59784 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

AGL ND D Minot AFB, ND [Revised]

Minot AFB, ND

(lat. 48°24′56′′N, long. 101°21′28′′W)

Deering TACAN

(lat. 48°24′54′′N, long. 101°21′54′′W)

That airspace extending upward from the

surface to and including 4,200 feet MSL

within a 4.5-mile radius of Minot AFB, and

within 2.2 miles each side of the Deering

TACAN 113° radial extending from the 4.5-

mile radius to 6.1 miles southeast of the

TACAN, and within 2.2 miles each side of

the Deering TACAN 303° radial, extending

from the 4.5-mile radius to 6.1 miles

northwest of the TACAN. This Class D

airspace area is effective during the specific

dates and times established in advance by a

Notice to Airmen. The effective dates and

times will thereafter be continuously

published in the Airport/Facility Directory.

* * * * *

Issued in Des Plaines Illinois on October

14, 1997.

Maureen Woods,

Manager, Air Traffic Division.

[FR Doc. 97–29195 Filed 11–4–97; 8:45 am]

BILLING CODE 4910–13–M

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 255

[Docket OST–96–1145 [49812]]

RIN 2105–AC35

Computer Reservations System (CRS)

Regulations

AGENCY: Office of the Secretary (DOT).

ACTION: Final rule.

SUMMARY: The Department is adopting a

rule that will prohibit each computer

reservations system (CRS) from adopting

or enforcing contract clauses that bar a

carrier from choosing a level of

participation in that system that would

be lower than the carrier’s level of

participation in any other system, if

neither the carrier nor any affiliate of

the carrier owns or markets a CRS. The

Department believes that this rule is

necessary to promote competition in the

CRS and airline industries, since the

contract clauses at issue unreasonably

limit the ability of airlines without CRS

interests to choose how to distribute

their services through travel agencies.

This rule will allow a CRS to enforce

such a contract clause against an airline

that owns or markets a competing CRS

or that has an affiliate that owns or

markets a CRS. The Department is

acting on a rulemaking petition filed by

Alaska Airlines.

DATES: This rule is effective December 5,

1997.

FOR FURTHER INFORMATION CONTACT:

Thomas Ray, Office of the General

Counsel, 400 Seventh St. SW.,

Washington, DC 20590, (202) 366–4731.

SUPPLEMENTARY INFORMATION:

Introduction

Almost all airlines in the United

States depend heavily on travel agencies

for the distribution of their services, and

travel agencies in turn rely heavily on

computer reservations systems (CRSs) in

responding to their customers’ requests

for information on airline services and

for booking seats. The large majority of

travel agencies use only one CRS (the

agencies using a system are called

‘‘subscribers’’). As a result, virtually

every airline must make its services

available through each of the four CRSs

operating in the United States in order

to distribute its services through the

travel agencies using each system (the

airlines that make their services

available through a system are called

‘‘participating airlines’’). Because each

airline must participate in each system,

the systems do not compete with each

other for airline participants and have

long been able to dictate the terms for

participation (in contrast, the systems

compete for travel agency users). Each

of the systems is controlled by one or

more airlines or airline affiliates, which

can use their market power over airline

participants to distort airline

competition. We therefore have rules

regulating CRS operations. 14 CFR Part

255, adopted by 57 FR 43780,

September 22, 1992, after publication of

a notice of proposed rulemaking, 56 FR

12586, March 26, 1991.

Alaska Airlines asked us to amend

those rules by adding a prohibition of

parity clauses—contract terms imposed

by three of the four CRSs operating in

the United States that require a

participating airline to purchase at least

as high a level of service from it as the

airline does from any other system. We

issued a notice of proposed rulemaking

that tentatively determined to adopt

such a rule. 61 FR 42197, August 14,

1996. Our proposed rule stated: ‘‘No

system may require a carrier to maintain

any particular level of participation in

its system on the basis of participation

levels selected by that carrier in any

other system.’’ We tentatively

determined that the proposed rule

would make airline operations more

efficient and promote competition in the

CRS and airline industries.

However, airlines that own or market

a CRS (or have an affiliate that does so)

may limit their participation in a

competing system in order to frustrate

that system’s ability to obtain travel

agency subscribers. Our notice therefore

asked whether we should allow a

system to enforce a parity clause against

an airline that owned or marketed a

competing system.

After considering the comments and

reply comments, we have determined to

prohibit parity clauses, subject to an

exception allowing a system to impose

such a clause on an airline that owns or

markets a competing system (this

reference to airlines that own or market

a system, and other such references in

this document, include airlines with

affiliates that own or market a system).

Since the parity clauses are currently

injuring some carriers, we are making a

final decision now on Alaska’s

rulemaking petition rather than waiting

for the completion of other pending CRS

proceedings.

As explained in more detail below,

parity clauses cause airlines either to

buy more CRS services than they wish

to buy from some systems or to stop

buying services from other systems that

they would like to buy, which creates

economic inefficiencies and injures

airline competition. In addition, the

clauses eliminate competition between

the systems for higher levels of

participation. Without the clauses, such

competition would exist, since the

airlines’ need to participate in systems

does not compel them to buy the higher

levels of service from each system. For

these reasons the Department of Justice,

several smaller airlines, and the CRS

that does not use a parity clause,

Galileo, support our proposal.

We have considered the arguments

made by the parties opposing the

proposal, but we have determined that

the rule would benefit competition and

airline efficiency. None of the

opponents denies that the parity clauses

compel airlines to buy services that they

do not want and that the clauses

provide no significant benefit to

airlines. We also conclude that our rule

will not adversely affect travel agencies.

Each airline’s interest in facilitating

travel agency sales of its services should

ensure that no important airline will

reduce its participation in any system

by enough to seriously interfere with the

efficiency of travel agency operations.

By adopting this rule we are following

our long-standing policy of promoting

the ability of airlines to choose how

they will distribute information on their

services and enable travel agencies to

carry out booking and ticketing

transactions through electronic means.

Parity clauses unreasonably interfere

with the ability of individual airlines

without CRS ties to choose the level of

CRS service they will buy and to choose

how best to communicate with travel
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59785

agencies in distributing their services,

and this harm is not offset by any

competitive benefits. Our prohibition of

airline parity clauses, moreover, is

consistent with our existing rule

prohibiting the use of parity clauses in

travel agency CRS contracts, 14 CFR

255.8(b). We prohibited parity clauses

in travel agency contracts in order to

eliminate unreasonable restrictions on

the travel agencies’ ability to change

systems and use more than one system.

We have concluded, however, that

entirely banning the use of parity

clauses would be unreasonable, since an

airline that owns or markets a CRS may

limit its participation in other systems

in order to compel travel agencies in

areas where it is the dominant airline to

subscribe to its own system. The

apparent use of such tactics by some

U.S. airlines caused us to adopt a rule

requiring significant owners of a CRS to

participate at equivalent levels in

competing systems, 14 CFR 255.7 (‘‘the

mandatory participation rule’’), and

some foreign airlines have apparently

reduced their participation in a U.S.

system in order to frustrate that system’s

marketing efforts in the foreign carriers’

homelands. Our rule will therefore

allow systems to enforce parity clauses

against airlines that own or market a

competing system.

Finally, several parties have proposed

other changes in our mandatory

participation rule and other CRS rules.

We will consider their proposals in our

next major CRS rulemaking, not here.

Background

The Systems’ Role in Airline

Distribution

As we explained in the notice of

proposed rulemaking, each CRS is able

to dictate its terms for airline

participation because virtually all

airlines must participate in each system

due to the role of travel agencies in

airline distribution and the agencies’

reliance on CRSs. 61 FR at 42198.

Almost all airlines depend heavily on

travel agencies for the sale of their

services, and travel agencies sell about

seventy percent of all airline tickets.

Travel agents primarily rely upon CRSs

to determine what airline services and

fares are available, to book seats, and to

issue tickets for their customers. Travel

agents use CRSs for these tasks because

the systems are the most efficient

method of carrying out these tasks. Ibid.

Travel agencies typically use only one

CRS for obtaining airline information

and making bookings. As a result, an

airline that wants its services sold by a

travel agency must make its services

available for sale in the CRS used by

that agency. If the airline does not

participate in that system, that system’s

subscribers are likely to make

significantly fewer bookings on the

airline, which will substantially

undermine the airline’s ability to

compete with other airlines that do

participate in the system. Given the

importance of marginal revenues in the

airline industry, an airline’s loss of a

few passengers on each flight will

substantially reduce, and perhaps

eliminate, the airline’s ability to operate

profitably. 61 FR at 42198.

Because most airlines are therefore

compelled to participate in each system,

the systems do not compete for airline

participation and their prices and terms

for participation are not disciplined by

market forces. 61 FR at 42198. In

contrast, the systems do compete for

travel agency subscribers, and travel

agencies do not pay supracompetitive

prices for CRS services (indeed many

agencies receive CRS services and

equipment for free). Saber Reply at 1, n.

1; Justice Dept. Comments at 5.

Some airlines, particularly Southwest,

compete successfully without

participating in all of the systems.

Southwest, for example, participates

only in Saber. As explained below, most

airlines could not duplicate Southwest’s

ability to avoid full CARS participation,

so Southwest’s experience does not

invalidate our finding that each system

has market power over almost all

airlines. See 61 FR at 42198. We note,

moreover, that some airlines like

Western Pacific and ValuJet have

recently decided to participate in CRSs.

The Systems’ Different Participation

Levels and the Parity Clauses

Each system offers several levels of

participation in its system and various

enhancements to the different levels of

participation. When an airline uses a

higher level of service, it must pay

higher fees. When an airline participates

at the ‘‘full availability’’ level in a

system, the travel agents subscribing to

that system can obtain a display of the

airline’s schedules and fares, learn

whether seats are available, book a seat,

and issue a ticket. However, if the

airline participates at a higher level, the

travel agent can obtain realtime

availability information and make a

booking in the airline’s internal

reservations system. If the airline

chooses to purchase the enhancements

offered by a system, travel agents can

also issue boarding passes and select

specific seats on the basis of seat maps.

Southwest, on the other hand, uses a

level of service offered by Saber called

Basic Booking Request. Saber does not

display Southwest’s availability, so the

travel agent must send Southwest an

electronic message to find out whether

seats are available. 61 FR at 42199.

While almost all airlines must

participate in each system at the full

availability level, participation at the

higher levels does not appear to be

essential for many airlines. Moreover,

higher-level participation increases an

airline’s CARS fees. Many airlines

accordingly choose not to participate at

higher levels, and, but for the parity

clauses, many would consider

participating at a higher level in some

systems but not in other systems. The

parity clauses, however, deny airlines

the ability to participate at different

levels in different systems. Three

CRSs—Saber, Worldspan, and System

One—impose parity clauses on their

airline participants, while the fourth

system—Galileo—does not. 61 FR at

42199.

The History of CARS Regulation

Each of the four systems is owned by

or affiliated with one or more airlines.

American Airlines’ parent corporation,

AMR, controls Saber, the largest system.

United Air Lines, US Airways, several

European airlines, and Air Canada own

most of Galileo, the second-largest

system, which is sold under the name

Apollo in North America. Galileo and

Saber also have public shareholders.

Delta Air Lines, Northwest Airlines,

Trans World Airlines, and Abacus, a

partnership of several Asian airlines,

own Worldspan. System One is owned

by Amadeus, which is owned by

Lufthansa, Air France, Iberia, and

Continental Air Lines. 61 FR at 42198.

Each of the airlines that owns a

system has the incentive to use its

control of a system to prejudice the

competitive position of other airlines.

We therefore regulate CARS operations

in order to protect competition in the

airline industry and help ensure that

consumers obtain accurate and

complete information on airline

services. 61 FR at 42198. Our current

rules, adopted in 1992, modified the

rules originally adopted by the Civil

Aeronautics Board (‘‘the Board’’), the

agency that had been responsible for the

economic regulation of airlines. 49 FR

32540, August 15, 1984, afield, United

Air Lines, 766 F.2d 1107 (7th Cir. 1985).

Both we and the Board adopted the

CARS rules under our authority to

prevent unfair methods of competition

and unfair and deceptive practices in

the marketing of airline transportation.

49 U.S.C. 41712, formerly section 411 of

the Federal Aviation Act, codified then

as 49 U.S.C. 1381. 57 FR at 43789–

43791. Since our rules by their terms

will expire at the end of 1997, 14 CAR
59786 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

255.12, we will begin a major

reexamination of the rules in 1997.

Two features of our 1992 rulemaking

are relevant here. First, we revised the

rules to give airlines and travel agencies

a greater ability to use alternative

electronic methods for communicating

information and conducting

transactions. In particular, we stated

that a system could not bar a travel

agency from using CARS terminals to

access other systems and databases with

airline information, unless the system

owned the terminals. We intended this

rule to make possible direct links

between the airlines’ internal

reservations systems and individual

travel agencies. 57 FR at 43796–43800.

We had hoped that this rule would

avoid the need for more intrusive

regulation. 57 FR at 43781. In addition,

we prohibited several types of

restrictive contract clauses imposed by

systems on subscribers—minimum use

clauses, roll-over clauses, and parity

clauses—that unreasonably limited the

travel agencies’ ability to switch systems

or use multiple systems. 57 FR at

43822–43826.

Secondly, we found that some U.S.

airlines with an ownership interest in a

CARS appeared to be limiting their

participation in competing systems to

prejudice competition in the CARS

business. If an owner airline limited its

participation in competing systems,

travel agencies in areas where that

airline was the major airline would be

compelled to subscribe to its system in

order to obtain the best information and

transactional capabilities on the airline.

56 FR at 12608; 57 FR at 43800–43801.

We therefore adopted the mandatory

participation rule, which requires each

airline deemed a ‘‘system owner’’ to

participate in other systems at the same

level in which it participates in its own

system as long as the terms for such

participation are commercially

reasonable. 14 CFR 255.7. An airline is

a system owner if it and its affiliates

hold five percent or more of a system’s

equity interest. 14 CFR 255.3. Since we

focused on the domestic CARS market

in adopting the mandatory participation

rule, we excluded carriers with a small

CARS ownership interest from the rule’s

coverage, since those airlines appeared

unlikely to have an incentive to distort

CARS competition within the United

States. 57 FR at 43795.

We have also addressed CARS issues

in other contexts. First, we found in

several proceedings under the

International Air Transportation Fair

Competitive Practices Act (‘‘IATFCPA’’),

49 U.S.C. 41310(c), that a foreign airline

was apparently refusing to participate in

a U.S. system at an adequate level (or at

all) in order to give a marketing

advantage to the system owned by that

airline or an affiliate in the airline’s

homeland. Complaint of American

Airlines against British Airways, Order

88–7–11 (July 8, 1988); Complaint of

United Air Lines v. Japan Air Lines,

Order 88–9–33 (September 15, 1988);

Complaint of American Airlines v.

