airlines in the world, which constitute a tiny proportion of the IATA membership

. 13
The PDG subgroup responsible for t he technical work on XML

- NDC is the Distribution Data Exchange Working Group (DDXWG). Over the period July 2012 to November 2012, t he DDXWG held two meetings that included a variety of stakeholders: airlines, the three major GDSs, online travel agents, traditional travel agents, and industry technology s ervice providers. 14 The PDG therefore took 12 months to deliberate internally before producing the initial proposal , and it opened the process to stakeholders for three months

. It is notable that based on information contained in the Application , Resolution 787 was adopted in Octo ber 2012. However, t he secon d meeting of stakeholder groups , in November 2012, occurred more than one month after the vote to adopt , thus begging the question of whether all stakeholder input was considered. 15 Needless to say, t he AAI and some other commenters have not been privy to the internal workings o f the IATA groups charged with promulg ating Resolution 78 7. In light of the apparent anomalies in IATA ’s stakeholder process, coupled with the competitive issues raised by the XML

- NDC proposal discussed below, the AAI urges the
DOT t o issue a data request to the parties to divulge all internal documents related to the!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 13 IATA Application, supra note 1 at 15. Those airlines are: Air Canada, Alitalia, United Airlines, Inc., Delta Air Lines Inc., Air France/KLM, British Airways p.l.c., Deutsche Lufthansa AG, Swiss International Airlines Ltd, Korean Air Lines Co. Ltd , Cathay Pacific Airways Ltd, and Singapore Airlines Ltd.

14 IATA Application, supra note 1, at 16

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15 Id.10 Resolution 787 process. Such discovery would allow the DOT to examine the openness and inclusiveness of IATA’s stakeholder proc ess. Deviations from an inclusive process would cast a shadow on the intent of Resolution 787 , potentially raisin g pressing policy questions or even

– if the outcome is anticompetitive

– antitrust liability

. B. NDC May Constitute a Potentially Anticompetitive Agreement Among Competitors on the “R ules” of Competition By intertwining the XML technical standard with the rollout of a new airline

crafted distribution model (NDC) that is the product of an agreement among the world’s largest airlines , Resolution 787 exits the realm of a technical stand ard setting exercise and
enter s the arena of potentially restraining competition

. A number of issues deserve the DOT’s consideration. First, a s no ted earlier, the apparent intent of the XML

- NDC model is to allow the airlines to implement dynamic pricing th rough sophisticated information collection and development of tailored , consumer - specific offers. Arguably , this objective can be fulfil led through means that stop short of an agreement among the 11 members of
IATA’s PDG to impose a new distribution standa rd on the industry. For example, IATA could promulgate a new uniform XML standard and offer a new menu of information o n fares, availability, and ancillary p roducts and services to GDSs and third party data aggregators that service the range of online and brick

- and

- mortar industry travel agencies

. Second, g oing the additional step of standardizing distribution under a model that has been agreed to by the very rivals who compete for consumer travel dollars potentially constitutes an anticompetitive agreeme nt on the “rules” of competition. T he nature of an agreement on rules

– which is not new to competition policy

– is generally to reduce the11 number of variables or dimensions across which rivals compete. Legal

- economic analysis of a nticompetitive agreements among competitors typically parses agreements into one of three categories : (1) agreements on price , (2) agreements to disadvantage rivals, and (3)
agreemen t s on rules. 16 Unlike naked price fixing, an a greement on rules is a more subtle form of c ompetitive restraint whereby rivals agree on and implement practices that

“ ins ulate cartel members to some degree from hard competition.” 17
Rule “ fixing ” often is found in situations such as the one under discussion , whe re straightforward price fixing is unduly dif ficult because the competitors compete along many dimensions in addition to price

. Afterwards there still will be price competition, but the price competition will be softer or less vigorous because the rule fixing will have collusively altered the competi tive environment

. The ultimate effect s of fixing the rules of competition, however, often will be the same as the effects of price fixing or other forms of cartelization

– higher prices and restricted consumer choice in terms of non

price competition. Imp osition of a uniform distribut ion model (NDC) that is the product of an agreement among the largest airlines could soften existing competition between airlines and between the airlines ’ direct

- connect distribution channel and other channels of distribution , such as online and offline retail and corporate travel agencies. The current model for purchasing airfares, particularly on the Internet, is widely acknowledged to be!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 16 Robert H. Lande & Howard P. Marvel, "The Three Types of Collusion: Fixing Prices, Rivals, and Rules," 2000 Wisconsin L. Rev. 941 (2000), at 2

- 3

. Available http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1134820&download=yes

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17 Id.12 transparent and to generate stiff price competition. 18 This is immensely valuable to

con sumers. NDC’s potential to allow airlines to escape this competition and erode existing consumer benefits highlight s why the DOT should exercise caution in considering IATA’s assertion that Resolution 787 will enable increased competition among airlines “seeking to entice customers with enhanced service offerings in addition to price.” 19 Under agreements on rules, airlines’ decisions on price and output may still be made independently , but t he agreement effectively create s the space for rivals to have some degree of pricing freedom

. 20 The DOT might consider whether that will facilitate the isolation of consumers who can then potentially be exploit ed through higher prices

