[Federal Register Volume 62, Number 212 (Monday, November 3, 1997)]
[Proposed Rules]
[Pages 59313-59317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29001]


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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 255

[Docket No. OST-97-3057; Notice No. 97-11]
RIN 2105-AC67


Computer Reservations System (CRS) Regulations (Part 255)

AGENCY: Office of the Secretary, (DOT).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department is proposing to revise its rules governing 
airline computer reservations systems (CRSs) by changing the rules' 
expiration date from December 31, 1997, to March 31, 1999. If the 
Department does not change the expiration date in the rules (14 CFR 
Part 255), they will terminate on December 31, 1997. The proposed 
extension of the current rules will cause those rules to remain in 
effect while the Department carries out an extensive reexamination of 
the need for CRS regulations. The Department tentatively believes that 
the current rules should be maintained because they appear to be 
necessary for promoting airline competition and helping to ensure that 
consumers and their travel agents can obtain complete and accurate 
information on airline services.

DATES: Comments must be submitted on or before November 18, 1997.


[[Page 59314]]


ADDRESSES: Comments must be filed in Room PL-401, Docket OST-97-3057, 
U.S. Department of Transportation, 400 7th St. SW., Washington, DC 
20590. Late filed comments will be considered to the extent possible. 
To facilitate consideration of comments, each commenter should file six 
copies of its comments.

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

SUPPLEMENTARY INFORMATION: The Department in 1992 adopted its rules 
governing CRS operations--14 CFR Part 255--because CRSs had become 
essential for the marketing of airline services for almost all airlines 
operating in this country. 57 FR 43780, September 22, 1992. We 
concluded that the rules were necessary to ensure that the owners of 
the systems--all of which were airlines or airline affiliates--did not 
use them to unreasonably prejudice the competitive position of other 
airlines or to provide misleading or inaccurate information to travel 
agents and their customers. CRS practices can injure airline 
competition because travel agents rely on CRSs to provide airline 
information and bookings for their customers and because almost all 
airlines rely heavily on travel agencies to distribute their services. 
Our rules will expire on their sunset date, December 31, 1997, unless 
we readopt them or extend the expiration date. We have begun a 
proceeding to determine whether the rules are necessary and should be 
readopted and, if so, with what modifications. 62 FR 47606, September 
10, 1997. We are proposing here to extend the expiration date for the 
current rules to March 31, 1999, so that they will remain in force 
while we conduct our overall reexamination of the rules.
    We have set a short comment period of fifteen days so that we can 
publish a final decision on this proposal before the rules' current 
expiration date. We note that our advance notice of proposed rulemaking 
has already given interested persons notice of our intent to propose an 
extension of the rules' expiration date. 62 FR at 47610-47611.

The CRS Business

    Four CRSs--each affiliated with one or more U.S. airlines--operate 
in the United States. A CRS consists of a periodically-updated central 
database that contains information on airline services and other travel 
services sold through the system. The major users of the information 
and transaction capabilities provided by CRSs are travel agents, who 
access CRSs through computer terminals, which are normally leased from 
the system. Consumers can also access a CRS through an on-line computer 
service or an Internet website. A CRS enables travel agents and other 
users to find out what airline seats and fares are available, book a 
seat, and issue a ticket on each airline that ``participates'' in the 
system, that is, that makes its services saleable through the CRS.
    Each CRS obtains most of its revenues from airlines and other 
travel suppliers participating in the system. An airline participant 
pays a fee whenever the system is used to make a booking on that 
airline (most of the systems also charge fees for related transactions, 
such as booking changes and cancellations). Other travel suppliers pay 
similar fees. While travel agencies subscribing to the system may also 
pay fees, subscriber fees, unlike airline fees, are disciplined by 
competition. Many travel agencies obtain CRS services at little or no 
charge.