Iberia, Lineas Aereas de Espan ̃ a, Order

90–6–21 (June 8, 1990). We concluded

in those orders that a foreign airline

would be engaging in unreasonably

discriminatory conduct if it refused to

participate in a U.S. system in order to

frustrate that system’s ability to compete

with the foreign airline’s own system,

since that would interfere with the right

of U.S. airlines to a fair and equal

opportunity to compete. See also

Complaint of American Airlines v.

Iberia, Lineas Aereas de Espan ̃ a et al.,

Order 93–2–37 (February 17, 1993).

In addition, we have completed two

studies of the CARS business and its

impact on airlines. Airline Marketing

Practices: Travel Agencies, FrequentFlyer Programs, and Computer

Reservation Systems, prepared by the

Secretary’s Task Force on Competition

in the Domestic Airline Industry

(February 1990) (Airline Marketing

Practices); and Study of Airline

Computer Reservation Systems (May

1988). We are currently conducting

another study, begun by Order 94–9–35

(September 26, 1994), which will

provide information for our review of

the CARS rules.

History of This Proceeding

As we explained in detail in the

notice of proposed rulemaking, Alaska

had been considering lowering its level

of participation in Saber while

maintaining a higher level of

participation in other systems. When

Saber learned of this, it told Alaska that

any such action would violate the parity

clause in Alaska’s CARS contract with

Saber. Saber also sued Alaska to enforce

the parity clause. 61 FR at 42199–42200.

After we issued our notice of proposed

rulemaking, the court dismissed Saber’s

suit on the ground that Saber’s claims,

all based on state contract law, were

preempted by federal law, particularly

in light of our tentative decision that

parity clauses should be prohibited as

unfair methods of competition.

American Airlines v. Alaska Airlines,

N.D. Tex. Civ. No. 4–94CV–595–Y

(September 18, 1996 memorandum

opinion).

In addition to defending itself in the

litigation, Alaska petitioned us for a rule

prohibiting parity clauses. We

published a notice inviting comments

on Alaska’s petition. 59 FR 63736,

December 9, 1994. American,

Worldspan, and System One filed

comments opposing Alaska’s petition,

as did the two major travel agency trade

associations, the American Society of

Travel Agents (ASTA) and the

Association of Retail Travel Agents

(ARTA), and three travel agencies.

Galileo International Partnership

submitted comments supporting

Alaska’s petition.

While Alaska’s rulemaking petition

was pending, Saber told Alaska,

Midwest Express, and a number of other

airlines that they were participating in

another system at a higher level than

they were in Saber, that each of them

was therefore violating the parity clause

in its Saber contract, and that their

continued participation in Saber

required each of them to either upgrade

its participation in Saber or downgrade

its participation in the other systems.

December 8, 1995, Letter of Scott Alvis,

included as Attachment D to Alaska’s

Reply. At our request, Saber agreed to

postpone enforcing this demand against

Alaska and Midwest Express for a short

time to give us an opportunity to rule

on Alaska’s petition. See 61 FR at

42201. We have not asked System One

or Worldspan to suspend enforcement

of their clauses, which to our knowledge

have not recently generated as much

controversy as Sabre’s clause.

We then issued a notice proposing to

adopt the rule sought by Alaska. 61 FR

42197, August 14, 1996. The basis for

our proposal was our tentative finding

that parity clauses unreasonably

interfered with each airline’s ability to

choose the level of CRS services that it

would buy and injured competition in

both the CRS and airline industries. We

recognized, however, that parity clauses

could be a legitimate tool against

discriminatory conduct by airlines that

own or market a competing system. We

therefore specifically requested

comment on whether we should include

an exception in the prohibition so that

a system could enforce a parity clause

against an airline that owned or

marketed a competing CRS. 61 FR at

42197, 42198, 42206.

In proposing the ban on parity

clauses, we summarized our reasoning

as follows, 61 FR at 42198:

[T]he vendor contract clauses at issue

appear to us to be fundamentally inconsistent

with our goals of eliminating unreasonably

restrictive practices in the CRS business that

limit competition. By denying each nonvendor airline an opportunity to change its

level of participation in a system in response

to the quality and price of the services

offered by each vendor and the airline’s own

marketing and operating needs, the contract

clauses unreasonably restrict competition in

the CRS and airline businesses.
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59787

Thus, despite our reluctance to

regulate CRS contracts, we proposed to

ban parity clauses because they

‘‘substantially—and unfairly—restrict a

non-vendor airline’s ability to choose

the level at which it is willing to

participate in a system.’’ 61 FR at 42201.

We further noted that the parity

clauses injured CRS competition: ‘‘[A]

system offering more attractive prices

and services may obtain less business

than it otherwise would, because some

airlines will be unwilling to purchase a

higher level of that system’s services

when doing so will force them to

increase their purchases from other

systems, even if the latter offer lower

quality services or charge higher fees.’’

61 FR at 42202. Galileo in fact had

alleged that four airlines had already

lowered their participation level in

Galileo due to Sabre’s threat to enforce

the parity clause and that Galileo

expected more airlines would take such

action. 61 FR at 42201.

Furthermore, the parity clauses could

drive up a non-vendor airline’s costs by

forcing it to buy more services from

some systems than it would otherwise

purchase, without the offsetting benefit

of precluding a CARS vendor from

compromising CARS competition.

Alaska and Midwest Express, for

example, stated that Saber’s demands

that they upgrade their level of

participation would increase their CARS

costs by more than ten percent. 61 FR

at 42201.

We tentatively determined that we

could adopt the proposed rule under

our power to prohibit unfair methods of

competition in the airline industry, a

power which authorizes us to prohibit

conduct which violates the letter or the

spirit of the antitrust laws. 61 FR at

42202. We based that determination on

our finding that each CARS has market

power over the airlines. Each system

had market power because the

economics of the airline and travel

agency businesses forced airlines (with

few exceptions) to participate in each

system, no matter how onerous the

terms of participation. Because the

systems have market power, the parity

clauses appeared to be analogous to

conduct prohibited by the antitrust

laws, such as tying arrangements. 61 FR

at 42203.

While we concluded that parity

clauses appeared to unreasonably

restrict competition as to airlines that

did not own or market a CARS, we

recognized that an airline that owned or

marketed a CARS could choose to lower

its participation in competing systems

in order to give its own system a

competitive advantage. In the past

several foreign airlines had lowered

their participation in Saber or another

U.S. system in order to cause travel

agencies in the foreign airline’s

homeland to subscribe to its system.

Saber represented that it had recently

used the parity clause against some

Latin American carriers in order to

ensure that they participated in Saber at

the same level that they participated in

the CARS they were marketing. 61 FR at

42206. We therefore asked for comments

on whether we should modify the

proposed rule to prevent unfair

competition by barring airline parity

clauses except when enforced against a

carrier owning or marketing another

system. 61 FR at 42197, 42198, 42206.

The Comments and Reply Comments

The Department of Justice; Galileo;

several smaller airlines—Alaska,

America West, Midwest Express, and

Reno; an association consisting of

smaller airlines, the National Air Carrier

Association; the American Automobile

Association; and the European Civil

Aviation Conference filed comments

supporting the proposed rule. Saber,

American, Worldspan, Delta, Northwest,

TWA, Continental and System One, the

American Society of Travel Agents

(ASTA), the Association of Retail Travel

Agents, and the United States Travel

Agent Registry opposed the proposal. In

addition, several hundred travel

agencies filed letters opposing the

prohibition against parity clauses (most

of these letters, however, followed form

letters prepared by Saber).

We will discuss the arguments made

by the commenters in the following

explanation of our decision to adopt a

rule generally prohibiting parity clauses

but allowing their enforcement against

airlines that own or market a competing

CARS.

Introduction to Our Decision

We have determined to adopt the

proposed rule barring parity clauses,

subject to an exception allowing a

system to enforce such a clause against

an airline that owns or markets a

competing CARS. We agree with the

Justice Department’s findings that the

clauses injure airline competition by

making airline distribution less efficient

and by eliminating the possibility of

competition among the CRSs for higherlevel participation by airline

participants. We further find that,

subject to the exception for airlines

owning or marketing a competing

system, prohibiting parity clauses will

promote rather than injure CARS

competition and will not significantly

injure travel agencies. We are relying on

the facts, undisputed by any party in

this proceeding, that parity clauses force

airlines to buy CARS services that they

do not want, that airline participants in

CRSs are compelled to accept parity

clauses, and that airlines receive no

benefit in return for the burdens

imposed on them by the clauses.

The parties opposing our proposal

base their position in large part on the

claim that an airline choosing to buy

more service from one system than from

another is improperly ‘‘discriminating’’

against the latter system. This claim has

no merit as to airlines that neither own

nor market the favored system. If an

airline without such CARS ties chooses

to favor one system over another, the

airline is only ‘‘exercis[ing] the normal

freedom of a purchaser in a competitive

market to choose its suppliers and the

quantity of goods or services that it will

buy from each,’’ as we stated in our

notice of proposed rulemaking. 61 FR at

42204. In that case the airline has

decided that the higher level of service

offered by the favored system is more

desirable in terms of price, quality, or

value than the comparable services

offered by other systems. If another

system wants that airline to upgrade its

participation level, it should do what

firms in competitive industries do to

win customers—lower its price or

otherwise make its service more

attractive.

Moreover, while Saber has

legitimately complained about foreign

airlines that discriminated against it in

order to promote the system they own,

Saber’s position in this rulemaking—

that any airline’s participation in one

system at a higher level than in other

systems is unreasonable

discrimination—is inconsistent with

Saber’s own conduct. Saber has

established a marketing arrangement

with Southwest Airlines, a major U.S.

airline that has long refused to

participate in any other system. Since

Southwest does not participate at all in

other systems, those systems’ parity

clauses cannot affect Southwest.

Southwest’s participation in Saber (and

the airline’s refusal to participate in any

other system) surely handicaps the other

systems’ ability to market themselves in

areas where Southwest is a major

airline. Yet in response to the other

systems’ argument that we should

expand the mandatory participation rule

to cover airlines that market a CARS,

not just airlines deemed ‘‘system

owners,’’ Saber says, ‘‘[If a carrier elects

not to participate in a system at all, it

should be allowed to act as it deems

appropriate, including marketing

another system.’’ Saber Reply at 25.

In this proceeding we are not taking

any steps to expand the coverage of the

mandatory participation rule, as
59788 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

explained below, or finding Southwest’s

conduct improper. Southwest, after all,

refused to participate in the other

systems long before it agreed to market

Saber. However, in our view Saber has

not reconciled its position that any

airline’s decision to participate at a

lower level in one system rather than

another is discrimination with its

position that it is entirely proper for an

airline marketing one system to refuse to

participate at all in other systems.

Saber wrongly complains that the

proposed rule amounts to ‘‘micro

management’’ of the CARS business and

is inconsistent with the

Administration’s goal of eliminating

unnecessary regulation. Saber

Comments at 2. Our rule is necessary—

market forces do not significantly

discipline the systems’ treatment of

participating airlines, and the systems

have used their market power to impose

contract terms that reduce competition

in the CARS and airline industries and

make airline distribution less efficient.

This rule is consistent with other

actions we have taken to restrict the

business choices of CASS and their

airline owners when doing so is

necessary to keep them from using a

dominant market position to frustrate

competition. See, e.g., Complaint of

American Airlines v. Iberia, Lines

Aereas de Espan ̃ a, Order 90–6–21 (June

8, 1990) at 9–10; Complaint of United

Air Lines v. Japan Air Lines, Order 88–

9–33 (September 15, 1988) at 11–12.

Before setting forth the basis for our

rule in detail, we will explain why we

are acting now rather than delaying our

decision until the completion of other

pending CRS matters.

The Need to Resolve the Parity Clause

Issue

Given the harm caused by parity

clauses, and the lack of any justification

for their continuation as to airlines

without CRS ties, our decision to adopt

a final rule prohibiting the clauses now

is clearly reasonable. Nonetheless,

several of the opponents argue that we

should delay a decision on the parity

clause issue, either because the issue

allegedly cannot be rationally resolved

until the completion of our pending

CRS study and our planned

consideration of all CRS regulatory

issues in our reexamination of the CRS

rules, or because the rule proposed by

us would have no significant practical

consequences. We cannot agree that any

delay is warranted.

First, all of the parties have had an

ample opportunity to address the issues

in this proceeding, both by filing

comments on Alaska’s petition and by

filing comments and reply comments on

our notice of proposed rulemaking. The

record in this proceeding, coupled with

our earlier analyses of CRS issues

(which parties were free to dispute in

their comments here), provides more

than an adequate basis for resolving the

issues in this rulemaking. Thus there is

no need for us to delay our decision

here until the completion of our

pending CRS study.

Worldspan and others argue that the

requests by several commenters for

changes in other rules, primarily the

mandatory participation rule,

necessarily mean that this rulemaking

should be postponed until we can

consider all of the commenters’ requests

for rule changes. See, e.g., Worldspan

Reply at 2–3. Despite these arguments,

we conclude that we can rationally and

fairly decide the parity clause issue

without deciding other issues or

changing other CRS rules.

Several parties have urged us to

reexamine the mandatory participation

rule applicable to airlines with a

significant CRS ownership interest,

either by limiting the rule or by

broadening its scope, and we recognize

that the mandatory participation rule

involves competitive and economic

efficiency issues like those presented by

the parity clause issue. Even so, the

relationship between the two rules is

not close enough to require them to be

decided together. No one, for example,

has claimed that our adoption of the

proposed rule on parity clauses will

make compliance with the mandatory

participation rule more burdensome for

the airlines subject to that rule.

We disagree with ASTA’s position

that it would be unfair to travel agencies

for us to act on Alaska’s petition

without addressing the travel agencies’

contention that their CRS contracts will

not allow them to switch to a different

system if the quality of a system’s

service declines during the contract

term because some airlines reduce their

participation levels in that system as a

result of our rule. Assertedly the travel

agencies entered into contracts with

systems in the expectation that no

airline participant could lower its level

of participation in one system while

maintaining a higher level in other

systems. ASTA Comments at 2–3.

However, travel agencies have never

had any implied guarantee that a system

will not become less useful during the

term of the subscriber contract. For

example, Galileo, Worldspan, and

System One changed their rules on nonparticipant airlines with the result that

their subscribers could no longer ticket

Southwest through the CRS. That

change immediately made those systems

less attractive for agencies in areas

where Southwest was an important

airline. Similarly, after a travel agency

chooses a system because its owner is

the major airline in the agency’s area,

that airline may decide to drastically

reduce its operations in the area. See,

e.g., Marketing Practices Report at 24, n.

50. Moreover, travel agencies have more

bargaining leverage with the systems

than the airlines do. That travel agencies

benefit from the systems’ competition

for their subscriptions is shown by the

systems’ reliance on the suppliers of

travel services for almost all of their

revenues; subscribers, in contrast,

contribute only about ten percent of

CRS revenues. Justice Dept. Comments

at 2, 5.

