Computer Reservations System (CRS) Regulations

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 255

[Docket No. OST-96-1145 [49812]; Notice No. 96-22]

RIN 2105-AC35

Computer Reservations System (CRS) Regulations

AGENCY: Office of the Secretary, Transportation.

ACTION: Notice of proposed rulemaking

-----------------------------------------------------------------------

SUMMARY: The Department is proposing to adopt a rule that would

prohibit each computer reservations system (CRS) from adopting or

enforcing contract clauses that bar a non-vendor 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. The Department

believes that this rule is necessary to promote competition in the CRS

and airline industries, since the contract clauses at issue appear to

unreasonably limit an airline's ability to choose how to distribute its

services through travel agencies. The Department will consider creating

an exception from this prohibition so that a CRS could enforce such a

clause against an airline that owns or markets a competing CRS. The

Department is acting on a rulemaking petition filed by Alaska Airlines.

DATES: Comments must be submitted on or before September 13, 1996.

Reply comments must be submitted on or before October 3, 1996. We are

shortening the comment period because our decision on Alaska's

rulemaking petition will resolve an existing controversy between Sabre

and many of its participating airlines, including Alaska, and because

our request for comments on Alaska's petition has already given the

public an opportunity to comment on Alaska's proposal.

ADDRESSES: Comments must be filed in Room PL-401, Docket OST-96-1145

(49812), 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: Travel agents in the United States largely

rely upon CRSs to determine what airline services and fares are

available in a market, to book seats, and to issue tickets for their

customers, because CRSs can perform these functions much more

efficiently than any other means currently available for gathering

information on airline services, making bookings, and issuing tickets.

Each of the CRSs operating in the United States is owned by or

affiliated with one or more airlines, each of which has the incentive

to use its control of a system to prejudice the competitive position of

other airlines. We found it necessary to adopt regulations governing

CRS operations, 14 CFR Part 255, in order to protect competition in the

airline industry (and to help ensure that consumers obtain accurate and

complete information on airline services). 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). In adopting those

rules, we followed the similar findings made by the Civil Aeronautics

Board (``the Board''), the agency that formerly administered the

economic regulatory provisions of the Federal Aviation Act (``the

Act''), now Subtitle VII of Title 49 of the U.S. Code. 49 FR 11644

(March 27, 1984).

Like the Board, we based our adoption of CRS regulations primarily

on our authority to prevent unfair methods of competition and unfair

and deceptive practices in the marketing of airline transportation

under 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.

Alaska Airlines has petitioned us to adopt a rule barring each CRS

vendor (the owner of a system) from imposing contract terms on

participating carriers that limit a carrier's ability to choose the

level at which it will participate in a system. Alaska wished to

consider lowering its level of participation in Sabre, the largest CRS,

but Sabre claimed that its contract with Alaska barred that airline

from reducing its level of participation in Sabre as long as it planned

to continue participating in any other system at a higher level. Alaska

contends that Sabre's contract clause--and similar clauses imposed by

Worldspan and System One--are contrary to our policies on CRS and

airline competition and should be proscribed (we will refer to these

contract clauses as parity clauses). Alaska's proposed rule would

protect non-vendor airlines (airlines holding no significant CRS

ownership interest) but would not affect the participation obligations

of vendor airlines under section 255.7(a) of our rules.

We issued a notice inviting comments on Alaska's petition. 59 FR

63736 (December 9, 1994). We received comments opposing the petition

from American Airlines; two other CRS vendors, Worldspan and System One

Information Management; 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. Alaska and

Galileo International Partnership each submitted reply comments

accompanied by a motion for leave to file the reply comments late. We

will grant the motions.

As described below, our staff has met with two system owners--

American Airlines and Galileo--and with Alaska and another carrier

affected by Sabre's parity clause, Midwest Express Airlines.

In considering the issues raised by Alaska's petition, we are

relying on the comments filed in response to the petition, as well as

Alaska's own arguments in support of its rule proposal. However, we

have also relied on our findings in our 1991-1992 rulemaking and in our

last study of the CRS business, Airline Marketing Practices: Travel

Agencies, Frequent-Flyer Programs, and Computer

[[Page 42198]]

Reservation Systems, prepared by the Secretary's Task Force on

Competition in the Domestic Airline Industry (February 1990) (Airline

Marketing Practices).