Regulatory Background

    CRSs became essential for airline distribution in the early 1980s. 
At that time each of the systems operating in the United States, with 
one exception, was owned by a single airline (one system was owned by a 
non-airline firm, but it had a small market share and was later sold to 
an airline CRS). Each owner airline used its system to prejudice 
airline competition and give consumers biased or incomplete information 
in order to obtain more bookings. These factors caused the agency 
formerly responsible for the economic regulation of airlines, the Civil 
Aeronautics Board (``the Board''), to adopt rules governing the 
operations of airline-affiliated CRSs. 49 FR 32540, August 15, 1984. 
The Board found that regulations were essential to keep the systems 
from causing substantial harm to airline competition. The Board adopted 
its regulations primarily under its authority under section 411 of the 
Federal Aviation Act, later recodified as 49 U.S.C. 41712, to prevent 
unfair methods of competition and unfair and deceptive practices in air 
transportation and the marketing of airline transportation. On review 
the Seventh Circuit upheld the Board's rules. United Air Lines v. CAB, 
766 F.2d 1107 (7th Cir. 1985).
    The Board's major rules required each system to make participation 
available to all airlines on non-discriminatory terms, to offer at 
least one unbiased display, and to make available to each airline 
participant any marketing and booking data from bookings for domestic 
travel that it chose to generate from its system. The Board's rules 
also prohibited certain contract terms that limited the travel 
agencies' ability to choose which system to use.
    We assumed the Board's responsibilities for airline regulation, 
including its regulation of CRSs, after the Board's sunset on December 
31, 1984. See United Air Lines, supra, 766 F.2d at 1109.
    To ensure that we would reexamine the need for the rules and their 
effects, the Board included a sunset date of December 31, 1990, in its 
rules. To carry out that reexamination we held a rulemaking proceeding 
to determine whether the rules should be readopted or modified. 54 FR 
38870, September 21, 1989, (advance notice of proposed rulemaking); 56 
FR 12586, March 26, 1991, (notice of proposed rulemaking); and 57 FR 
43780, September 22, 1992, (the final rule). Since we did not complete 
that rulemaking by December 31, 1990, the rules' original expiration 
date, we extended that date to keep the rules in effect until the 
rulemaking's completion. 55 FR 53149, December 27, 1990; 56 FR 60915, 
November 29, 1991; 57 FR 22643, May 29, 1992. In the rulemaking we 
relied in part on the findings made in the staff's study of the rules 
and the CRS business. Secretary's Task Force on Competition in the U.S. 
Domestic Airline Industry, Airline Marketing Practices: Travel 
Agencies, Frequent-Flyer Programs, and Computer Reservation Systems 
(February 1990).
    In our rulemaking we concluded that CRS rules remained necessary: 
market forces still did not discipline the price or level of service 
offered participating airlines by the systems, CRS owners would still 
use their control of the systems to prejudice airline competition if 
there were no rules, and systems could still bias their displays of 
airline services if there were no rules requiring unbiased displays. 57 
FR at 43783-43787. We therefore readopted the Board's rules with 
several changes intended to further promote competition in the airline 
and CRS industries.
    To ensure that we would reexamine the need for our rules and their 
effectiveness, our rules, like the Board's rules, included a sunset 
date, December 31, 1997. 14 CFR 255.12; 57 FR, 43829-43830, September 
22, 1992. If we do not readapt the rules or extend their expiration 
date, the rules will end on that date.
    We recently published an advance notice of proposed rulemaking 
asking interested persons to comment on whether we should readapt the 
rules and, if so, with what changes. 62 FR 47606, September 10, 1997. 
We did not issue the advance notice earlier due to

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the on-going study of the CRS business and the impact of the rules 
being conducted by the staff, which was begun by Order 94-9-35 
(September 26, 1994) and is examining such recent developments as the 
growth in Internet booking services.
    Since we adopted the rules, we have proposed two amendments to 
them. One proposed rule would prohibit each system from imposing 
contract terms on participating airlines that require an airline to 
participate in a system at least as high a level as the airline 
participates in any other system, at least when the airline participant 
did not own or market a competing system. 61 FR 42197, August 14, 1996. 
The second proposal would revise our rules on CARS displays to promote 
airline competition and ensure that systems provide reasonable displays 
of airline services. 61 FR 42208, August 14, 1996.