Deferring this proceeding until the

completion of the major rulemaking

could also lead to a significant delay in

remedying the competitive harm

addressed by this rule. While the

reexamination of all of the CRS rules is

scheduled to be completed by the end

of 1997, that will probably not happen.

Our last major reexamination of the CRS

rules took much longer than expected.

We did not publish our revised rules

until September 1992, almost two years

after the original deadline of December

1990.

Furthermore, delaying the completion

of this rulemaking would postpone the

beginning of potential competition

among the systems for airline

purchasers of higher levels of CRS

service. Equally importantly, it could

create substantial risks for Alaska and

Midwest Express, since Sabre has told

them that it considered them in

violation of the parity clause and that

they would be excluded from Sabre if

they did not upgrade their level of

participation in Sabre (or reduce their

level of participation in other systems).

Sabre agreed not to enforce the parity

clause against them only for a short

period, not indefinitely. 61 FR at 42201;

Alaska Reply at 5.

Sabre has argued that the parity

clause issue is too insignificant to

warrant prompt action. Sabre bases this

argument in part on its contention that

its clause only applies when the fees

and quality of service offered by Sabre

are comparable to those offered by the

system in which the airline is

participating at a higher level. Sabre

Comments at 3–4. Sabre’s contention,

however, does not accurately

characterize the contract clause, as

explained below. But even if the

characterization were accurate, the

clause should still be prohibited due to

the competitive harm it causes.

Sabre asserts that the parity clauses

cannot have any significant impact,

since the airlines operating the great
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59789

majority of domestic service are subject

to the mandatory participation clause

and since the amount of revenue

obtained by Sabre as a result of the

parity clause is so small that a

prohibition of parity clauses would have

no significant impact on U.S. airlines.

Sabre Reply at 2–3. We disagree. Even

though this rulemaking will not change

the applicability of our mandatory

participation rule to airlines with CRS

ownership interests, Alaska and

Midwest Express have estimated that

Sabre’s most recent threat to enforce the

clause against them would have

increased their CRS expenses by more

than ten percent. 61 FR at 42201.

Galileo has stated that at least four

airlines reduced their participation

levels in Galileo as a result of Saber’s

recent threats to enforce the parity

clause and that other airlines are likely

to do so if we do not issue a final rule

in this proceeding. Galileo Comments at

2–3. And, as shown by the Justice

Department’s comments, the systems’

recent enforcement of the parity clauses

has thwarted efforts by Reno Air and at

least one other airline to improve the

efficiency of the distribution of their

services. Justice Dept. Comments at 6–

7, 8–9. While the increased CRS

expenses imposed on an airline by the

parity clause may be small, even small

expenses are important because of the

thin margins in the airline business. 57

FR at 43783. In addition, airlines like

Alaska must lower their expenses since

they increasingly face competition from

Southwest and other low-fare carriers

that have lower distribution costs. See

61 FR at 42199; United Comments at 6–

7.

The Systems’ Market Power

Airlines must accept parity clauses as

part of the price for obtaining any

services from three of the systems. The

systems can compel airlines to accept

the clauses because each system has

market power over airline participants,

as we have found in our past

rulemakings and CRS studies. 56 FR at

12591–12600; 57 FR at 43783–43784;

Airline Marketing Practices at 44, 76–77,

83–84, and 91–93. The Justice

Department thus states, Justice Dept.

Comments at 2–3 (footnote omitted):

Each CRS provides access to a large,

discrete group of travel agents, and unless a

carrier is willing to forego access to those

travel agents, it must participate in every

CRS. Thus, from an airline’s perspective,

each CRS constitutes a separate market and

each system possesses market power over

any carrier that wants travel agents

subscribing to that CRS to sell its airline

tickets.

See also Midwest Express Comments

at 4; Alaska Reply at 16.

Our conclusion that each system has

market power is consistent with the

Supreme Court’s analysis in Eastman

Kodak Co. v. Image Technical Services,

504 U.S. 451 (1992). There the Court

explained that market power is the

power ‘‘to force a purchaser to do

something that he would not do in a

competitive market,’’ 504 U.S. at 464,

quoting Jefferson Parish Hospital v.

Hyde, 466 U.S. 2, 14 (1984), and ‘‘the

ability of a single seller to raise price

and restrict output.’’ 504 U.S. at 464,

quoting Fortner Enterprises, Inc. v.

United States Steel Corp., 394 U.S. 495,

503 (1969).

The Court’s definition of market

power fits the systems’ imposition of

parity clauses, since there is no

evidence that an airline would accept an

obligation like the parity clause in a

competitive market. We noted in the

notice of proposed rulemaking that no

one had given us an example of any

comparable practice by a seller in a

competitive industry (while Sabre cites

the most favored nations clauses

imposed by buyers in some markets,

those clauses are different from the

parity clauses imposed on buyers by the

systems, as discussed below). 61 FR at

42202.

In addition, the clauses demonstrate

the systems’ ability to raise prices or

restrict output by forcing airlines to

choose between paying higher CRS fees

for unwanted services or reducing their

purchase of services from a competing

system.

In Eastman Kodak the Court also

noted that market power is usually

inferred from the seller’s possession of

‘‘a predominant share of the market.’’

504 U.S. at 464. Insofar as electronic

access to travel agency subscribers is

concerned, each system effectively

holds a monopoly market share. Justice

Dept. Comments at 2–3. See also 57 FR

at 43783–43784, quoting the Department

of Justice’s analysis in the last

comprehensive CRS rulemaking.

Sabre nonetheless contends that no

system has market power. Sabre,

however, does not argue that any airline

has an alternative means for

electronically giving travel agencies the

ability to obtain information on its

services and conduct booking and

ticketing transactions. Sabre similarly

offers no analysis showing that market

forces limit in any way a system’s

ability to raise the fees charged

participating airlines. While Sabre

submitted an affidavit from Dr. Gary

Dorman, an economist, in an attempt to

refute our findings of market power, his

affidavit is unpersuasive. He claims that

the relationships between airlines and

CRSs ‘‘closely resemble those found

between suppliers and distributors

throughout the economy.’’ Dorman

Affidavit at 1. He provides no support

for this assertion. He suggests that the

Justice Department’s rationale—that

each system has a monopoly over

electronic access to its subscribers—

would be irrational if applied to grocery

stores. Id. at 2–3. We agree—the grocery

store business is quite competitive. The

Justice Department, however, based its

rationale on its analysis of the airline

and CRS businesses, and Dr. Dorman

submitted no analysis of his own. While

he asserts that the Justice Department

has failed to show that the CRS fees

charged participating airlines are at

supracompetitive levels, id. at 3, he has

presented no analysis indicating that

Sabre’s booking fees do not exceed the

system’s costs. The Justice Department’s

conclusion, on the other hand, is

consistent with our past findings on the

systems’ ability to charge airlines fees

that are unrelated to their costs. 57 FR

at 43785.

While Sabre additionally argues that

the systems cannot have market power

since Southwest has prospered while

participating only in Sabre, Sabre

Comments at 23, we think Southwest’s

experience does not disprove the

systems’ possession of market power

over airline participants. Southwest

itself has chosen to participate in Sabre,

the system with the largest market share

in the United States. More importantly,

Southwest’s operations are substantially

different from those of other airlines.

Southwest operates as a low-fare carrier

relying heavily on direct sales to

consumers, not on travel agency sales.

For these and other reasons, few other

airlines can copy Southwest’s

experience and thereby avoid

depending on CRSs for the distribution

of their services. Alaska Reply at 16;

Midwest Express Comments at 7. As the

Justice Department points out, while

some new entrant airlines have tried to

bypass CRSs by creating alternative

methods for bookings, ‘‘the vast majority

of tickets are still booked through travel

agents using a traditional CRS, and

airlines that desire access to consumers

who purchase through such channels

must participate in each CRS.’’ Justice

Dept. Comments at 3, n. 2.

While Sabre claims that airlines can

avoid depending on CRSs due to the

growth in use of the Internet for airline

bookings, Sabre Comments at 23, the

Internet cannot enable airlines to avoid

CRS participation, at least not in the

near future. ASTA Comments at 3–4.

The great majority of airline tickets are
59790 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

still sold by travel agents, not through

direct purchases by consumers.

Thus, despite the existence of some

alternative means of distribution, most

airlines depend on travel agencies for

distribution, so the systems have market

power over those airlines. The systems

have used that power to impose parity

clauses on airline participants which

reduce competition in the airline and

CRS businesses and make airline

operations more inefficient, as

explained next.

The Inefficiency and Reduced

Competition Caused by the Parity

Clauses

Because of the parity clauses, the

systems need not compete on price and

service quality to obtain higher-level

participation by airlines. Such

competition might well exist otherwise

(although somewhat limited for airlines

subject to our mandatory participation

rule). While virtually all airlines must

participate in each system at the full

availability level, the competitive

demands of the airline business do not

compel them to participate in the

highest levels of CRS service. Alaska

and Midwest Express, for example, have

chosen not to purchase some of the

enhancements offered by Sabre, a

decision that led to Sabre’s threats to

exclude them entirely from the system.

Alaska Reply at 5.

In a competitive market, each system

would compete to obtain higher levels

of participation by airlines, in order to

make the system more attractive to the

travel agencies doing business in

regions where those airlines have a

significant market share. See, e.g.,

Justice Dept. Comments at 2. Systems

would also compete for higher levels of

participation in order to increase

revenues, since airlines pay higher fees

for higher levels of participation.

The parity clause, however, reduces

or eliminates the systems’ competition

for higher level participation by airlines,

as the Justice Department has explained,

Justice Dept. Comments at 5:

Without the parity provision, each CRS

would likely have to respond competitively

to a large booking fee decrease offered by one

of its competitors to airlines. With the parity

provision, however, each CRS knows that a

participating carrier cannot be induced by

price to upgrade its service level in a

competing CRS without also upgrading in its

own. Thus, there is little reason for any CRS

to lower booking fees to induce participating

carriers to upgrade their service levels.

[footnote omitted]

In addition, the Justice Department

states that the parity clauses have kept

the systems from working with airlines

to create levels of service that will meet

their needs. The Justice Department

cites Reno Air’s experience as an

example. When Reno Air, which

participates in all four systems, wanted

a system to develop a level of service

that would meet its distribution needs,

none of the systems would work with it.

In contrast, when Southwest wanted

Sabre to develop a participation level

that suited Southwest’s needs, Sabre

was willing to create such a product.

Southwest, unlike Reno, is not bound by

the parity clauses since it participates in

only one system, Sabre. Justice Dept.

Comments at 6–7.

Furthermore, as shown by the Justice

Department, the parity clauses reduce

the systems’ incentive to provide

satisfactory service to participating

airlines. Because each airline must

participate in each CRS, the airline’s

only credible response to poor service

would be a threat to lower its

participation level. The parity clause,

however, prevents an airline from taking

such action, unless it simultaneously

lowers its participation level in the

other systems. Justice Dept. Comments

at 7–8.

Finally, of course, parity clauses

create inefficiency by compelling nonvendor airlines, which have no

incentive to skew CRS competition, to

buy a higher level of service from the

systems than they would otherwise

choose. Without the clauses an airline

might well decide that participation at

a higher level in some systems but not

others would be the most efficient

method for distributing its services.

Justice Dept. Comments at 8–9; Midwest

Express Comments at 3–5; Alaska Reply

at 19–20; America West Reply at 2–4.

The parties opposing our proposal

argue that the parity clauses do not

injure airlines and, even if airlines were

injured, the clauses provide competitive

benefits that outweigh any possible

injury. We find these arguments

unpersuasive.

According to Sabre, parity clauses do

not give it the power to increase airline

fees due to the impact of our rules. One

rule, 14 CFR 255.6(a), requires fees to be

nondiscriminatory, while the mandatory

participation rule requires system

owners to participate in competing

systems only if the terms for

participation are commercially

reasonable. Sabre contends that these

two rules in combination ‘‘severely’’

restrict a system’s ability to raise prices.

Sabre Comments at 16–18. Sabre’s

contention is contradicted by the

systems’ ability to impose fees on

airlines for CRS services that are

unrelated to the costs of providing CRS

services. 57 FR at 43785. We doubt that

the systems’ fees would be so high if our

rules had the effect suggested by Sabre.

Moreover, airlines have increasingly

complained about the continuing series

of fee increases imposed by the systems

in recent years. See, e.g., Justice Dept.

Comments at 5.

Sabre further contends that a rule

allowing airlines to ‘‘discriminate’’

against one or more systems will lead to

higher levels of concentration in the

U.S. CRS market. Assertedly the United

States CRS market is one of the most

competitive in the world ‘‘largely

because airline discrimination against

CRSs is rare,’’ whereas in foreign

markets discrimination is much more

likely. Sabre Reply at 17. We think that

the U.S. market is more competitive

than foreign markets primarily because

the United States had five large airlines

(American, United, TWA, Eastern, and

Delta) that each had the resources to

create a CRS when the CRS business

was developing. However, even if

Sabre’s analysis were correct, our

mandatory participation rule already

prevents any of the largest airlines in

the United States from selectively

lowering its participation in competing

systems because each of those airlines

holds a significant CRS ownership

interest and is covered by that rule.

Sabre argues that parity clauses are

essential for ensuring competition in the

CRS market, since otherwise carriers

could discriminate against one or more

systems, as shown by past experience.

Sabre Comments at 9–10, 19–20. As

discussed below at greater length,

however, the anticompetitive

discrimination that has occurred has

involved decisions to reduce or end

participation in competing systems by

an airline that either itself or through an

affiliate owned or marketed a system.

Those kind of abuses should be

prevented by our mandatory

participation rule and the exception

included in this rule that allows a

system to enforce a parity clause against

an airline that directly or indirectly

owns or markets a competing system.

Sabre also repeats the argument made

by others earlier in this proceeding that

eliminating the parity clauses will make

it more difficult for the smaller CRSs to

survive. Sabre Comments at 14. We

concluded that this claim was

unpersuasive—a smaller system can

obtain higher-level participation by

airlines if it offers attractive prices and

service. 61 FR at 42205. Moreover,

System One, previously the smallest

U.S. system, is now part of Amadeus,

one of the largest systems in the world.

In addition, as we explained earlier, the

smaller systems’ past conduct indicates

that they do not view the ability to offer

competitive functionality on all
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59791

significant airlines as crucial to their

ability to survive in the U.S. market,

since they changed their policies on the

treatment of non-participating airlines

and thereby ended their subscribers’

ability to issue tickets on Southwest

through the CRS. 61 FR at 42205.

Although Southwest had never been

willing to pay for CRS services in those

systems—Worldspan and System One—

or in Galileo, each of those systems

nonetheless had displayed some

information on Southwest’s flights and

allowed travel agents to write Southwest

tickets using the system until 1994.

