Industry Heads Discuss Distribution Issues On The Hill

Washington - A national commission formed to study the role of travel agents in the airline distribution system and determine whether impediments exist that block consumer access to airline fare and schedule information has completed four public hearings and will deliver its recommendations to the U.S. Department of Transportation by Nov. 16.

The National Commission to Ensure Consumer Information and Choice in the Airline Industry, which was created on May 16, was mandated under terms of AIR-21. While testimony delivered to the panel covered a broad range of issues, including travel agency operations and the impact of the economy on air travel, a flashpoint for discussion was the existence of Orbitz, the online agency formed by five major airlines.

In a report to Congress in June, DOT declined to reach definitive conclusions about Orbitz, saying that the U.S. Department of Justice hadn't completed its antitrust review of the company. DOT said Orbitz has had "some pro-competitive effects in the marketplace and has brought some benefits to consumers." However, Orbitz could evolve "in ways that could harm airline competition and the potential for concern still exists."

Regardless of the prime interest of each party testifying, few passed up the opportunity to discuss the impact Orbitz already has had on the distribution system. Orbitz vice president and general counsel Gary Doernhoefer told the commission at its June 26 hearing that much of the debate about impediments to airline product and service information has focused on the availability of Web fares. "Why do CRSs not have Web fares to sell? Because they have priced themselves—and, unfortunately, the agents who depend on them—out of the business of selling Web fares," Doernhoefer said. "In the view of the airlines, Sabre in particular and the CRSs in general charge so high a fee for each booking routed through a CRS that the lowest fares an airline offers are simply not economic to sell through a CRS."

The ability of Orbitz to distribute Web fares is a product of the company's agreement to return a portion of the booking fare to the airline, if the airline agrees to make available on Orbitz any fare it makes available to the general public elsewhere, Doernhoefer said. Complaints about Orbitz should not be the focus of the commission, he urged, adding that, "Hell hath no fury like a monopolist rudely awakened by the faint whiff of a little actual price competition." Because Orbitz has brought new price competition to the booking fee, "The biggest CRSs, in response, are doing everything they can to turn every issue into an Orbitz issue, no matter how much of a stretch that may be," he said.

John Caldwell, president of Caldwell Associates, at the July 31 hearing said carriers are seeking innovative ways to cut distribution costs beyond commissions. One example is to create direct connections to their inventory, bypassing the GDSs, Caldwell said. A number of companies are exploring this option for their preferred airline deals, he explained: "Like Web fares, these arrangements can present management and reporting challenges for travel agencies and companies, but incremental savings from $12 to $14 more per trip paid by carriers for GDS bookings can be attractive."

Caldwell testified that government intervention or regulation that results in controls over pricing or costs of distribution "would be a mistake." For Web fare access, "The major issues appear to relate to costs and pricing, where market forces should dictate an efficient solution," he said. Yet, "simply because the Internet is new and different does not mean reasonable DOT anti-bias and pro-competitive rules would inhibit growth or innovation" in online agencies. "However, to require access by GDSs to all Web fares would necessarily involve DOT in cost and pricing issues, well beyond its purview or expertise."

Michael Mulvagh, American Express vice president of industry affairs and communications, in the July 11 session said his company wants "the ability to offer all airline inventory and fares to our business and leisure travelers in an efficient and meaningful way, and we want the existing DOT GDS rules to be applied to any airline-owned distribution system." Specifically, he said Orbitz qualifies as an airline-owned distribution system and should be regulated by the existing federal regulations.

Economy-conscious travelers now must book outside their preferred booking programs and locations and use such systems as Orbitz, "if they are to be sure they have researched all avenues pertaining to lowest fares," Mulvagh said. Due to this trend, agencies that have served these individuals in the past "will see reduced or negative customer growth and their earnings will decline further."

Officials for Northwest and Delta airlines, which have equity participation in Orbitz, defended the online agency as important to their need to offer products efficiently and through multiple channels. Northwest vice president of distribution and e-commerce Al Lenza on June 12 said, "We are pulling all stops to harness the fastest growing distribution expense for Northwest—GDS booking fees, which have grown to account for nearly $14 per ticket and continue to increase at a rate of approximately 7 percent per year. Northwest will spend more than $200 million in GDS fees this year, despite reduced traffic levels."

It was partly for this reason that Northwest backed the creation of Orbitz, Lenza said. "By every measure, Orbitz is delivering on its objectives," he said. "Northwest has saved nearly $2 million in GDS fees in less than one year and is poised to save substantially more in the next few years after implementing a direct link between Orbitz and Northwest's internal reservations system." He added that Northwest is expanding its Web site dedicated to travel agents and soon will offer a booking site exclusively for agents. "This will provide us with a platform to reach travel agents, without the need to sell via a GDS," he explained.