Our Proposed Extension of the CARS Rules

    We are proposing to change the expiration date for our CARS rules 
to March 31, 1999, so that the rules will remain in effect while we 
conduct our reexamination of the need for the rules and the rules' 
effectiveness. Given the time required for completing the overall 
reexamination of our rules, including the need to give parties an 
adequate opportunity to file comments and reply comments in response to 
the advance notice of proposed rulemaking and to our future notice of 
proposed rulemaking, we will not be able to complete that proceeding by 
the current expiration date of our rules.
    A temporary extension of the current rules will preserve the status 
quo until we determine which rules, if any, should be adopted. Allowing 
the current rules to expire could be disruptive, since the systems, 
airlines, and travel agencies have been conducting their operations in 
the expectation that each system will comply with the rules. Systems, 
airlines, and travel agencies, moreover, would be unreasonably burdened 
if the rules were allowed to expire and if we later determined that 
those rules (or similar rules) should be adopted, since they could have 
changed their business methods in the meantime.
    We tentatively find that a short-term continuation of the current 
rules is necessary, primarily because of the need to protect airline 
competition and consumers against unreasonable practices. Before 
adopting our current rules we carefully considered the CARS business 
and airline marketing, both as part of the Secretary's study of 
domestic airline competition and through the rulemaking. We concluded 
in that CARS rulemaking, completed in 1992, that CRSs were still 
essential for the marketing of the services of virtually all airlines. 
57 FR 43780, 43783-43784, September 22, 1992. Each airline's need to 
participate in each system meant that market forces did not discipline 
the terms offered by the systems for airline participation.
    Although the staff has not completed its current study of the CARS 
business and although we have only begun a rulemaking to reexamine the 
need for the rules, we tentatively believe that the findings made in 
our last CARS rulemaking on the need for CARS rules are still valid, at 
least for the purpose of a short-term extension of the rules' 
expiration date. If we continue the current rules, those regulations 
will protect airline competition and consumers against the injuries 
that might otherwise occur, given our earlier findings on the market 
power of the systems and each airline owner's potential interest in 
using its affiliated CARS to prejudice the competitive position of 
other airlines. Continuing the rules in effect should not impose 
significant costs on the systems and their owners, since they have 
already adjusted their operations to comply with the rules and since 
the rules do not impose costly burdens of a continuing nature on the 
systems.
    The need for the rules results from the airlines' dependence on 
travel agencies, the agencies' dependence on CRSs, the use by most 
travel agency offices of only a single CARS, the difficulty of creating 
alternatives for CRSs and getting travel agencies to use them, and the 
airlines' inability to cause agencies to use one CARS instead of 
another. Because of these factors, almost all airlines must participate 
in each CARS, and the CRSs have no need to compete for airline 
subscribers.
    In recent years seventy percent of all airline bookings in the 
United States have been made by travel agencies, and travel agencies 
have relied almost entirely on CRSs to determine what airline services 
are available and to make reservations for their customers. 57 FR at 
43782. Few travel agency offices make extensive use of more than one 
CARS. 57 FR at 43783.
    If an airline does not participate in one system, the travel agents 
using that system must call the airline to obtain information and make 
bookings, which is substantially less efficient than using a CARS. 
Travel agents are less likely to book an airline when doing so is 
significantly more difficult than booking a competing airline 
participating in the agents' CARS. As a result, the non-participating 
airline will receive fewer bookings than it would obtain if it 
participated in the agents' system. The importance of marginal revenues 
in the airline industry means that an airline's loss of a few bookings 
on each flight is likely to substantially reduce its profitability. 57 
FR at 43783-43784.
    Most airlines do not have practicable alternatives to CARS 
participation. An airline could try to mitigate the loss of bookings 
caused by non-participation in a system by establishing a direct 
electronic link between the travel agencies using that system and its 
own internal reservations system, but doing so is expensive and 
potentially less convenient for travel agents.
    We doubt that any airline could successfully create a new CARS, 
since doing so would be extremely costly. In addition, any new system 
could not easily obtain a significant number of subscribers. Moreover, 
due to the economies of scale in the CARS business, a system without a 
large subscriber base is unlikely to be profitable. 57 FR at 43783-
43784. We recognize that U.S. Travel Agency Registry has announced a 
plan to create a new CARS, but its system would apparently not be 
available until late 1998, and a few industry sources have questioned 
USTAR's plans. See Travel Distribution Report, vol. 5, no. 11, August 
28, 1997, at 1, 4. We will welcome new competition in the CARS 
business, but USTAR's plans do not undermine the apparent need for a 
short-term extension of the rules.
    Airlines could exert some competitive pressure on the systems if 
they could encourage travel agencies to use one system instead of 
another, but that has not been practicable. 57 FR at 43831.
    In our recent notices of proposed rulemaking on airline parity 
clauses and CARS displays, we tentatively concluded that market forces 
did not discipline the terms offered by a system for airline 
participation. See, e.g., 61 FR at 42198. The Department of Justice 
filed comments in the parity clause rulemaking which supported our 
tentative findings. The Justice Department thus stated, Justice Dept. 
Comments at 2-3, Docket OST-96-1145 (footnote omitted):