Because of Southwest’s continuing

refusal to pay for CRS services, each of

those systems then decided to change its

policies on the treatment of nonparticipating airlines and thus to

remove Southwest flight information

from its displays and to bar the system’s

use for writing Southwest tickets. These

steps greatly reduced the efficiency of

travel agencies subscribing to one of

those systems when they were located

in regions where Southwest is an

important airline. 61 FR at 42198. We

recognize the claims that each system’s

action was a rational response to

Southwest’s continuing refusal to pay

CRS fees, Worldspan Comments at 9–10,

but their action still undermines Sabre’s

argument that a system must provide

functionality on all important airlines

that is comparable to the functionality

available from competing systems.

Sabre additionally disputes our

competitive analysis by arguing that the

elimination of parity clauses could

cause the systems to limit the number

of different levels of service offered

participating airlines because the

systems ‘‘might find it necessary’’ to

phase out the lower levels of service or

to reduce the price differentials between

the various levels of service in order to

limit the airline participants’ ability to

discriminate against the system. Sabre

Comments at 16–17; Sabre Reply,

Dorman Affidavit at 4. Sabre does not

explain why the systems would reduce

the number of options available to

airline participants when airlines have a

greater ability to choose the level of

service they wish to purchase. Sabre

also does not explain why eliminating

the lower levels of service would solve

its alleged discrimination problems. If

Sabre eliminates the less costly levels of

service, it might also discourage smaller

airlines from participating at all in

Sabre. If Sabre’s arguments were

accurate, that could hamper the

system’s ability to obtain subscribers.

But if Sabre in fact reacted to our

decision by reducing the levels of

service available to participating

airlines, that would seem to confirm

that it believes that it has the power to

control the distribution choices of the

airlines that used the eliminated service

levels.

The Broad Applicability of the Parity

Clauses

In concluding that the parity clauses

unreasonably deny airlines the ability to

choose how much CRS service they

wish to purchase, we read the clauses as

requiring an airline to upgrade its

participation in a system if it is already

participating at a higher level in another

system, even if the system requiring the

upgraded participation offers inferior

service or charges higher prices than the

system whose higher-level service is

already being used by the airline. 61 FR

at 42201–44202.

Sabre and Worldspan now contend

that we mischaracterized their parity

clauses. Sabre claims that its parity

clause requires upgraded participation

only when Sabre offers the higher-level

service at a price and on terms

comparable to those offered by the

system in which the airline is already

participating at the higher level. Sabre

Comment at 18. Worldspan similarly

contends that it enforces its parity

clause only when Worldspan’s service is

comparable in price and quality to the

higher-level service purchased by the

airline participant from a competing

system. Worldspan Reply at 5–7. The

record does not support these claims.

Sabre’s clause states, ‘‘[A]ny

improvements, enhancements, or

additional functions to Participating

Carrier’s reservations services offered to

end users of any [CRS] will be offered

by Participating Carrier to SABRE

Subscribers on the same terms and

conditions as are agreed to with such

[CRS].’’ Alaska Reply at 22. Alaska

contends that the clause appears to

impose an obligation on the

participating airline, not on Sabre, to

use the same terms and conditions; the

clause does not imply that the airline is

excused from the higher level of Sabre

participation if Sabre’s terms and

conditions are different. In addition,

Alaska points out that Sabre’s current

interpretation is very new: Sabre did not

interpret the clause as requiring a higher

level of participation only when Sabre

offered comparable price and terms

until after we issued our notice of

proposed rulemaking. Neither Sabre’s

comments on Alaska’s rulemaking

petition nor its pleadings in its suit

against Alaska stated that Sabre’s price

and terms for higher-level participation

had to be comparable to those offered by

the system in which the airline was

already participating at a higher level.

Alaska Reply at 22–23. See also Galileo

Reply at 4–5.

We also note that Sabre’s reading of

its clause would make the clause

difficult to implement, since different

systems use different pricing methods

and do not offer the same levels of

service.

Sabre, for example, makes much less

use of transaction pricing than the other

systems. As Alaska notes, Sabre has had

to read the word ‘‘same’’ in its contract

clause as ‘‘comparable’’ in order to make

its interpretation plausible, but the

resulting interpretation is inconsistent

with the contract’s literal language.

Alaska Reply at 22, n. 7.

Worldspan, unlike Sabre, does not

contend that the language of its clause

requires an airline to increase its

participation in Worldspan only when

Worldspan’s prices and services are

comparable to the higher-level service

already being purchased by the airline

from another system. Worldspan instead

claims only that it does not enforce its

clause against airlines unless

Worldspan’s price and quality are

comparable. However, Worldspan’s

parity clause in no way limits

Worldspan’s ability to enforce the

clause, whether or not its price and

quality are comparable. Worldspan’s

clause, included as an attachment to

Alaska’s rulemaking petition, reads as

follows, ‘‘Participating Carrier will

provide Worldspan users with any

improvements, enhancements, or

functions related to Participating

Carrier’s reservations services as offered

to users of any other CRS.’’ The clause

would not block Worldspan from

changing its enforcement policy in the

future.

As a result, we conclude that our

notice of proposed rulemaking correctly

interpreted the scope of the parity

clauses. Moreover, even if the

interpretation now offered by Sabre and

Worldspan were correct, airline

participants would have little

protection, since Sabre or Worldspan

would decide whether the price and

quality of the competing system’s

service were comparable to the service

offered by itself. Midwest Express Reply

at 5.

More importantly, even if the parity

clauses were limited as claimed by

Sabre and Worldspan, allowing systems

to enforce them against airlines with no

CRS ownership or marketing interest

would still be contrary to the public

interest. Parity clauses eliminate price

and service competition among the

systems for higher levels of CRS service

and make airline distribution less

efficient. If the clauses were limited as

proposed by Sabre and Worldspan, the
59792 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

systems would still have no need to

improve their prices and services

relative to their competitors. For

example, parity clauses of the type

proposed by Sabre and Worldspan

would still eliminate any need by a

system to respond to Reno Air’s request

for a new level of service that would

match Reno’s distribution needs. And

airlines would still be forced to either

buy more CRS services than they

wanted or reduce their purchase of

services from some systems in order to

avoid violation of the parity clauses

imposed by other systems. Midwest

Express Reply at 4–5.

For these reasons, we also find

unacceptable Sabre’s proposal that we

modify our rule to allow a system to

enforce a parity clause against an airline

as long as the system’s price and other

terms for participation are comparable

to those offered by the system in which

the airline already participates at a

higher level.

The Systems’ Claims of Discrimination

by Airline Participants

In arguing that parity clauses are

essential for fair CRS competition, Sabre

characterizes an airline’s decision to

participate at a higher level in one

system than in another as

‘‘discrimination.’’ We cannot agree with

Sabre’s view with respect to airlines that

do not own or market a system. An

airline is not engaging in

‘‘discrimination’’ when it decides to

participate at a higher level in one

system than in other systems. 61 FR at

42204. When a firm in a competitive

industry chooses to buy more service

from one supplier than another, no one

characterizes that choice as

‘‘discrimination.’’

In arguing the contrary with respect to

airline choices on their levels of CRS

participation, Sabre complains that an

airline’s decision to participate at a

lower level in one system than in other

systems will handicap the former

system’s ability to compete in regions

where the airline is a major carrier. For

example, Sabre alleges that it might be

forced to withdraw from the Pacific

Northwest and State of Alaska CRS

markets if Alaska Airlines downgraded

its participation in Sabre. Sabre

contends that Alaska’s choice of a lower

participation level would make using

Sabre less efficient for travel agencies in

those regions, where Alaska is a

principal airline, and thus end Sabre’s

ability to obtain subscribers in those

regions. Sabre Comments at 7–8.

If Sabre’s claims were true, however,

Southwest’s participation in Sabre and

refusal to participate at all in other

systems should have eliminated those

systems from regions like California

where Southwest is a major airline. We

have no evidence that Sabre has driven

Galileo, Worldspan, and System One

from those regions. And the continuing

policy of those systems not to allow

their subscribers to use the CRS to issue

tickets on Southwest further suggests

that a system’s failure to provide as

much information and booking

capability on a significant airline as do

other systems is not a fatal competitive

handicap. 61 FR at 42205.

In any event, if Alaska participates in

Sabre at at least the full availability

level, as is its stated intent, Alaska

Comments at 4, Sabre agencies could

obtain schedule, fare, and availability

information on Alaska’s services, make

bookings on Alaska, and issue Alaska

tickets through Sabre. We doubt that

Alaska’s choice of a lower participation

level in Sabre than in other systems

would drastically reduce Sabre’s

competitiveness in Alaska and the

Pacific Northwest.

Even if Sabre were correct in claiming

that a regionally-important airline’s

decision to participate at a lower level

in one system than in other systems is

a substantial competitive handicap, the

proper remedy would not be the

system’s use of market power to compel

the airline to buy a higher level of

service than it wanted, when the airline

neither owns nor markets a competing

system. The system instead should

make its price and service more

attractive so that the airline will

determine that the system’s higher level

of service is economically worthwhile.

Midwest Express Reply at 3.

We note, moreover, that Galileo

believes that it can obtain an adequate

number of airline users of its higherlevel services by offering better service.

Galileo, whose contracts contain no

parity clause, asserts that airlines are

willing to participate in its higher-level

features because of their superiority.

Galileo Comments at 2.

Sabre suggests that an airline that

neither holds a CRS ownership stake

nor has a contract compensating it for

marketing another system may still

choose to lower its participation level in

a system in order to distort competition

in the CRS business. Sabre Comments at

10–11. Sabre has provided no evidence

of such conduct, and we consider such

a scenario unlikely. Given the

importance of CRS participation to an

airline’s ability to distribute its services

efficiently and the significant

differences in fees between different

levels of CRS participation, we see no

reason why an airline that neither owns

nor markets a competing system would

base its decision on extraneous factors

instead of an assessment of its

distribution needs and costs. Even if

such an airline might choose a lower

level of participation in one system for

illegitimate reasons, the slight

possibility of such an occurrence cannot

justify the systems’ elimination of the

ability of all other non-owner airlines to

choose their level of participation in

each system. We will, however, add an

exception to the rule so that a system

can enforce a parity clause against

airlines that own or market another

system.

Finally, in an effort to bolster its

discrimination claims, Sabre asserts that

Alaska’s motive for lowering its

participation level in Sabre was Alaska’s

interest in obtaining payments from

Galileo under an arrangement between

Alaska and Galileo for switching travel

agencies from Sabre to Galileo. Sabre

Comments at 11. Alaska, Galileo, and

Galileo’s marketing affiliate, Apollo

Travel Services, have each denied that

any such arrangement ever existed or

was considered.

Alaska Reply at 12–13; Galileo Reply

at 4; Apollo Travel Services Reply.

Sabre’s charge seems implausible—

Sabre only made the charge at a late

stage in this proceeding, and the

affidavits submitted by Sabre largely

rely on speculation and hearsay. But if

Sabre’s charge were true, our rule would

allow Sabre to enforce the parity clause

against Alaska—or any other

participating airline—that had a

marketing arrangement with another

system.

Impact on Travel Agencies

In proposing the rule prohibiting

parity clauses, we tentatively

determined that such a rule would not

significantly harm travel agencies. We

noted that airlines like Alaska rely on

travel agencies for their distribution and

so would not likely take steps that

would deny travel agencies the ability to

obtain information and make bookings

electronically. 61 FR at 42205–42206. In

addition, travel agencies using any

system other than Sabre were already

handicapped, since they could not use

their system to issue tickets on

Southwest, a major airline in many

domestic markets, since 1994. 61 FR at

42206.

We find unpersuasive the arguments

by Sabre, ASTA, and several other

parties that the rule will harm U.S.

travel agencies, although we recognize

that most travel agencies use only one

system and thus largely depend on that

system to electronically obtain airline

information and conduct booking and

ticketing transactions.
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59793

First, the largest airlines are CRS

owners and thus subject to the

mandatory participation rule. Secondly,

the claims that U.S. travel agencies will

be injured essentially assume that one

or more important airlines without CRS

ownership or marketing ties will reduce

their participation in some systems

below the full availability level, with

the result that travel agents using that

system could neither obtain availability

information nor make bookings and

issue tickets on those airlines through

the CRS. No one has shown that airlines

are likely to use the rule to do that.

Airlines participate in the systems, after

all, to make their services readily

saleable by the agents using each

system, and no airline (other than

Southwest and some other low-fare

airlines) is likely to reduce its

participation level in any system to an

extent that would keep the airline from

being booked through the system. See,

e.g., Alaska Comments at 5–6.

We assume that airlines without CRS

ownership or marketing ties would use

the rule to avoid buying higher levels of

participation from one or more

systems—in other words, those airlines

will participate at the full availability

level but may choose not to participate

in direct access or all of the

enhancements offered by a system.

While an airline’s non-participation in

these features may cause some

inconvenience to the travel agents using

that system, the amount of

inconvenience should not cause

substantial inefficiencies. Furthermore,

if the systems could maintain parity

clauses, airlines could respond by

lowering their participation in systems

that they would otherwise participate in

at a higher level. Galileo thus states that

some airlines have lowered their

participation in its system as a result of

Sabre’s threats to enforce its parity

clause. Galileo Comments at 2–3. The

Justice Department states that Reno Air

reduced its participation level in the

systems as a result of the systems’

enforcement of the parity clause. Justice

Dept. Comments at 7. And the American

Automobile Association believes that

our rule will lead to a greater degree of

airline participation in CRSs, not less

participation.

In addition, while each airline must

participate in every system, most travel

agencies can choose between systems.

The systems compete for travel agency

subscribers—indeed, according to Sabre,

some agencies receive cash bonuses in

exchange for agreeing to use a system.

Sabre Reply at 1, n. 1. Thus travel

agencies should have some ability to

influence systems to make higher levels

of functionality attractive to non-owner

airlines.

Furthermore, our CRS rules include

several provisions that give travel

agencies the ability to use two or more

systems. In 1992, for example, we

prohibited parity clauses and minimum

use clauses in travel agency contracts,

gave travel agencies the right to use

their own equipment, stated that

equipment owned by a travel agency

could be used to access any database,

CRS, or internal reservations system of

any airline, and required systems to

offer travel agencies three-year

contracts. 57 FR at 43822–43826. Thus,

a travel agency should have some ability

to protect itself if one system offers

unsatisfactory information and booking

capability on an airline important to the

agency.

ASTA further contends that our

proposed rule is unfair, since travel

agencies will have no protection if their

chosen system becomes less efficient

due to an important airline’s reduction

in its participation level. As noted, we

doubt that airlines will use the rule to

drastically downgrade their

participation in any system. Travel

agencies, moreover, have never had a

guarantee that all important airlines not

covered by the mandatory participation

rule will participate in each system.

Indeed, as shown, Southwest has only

participated in Sabre, so agencies using

one of the other three systems have

never been able to obtain availability

information on Southwest’s flights or to

book Southwest through their CRS.