We are proposing to adopt the rule requested by Alaska, since the

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

non-vendor 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. However, an airline owning or marketing a

system may choose to limit its participation in a competing system in

order to make its own system more attractive to travel agencies.

We are asking for comments on whether the proposed rule should

allow systems to use the contract clauses to deter such conduct by

airlines that own or market a CRS.

Background

Four CRSs operate in the United States. The largest system, Sabre,

is owned by the parent corporation of American Airlines. Apollo, the

second largest system, is operated by Galileo International

Partnership, which is owned by United Air Lines, USAir, Air Canada, and

several European airlines. Worldspan is owned by Delta Air Lines,

Northwest Airlines, Trans World Airlines, and Abacus, a group of Asian

airlines. System One was formerly controlled by an affiliate of

Continental Air Lines, but recently Amadeus, a major European system,

acquired control of the system.

With the exception of Southwest Airlines and several low-fare

carriers, virtually all U.S. airlines have found it essential to

distribute their services through each of the four CRSs operating in

the United States due to two factors: the importance of travel agencies

in the distribution of airline services and each travel agency's

predominant use of a single system.

As we explained in our last CRS rulemaking, at least seventy

percent of all airline bookings are made by travel agencies, and travel

agencies rely almost entirely on CRSs to determine what airline

services are available and to make bookings for their customers. Travel

agencies rely so much on CRSs because of their efficiency. If travel

agency offices commonly used several CRSs, travel agents would be able

to obtain information and make bookings on a carrier even if the

carrier participated in only some of the four systems. Each travel

agency office, however, generally uses only one system for the great

majority of its bookings.

An airline's ability to sell its services will be significantly

impaired if its services are not readily available through a CRS used

by a significant number of travel agents. If the airline does not

participate in one system, the travel agents using that system can

obtain information and make bookings on that carrier only by calling

the carrier, which is substantially less efficient than using a CRS.

The carrier's sales accordingly will be lower than they would otherwise

be. Because of the importance of marginal revenues in the airline

industry, a loss of a few bookings on each flight is likely to

substantially reduce the airline's profitability. Finally, the airline

could not practicably enter the CRS business on its own, for entry

would be extremely costly and the airline would have difficulty

obtaining a significant market share. 57 FR at 43782-43784.

Each carrier's need to participate in each system is reflected in

the vendors' conduct and the terms imposed by each for participation in

its system. Since a vendor has little need to compete with other

systems for airline participants, the terms for airline participation

are not significantly affected by market forces. Among other things,

market forces do not discipline the booking fees charged by each

system. 57 FR 43784-43785.

Since each system is entirely or largely owned by one or more

airlines, each system's owners also have an incentive to use the system

to prejudice the competitive position of competing airlines. Otherwise,

CRS business practices would present little competitive concern. For

example, the treatment of rental car companies and hotel companies by

the CRSs had not led to any claims that the vendors' conduct was

contrary to antitrust law principles. 57 FR 43784.

We recognize, however, that some recently-established low-fare

airlines compete successfully while participating in none of the

systems and that Southwest Airlines has succeeded without participating

in any system except Sabre. Nonetheless we believe that the systems

still have market power with regard to the major portion of the airline

industry. Despite the growing number of low-fare airlines, the more

established airlines provide the great majority of domestic airline

service and virtually all of the international service operated by U.S.

airlines. And even Southwest has found it necessary to participate in

Sabre, albeit at a low level (formerly ``call direct'' and now Basic

Booking Request).

Moreover, for a number of years, Southwest's refusal to participate

in any system but Sabre did not entirely prevent travel agents using

those systems from obtaining some information on Southwest's services

and using the systems to write tickets on Southwest. In 1994, however,

the other three systems--Apollo, Worldspan, and System One--changed

their policies on the treatment of non-participating carriers in ways

which made the sale of tickets on Southwest much harder for travel

agents using one of those systems. While section 255.11 of our rules

states that a system must treat all non-paying airlines the same, an

airline that refuses to participate in a system has no right under our

rules to obtain CRS services. Apollo, Worldspan, and System One each

changed its policies on non-paying carriers so that travel agents using

the system no longer had ready access to the schedules offered by any

non-paying carrier and, as to two of the systems, could no longer use

the system to write tickets on such carriers. As a result, agents using

these systems could no longer efficiently serve customers who wanted to

fly on Southwest. ASTA Answer at 2-3. This experience is relevant to

several issues raised by Alaska's petition, as explained below.