    Each CARS 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 CARS. Thus, from an 
airline's perspective, each CARS constitutes a separate market and 
each system possesses market power over any carrier that wants 
travel agents subscribing to that CARS to sell its airline tickets.

    We are aware of the changes in the CARS business and airline 
marketing

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practices since our last major CARS rulemaking, but we are reluctant to 
change our existing regulations until we have completed our study of 
the impact of those changes.
    Many airlines and travel agencies and some CRSs now offer booking 
sites on the Internet that consumers may use, but few consumers 
currently book airline services through the Internet. Despite the rapid 
growth in the number of consumers using the Internet for airline 
bookings, airlines will probably remain dependent on travel agencies 
for most of their revenues for at least the next few years. 
Furthermore, many of the websites use a CARS for a booking engine, so 
CRSs have captured a significant share of the Internet business.
    In addition, several new low-cost airlines began operations without 
making their services saleable through any CARS. Initially those 
airlines' adoption of that strategy suggested that airlines could 
compete successfully without CARS participation. However, some of these 
low-cost airlines--Western Pacific and ValuJet, for example--have 
recently announced plans to make their services available through CRSs, 
and other low-cost airlines--Reno and Frontier, for example--have 
always relied on CARS participation in their marketing. As a result, 
while Southwest has managed to prosper without participating in any 
CARS except Sabre, it appears that virtually no other airline has been 
able to duplicate Southwest's method of operations enough to avoid CARS 
participation.
    Our tentative conclusion that CARS rules remain necessary, at least 
on a short-term basis, is supported by current airline complaints about 
CARS practices. For example, a number of airlines (including Delta, one 
of the three largest airlines in the United States and a part-owner of 
a CARS) have complained about the continuing increases in booking fees 
and the airlines' inability to exert any check on those increases. 
Justice Dept. Comments at 5, Docket OST-96-1145. There are also 
disputes between some participating airlines and some systems over the 
systems' imposition of booking fees on transactions that participating 
airlines believe are of no benefit to them. See, e.g., Travel 
Distribution Report, vol. 5, no. 2, April 24, 1997, at 1.
    Finally, there is an additional basis for our tentative 
determination that we should keep the current rules in place pending 
our reexamination of the rules. Our goals of promoting airline 
competition and preventing consumer deception were not the only bases 
for our adoption of the rules. We also relied on our obligation under 
section 1102(b) of the Federal Aviation Act, recodified as 49 U.S.C. 
40105(b), to act consistently with the United States' obligations under 
treaties and bilateral air services agreements. Many of those bilateral 
agreements assure the airlines of each party a fair and equal 
opportunity to compete. We have held that the fair and equal 
opportunity to compete includes, among other things, a right to have an 
airline's services fairly displayed in CRSs. Our rules against display 
bias and discriminatory treatment help to provide foreign airlines with 
a fair and equal opportunity to compete in the United States. 57 FR at 
43791-43792. We note in that regard that the European Union, Canada, 
and Australia, among other countries, have adopted rules regulating 
CARS operations that help give U.S. airlines a fair opportunity to sell 
their services in the countries covered by the rules.