Nonetheless, many travel agencies were

willing to subscribe to one of those

systems.

We have also received a large number

of letters from travel agencies opposing

our proposal. We recognize, as shown

by these letters, that travel agencies

would prefer to obtain the best possible

information and functionality on all

airlines from each of the systems.

However, that result would require us to

allow the systems to continue using

their market power to force some

participating airlines to buy a higher

level of service than they wish, a result

that would be inconsistent with our

policy of enabling airlines (and travel

agencies) to benefit from CRS

competition.

In addition, a large portion of the

travel agency letters are form letters

solicited by Sabre, according to Alaska’s

reply comments. Alaska Reply at 8–9.

Moreover, the letters using Sabre’s

suggested form predict that airlines will

lower their participation in a system in

order to injure travel agencies. Given the

airlines’ reliance on the agencies for

distribution, we do not believe that an

airline will be taking steps just to injure

travel agencies; an airline will only

change its level of participation if it

decides that doing so is cost-effective.

We also note, as explained by Alaska,

that the material used by Sabre to obtain

the letters did not accurately describe

the CRS business. Alaska Reply at 8–9.

Worldspan contends that the rule

would hurt travel agencies by reducing

the systems’ ability to compete for

subscribers in areas where an important

airline lowered its participation level in

some systems but not others. Worldspan

Comments at 7. As discussed, a system

can compete for higher-level

participation by airlines. And

Worldspan’s prediction, even if correct,

could not justify the continuation of a

regime where the systems use their

market power to force airlines to buy

more services than they want.

Furthermore, our ban on airline parity

clauses essentially duplicates our ban

on parity clauses in subscriber

contracts. 57 FR at 43826.

Legal Authority for Adopting the

Proposed Rule

The adoption of the rule prohibiting

parity clauses is clearly within our

statutory authority. As we explained in

our notice of proposed rulemaking, 61

FR at 42202–42203, we may investigate

and determine whether any air carrier or

ticket agent has been or is engaged in

unfair methods of competition in the

sale of air transportation. 49 U.S.C.

41712, formerly section 411 of the

Federal Aviation Act (and codified then

as 49 U.S.C. 1381). Our authority,

modelled on section 5 of the Federal

Trade Commission Act, 15 U.S.C. 45,

allows us to define and prohibit as

unfair methods of competition practices

that do not violate the antitrust laws.

See, e.g., United Air Lines, 766 F.2d

1107, 1114 (7th Cir. 1985). We may not

prohibit a practice as an unfair method

of competition, however, if the practice

does not violate the letter or the spirit

of the antitrust laws. See, e.g., E.I. Du

Pont de Nemours & Co. v. FTC, 729 F.2d

128 (2d Cir. 1984).

In the notice of proposed rulemaking,

we tentatively concluded that the parity

clauses were comparable to antitrust

violations on several grounds, based on

our finding that each of the systems had

market power over airline participants.

We reasoned that the parity clauses

were analogous to impermissible tying

arrangements, violations of the essential

facility doctrine, and attempts to

monopolize the electronic distribution

of information on airline services to

travel agencies. 61 FR at 42203.

Sabre’s parity clause—and the similar

clauses used by Worldspan and System
59794 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

One—violate antitrust principles

because they deny an airline the ability

to choose for itself the level of service

it will buy from each system. As the

Supreme Court has stated, ‘‘A restraint

that has the effect of reducing the

importance of consumer preference in

setting price and output is not

consistent with [the] fundamental goal

of antitrust law’’ that price and output

should respond to consumer preference.

NCAA v. Board of Regents, 468 U.S. 85,

107 (1984). NCAA also undermines

Sabre’s contention that the parity clause

merely allows Sabre to compete on an

equal footing with other systems, for the

Court rejected a similar defense by the

NCAA. The NCAA had argued that its

restraints were necessary since its

preferred product—tickets for college

football games—would not attract

enough consumers without limits on

televised games. The Court reasoned

this justification was inconsistent with

the basic policy of the Sherman Act. 468

U.S. at 116–117.

Only Sabre objected to our tentative

conclusion that our legal authority

enables us to adopt a rule prohibiting

parity clauses, and Sabre has not shown

that our analysis was invalid.

Significantly, Sabre has not

challenged several key points in our

reasoning. We stated our doubt that

firms in any competitive industry could

unilaterally impose a requirement like

the parity clauses on their customers.

We noted that purchasers typically

obtained offsetting benefits, such as a

guaranteed supply or a lower price,

when they agreed with suppliers in

competitive industries to requirements

contracts or contracts requiring

purchases in large quantities or over

long periods of time. Cf. Barry Wright

Corp. v. ITT Grinnell Corp., 724 F.2d

227, 237 (1st Cir. 1983) (Breyer, J.). As

we pointed out, no one in this

proceeding had claimed that

participating airlines obtained any

benefit from the clauses or obtained

other benefits in exchange for accepting

the clauses. 61 FR at 42202. Neither

Sabre nor any other party argues the

contrary, nor has Sabre or any other

party cited comparable business

practices in competitive industries

(while Sabre contends that the most

favored nation clauses used by some

health insurers are comparable, we find

that they are not, as explained below).

In arguing that we have no legal

authority to prohibit parity clauses,

Sabre disputes our finding that each

system has market power over airline

participants, but, as discussed above,

after reviewing the comments, we have

determined that the systems do have

market power.

Sabre further contends that we may

not prohibit parity clauses, because the

clauses allegedly have no impact on

airline competition and our authority to

prohibit unfair methods of competition

runs only to practices that reduce airline

competition. Sabre is mistaken in

arguing that the clauses have no impact

on airline competition. The clauses

force airlines with no CRS ownership

interest to buy a higher level of service

than they would buy if they had the

freedom to choose what level of service

to buy from each system. The clauses

thereby increase the costs of the airlines

competing with the system owners and

injure those airlines’ ability to compete

effectively. See, e.g., Midwest Express

Comments at 6; National Air Carrier

Ass’n Comments at 2–3. See also Justice

Dept. Comments at 6–7, 8–9.

Sabre in any event errs in contending

that our authority is limited to practices

that interfere with airline competition.

The statute expressly authorizes us to

prohibit ‘‘an unfair method of

competition in * * * the sale of air

transportation.’’ 49 U.S.C. 41712. Parity

clauses clearly affect ‘‘the sale of air

transportation’’ and affect competition

among the systems in distributing

airline information and booking

capabilities. The clauses thus are within

our authority over unfair methods of

competition. By requiring airlines to

purchase services they do not want (or

to avoid the purchase of services they

do want), the clauses drive up airline

costs and thus increase airfares.

Judicial Rulings on Most Favored Nation

Clauses

Sabre’s principal challenge to our

legal analysis is its argument that the

courts have approved practices that

allegedly resemble the parity clauses—

most favored nation clauses imposed by

buyers—as pro-competitive. Sabre cites

such cases as Ocean State Physicians

Health Plan v. Blue Cross, 883 F.2d

1101 (1st Cir. 1989), cert. denied, 494

U.S. 1027; and Blue Cross & Blue Shield

v. Marshfield Clinic, 65 F.3d 1406, 1415

(7th Cir. 1995), cert. denied, 64 U.S.L.W.

3624 (March 19, 1996). Sabre analogizes

the most favored nation clauses

imposed by buyers with its clause,

which protects a seller against a buyer’s

decision to buy more service from

another supplier. As a result, Sabre

argues, we cannot conclude that the

clauses are an unfair method of

competition.

Sabre made this same argument in its

response to Alaska’s rulemaking

petition, and we found it unpersuasive.

As we explained, in the cases cited by

Sabre, the courts upheld a buyer’s

insistence on a most favored nation

clause which assured the buyer that its

supplier would not give any other

customer a lower price. The courts

reasoned that a most favored nation

clause imposed by a buyer represented

the buyer’s insistence on obtaining the

lowest price and thus was a practice

which tended to promote competition

on the merits. Such a clause benefited

consumers by giving them lower prices.

61 FR at 42204.

We concluded that the most favored

nation clause cases did not support

Sabre’s position. Unlike the most

favored nation clauses imposed by

buyers, the parity clauses imposed by

the CRSs on their airline customers do

not promote efficiency, do not lead to

lower prices for airline participants, and

cause consumers to pay higher prices, as

we explained in our notice of proposed

rulemaking. 61 FR at 42204. And we

pointed out that the Justice Department

believed that most favored nation

clauses imposed by buyers could violate

the antitrust laws. Ibid., citing the

proposed consent decrees in United

States v. Vision Service Plan and United

States v. Delta Dental Plan of Arizona,

published respectively at 60 FR 5210,

January 26, 1995, and 59 FR 47349,

September 15, 1994.

Sabre has not shown that our earlier

analysis of the most favored nation

clause cases was incorrect. Sabre again

cites the court cases that held that a

health insurer’s insistence on ‘‘most

favored nation’’ clauses did not violate

the antitrust laws, e.g., Ocean State

Physicians Health Plan and Blue Cross

& Blue Shield, and additionally cites E.I.

Du Pont de Nemours & Co. v. FTC, 729

F.2d 128 (2d Cir. 1984). In Du Pont the

Second Circuit reversed an FTC order

that held unlawful several practices

used by the major suppliers of lead

additives for gasoline, one of which was

a ‘‘most favored nation’’ clause given

purchasers. Sabre Comments at 21–22.

Sabre has again failed to show that the

health insurer clauses upheld by the

courts are equivalent to the parity

clauses imposed by the systems on their

airline customers. In particular, Sabre

has not shown that the parity clauses

provide consumer benefits like the

‘‘most favored nation’’ clauses used by

health insurers. In Ocean State

Physicians the First Circuit held that

Blue Cross’ conduct benefited

consumers by giving them lower prices.

883 F.2d at 1111. Cf. Blue Cross & Blue

Shield, supra, 65 F.3d at 1415 (‘‘the

antitrust laws seek to encourage’’ a

buyer’s efforts to minimize its costs).

Unlike the health insurer clauses, the

parity clauses do not enable any

consumers to receive lower prices. The

clauses instead force airlines to buy
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59795

services they neither need nor want, and

the resulting increase in airline costs

can cause consumers to pay higher fares

or receive less service. Furthermore, one

court has indicated that most favored

nation clauses may injure competition.

Willamette Dental Group P.C. v. Oregon

Dental Service Corp., 882 P.2d 637,

642–643 (Or. App. 1994).

Sabre does not attempt to show that

parity clauses result in lower costs for

airline participants or their customers,

the travelling public. Instead, Sabre

initially claims that a most favored

nation clause has the same effect

whether imposed by a seller or a buyer.

Sabre Comments at 21. But a seller’s

insistence on most favored nation

treatment, unlike a buyer’s demand for

such treatment, is unlikely to result in

lower prices. Sellers, after all, are

typically interested in obtaining higher

revenues, which typically does not

result in lower prices.

Equally unavailing is Sabre’s theory

that its parity clause is comparable to

the health insurer clauses, because the

parity clause ensures that Sabre receives

the same information as competing

CRSs. Sabre Comments at 22. This

theory again ignores Sabre’s position as

a seller of the service, not a buyer.

Significantly, Sabre has made no

showing that its airline participants

benefit as a result. Sabre’s parity clause

operates as a means of saving Sabre the

trouble of competing to entice airlines to

purchase a higher level of CRS service—

the clause enables Sabre to compel such

participation if an airline participating

in Sabre chooses to participate at the

higher level in another system without

regard for the price and quality of

Sabre’s service or the airline’s need for

the increased functionality in Sabre.

Sabre argues that we may not rely on

the Justice Department’s position,

reflected in the consent decrees cited in

our notice of proposed rulemaking, that

the ‘‘most favored nation’’ clauses

unreasonably restrain competition.

Allegedly we cannot prefer the Justice

Department’s position to the holdings of

the courts. Sabre Comments at 22–23.

This argument misconstrues the scope

of our authority to prohibit unfair

methods of competition. We may outlaw

conduct that the courts would find

permissible under the antitrust laws.

United Air Lines, 766 F.2d at 1114. And

Sabre wrongly implies that the courts

necessarily disagree with the Justice

Department’s position. The Seventh

Circuit, for example, amended its

opinion in Blue Cross & Blue Shield to

state that it had not rejected the Justice

Department’s view that ‘‘most favored

nation’’ clauses may be anti-competitive

in some cases—the court noted instead

that there was no evidence of an anticompetitive effect in the case before it.

65 F.3d at 1415. And one district court

recently refused to dismiss a Justice

Department suit against a most favored

nation clause imposed by a health

insurer. United States v. Delta Dental of

Rhode Island, 943 F.Supp. 172 (D.C. R.I.

1996).

The Du Pont case cited by Sabre is

also consistent with our analysis. That

case involved an FTC decision that

invalidated several pricing practices

used by manufacturers of lead additives

for gasoline; one of the practices was a

most favored nation clause protecting

the manufacturer’s customers against

other customers obtaining lower prices.

In reversing the FTC’s decision, the

Second Circuit found that the

competitive conditions in the gasoline

additive industry, which were far

different from those in the CRS

business, did not support the FTC’s

conclusion. Although the gasoline

additive industry was an oligopoly, its

participants did not have monopoly

power and competed with each other:

‘‘Notwithstanding the highly

concentrated structure of the industry,

there was substantial price and nonprice competition during the 1974–1979

period that is the subject of the [FTC’s]

complaint.’’ 729 F.2d at 132. In the CRS

business, on the other hand, there has

been no price or non-price competition

on providing services to airlines.

Furthermore, the Court held that the

FTC could invalidate a business practice

as unfair on ‘‘proof of a violation of the

antitrust laws or evidence of collusive,

coercive, predatory, or exclusionary

conduct * * *.’’ 729 F.2d at 140. The

Court reversed the FTC in part because

there was no evidence of coercive

conduct. Ibid. Here, in contrast, there is

such evidence—the system refuses to

provide any CRS services to an airline

unless the airline agrees to buy at least

as high a level of service from the

system as the airline buys from any

other system.

We therefore conclude that the most

favored nation clause cases cited by

Sabre do not support its argument that

we may not prohibit parity clauses. We

will instead make final our tentative

conclusion that we may define the

parity clauses as unfair methods of

competition, since a parity clause is

equivalent to an unlawful tying

agreement, a denial of access to an

essential facility on reasonable terms,

and an attempt to maintain monopoly

control over electronic access to each

system’s subscribers. We will begin with

our conclusion that the parity clauses

are equivalent to a tying arrangement

prohibited by the Sherman Act.