Regulatory Background

Because each vendor has the power and the incentive to deny

competing carriers access to its system except on terms which will

prejudice the competitive position of those carriers, we and the Board

determined that regulations restricting the discretion of CRS owners

were necessary to protect airline competition and to ensure that

consumers obtain accurate, complete, and unbiased information on

airline services. 14 CFR Part 255, originally adopted by the Board,

Regulation ER-1385, 49 FR 32540 (August 15, 1984), and readopted by us,

57 FR 43780 (September 22, 1992), after the publication of a notice of

proposed rulemaking, 56 FR 12586 (March 26, 1991). Those rules regulate

several aspects of CRS operations, including CRS contracts between

vendors and participating carriers and between vendors and subscribers

(subscribers are the travel agencies using a system by contract with

the system), although they do not address the issue raised by Alaska's

petition. When we readopted and modified those rules in 1992, one of

our goals was to give carriers (and

[[Page 42199]]

travel agencies) a greater ability to choose alternative means of

electronically transmitting information and making airline bookings. We

reasoned that this would promote competition in the airline and CRS

businesses. 57 FR at 43781, 43797.

To advance this goal, we adopted a rule (section 255.9) giving

travel agency subscribers the right to use CRS terminals not owned by a

vendor to access other systems and databases with airline service

information. We expected that this rule would make it practicable for

carriers to create direct links between the carriers' internal

reservations systems and CRS terminals at travel agencies, which would

enable carriers to bypass CRSs for some transactions. 57 FR at 43796-

43798. We also prohibited certain types of contract clauses imposed by

vendors on subscribers--rollover clauses, minimum use clauses, and

parity clauses--that unreasonably restricted the agency's ability to

use more than one system or to replace one system with another as its

primary system. 57 FR at 43823-43824.

We are proposing to grant Alaska's rulemaking petition, because we

believe that the airline parity clauses challenged by Alaska resemble

the types of restrictive practices currently prohibited by our rules:

the airline parity clauses seemingly lack a legitimate business

justification, and they unduly restrict the business options of the

firms on which they are imposed. While section 255.7 of our rules

requires each airline with a significant ownership share in a CRS to

participate in other systems at the level in which it participates in

its own system, the rationale for that rule does not apply to non-

vendor airlines.

The Vendor Contract Clauses

Sabre, System One and Worldspan, but not Apollo, each requires

every carrier participating in the system to agree that it will

participate at as least as high a level of service as it participates

in any other system. These parity clauses do not excuse the airline

from this requirement if the service offered by the system imposing the

clause is inferior or more expensive than the similar level of service

being purchased by the participating airline from another system (the

Appendix to Alaska's Petition sets forth each system's contract terms

on this issue).

Each CRS offers carriers several levels of participation in its

system. The vendors obtain payments from participating carriers for CRS

services by charging them a fee for each booking made through the

system. The booking fee increases as the carrier's level of

participation increases. For example, when Alaska filed its petition a

carrier could participate in Sabre at the ``call direct'' level, where

the system displayed the carrier's schedules but neither showed whether

seats are available nor enabled the agent to make a booking on the

carrier. When a carrier participates at the ``full availability''

level, travel agents can use the system to learn whether seats are

available on the carrier and make a booking. When Alaska filed its

complaint, Sabre's charge for the full availability level of service

was $2.43 per segment booked and $1.25 per segment for the call direct

level of service. Alaska Petition at 7.

