Solutions For The CRS Parity Problem
<H1> Solutions For The CRS Parity Problem</H1><B>I</B>n mid-August, the Department of Transportation published two Notices of Proposed Rule Making in an attempt to fix alleged abuses by various CRSs. In the first, the DOT is leaning toward preventing vendors from enforcing certain contract provisions for non-CRS-owning airlines. The DOT's preliminary opinion is that "parity" clauses, under which airlines have to participate essentially at the same level in each CRS, inhibit competition. In the second, the DOT is inclined to mandate further restrictions on CRS screen displays, requiring them to be more directly in accord with consumer preferences.
The DOT has erroneously opted for a piecemeal approach. Complaints about CRS practices will only get louder until the DOT addresses the root causes of those justifiable complaints. These include accusations about "supra-competitive" booking fees, billing disputes and CRS contracting practices with both airlines and agencies. As the DOT itself acknowledges, "since a vendor has little need to complete with other systems for airline participants, the terms for airline participation are not significantly affected by market forces." Most people outside the vendor community would extend that statement to say that questionable CRS practices in contracting and pricing are little more than abuses of monopoly power.
Three basic treatments have been suggested in the past several years to correct the fundamental problem. Two have been around for a while, while the third is recent.
The first suggested solution, and the oldest, is forced divestiture of the CRSs by their owners. The argument goes that as long as the CRSs are owned by airlines, there will be no end to steps they can take to disadvantage their competitors. No matter how many regulations are enacted, there will always be opportunities to exploit an "unfair" market position to gain competitive advantage, whether it's making other airlines harder to book or raising their costs.
The difficulty with this proposal is that it assumes airline ownership is the root cause of the CRSs' power. But in my opinion, it is features of the DOT's own rules that lead to market distortion. The rules were put in place in1984 and again in 1992 to protect airlines that competed with CRS hosts, and they have the contrary effect of artificially propping up the CRSs.
In this case, forced divestiture would accomplish very little, for non-airline owners could continue to take advantage of their artificial market position. If anything, they would have an easier time, for they would not be subject to the complaint that they were transferring wealth illegitimately from participating carriers to the CRS hosts.
The second proposed solution is the "zero fee" proposal, most prominently identified with the Department of Justice, which advocated it in the 1992 rule making. Currently, the airline participants pay booking fees, while cash and other benefits are provided to larger agencies for choosing a CRS. Under the zero-fee approach, carriers would pay nothing to participate, and all CRS fees would be paid by subscribers. This would more obviously match CRS beneficiaries with the payers. Individual travel agencies and other subscribers would make their own decisions as to their optimal price-service trade-off. Some claim, however, that this would create a different set of distortions. After all, the carriers receive a benefit from participating in the CRSs, and they should pay for that benefit.
The third solution, and the one I favor, stems from the belief that the real source of the CRSs' ability to distort competition comes from two DOT rules. The first, the non-discriminatory pricing rule, says that any airline at a given participation level must be charged the same as any other carrier at the same level. This means that a CRS has no incentive to negotiate with any airline; any concessions offered to one airline have to be offered to all. And, at least as importantly, every CRS knows this is true for every other CRS. Were CRSs and airlines free to negotiate, there is no telling what kinds of terms they could come up with. Parity clauses, for example, could be a legitimate subject for negotiation, as could requirements for billing documentation. Smaller carriers could be protected through buying groups or code sharing agreements, subject to the normal antitrust laws.
The other rule is the mandatory participation rule. This says that any CRS-owning carrier has to participate in other CRSs at the same level as in its own. This has the net effect of forcing participation up. Currently, no owning airline is free to negotiate even its level of participation, much less the price it pays.
Complaints about CRS practices aren't going to go away. Small fixes will solve little, while adding to everybody's cost and ignoring the basic problem. A piecemeal approach is definitely not the right way to go, and only radical steps will solve the problem once and for all.
<I>Robert Moss is president of Travel Intelligence Inc., a Belmont, Mass.-based firm that provides customized market intelligence to airlines, travel agencies and other corporate travel service providers.