Tying Arrangements

We viewed parity clauses as

analogous to the tying arrangements

prohibited by the antitrust laws, since

the parity clauses result from a system’s

use of its market power to force each

participating airline to purchase

services that it may not want as a

condition to obtaining any service. A

tying arrangement—a seller’s agreement

to sell one product only on condition

that the buyer purchase a second

product from the seller (or promise not

to buy the product from another

seller)—is a per se violation of the

Sherman Act if the seller has

appreciable market power in the tying

product and if the arrangement affects a

substantial volume of commerce in the

tied product. Eastman Kodak Co., supra,

504 U.S. at 461–462 (1992). Tying

arrangements are objectionable because

they force buyers to accept conditions

that they would not accept in a

competitive market. See, e.g., Jefferson

Parish Hospital, 466 U.S. at 12–15. As

the Court has explained, ‘‘The essential

characteristic of an invalid tying

arrangement lies in the seller’s

exploitation of its control over the tying

product to force the buyer into the

purchase of a tied product that the

buyer either did not want at all, or

might have preferred to purchase

elsewhere on different terms.’’ When a

seller imposes a tying arrangement on a

buyer, ‘‘competition on the merits in the

market for the tied item is restrained *

* *.’’ Jefferson Parish Hospital, 466

U.S. at 12. A tying arrangement can well

cause consumers to pay higher prices, a

result that violates the goals of the

antitrust laws. Eastman Kodak Co., 504

U.S. at 478.

A parity clause is like a tying

arrangement, because the clause

represents the system’s use of its market

power to force each airline participant

to buy at least as much service from the

system as it buys from any other system.

Like the tying arrangements proscribed

by the Sherman Act, the CRS clauses

restrict competition on the merits for the

tied service—the higher levels of service

offered by each system—and cause the

systems’ airline participants to pay

higher prices. Since each system offers

several different levels of participation,

as well as various enhancements, the

parity clause is akin to a tie, since the

system will not sell an airline any

service unless the airline buys a

specified level of services.

Sabre does not challenge our

reasoning that the parity clauses have

the effect of a tying arrangement.

Instead, Sabre objects that there is no

tie, since each level of service is
59796 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

mutually exclusive and thus each level

of service is being sold separately rather

than in combination. Sabre Comments

at 24.

Sabre’s position is obviously flawed—

even if each level of service is mutually

exclusive, Sabre’s parity clause operates

in practice like a prohibited tying

arrangement. An airline can not obtain

the services included within the lower

level of service if it buys a higher level

of service from any other system, even

though Sabre otherwise offers the lower

level of service as a separate product to

airline participants. As explained above,

the parity clause has the same effects as

an unlawful tying arrangement—the

parity clause restrains competition in

the tied product, the higher levels of

service, and the clause causes airlines to

pay higher fees.

In addition, while Sabre sells different

levels of service as separate items, Sabre

also sells enhancements as additions to

the various levels of service. Alaska

Comments at 2, n. 1. Enhancements also

operate as tied products. Indeed the

pending dispute between Sabre, on the

one hand, and Alaska and Midwest

Express, on the other hand, involved the

two airlines’ failure to buy

enhancements. Midwest Express

Comments at 11.

The Essential Facility Doctrine

Secondly, we tentatively determined

that the parity clauses are comparable to

a violation of the essential facility

doctrine. That doctrine requires a firm

that controls a facility essential for

competition to give its competitors

access to the facility on reasonable

terms. The firm will violate section 2 of

the Sherman Act if it denies access (or

imposes unreasonable conditions on

access). A facility is essential if it cannot

be feasibly duplicated by a competitor

and if the competitor’s inability to use

it will severely handicap its ability to

compete. 61 FR 42203, citing Aspen

Skiing Co. v. Aspen Highlands Skiing

Corp., 472 U.S. 585 (1985); and

Delaware & Hudson Ry. v. Consolidated

Rail Corp., 902 F.2d 174 (2d Cir. 1990),

cert. denied, 111 S. Ct. 2041.

In our last major rulemaking we

determined that each of the systems is

comparable to an essential facility and

must therefore offer airlines access to its

services on reasonable terms. 57 FR at

43790. We tentatively concluded in this

proceeding that a system is denying

access on reasonable terms if it makes

a non-owner airline’s participation

contingent on the airline’s agreement to

purchase at least as high a level of

services from that system as it does from

any other system, without regard for the

price or quality of the system’s services.

61 FR 42203.

Sabre objects on several grounds to

our reliance on the essential facility

doctrine. According to Sabre, we may

not consider a CRS to be an essential

facility because the Ninth Circuit held

in a private antitrust case, Alaska

Airlines v. United Air Lines, 948 F.2d

536 (9th Cir. 1991), that CRSs were not

essential facilities. As we explained in

both the notice of proposed rulemaking

in this proceeding and in our last major

CRS rulemaking, the Ninth Circuit’s

decision does not preclude us from

basing our CRS rules on an analogy with

the essential facility doctrine. 57 FR at

43791; 61 FR at 42203.

Sabre further claims that, if anything

is ‘‘essential’’, it is the information

provided by important airlines, since

otherwise the CRS cannot provide

adequate information to travel agents

and so cannot obtain subscribers. Sabre

Comments at 25. But the relationship

between the systems and airline

participants indicates that an airline’s

control over its information does not

give it any power over the systems.

Participating airlines have had little or

no ability to bargain over a system’s

terms for participation. The systems

instead have been able to impose terms

on airlines that are not disciplined by

market forces.

Sabre’s primary defense is its

argument that the essential facility

doctrine allows the owners of essential

facilities to impose reasonable nondiscriminatory conditions on access to

the facility and that the parity clause is

such a reasonable non-discriminatory

condition. Sabre Reply at 21–22. We

disagree—the clause is not a reasonable

condition. The clause forces airlines to

either buy more service than they want

from some systems or less service than

they would like from other systems. The

airlines, moreover, obtain no benefits in

return.

In arguing that the clause is a

reasonable condition for access, Sabre

alleges that the clause carries out the

same goal as our mandatory

participation rule, which requires

system owners to participate in

competing systems at the same level

that they participate in their own

system. Sabre Reply at 21. However, as

shown, the parity clauses, unlike our

rule, do not require that the service be

offered on commercially reasonable

terms. More importantly, we adopted

the mandatory participation rule to keep

system owners from distorting CRS

competition by unreasonably limiting

their participation in competing

systems. Airlines like Alaska have no

incentive to distort CRS competition,

since they have nothing to gain from

doing so if they neither own nor market

a system.

Monopolization

Finally, since, as shown, most travel

agencies subscribe to only one CRS, the

system used by those agencies will

essentially hold a monopoly over the

electronic provision of information to

the agencies and the agencies’ ability to

carry out booking and ticketing

transactions electronically. If an airline

established a direct link between its

internal reservations system and a travel

agency, the agency could obtain some

information and conduct some

transactions without using the CRS. A

parity clause, however, requires an

airline to participate in a system at a

higher level than it prefers (and to pay

higher fees than it would otherwise pay

for CRS services). The parity clause

thereby reduces the travel agencies’

incentive to accept and use an

alternative channel and the airline’s

ability to fund an alternative channel.

Establishing direct links is costly, and

an airline will have little incentive to

incur that cost if it must still participate

in every system at a high level (and pay

the higher CRS fees). Alaska Reply at

27–28; Midwest Express Reply at 5–6.

By discouraging the creation and use

of alternative methods of electronically

providing travel agencies with

information and booking capabilities,

the parity clause helps to maintain the

system’s existing monopoly over

electronic access to its subscribers. We

found that the clause is comparable to

conduct designed to maintain or create

a monopoly, which would be unlawful

under section 2 of the Sherman Act. 61

FR at 42203.

Sabre asserts that the parity clauses

cannot be comparable to unlawful

monopolization since the systems have

a legitimate business reason for

adopting the clauses—preventing

exclusionary tactics by other systems.

Sabre Comments at 26. The clauses,

however, apply to all airline

participants, not just those with ties to

a CRS, and thus are not legitimate

insofar as they restrict the choices of

non-owner airlines.

Sabre and Worldspan also attack our

analysis of an airline’s incentives for

creating a direct link with travel

agencies. They claim that an airline will

have a greater incentive to find

alternatives for CRSs if its costs go up,

so the systems’ enforcement of the

parity clauses will give airlines the

incentive to find alternatives such as

direct links, since the clauses increase

their CRS costs. See, e.g., Sabre

Comments at 26; Worldspan Comments

at 6. We disagree—while airlines always
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59797

have an incentive to avoid higher CRS

fees, the parity clause in practice seems

likely to discourage airlines from

creating such links, given the cost of

doing so and the agencies’ reduced

incentive for using them.

The Exception for Owners and Sellers

of Other Systems

While we have determined that parity

clauses are an unfair method of

competition when imposed on airlines

that have no CRS affiliation, we agree

with the Justice Department, Sabre,

Worldspan, Delta, TWA, and System

One/Continental that parity clauses can

provide an effective means of

countering some forms of

discriminatory conduct by airlines that

own or market a competing CRS. As

suggested in our notice of proposed

rulemaking, we will therefore create an

exception in our rule allowing a system

to enforce a parity clause against an

airline that owns or promotes a

competing system. We are not adopting

the much broader exception sought by

Sabre, which would apply to any airline

with ties of any kind with a CRS-owning

airline, such as a code-sharing

relationship. Sabre has not shown that

that exception is necessary, and it

would virtually destroy the prohibition

against parity clauses.

Discriminatory Conduct by Airlines with

CRS Affiliations

As we stated in our notice of

proposed rulemaking, 61 FR at 42206, in

the past we have considered cases

where a foreign airline apparently

reduced (or ended) its participation in a

U.S. system in order to frustrate the U.S.

system’s ability to market itself in the

foreign carrier’s homeland. See, e.g.,

Complaint of American Airlines against

British Airways, Order 88–7–11 (July 8,

1988). We have been prepared to take

countermeasures against foreign airlines

that deny U.S. systems a fair chance to

compete in the foreign airline’s

homeland, thereby interfering with the

right of the U.S. airlines affiliated with

those systems to a fair and equal

opportunity to compete. Furthermore, in

our last major CRS rulemaking we

concluded that there was evidence that

U.S. airlines had limited their

participation in competing CRSs in

order to promote the system that they

owned, a conclusion which caused us to

adopt the mandatory participation rule.

56 FR at 12608; 57 FR at 43800. That

rule requires each airline with a

significant ownership interest in a CRS

operating in the United States to

participate in other systems at at least as

high a level as it participates in its own

system, assuming the terms for

participation are commercially

reasonable. 14 CFR 255.7.

Sabre, moreover, has stated that it

created its parity clause to keep other

airlines from engaging in unfair

competition by participating at a high

level in their affiliated system while

participating at a low level in competing

systems like Sabre, and that it has

successfully used the parity clause in

recent years to stop foreign airlines from

discriminating against Sabre and in

favor of a system affiliated with the

foreign carrier. 61 FR at 42206.

In recognition of the apparent value of

the parity clauses in preventing

discrimination by airlines affiliated with

a competing CRS, we specifically

requested parties to comment on

whether a rule prohibiting parity

clauses should include an exception

allowing a system to enforce a parity

clause against an airline that owned or

marketed a competing CRS. 61 FR at

42197, 42198, 42206.

The Parties’ Comments

In response to our request for

comments, the Justice Department,

Sabre, Worldspan, Delta, TWA, and

Continental/System One stated that they

supported an exception that would

allow a system to use a parity clause

against airlines owning or marketing a

competing system. Galileo opposes any

such exception, while Midwest Express

does not object to the enforcement of

parity clauses against foreign airlines

that own or market a system. Alaska

opposes any exception allowing

enforcement of a parity clause against

an airline without an ownership interest

in a system, even if the airline markets

a system.

The Need for the Exception

We have determined to allow systems

to enforce parity clauses against airlines

that own or market a competing system.

As shown by our own experience with

both U.S. and foreign airlines, an airline

that owns a CRS may well decide to

limit its participation in other systems

in order to encourage travel agencies in

areas where it is a major airline to use

the system that it owns. While our past

experience has involved airlines that

either owned or were affiliated with an

owner of a system, the same incentive

to downgrade participation in

competing systems could well exist in

an airline that is marketing a system.

Sabre has cited cases where some South

American airlines reduced their

participation in Sabre in order to create

a marketing advantage for a system that

they marketed but did not own. See 61

FR at 42206.

Galileo claims that discrimination is

unlikely, as shown by the decisions of

some of Galileo’s airline owners and

marketers to participate in other systems

at a higher level than they participate in

Galileo. Galileo Comments at 5–6. While

this indicates that many airlines with

CRS ties do not discriminate, it does not

show that discrimination never occurs

or is so unlikely that we should deny a

system a useful tool for ending such

discrimination. Indeed, Worldspan and

its owners complain that Egyptair,

which markets Galileo, is discriminating

against Worldspan in order to promote

Galileo. Worldspan Comments at 8–9;

TWA Comments at 3. Continental and

System One similarly complain that the

TACA carriers in Central America,

which are associated with American, are

discouraging Central American agencies

from using System One. System One/

Continental Comments at 4–5.

Galileo and Alaska argue that any

potential discrimination problem does

not warrant creating an exception from

the ban on parity clauses, because there

are other means available for preventing

discriminatory conduct by a foreign

airline, in particular, the complaint

procedures established by the

International Air Transportation Fair

Competitive Practices Act (‘‘IATFCPA’’),

codified as 49 U.S.C. 41310(c). Sabre

and Worldspan, however, point out that

the statutory remedy has a number of

restrictions that limit its effectiveness,

including the requirement that the

complaint be filed by a U.S. airline

rather than a system. In addition, a

system’s use of the private contractual

remedy has other advantages, including

the avoidance of a dispute between the

United States and the foreign

government. Sabre Reply at 8–10;

Worldspan Reply at 8–9. See also 57 FR

at 43819.

The Scope of the Exception

Despite our willingness to create an

exception in the rule that will protect

the legitimate interests of U.S. systems,

we do not wish to create an exception

that will swallow the rule. We are

therefore unwilling to accept Sabre’s

argument that a system should be

entitled to enforce a parity clause

against any airline whose reduced

participation would arguably harm the

system’s ability to obtain subscribers.

Sabre Comments at 32–33. In addition,

as discussed below, Sabre has not

shown that a broader exception is

essential.

Sabre argues that a system could pay

a regionally-important airline without

any CRS ownership interest to lower its

participation in competing systems and

that the airline’s discriminatory
59798 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

lowering of its participation level would

prejudice the marketing efforts of the

competing systems. According to Sabre,

a system owned by the dominant airline

in a country has many ways to induce

smaller airlines in that country to create

a marketing advantage for itself. The

system and its owner could secretly

compensate a non-owner airline for

lowering its participation level by giving

it better pro-rates for interline travel,

discount ground-handling services,

lower prices for reservations services,

and slots or space at crowded airports.

Sabre Reply at 10–11.

We appreciate Sabre’s concerns, but

the broad exception urged by Sabre

would destroy the ban on parity clauses.