After Alaska filed its petition, Sabre changed its participation

levels by eliminating the call direct level and creating a new level of

service, Basic Booking Request, which allows travel agents to make a

reservation with the participating airline through Sabre; in contrast

to the call direct level, the agent does not need to call the airline

by telephone to make a booking. Sabre does not display availability

information for carriers participating at the Basic Booking Request

level, and any booking request made by a travel agent will take longer

to process than it would for carriers participating at the full

availability level. The fee charged the airline is $1.60 per segment

booked. Alaska Reply Comments at 15.

In addition to the different levels of participation, systems

separately offer different enhancements, such as the ability to display

a seat map of the aircraft used for the flight being booked by a travel

agent or to issue a boarding pass.

Almost all major carriers have participated in each system at the

full availability level or at a higher level involving some form of

direct access. However, in the past some U.S. carriers have limited

their participation in a system in order to save money by avoiding the

higher booking fees charged for higher levels of participation. Airline

Marketing Practices at 68. Galileo represents that more than one

hundred airlines participate in Apollo at a higher level than they do

in Sabre. Galileo Comments at 3. Thus, while participation at some

level in each system appears to be essential for almost all U.S.

airlines, airlines may be able to compete without using all of the

service features offered by a system.

If a system did not impose a parity clause, an airline that had no

significant ownership affiliation with a CRS could participate at a

lower level in that system and at a higher level in other systems. If

an airline and its affiliates own five percent or more of the equity of

one system, that airline, deemed a ``system owner'' under 14 CFR 255.3,

must participate in each other system and its enhancements if the

airline participates in such enhancements in its own system, if the

other systems offer commercially reasonable terms for such

participation. 14 CFR 255.7 (for the rationale for this rule see 57 FR

43800-43801). Nothing in our rules requires other airlines to

participate in any system, although in some circumstances an airline's

refusal to participate could be an unfair method of competition or a

form of discrimination prohibited by the United States' bilateral air

services agreements.

Alaska's Rulemaking Petition

Alaska's rulemaking petition stems from American's efforts to keep

Alaska from lowering its level of participation in Sabre, the system

affiliated with American, while maintaining a higher level of

participation in other systems. American contends that the parity

clause included in Alaska's participation contract with Sabre bars

Alaska from reducing its level of participation in Sabre unless Alaska

similarly reduces its level of participation in all other systems.

Alaska was considering reducing its participation in Sabre from the

full availability level to the call direct level in order to reduce its

costs. Alaska has generally become increasingly dissatisfied with CRS

services, in part due to increased booking fees and in part due to the

ways in which the airlines owning the systems allegedly discriminate

against other airlines. Alaska Petition at 6-7. One of Alaska's major

competitors, Southwest, participates in Sabre at a low level and thus

incurs lower CRS costs than Alaska for Sabre bookings. As explained

above, Sabre charges higher booking fees when a carrier participates in

the system at a higher level. Alaska Petition at 7, 17.

Although Sabre has eliminated the call direct level and replaced it

with the Basic Booking Request level, Alaska was still considering

reducing its participation in Sabre. If Alaska participated in Sabre at

the Basic Booking Request level, travel agents could not obtain

availability information on Alaska through the CRS, but they could make

bookings electronically. Alaska Reply Comments at 5, 7.

American told Alaska that reducing its participation level would

violate the parity clause in Alaska's Sabre contract if Alaska

continued to participate at a higher level in any other system, as

Alaska had planned. American filed suit against Alaska to enforce the

parity

[[Page 42200]]

clause. American Airlines v. Alaska Airlines, N.D. Texas Civ. Action

No. 4-94CV-595-Y.

In addition to defending itself in that suit, Alaska has asked us

to adopt a rule invalidating the parity clauses. Alaska's proposed rule

reads as follows:

No system may claim discrimination or require participating

carriers which are not system owners to maintain any particular

level of participation in its system on the basis of participation

levels selected by participating carriers in any other system.

To support its petition, Alaska first notes that we adopted a rule,

section 255.9, in our last CRS rulemaking which gives travel agencies

the right to use their CRS terminals, if not owned by the vendor, to

access other systems and databases. We thereby intended to give non-

vendor airlines some ability to avoid CRS fees by creating direct links

between travel agencies and their internal reservations systems. Alaska

argues that the vendors' parity clauses will discourage carriers from

creating direct links, by keeping them from reducing their level of

participation in one system unless they do so in all systems, which

would be too risky for most carriers. According to Alaska, if a carrier

cannot reduce its booking fee costs by reducing its participation

level, it will have little incentive to incur the costs of creating

direct links between the agencies using that system and the carrier's

own internal reservations system. Alaska Petition at 10-11.

