OST-006984 / Third Extension of CRS Rules / Response of The Air Carrier Association / April 14, 2000

 

In the matter of

THIRD EXTENSION OF COMPUTER RESERVATION SYSTEMS REGULATIONS (CRS) / DOCKET OST-2000-6984

 

RESPONSE OF THE

AIR CARRIER ASSOCIATION OF AMERICA

The Department of Transportation has proposed to extend the expiration date of the CRS regulations (14 C.F.R., Part 255) until March 31, 2001. While the Air Carrier Association of America ("ACAA") supports such an extension, we are disappointed that a number of issues that continue to allow some of the nation's largest carriers to block entry of small carriers will not be immediately addressed.

The decision by the Department to delay for the third time decisions on CRS abuses comes at a time in which concentration in the airline industry is increasing and large carriers continue to take steps to drive new entrants out of markets. As the Department has acknowledged, the problems at concentrated hubs are even more significant. The nation's five

 

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largest carriers control approximately 84 percent of overall domestic market share. New entrants control less than 2 percent of that market share.

New entry is the backbone of the Airline Deregulation Act. In order for deregulation to work, it is essential that the Department adhere to the principles behind deregulation which call for "the encouragement of entry into air transportation markets by new air carriers, the encouragement of entry into additional air transportation markets by existing air carriers, and the continued strengthening of small air carriers so as to assure a more effective, competitive airlines industry." (The Airline Deregulation Act of 1978. P.L. 95-504, 902 Stat. 1705, Sec. 102(a)(10)). At a Transportation Research Board hearing on airline competition held by the Committee for a Study of Competition in the U.S. Airline Industry (as required by H.R. 4328, The Omnibus Appropriations Bill of 1999), Department officials stated that new entry is key to industry competitiveness. The document they presented explained that, "in spite of deregulation's success," a number of competitive concerns exist. They added that "barriers to entry, particularly at dominated hubs, inhibit the successful introduction of new competition."

In the summer of 1999, the TRB issued its report, Special Report 255 - Entry and Competition in the US. Airline Industry, in which it addressed CRS issues finding that:

Travel agents - and the CRSs they use - provide an important service to consumers by making information available about the fare and service offerings of competing airlines. They also offer small airlines and new entrants access to a national network for marketing their services and distributing their tickets. Continued improvements to this system and the advent of new means of ticket distribution by airlines and agents - including Internet options - should be encouraged, since the potential gains from advances in distribution are so large. Nevertheless, ensuring and instilling impartiality in the system, however it evolves, should remain a priority for DOT.

DOT should monitor and investigate airlines' aggressive and selective use of travel agent incentives - as well as disincentives - to divert customers away from rival carriers. Consideration also should be given to developing rules for

 

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CRS listings to limit the kinds of code-shared flights posted and to avoid conferring unfair competitive advantages.

For the past decade, Department and GAO studies have identified CRS abuses as one of the factors that inhibits competition and new entry. In testimony before the House Aviation Subcommittee Hearing (October 21, 1999), Department General Counsel Nancy McFadden stated:

A number of factors still prevent airline passengers and the airline industry itself from enjoying the full benefits of deregulation. These have been documented in a number of studies, including the TRB's. In particular, barriers to entry within the industry include computer-reservations systems, frequent flyer programs, travel agent commission overrides, exclusionary behavior. . . "

At that hearing, the Department released its response to the TRB report and further addressed CRS issues:

The Department is aware that changes in the airline distribution system can affect airline competition and the ability of consumers to obtain complete and impartial airline information. Because of the importance of these issues, we are monitoring changes in airline distribution practices and conducting our own study of airline computer reservation systems (CRS) and related airline distribution issues in connection with our pending review of our CRS rules. The potential impact of airline distribution practices on airline competition and consumers has also been the subject of recent reports by this Department's Office of the Inspector General on override commissions and by the General Accounting Office on changes in airline ticketing practices.

In our CRS rulemaking, we will investigate whether additional rules are needed to prevent airlines that dominate markets from using that dominance to deter travel agencies from booking customers on competitors and from giving travel agency customers complete and impartial advice.

In response to the Department's proposal to extend the CRS rules, on March 14, 2000, the American Society of Travel Agents, Inc., ("ASTA") requested that the Department of Transportation ("Department") begin an expedited review of 14 CFR sec. 255.10, which directs

 

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Computer Reservation System ("CRS") vendors to sell travel agency-generated transaction data that it generates from its CRS.

Under sec. 25 5. 1 O(a) each system:

shall make available to all U.S. participating carriers on nondiscriminatory terms all marketing, booking, and sales data relating to carriers that it elects to generate from its system. The data made available shall be as complete and accurate as the data provided a system owner.

The ACAA joins ASTA in urging the Department to immediately begin a proceeding to bar CRS owners from providing such agency and corporation specific termination data to air carriers. To allow carriers that already dominate hub airports and entire regions of the country access to the transaction data of their small competitors, a practice inconceivable in any other industry, is an obvious threat to the survival of competition. This is particularly the case for carriers that engage in anti -competitive and predatory practices.

Section 255.10 allows a dominant hub carrier to obtain information about other carrier's transactions including the class of service, price paid, date of purchase and route selected. The data also allows a large carrier to monitor travel agencies and corporations it has agreements with and already dominates. Although all carriers may have the opportunity to purchase the tapes, only the large carriers are able to do so because of costs. Moreover, because of the importance of this information in combating a new entrant's attempt to enter a hub, it makes that new entrant even more vulnerable to the onslaught of large carriers' anti-competitive practices. In enabling a large carrier to oversee the details of travel agency and corporate business transactions and to monitor who is utilizing a new entrant's service, the rule provides the large carriers with even more opportunity to eliminate competitive pricing and ultimately, competition.

 

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There is little doubt that large carriers are using CRS information to destroy new entry and competition. Predatory behavior permeates throughout this industry. An example of how carriers drive competitors out of markets is the case brought against AMR, American Airlines and American Eagle by the government. In its Complaint, the Department of Justice stated:

American dominates DFW and charges monopoly fares on many DFW routes. When small airlines try to compete against American on these routes, American typically responds by increasing its capacity and reducing its fares well beyond what makes business sense, except as a means of driving the new entrant out of the market. Once the new entrant is forced out, American promptly raises its fares and usually reduces its service. Through its predatory and monopolistic conduct, American deprives consumers of the benefits of competition in violation of the antitrust laws.

Why would the Department want to allow American (or any large carrier) to oversee travel agency and corporate purchases of tickets by new entrants? The Department has recently announced that it is reviewing anti -competitive complaints brought by Sun Country and Air Tran against several of the large carriers.

For these reasons, the use and possession of CRS transaction data is a matter that requires immediate attention from the Department. ACAA strongly believes that the Department must begin a proceeding to terminate the rule that directs CRS vendors to sell transaction data and proscribe the dissemination of this data to carriers who are not a party to the transaction. There is no legitimate purpose for any carrier to posses this type of information about another carrier.

 

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In addition to taking this immediate action, the Department needs to accelerate its review of internet ticket sales agreements and exclusions.

Respectfully submitted,

Edward P. Faberman,

Executive Director

Michelle M. Faust,

Legislative Counsel

AIR CARRIER ASSOCIATION OF AMERICA

1500 K Street, NW, Suite 250

Washington, DC 20005-1714

Tel: 202-639-7502

Fax: 202-639-7505

April 14, 2000