We note, for example, that Alaska has a

code-sharing relationship with

Northwest, one of Worldspan’s owners;

thus, if we created the broad exception

sought by Sabre, we would deny Alaska

the benefit of the general prohibition

against parity clauses. Similarly, Alaska

and Midwest Express are hosted in

Sabre, so an exception allowing systems

to enforce parity clauses against airlines

hosted in another system would deny

those two airlines the ability to lower

their participation level in any system

but Sabre.

At the same time, the expansive

exception sought by Sabre seems to be

unnecessary, for every case of

discrimination cited by Sabre or

otherwise known to us has involved

either an airline that owned a system

(British Airways, Iberia, and Japan Air

Lines), an airline that was affiliated with

an owner of a system (Air Inter and

Iberia’s domestic affiliates), or an airline

that was marketing a system (Egyptair,

the South American airlines cited by

Sabre, and the TACA carriers cited by

Continental and System One). We are

unaware of any case where an airline

without any affiliation with the owner

or marketer of a system reduced its

participation in another system in order

to prejudice that system’s ability to

market itself to travel agencies.

Sabre claims that a number of small

airlines hosted in Amadeus have been

unwilling voluntarily to participate in

Sabre at the same level that they

participate in Amadeus. Sabre Reply at

11. However, Sabre has neither named

the airlines nor explained how their

levels of participation varied or why a

small airline’s presence in Sabre would

significantly affect Sabre’s ability to

market itself in foreign countries. Our

rule will allow Sabre to enforce the

parity clause against all airlines that

own or market a competing system,

such as Amadeus, a category that should

include the critical mass of airlines in

the countries where Sabre is being

marketed. In addition, even if we

allowed Sabre to enforce the parity

clause against airlines hosted in a

system but not otherwise affiliated with

that CRS, those airlines, unlike U.S.

airlines, might well decide to withdraw

entirely from Sabre, which would put

them out of reach of the parity clause.

We are at this time also skeptical of

Sabre’s assertion that a system and its

owner airlines could secretly pay an

unaffiliated airline to lower its

participation level in Sabre.

Furthermore, given the importance of

CRS use to airlines, it seems doubtful

that an airline would change its level of

participation in a system in exchange

for unrelated benefits. And Sabre would

presumably become aware of any efforts

by the unaffiliated airline to market the

system itself.

However, we are willing to reconsider

the issue in our next major CRS

rulemaking, if Sabre can show that

unaffiliated airlines will change their

participation level in order to distort

CRS competition and can suggest a rule

modification that would alleviate that

problem without making the overall

prohibition of parity clauses ineffective.

In the meantime, we have the ability to

address specific issues or problems with

our foreign counterparts.

Having determined that systems

should be allowed to enforce parity

clauses against airlines promoting a

different CRS, we must craft a rule that

will allow systems to counteract

discrimination by airlines owning or

marketing a competing system without

allowing them to coerce the

participation level choices of airlines

with no CRS interests. Midwest Express

and Alaska have suggested we should

give the systems the ability to enforce a

parity clause against foreign airlines but

not U.S. airlines. Alaska Reply at 11;

Midwest Express Comments at 10–11.

Because of the United States’

international agreements, we may not

discriminate against foreign airlines. If

we adopted such an exception allowing

the enforcement of parity clauses only

against foreign airlines, we would be

violating our obligation to treat U.S. and

foreign airlines the same. See also

Continental/System One Reply at 2, n.

3; Galileo Comments at 7, n. 4. Although

Midwest Express has noted the CRS

market in the United States differs in

important respects from the CRS market

in many foreign countries, Midwest

Express Reply at 13–15, we doubt that

those differences would justify a rule

allowing systems to enforce parity

clauses against all foreign airlines but

no U.S. airlines.

The Justice Department has proposed

that we allow enforcement of a parity

clause against airlines that themselves

or through affiliates own or market a

system and that we define ‘‘market’’ as

‘‘to cause, encourage, or persuade a

person or entity to subscribe to a

particular foreign or domestic system in

return for some material benefit that is

conditioned upon the number of

subscriptions received.’’ Justice Dept.

Comments at 11. Two commenters

would accept the Justice Department’s

proposal if the phrase ‘‘that is

conditioned upon the number of

subscriptions received’’ is struck, for

they believe that a system could easily

compensate an airline for marketing on

some basis other than the number of

subscriptions received. TWA Reply;

System One/Continental Reply at 6.

We have decided not to adopt the

Justice Department’s proposed

definition of ‘‘to market’’ or otherwise

attempt to define that term in the rules.

We are concerned that a system seeking

to enforce a parity clause may have

difficulty proving that an airline

received a ‘‘material benefit’’ for

marketing a competing system. We do

not, however, intend to give the systems

broad authority to assert that an airline

participant is marketing a competing

system. For example, neither a codesharing relationship between a nonowner airline and an owner airline nor

a hosting agreement between a nonowner airline and a system can cause

the non-owner airline to be deemed a

marketer of a system, unless the nonowner airline is specifically engaged in

promoting the system to travel agencies.

We appreciate the concern raised by

Alaska that any exception for airlines

marketing a system phrased in general

language will give the systems too much

discretion. Alaska Reply at 10–11. See

also Midwest Express Reply at 13–15.

But, given past and current problems

with discrimination by airlines that

market a CRS, some exception to our

general ban on parity clauses seems

necessary. However, we will reexamine

the language of our rule if the systems

attempt to use the exception to enforce

a parity clause against airlines

uninvolved in marketing another

system.

Furthermore, we will impose a

fourteen days notice requirement on the

enforcement of a parity clause. A system

may not enforce a parity clause against

an airline without first giving us and

that airline fourteen days written notice

of its intent to take that action. The

notice requirement would give the

airline time to complain if it considered

the system’s action unauthorized by our

rule and give us time to intervene if

necessary. We included a similar

requirement in our rule excusing a
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59799

system from complying with our rules if

a foreign airline owns or is affiliated

with a system that discriminates against

U.S. airlines. Section 255.11; see 57 FR

at 43829, 56 FR at 12637.

As provided by the Justice

Department’s proposed language, the

exception in the rule will allow

enforcement of a parity clause against

an airline that markets a CRS in foreign

countries, even if that CRS does not do

business in the United States.

Inclusion of Enhancements

We will modify the rule’s language to

clarify its applicability to

enhancements, as requested by Alaska.

The language proposed by us would

prohibit a system from requiring any

airline to maintain ‘‘any particular level

of participation in its system’’ on the

basis of the airline’s level of

participation in another system. Alaska

and Midwest Express ask us to revise

the language to make it clear that a

system also cannot use a parity clause

to force an airline to purchase

enhancements from it on the ground

that the airline is purchasing those

enhancements from another system.

Alaska Comments at 4–5; Midwest

Express Comments at 11–12. Galileo

supports this proposal, Galileo Reply at

5–6, but Worldspan claims that it was

not included in the notice of proposed

rulemaking, Worldspan Reply at 4.

Both logic and policy support our

inclusion of enhancements within the

scope of the prohibition of parity

clauses. First, the systems have used

parity clauses to require airlines to

purchase enhancements, not just to

require them to upgrade their level of

participation. Indeed, when Sabre at the

beginning of 1996 threatened to use the

parity clause against Alaska and

Midwest Express, Sabre was demanding

that the two airlines buy some

enhancements from Sabre because their

level of participation in one or more

other systems allegedly included those

enhancements. Alaska Comments at 3;

Midwest Express Comments at 11. In

addition, according to Alaska, Sabre’s

lawsuit against Alaska also argued that

the parity clause applied to

enhancements. March 8, 1995 Alaska

Reply at 3–4. And we noted in the

notice that Alaska’s current interest in

the parity clause issue involved its wish

to avoid purchasing some enhancements

from Sabre that it bought from other

airlines. 61 FR at 42207.

Furthermore, the reasons for our

findings that parity clauses reduce CRS

and airline competition and make

airline distribution less efficient are

fully applicable to the systems’ use of

parity clauses to force airlines to buy

enhancements. Whether a system is

forcing an airline to buy an

enhancement or to upgrade its overall

level of participation, the system is

using its market power to force an

airline to buy unwanted services (or to

cancel its purchase of services from

another system that it did want to buy).

Thus, when we proposed to prohibit

parity clauses, we intended to prohibit

any use of the clauses, whether the

system wanted to force an airline to

upgrade to a higher level of

participation or to buy enhancements

that the airline preferred not to buy. As

noted by Alaska, however, the proposed

rule did not expressly refer to

enhancements. We will therefore

modify it to make that clear.

Worldspan opposes Alaska’s

proposal. It argues that including

enhancements in the rule would

substantially change the proposal, since

enhancements allegedly had not been

included in the proposal, and could not

be included without a new notice of

proposed rulemaking. Worldspan Reply

at 4. Worldspan, however, has not

explained why a prohibition against the

use of parity clauses for enhancements

would involve any new or different

issues. The analysis of the benefits and

harm caused by the clauses is the same

in either case. Moreover, this

proceeding resulted in large part from

Sabre’s use of its parity clause to make

Alaska and Midwest Express buy

enhancements, so the use of parity

clauses to require airlines to buy

enhancements was inherently at issue

when we issued our proposal. Every

party in the proceeding should have

understood that the use of the clauses as

to participation in enhancements would

be an issue. We note in that regard that

no one else has supported Worldspan’s

position on enhancements.

The Parties’ Proposals for Other Rule

Changes

Our request for comments on our

proposal to prohibit parity clauses

generated a number of requests for

changes to other provisions in our CRS

rules, especially the mandatory

participation rule.

Galileo, Worldspan, Delta, Northwest,

TWA, and System One/Continental urge

us to amend the mandatory

participation rule, 14 CFR 255.7, so that

it requires airlines that market a system,

not just airlines with a significant CRS

ownership interest, to participate in

other systems. Such an amendment

would require Southwest to participate

in Galileo, Worldspan, and System One,

if it continues to promote Sabre.

Southwest opposes this suggestion, as

does Sabre.

United argues that we should

eliminate the mandatory participation

rule, since CRS owner airlines should be

able to choose the level of CRS

participation needed for distributing

their services. Delta also favors the

elimination of the mandatory

participation rule if it is not extended to

cover airlines marketing a system. TWA,

on the other hand, supports extending

the mandatory participation rule to

airlines that market a system, but asserts

that the rule should require only

participation at the full availability

level, not at higher levels.

Delta suggests that we should bar

systems from contractually tying nontravel agency services to participation in

agency services. Under Delta’s proposal,

an airline could choose whether to

participate in the information and

booking functions provided by a system

to Internet sites.

Worldspan asks us to amend the rule

authorizing a system to take

countermeasures against foreign airlines

affiliated with a CRS, 14 CFR 255.11, so

that a system would have broader

authority to react to discriminatory

treatment.

Finally, ASTA and USTAR contend

that, if we adopt the parity clause

prohibition, we should allow travel

agencies to cancel their CRS contracts if

the quality of a system’s service is

greatly reduced by a carrier’s decision to

lower its participation in that system.

We have decided not to proceed on

any of these suggested changes before

the next major rulemaking, which is

scheduled for this year. We could not in

any event adopt any of these proposals

without a new notice of proposed

rulemaking, since none of them were

proposed in our notice of proposed

rulemaking. We have issued an

advanced notice of proposed

rulemaking on the CRS rules, since, as

discussed above, those rules will expire

at the end of 1997 unless extended. 62

FR 47606, September 10, 1997. The

suggestions for additional rule changes

made by the parties can be considered

in the coming rulemaking.

Procedural Issues

We have considered Alaska’s request

for a rule barring parity clauses through

informal rulemaking procedures. Those

procedures, which included the

opportunity to file comments and reply

comments on our notice of proposed

rulemaking, have enabled every party to

fully present its position on the legal

and factual issues.

Our use of informal rulemaking

procedures here follows our consistent

past practice. When we reexamined and

readopted the Board’s rules, we used
59800 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

informal rulemaking procedures. No one

asserted that those procedures were

improper or unfair, 57 FR at 43792,

although American had initially argued

that a formal hearing should be held to

resolve factual disputes. See 56 FR

12586, 12603, March 26, 1991. In an

earlier proceeding we used informal

rulemaking procedures to amend the

CRS rules as part of a package of rules

designed to reduce airline delay

problems. 52 FR 34056, September 9,

1987.

Most importantly, when the Board

adopted the original CRS rules, it did so

in an informal rulemaking proceeding

over United’s objections, and the

Seventh Circuit affirmed the Board’s

procedural decision in United Air Lines

v. CAB.

Sabre nonetheless argues that we may

not adopt the proposed ban on parity

clauses without holding a formal

hearing. Sabre Reply at 18–20. Sabre’s

objection has no merit.

Sabre recognizes that the Seventh

Circuit held that the Board could adopt

comprehensive CRS rules without a

formal hearing. Sabre Reply at 19. Sabre,

however, suggests that the Court

decided the United Air Lines case

incorrectly, because the language of the

statute authorizing us to define and

prohibit unfair methods of competition

and unfair and deceptive practices, 49

U.S.C. 41712, allegedly requires the

holding of a formal hearing. Sabre Reply

at 19, n. 20. We disagree. As the Seventh

Circuit explained in rejecting the same

contention made by United, the statute

clearly authorizes the use of informal

rulemaking procedures for prohibiting

unfair methods of competition and

unfair and deceptive practices. United

Air Lines, 766 F.2d at 1111–1112.

Sabre wrongly contends that this

rulemaking is so different from the rules

upheld in United Air Lines that the

Seventh Circuit’s decision is

inapplicable here. Sabre argues that we

cannot use informal rulemaking

procedures since our decision

necessarily involves a determination on

the ‘‘nature and validity of past

conduct.’’ Sabre Reply at 19. Most

rulemaking decisions made by

regulatory agencies, however, involve

findings about the reasonableness of the

private parties’ past conduct, as did the

Board’s original CRS rulemaking. Cf.

United Air Lines, 766 F.2d at 1107.

Moreover, like the Board’s CRS rules,

this rule imposes no sanctions on

anyone for past conduct.

Sabre similarly errs in arguing that a

formal hearing is needed here because

the allegations made by the parties are

unsupported and ‘‘under crossexamination would be exposed as

seriously flawed.’’ Sabre Reply at 19.

Most rulemaking decisions require the

resolution of disputed issues of material

fact, but that does not force the agency

to hold a formal hearing. The

Administrative Procedure Act, after all,

expressly authorizes agencies to adopt

rules without such a hearing. Indeed we

may decide adjudicatory cases without

holding a formal hearing, even when

there are material factual issues in

dispute. See, e.g., City of St. Louis v.

DOT, 936 F.2d 1528, 1534, n. 1 (8th Cir.

1991). We are satisfied, moreover, the

record here amply supports our findings

in this rule.