Secondly, Alaska contends that the parity clauses limit a non-

vendor carrier's ability to respond to unacceptable CRS service or

pricing. If a carrier wished to reduce its level of participation in

one system because the system's service was poor or too expensive, the

carrier could not do so unless it simultaneously reduced its level of

participation in other systems, even if the other systems' service and

pricing were superior. Alaska Petition at 13. Alaska, however, has not

alleged that Sabre's service and pricing are in fact inferior to the

service and pricing offered by other systems.

In response to the argument of the parties opposing the petition

that Alaska could avoid the effects of the Sabre clause by suspending

entirely its participation in Sabre, Alaska claims it could never

afford to do that. Alaska relies on travel agencies for 85 percent of

its bookings, so it could not afford to take any action that would

alienate the travel agency community. Alaska Reply Comments at 19-20;

Alaska Reply Comments at 3.

Comments on Alaska's Petition

In response to our request for comments on Alaska's petition, we

received comments opposing Alaska's petition from the three vendors

that use parity clauses, the two major travel agency trade

associations, and three travel agencies. Galileo filed a late comment

supporting Alaska's petition. Our staff has met with American, Galileo,

Alaska, and Midwest Express on the petition and American's enforcement

of the parity clause earlier this year, as discussed below. Midwest

Express supported Alaska's opposition to Sabre's parity clause.

American argues that its contract clause is necessary to prevent a

carrier like Alaska from discriminating in favor of one system by

reducing its level of participation in other systems, that Alaska

unfairly intends to get the benefits of Sabre participation without

paying for them, that travel agencies would be hurt if they could not

make bookings on Alaska through their CRS, and that the contract clause

prevents foreign airlines from discriminating against a U.S. system in

favor of a system with which they have ownership or marketing ties.

American also argues that the clause does not unfairly restrict

Alaska's distribution options, since Alaska is always free to quit

participating in Sabre. Furthermore, some of Alaska's major competitors

participate in Sabre at the full availability level. And, according to

American, the Sabre contract clause is similar to other contract

clauses which the courts have found permissible under the antitrust

laws.

Worldspan argues that we should not attempt to regulate the kind of

contract issue raised by Alaska and that in any event no rule should be

proposed until after the completion of our current investigation into

the CRS business and airline marketing practices. Worldspan also

asserts that the rule proposed by Alaska would harm the smaller

systems, because carriers would be more likely to withdraw from those

systems than from the largest two systems. In opposing Alaska's

petition, System One Information Management focuses on the harm

Alaska's business proposal would cause travel agencies and the

competitive position of the smaller CRSs. System One Information

Management further asserts that the parity clauses are consistent with

antitrust principles and do not unduly restrict Alaska's response to

unsatisfactory CRS service and fees.

While ASTA has supported rules giving travel agencies and airlines

more flexibility in receiving and sending airline information, ASTA

opposes Alaska's petition because travel agencies still must depend on

the systems for airline information and booking capabilities. If an

airline does not fully participate in the system used by an agency, the

agency's alternatives for obtaining information and making bookings on

that airline are quite burdensome, as shown by the recent experience of

many agencies when the policy changes by Apollo, Worldspan, and System

One made it more difficult for agents to book customers on Southwest.

ASTA accordingly cannot support a rule which would make it easier for

other airlines to reduce their level of participation in the CRSs.

Furthermore, ASTA points out that travel agencies would have a

limited ability to switch to another system if a major airline in their

region stopped fully participating in the agencies' CRS. Most travel

agency contracts for CRS services have five-year terms, so an agency

probably would be forced to continue using a system even if the

airline's reduced level of participation substantially reduced the

value of the system used by an agency. As a result, ASTA contends that

we should allow travel agencies to cancel their CRS contracts on short

notice if we grant Alaska's rulemaking petition.