. 21
Other c o mments in this proceeding have raised concerns about consumers ’ ability
to c omparison shop for fares under NDC in a way that lends itself to maximum transparency. For example, consumers will be furnished tailo red or targeted offers from airlines based on the provision of detailed informatio n under “authenticat ion

. ” Contrary
to IAT A’s claim that NDC supports comparison shopping and enhanced consumer!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 18 See, e.g. , written testimony (dated March 12, 2012) of Daniel Kasper in the American Airlines bankruptcy proceeding: “In addition, other factors such as Internet

- based airline search and booking tools have also put downward pressure on airfares by increasing price transparency for both business and leisure passengers
. ” ( at 21 ) “Quoting Airlines & Academics About Comparison Shopping ,” Business Travel Coalition , a v ai lable http://businesstravelcoalition.com/documents/quoting

- airlines

-- academics.html

.
19 IATA Application, supra note 1, at 18

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20 There is a burgeoning literature on privacy as a term of competition. See e.g. Julie Brill, The Intersection of Consumer Prote ction and Competition in the New World of Privacy , 7 Competition Policy Int’l. 7 (Spring 2011); Pamela Jones Harbour & Tara Isa Koslov, Section 2 in a Web 2.0 World: An Expanded Vision of Relevant Markets , 76 Antitrust L. J. 769 (2010). One of the concerns with NDC is that potential privacy competition may be absorbed in the “cushion” provided by a rules agreement. NDC has the potential to mandate uniformity in the terms of data collection , thereby threatening to eliminate incentives for airlines to compete by offering less intrusive booking opportunities.

21 Lande & Marvel, supra note 16, at 4.13 choice , a standardized distribution model may well undermine the ability of consumers to assess their options, leading to undesirable outcomes, even if price competition in the industry continues

. In other words, authenticat ion could affirmatively reduce transparency. Finally, IATA asserts that a major role for distributors under NDC will be to add the necessary dimensions to allow consumers to comparison shop. For example, the Applicati on states that NDC will open the “ existing distribution market to strong competition from new di stribution channels (e.g., travel agents ) . . . to evolve to better meet customer needs

. ” 22 However, by mandating a standard industry distribution model,
NDC rem oves many of the dimensions and opportunities that currently facilitate inter

channel competition. In fact, NDC may well facilitate further distribution standardization that could ultimately eliminate the need for GDSs or other data aggregators. These enti ties could be replaced with airline joint ventures that use airline data, together with detailed consumer information, under an algorithm that would help airlines set their prices for individual customers

. The efficiency with which the airline industry mi grates to a dynamic pricing model is, of course, a central issue for any trade association in a standard setting exercise. There is nothing to prevent any individual airline from developing and implementing dynamic pricing on its own, and we would have no objection to individual airlines doing this unilaterally. There is, however, no need for the airlines to do this collectively. On the contrary, it is their collective action that has the potential to be as anticompetitive as more straightforward forms of c ollusion. In light of these concerns, the AAI suggests that the!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! 22 IATA Application, supra note 1, at 18

.14 DOT carefully scrutinize the Resolution 787 proposal to determine if an agreement among airlines to impose a standardized distribution model is necessary to achieve reasonable commercial goals within the confines of fair competition and the public interest. If it is not, then IATA should go back to the drawing board to explore other ways to modernize the airlines’ delivery of pricing and other information to consumers. V . Policy Issues and Reco mmendations The foregoing analysis highlights a fundamental tension surrounding the airline industry’s efforts to update their b usiness model and move toward a more sophisticated system where they compete not only on price but also on other dimensions of service and quality. It is very likely possible to implement such changes without the steps proposed by Resolution 787, particularly an agreement on new rules of competitio n embodied in the NDC proposal. However, IATA is asking the DOT to sign off to a lar ge degree on a proposal that has not been articulated with sufficient specificity or clarity to evaluate its potential upsides or downsides. In light of the fundamental questions raised by the proposed IATA Resolution 787 agreement, the AAI suggests that t he DO T pursue further avenues of inquiry to determine if the proposal is in the public interest

. The AAI respectfully suggests the DOT should:
1. Issue a data re quest for all internal IATA documents relating to the Resolution 787 crafting and adoption p roc ess. W ere all relevant stakeholders in the supply chain invited to participate in the process in a timely and meaningful way? How was input from various stakeholders processed and included in the final recommendation?
2. In conjunction with the DOJ, d ete rmine the extent to which the NDC agreement among rivals will disable or soften competition between airlines or between the direct connect distribution channel and other distribution channels. Even though airlines will continue to compete on price, will th e agreement allow airlines to compete less vigorously15 on price and along other non - price dimens ions of competition, resulting i n higher overall prices and restricted consumer choice ?
3. Determine whether the XML
- NDC model will deliver benefits to compet ition and consumers that cannot be achieved in any other feasible way. Absent the NDC could XML

– i n conjunction with ot her changes to how airlines provide information on products and service s
– achieve the same goal s toward improving how consumers are abl e to shop for travel? Can this be done without sacrificing competition and consumer choice? Respectfully submitted, Diana L. Moss, Ph.D.

Vice President American Antitrust Institute 720

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- 5971 dmoss@antitrustinstitute.org Randy M. Stutz

Senior Counsel and Director of Special Projects American Antitrust Institute 202

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- 9420 rstutz@antitrustinstitute.org May 1 , 2013