According to Sabre, however, this

proceeding is also different from the

Board’s original rulemaking because our

proposed rule ‘‘may also retroactively

alter some expectations,’’ since the rule

would allegedly ‘‘disrupt’’ the

expectations of the systems and their

subscribers. Sabre Reply at 19–20. The

Board’s rules in fact were much more

disruptive. See Republic Airlines versus

United Air Lines, 796 F.2d 526 (D.C. Cir.

1986), where the Court held that a

system could require an airline to pay

higher fees for CRS participation, since

the Board’s rules invalidated the

contract allowing the airline to pay

lower fees. We are not interferring here

with any party’s reasonable contract

expectations. But, even if we were

disrupting existing contracts, we could

still act by rulemaking. As the Court

stated in Republic, 796 F.2d at 528,

‘‘There is of course no question that the

CAB had the power, as a matter of

federal law, to render the violative CRS

contracts entered into by the airlines

unenforceable from the effective date of

the rule.’’

Finally, Sabre alleges that a hearing is

necessary since we cannot adopt rules

prohibiting unfair methods of

competition without first finding that

antitrust violations have occurred, a

step which would require a formal

hearing, according to Sabre. Sabre Reply

at 19, n. 20. Sabre’s allegation is plainly

wrong, for we need not find that anyone

has violated the antitrust laws as a

condition for prohibiting a practice as

an unfair method of competition. 49 FR

at 32545. Cf. United Air Lines, 766 F.2d

at 1119–1120.

Worldspan asserts that we cannot

fairly rely on our past analyses of the

CRS business and its impact on airlines,

both because those findings are now

several years old and because we

allegedly did not specifically identify

which of the past findings are relevant

to our proposed rule. Worldspan

Comments at 4. Our use here of our

earlier rulemakings and studies is

neither unfair nor irrational. We relied

on our past findings on the basic

structure and operation of the CRS and

airline businesses, and their structure

and operation have not changed

significantly since our last rulemaking.

The past findings on which we relied

were identified in the notice of

proposed rulemaking. If Worldspan

believed that our past findings were

outdated or inaccurate, it had the

chance in its comments to argue that

those findings were no longer valid, as

we specifically said in our notice. 61 FR

at 42206. Cf. 57 FR at 43793.

The other procedural issues concern

the motions by the Department of

Justice and America West for leave to

file pleadings after the due date for

comments or reply comments and the

late submission of letters from a number

of travel agencies and from the

European Civil Aviation Conference

(ECAC). The Justice Department filed its

comments soon enough to give other

parties the ability to address its

arguments in their reply comments.

While America West filed its reply

comments long after the applicable

deadline, its reply responds to the

points in the initial round of comments

and contains no new factual or legal

arguments. The late travel agency

letters, which were largely generated by

Sabre, primarily used Sabre’s form

response and thus duplicated the views

stated in the timely letters. ECAC’s

comment states its position but does not

present new arguments and evidence.

Thus the acceptance of the late

comments and letters will not prejudice

anyone. We will therefore accept the

Justice Department’s comments,

America West’s reply comments,

ECAC’s comments, and the late letters

from travel agencies.

Finally, we note that Sabre has tried

to persuade the Departments of State

and Commerce, the United States Trade

Representative, and the Office of

Management and Budget to keep us

from adopting a rule prohibiting parity

clauses. Our ex parte docket contains

OMB’s outline of Sabre’s meeting with

OMB officials.

Regulatory Process Matters

Regulatory Assessment

This rule is a significant regulatory

action under section 3(f) of Executive

Order 12866 and has been reviewed by

the Office of Management and Budget

under that order. Executive Order 12866

requires each executive agency to

prepare an assessment of costs and

benefits under section 6(a)(3) of that

order. The proposal is also significant

under the regulatory policies and
Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations 59801

procedures of the Department of

Transportation, 44 FR 11034.

Our notice of proposed rulemaking

stated our tentative conclusions that the

rule would benefit competition and

innovation and give non-owner

participating airlines a greater ability to

choose the distribution methods that

best meet their needs. We further stated

that we did not think the rule would

significantly injure travel agencies or

affect the systems’ operations. Among

other things, no airline appeared likely

to use the rule to lower its level of

participation in any system below the

full availability level. We found that the

costs and benefits of the proposed rule

appeared to be unquantifiable, but we

asked interested persons to provide

information on the costs and benefits.

61 FR at 42207.

After reviewing the comments and

reply comments submitted in response

to our notice of proposed rulemaking,

we have determined that the rule should

provide significantly more benefits than

costs. We do not have data, however,

that would enable us to accurately

quantify the benefits of the rule for

airlines and airline passengers and the

costs of the rule for systems and travel

agencies, although we had asked for

such data. We are therefore providing a

qualitative assessment of the rule’s costs

and benefits.

The rule will benefit airlines that do

not own or market a CRS because it will

allow them to choose the level of service

purchased from each system. The rule

will thereby enable each such airline to

choose the most efficient method for

distributing its services. Airlines can

also avoid purchasing services they do

not need, which may save them

significant amounts of money. Alaska

and Midwest Express, for example, had

estimated that Sabre’s most recent threat

to enforce the parity clause against them

would raise their booking fee expenses

by more than ten percent. 61 FR at

42201.

The rule should also cause the

systems to compete for airline

purchasers of higher-level services.

Although virtually all airlines must

participate in each system at the full

availability level, many non-owner

airlines do not need to purchase higher

levels of service from each system (our

mandatory participation rule generally

requires airlines with significant CRS

ownership interests to buy an

equivalent level of service from each

system). Since a system’s services will

be more attractive to travel agencies if

more airlines participate at higher

levels, and since higher-level

participation by more airlines will

produce more revenue for a system, the

systems should compete for higher-level

participation by offering better service

and perhaps lower fees.

In addition, if airlines can operate

more efficiently, they can reduce their

costs, which should lead to lower fares

for airline travellers. However, while

CRS costs are relatively large in relation

to airline profit margins, they are

relatively small in relation to total

operating costs, so lower CRS costs are

unlikely to result in large fare decreases.

We do not expect the rule to impose

a substantial burden on the systems.

The rule will not require the systems to

change their method of operations. If the

systems compete for higher-level airline

participation, they are likely to incur

additional marketing and

developmental expenses, but nothing in

the record indicates that those expenses

would be significant. The systems may

also have to lower their fees for higherlevel participation. However, since the

fees charged airlines do not currently

appear to be disciplined by market

forces, any marketplace discipline on

the systems’ fees would be economically

beneficial.

The rule should not significantly

affect travel agencies. We doubt that any

significant airline that currently

participates in CRSs will reduce its level

of participation in any system below the

full availability level, so travel agents

using any system should continue to

have the ability electronically to obtain

information on the airline’s schedules,

fares, and availability, to make

bookings, and to issue tickets. While

some airlines are likely to reduce their

level of participation in some systems,

the operations of the travel agents using

those systems should not become

significantly less efficient, since the

higher-level participation does not

appear to greatly affect the efficiency of

agency operations. Furthermore, if the

systems could continue to enforce the

parity clauses, airlines that would

otherwise prefer to buy a higher level of

service from one or a few systems would

have the option of reducing their level

of participation in those systems rather

than upgrading their level of

participation in the other systems. Thus

the rule should not cause a significant

reduction in the efficiency of travel

agency operations.

Barring the systems from enforcing a

parity clause against airlines that own or

market a competing system would

reduce CRS competition, since some

airlines with CRS ties might well choose

to discriminate against competing

systems in order to create a marketing

advantage for the system that they own

or promote. Since our rule will allow

systems to continue enforcing a parity

clause against airlines that own or

market a system, our rule should not

cause any distortions in CRS

competition.

The Department does not believe that

there are any alternatives to the rule

which would accomplish the goal of

giving each participating carrier (other

than carriers with a significant

ownership interest in a CRS, which

remain bound by section § 255.7(a)) the

ability to choose its level of

participation in each system.

Some parties have suggested that we

should adopt a rule allowing a system

to enforce parity clauses when the price

and quality of its higher level of

participation are comparable to those of

the systems from which the airline is

already purchasing the higher level of

service. That proposal, however, would

neither promote price and service

competition among the systems for

higher-level participation nor give

participating airlines the ability to

choose what service levels were most

efficient for them.

This rule does not impose unfunded

mandates or requirements that will have

any impact on the quality of the human

environment.

Regulatory Flexibility Analysis

The Regulatory Flexibility Act of

1980, 5 U.S.C. 601 et seq., was enacted

by Congress to ensure that small entities

are not unnecessarily and

disproportionately burdened by

government regulations. The act

requires agencies to review proposed

regulations that may have a significant

economic impact on a substantial

number of small entities. For purposes

of this rule, small entities include

smaller airlines and travel agencies. The

notice of proposed rulemaking

contained our initial regulatory

flexibility analysis. This rule and our

notice of proposed rulemaking set forth

the reasons for our adoption of Alaska’s

rule proposal and the objectives and

legal basis for the rule.

A number of the commenters

submitted their views on our proposal’s

impact on small entities. We considered

their comments in deciding whether to

make final our proposed ban on parity

clauses final.

The rule will primarily affect two

types of small entities, smaller airlines

and travel agencies. To the extent that

airlines can operate more efficiently and

reduce their costs, the rule will also

affect all small entities that purchase

airline tickets, since airline fares may be

somewhat lower than they would

otherwise be, although the amount may

not be large.
59802 Federal Register / Vol. 62, No. 214 / Wednesday, November 5, 1997 / Rules and Regulations

The rule, as explained above, will

give smaller non-owner airlines the

ability to choose the level of service

they will buy from each system by

barring the use of airline parity clauses.

Smaller non-owner airlines will be able

to choose how they will distribute their

services and thus be better able to

operate more efficiently.

The rule will not directly affect travel

agencies but may affect the operations of

smaller travel agencies. If an airline

reduces its level of participation in one

or more systems without reducing its

level of participation in all of the

systems, agencies using a system in

which the airline reduced its level of

participation would not be able to

operate as efficiently as before or as

efficiently as some of the agencies’

competitors. That loss in efficiency

would be significant for an agency only

if the airline provided a substantial

amount of the airline service in the area

where the agency conducts its business

and if the reduction in the level of

participation made it substantially more

difficult for an agent to book the

airline’s services. We doubt that any

significant airline currently

participating in the systems will

drastically reduce its level of

participation in any system, so changes

in participation levels are not likely to

significantly interfere with the

efficiency of travel agency operations.

Furthermore, the parity clauses give

airlines the option of either reducing

their level of participation in the

favored system or upgrading their level

of participation in other systems. Since

a participating airline may well choose

to reduce its participation level in the

favored system, parity clauses do not

ensure that every airline will participate

at a high level in all systems. For these

reasons, we conclude that the rule will

not significantly harm travel agencies.

In addition, the rule should encourage

airlines and other firms to develop

alternative means of transmitting

information on airline services and

enabling travel agencies to carry out

booking transactions. In the long term

these developments would benefit travel

agencies.

The only alternative rule suggested by

the commenters was Sabre’s proposal

that we allow each system to enforce a

parity clause as long as that system’s

terms for the higher level of

participation or enhancement were

comparable to the terms offered by the

competing system in which the airline

was already participating at a higher

level. As discussed above, we decided

against adopting this proposal, since it

would not promote competition in the

CRS and airline industries and would

force airlines without any CRS

affiliation to buy more services than

they considered desirable.

Our rule contains no direct reporting,

recordkeeping, or other compliance

requirements that would affect small

entities. There are no other federal rules

that duplicate, overlap, or conflict with

our proposed rules.

The Department certifies under

section 605(b) of the Regulatory

Flexibility Act (5 U.S.C. et seq.) that this

regulation will not have a significant

economic impact on a substantial

number of small entities.

Paperwork Reduction Act

This rule contains no collection-ofinformation requirements subject to the

Paperwork Reduction Act, Public Law

96–511, 44 U.S.C. Chapter 35.

Federalism Implications

The rule we are adopting will have no

substantial direct effects on the States,

on the relationship between the national

government and the States, or on the

distribution of power and

responsibilities among the various

levels of government. Therefore, in

accordance with Executive Order 12812,

we have determined that the rule does

not have sufficient federalism

implications to warrant preparation of a

Federalism Assessment.

This rule does not impose unfunded

mandates or requirements that will have

any impact on the quality of the human

environment.

List of Subjects for 14 CFR Part 255

Air carriers, Antitrust, Reporting and

recordkeeping requirements.

Accordingly, the Department of

Transportation amends 14 CFR Part 255,

Carrier-owned Computer Reservations

Systems, as follows:

PART 255—[AMENDED]

1. The authority citation for part 255

is revised to read as follows:

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

40113, 41712, recodifying 49 U.S.C. 1301,

1302, 1324, 1381, 1502 (1992 ed.).

2. Section 255.6 is amended by

adding paragraph (e) to read as follows:

§ 255.6 Contracts with participating

carriers.

* * * * *

(e) No system may require a carrier

(other than a carrier that owns or

markets, or is an affiliate of a person

that owns or markets, a foreign or

domestic computerized reservations

system) to maintain any particular level

of participation or buy any

enhancements in its system on the basis

of participation levels or enhancements

selected by that carrier in any other

foreign or domestic computerized

reservations system. A system may not

compel a carrier that owns or markets,

or is an affiliate of a person that owns

or markets, a foreign or domestic

computerized reservations system, to

maintain a particular level of

participation or buy an enhancements in

its system on the basis of participation

levels or enhancements selected by that

carrier in another foreign or domestic

computerized reservations system, until

14 days after it has given the

Department and such carrier written

notice of its intent to take such action.

Issued in Washington, D.C. on October 28,

1997.

Rodney E. Slater,

Secretary of Transportation.

[FR Doc. 97–29295 Filed 11–4–97; 8:45 am]

BILLING CODE 4910–62–P

DEPARTMENT OF ENERGY

Federal Energy Regulatory

Commission

18 CFR Parts 4 and 375

[Docket No. RM95–16–000; Order No. 596]

Regulations for the Licensing of

Hydroelectric Projects; Final Rule

Issued October 29, 1997.

AGENCY: Federal Energy Regulatory

Commission, DOE.

ACTION: Final rule.

SUMMARY: The Federal Energy

Regulatory Commission (Commission) is

revising its procedural regulations

governing applications for licenses and

exemptions for hydroelectric projects.

The regulations offer an alternative

administrative process whereby in

appropriate circumstances the pre-filing

consultation process and the

environmental review process will be

combined. This alternative process is

designed to improve communication

among affected entities and to be

flexible and tailored to the facts and

circumstances of the particular

proceeding. The final rule does not

delete or replace any existing

regulations.

EFFECTIVE DATE: December 5, 1997.

FOR FURTHER INFORMATION CONTACT:

Edward Abrams, Office of Hydropower

Licensing, 888 First Street, N.E.,

Washington, DC 20426, (202) 219–

2773

Merrill Hathaway, Office of the General

Counsel, 888 First Street, N.E.,

Washington, DC 20426, (202) 208–

0825