Regulatory Process Matters

Regulatory Assessment

    This rule is a nonsignificant regulatory action under section 3(f) 
of Executive Order 12866 and has not 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 
for each significant rule under section 6(a)(3) of that order. The 
proposal is also not significant under the regulatory policies and 
procedures of the Department of Transportation, 44 FR 11034.
    Maintaining the current rules should impose no significant costs on 
the CRSs. The systems have already taken all the steps necessary to 
comply with the rules' requirements on displays and functionality, and 
operating in compliance with the rules does not impose a substantial 
burden on the systems. Maintaining the rules will benefit participating 
airlines, since otherwise they would be subjected to unreasonable terms 
for participation, and will benefit consumers, who otherwise might 
obtain incomplete or inaccurate information on airline services. 
Several provisions of the rules, moreover, are designed to prevent 
abuses in the systems' competition with each other for travel agency 
subscribers.
    When we conducted our last major CARS rulemaking, we included a 
tentative regulatory impact statement in our notice of proposed 
rulemaking and made that analysis final when we issued our final rule. 
We believe that analysis remains applicable to our proposal to extend 
the rules' expiration date. As a result, no new regulatory impact 
statement appears to be necessary. However, we will consider comments 
from any party on that analysis before we make our proposal final.
    This rule does not impose unfunded mandates or requirements that 
will have any impact on the quality of the human environment.

Initial 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 U.S. and 
foreign airlines and smaller travel agencies. Our notice of proposed 
rulemaking sets forth the reasons for our proposed extension of the 
rules' expiration date and the objectives and legal basis for that 
proposed rule.
    In addition, we note that keeping the current rules in force will 
not modify the existing regulation of small businesses. Our notice of 
proposed rulemaking in our last major CARS rulemaking contained an 
initial regulatory flexibility analysis on the impact of the rules, and 
we discussed the comments on that analysis in our final rule. Our 
analysis appears to be valid for our proposed extension of the rules' 
termination date. Accordingly, we adopt that analysis as our tentative 
regulatory flexibility statement and will consider any comments filed 
on that analysis in connection with this proposal.
    The continuation of our existing CARS rules 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.
    Continuing the rules will protect smaller non-owner airlines from 
certain potential system practices that could injure their ability to 
operate profitably and compete successfully. No smaller airline has a 
CARS ownership interest. Market forces do not significantly influence 
the systems' treatment of airline participants. As a result, if there 
were no rules, the systems' airline owners could use them to prejudice 
the

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competitive position of other airlines. The rules provide important 
protection to smaller airlines. For example, by prohibiting systems 
from ranking and editing displays of airline services on the basis of 
carrier identity, they limit the ability of each system to bias its 
displays in favor of its owner airlines and against other airlines. The 
rules also prohibit charging participating airlines discriminatory 
fees. The rules, on the other hand, impose no significant costs on 
smaller airlines.
    The CARS rules affect the operations of smaller travel agencies, 
primarily by prohibiting certain CARS practices that could unreasonably 
restrict the travel agencies' ability to use more than one system or to 
switch systems. The rules prohibit CARS contracts that have a term 
longer than five years, give travel agencies the right to use third-
party hardware and software, and prohibit certain types of contract 
clauses, such as minimum use and parity clauses, that restrict an 
agency's ability to use multiple systems. By prohibiting display bias 
based on carrier identity, the rules also enable travel agencies to 
obtain more useful displays of airline services.
    The Regulatory Flexibility Act also requires each agency to 
periodically review rules which have a significant economic impact upon 
a substantial number of small entities. 5 U.S.C. 610. Our rulemaking 
reexamining the need for the CARS rules and their effectiveness will 
constitute the required review of those rules.
    Our proposed 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.
    Interested persons may address our tentative conclusions under the 
Regulatory Flexibility Act in their comments submitted in response to 
this notice of proposed rulemaking.
    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 proposal contains no collection-of-information requirements 
subject to the Paperwork Reduction Act, Pub. L. No. 96-511, 44 U.S.C. 
Chapter 35.

Federalism Implications

    The rule proposed by this notice 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 
proposed rule does not have sufficient federalism implications to 
warrant preparation of a Federalism Assessment.

List of Subjects for 14 CFR Part 255

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

    Accordingly, the Department of Transportation proposes to amend 14 
CFR Part 255, Carrier-owned Computer Reservations Systems, as follows:

PART 255--[AMENDED]

    1. The authority citation for Part 255 continues to read as 
follows:

    Authority: 49 U.S.C. 1301, 1302, 1324, 1381, 1502.
    2. Section 255.12 is amended to read as follows:


Sec. 255.12.  Termination.

    Unless extended, these rules shall terminate on March 31, 1999.

    Issued in Washington, D.C. on October 27, 1997.
Rodney E. Slater,
Secretary of Transportation.
[FR Doc. 97-29001 Filed 10-31-97; 8:45 am]
BILLING CODE 4910-62-P