"There is a view among some that all prices should be available in all channels at all times," Lenza said. "It is our view that if such a regulation or process were to become a requirement, airlines would lose their incentive to offer low fares in cost-friendly distribution sites or channels and lose any leverage over GDS fees. The net result is that consumers could lose the opportunity to purchase some low fares."

Scott Yohe, Delta senior vice president of government affairs, on June 26 said no significant impediments exist to the dissemination of information about air travel products. "To the contrary," he said, "the e-commerce revolution has made air travel information more available to consumers than ever before."

Yohe added that Delta spent more than $350 million last year on GDS fees. "These booking fees have increased from 4 percent to 7 percent every year since 1999, despite the falling cost of information processing and computer systems," he said. "Delta wants to be able to sell tickets through any distribution channel that its customers want to use to buy Delta tickets." Much of the "distorted" criticism of Orbitz "is really an attempt by its competitors to shield themselves from competition," he said.

Representatives from Sabre and Galileo claimed that Orbitz's airline owners have given the online agency an unfair advantage. Sabre executive president and general counsel David Schwarte said the owners of Orbitz have denied them "fair and open access to critical travel information," which raises substantial public policy questions that Congress, DOT, DOJ and state attorneys general should address. He described Orbitz as "a cartel owned by big suppliers that is the antithesis of competition."

A linchpin of Orbitz's airline owners plan is "to bestow on Orbitz alone the lowest fares these five offer, thus driving travelers who want the lowest rate to the Internet site they jointly own, and a site at which consumers will see their options through the window the five large carriers control," he said.

Schwarte said that since the current CRS rules were adopted prior to the boom in Internet ticket sales, they contain a loophole that Orbitz has exploited. "The many protections of the regulations are fully applicable to CRSs distributed to travel agencies, but are completely inapplicable to ticket distribution systems targeted at consumers. It is noteworthy that the Canadian and European rules, adopted more recently than the U.S. rules, have eliminated this loophole." DOT should act now to ban Orbitz from using contract provisions that require carriers to provide "most-favored nation" fare treatment to Orbitz and should void the provisions of the Orbitz agreement that give airlines financial incentives to provide fares and other content to Orbitz on an exclusive basis, Schwarte said. "If DOT fails to tackle these problems posed by Orbitz, it may be necessary for Congress to step in and do the job DOT has failed thus far to do," he said.

Cathy Cupp, Galileo senior vice president and general counsel, said her company and travel agents "have attempted to persuade air carriers to make all of their fares, including Web fares, available through the Galileo system in a cost-effective manner, with very little success." Orbitz has provided few specifics to support its claims about CRS fees, she said. "The fact is that over the past 17 years the basic fee for the simplest booking transaction in the Galileo system has hardly increased at all," despite the fact that the system's functionality has greatly improved, she added. Cupp said it appears that the airlines' decision not to provide Web fares to distribution channels other than Orbitz "has little to do with cost and much to do with control. Based on what Galileo has observed, air carriers appear to be seeking to provide special preference to their own system, Orbitz, in the hope that it ultimately will displace other forms of distribution." If the airlines succeed in shifting large amounts of business away from travel agents and into the Orbitz channel, "The travel agent community will experience even greater financial distress." The commission should recommend that Congress and DOT take steps to ensure that CRSs and agents have access to all fares offered by airlines, Cupp said.

Worldspan, which hosts the booking engine for Orbitz, announced that it plans to restructure its pricing model "to better reflect the value of the GDS and its distribution partners and to divide more equitably the costs of distribution." The current GDS pricing model is based on a legacy system that no longer works, Paul Blackney, Worldspan president and CEO, told the panel on June 26. "Worldspan is developing a number of pricing model options to be as comprehensive as possible. This will be a collaborative undertaking with all of our constituents, as Worldspan is soliciting feedback from distributors as well as suppliers." Decisions will be announced later this year, he added.

Lead-off speaker for the commission's hearings was William Maloney, executive vice president of the American Society of Travel Agents. He outlined the financial status of the nation's agency community, and said that airline ownership of Orbitz is designed to impair the ability of agencies to compete for customers. "The airlines' long-run goal is the effective disintermediation of independent travel agencies as an effective national economic force, offline and online, replacing them with instrumentalities, such as Orbitz, which are controlled by the airlines." If this strategy succeeds, he said, the industry will return to the state that existed prior to 1984, when the federal government first adopted CRS rules to halt abuses in the industry.