ARTA similarly argues that Alaska's proposal would injure travel

agencies. According to ARTA, over one-third of the agencies in the

Pacific Northwest and Alaska--the regions where Alaska principally

operates--use Sabre, and those agencies will be at a considerable

competitive disadvantage if Alaska reduces its participation in Sabre.

Three travel agencies--Carlson Wagonlit Travel of Minneapolis,

Austin Travel of Melville, New York, and Tyee Travel of Wrangell,

Alaska--wrote to oppose Alaska's petition. Tyee Travel, a Sabre

subscriber, states that Alaska's reduction in the level of

participation in Sabre would seriously damage the agency's ability to

operate and survive. Carlson Wagonlit Travel and Austin Travel contend

that a rule allowing airlines to reduce their participation in one

system would injure travel agencies.

Apollo Travel Services (ATS), which distributes Apollo in the

United States, Mexico, and the Caribbean and manages the system's

distribution in Japan, filed a comment opposing ASTA's requested rule

giving travel agencies the right to terminate a CRS contract before it

expires. ATS claims that its ability to offer travel agencies contracts

with terms as long as five years gives it the ability to recover its

costs over a longer period and thus enables it to offer lower prices to

travel agencies. ATS would

[[Page 42201]]

have to increase its charges to travel agencies if subscribers had the

freedom to cancel contracts before the end of their term.

No one else submitted comments to us on Alaska's petition until

Sabre recently enforced the parity clause against many of the airlines

participating in its system, as described next.

Sabre's Recent Enforcement of Its Parity Clause

While we were considering Alaska's petition, Sabre notified its

participating airlines that Sabre was revising its contractual terms

and that each participating airline had to sign the contract amendment.

Sabre's letter to many of these airlines additionally stated that Sabre

would eliminate the airline's services from Sabre's display on February

1, 1996, unless the airline upgraded its participation level in Sabre,

since the airline allegedly was participating at a higher level in

another system than it was participating in Sabre.

Two of the airlines receiving this letter were Alaska and Midwest

Express, each of which uses Sabre as its internal reservations system.

Since they are ``hosted'' in Sabre, they thought that Sabre provided

its subscribers at least as much functionality for information requests

and booking transactions on themselves as was provided by any other

system. In their view, accordingly, they were already in compliance

with Sabre's parity clause. They asked us to stop Sabre from compelling

them to purchase additional services from Sabre, a demand that they

estimated would raise their booking fee expenses by over ten percent.

After meeting with these two airlines, Patrick V. Murphy, the Deputy

Assistant Secretary for Aviation and International Affairs, wrote Sabre

and obtained its agreement that Sabre temporarily would not compel

either airline (or any other airline hosted in Sabre) to upgrade its

participation level. Although Alaska and Midwest focused at the meeting

on Sabre's demands that each airline upgrade its participation in

Sabre, Alaska also noted that it was no longer considering reducing its

level of participation in Sabre. Alaska still asked us to prohibit

parity clauses, since it did not wish to be compelled by contract to

buy CRS services that it preferred not to use.

Soon after Alaska and Midwest Express had presented their

complaint, Galileo complained in writing to Mr. Murphy that Sabre's

threats to participating airlines were causing some airlines to comply

with Sabre's demands by reducing their level of participation in

Galileo rather than increasing their level of participation in Sabre.

Galileo thereafter filed a comment supporting Alaska's petition.

Galileo complains that Sabre's parity clause restricts CRS competition,

since the clause prevents airlines from choosing their participation

level and other features in each system on the basis of price and

quality. Since an airline's Sabre fee expenses will increase if the

airline increases its participation level in Sabre, an airline will be

reluctant to maintain a higher level of participation in Apollo (or

another system) if the airline must then increase its participation

level in Sabre and thereby incur higher CRS costs. As a result, Sabre's

threats have forced some airlines to reduce the amount of services they

are purchasing from Galileo, which reduces Galileo's revenues, even

though those airlines would prefer to buy a higher level of CRS

services from Galileo.

In response to Mr. Murphy's letter, American and Sabre met with him

and Department staff members to discuss American's rationale for the

parity clause. Sabre stated that it had begun requiring parity and non-

discrimination clauses in its participation agreements with several

European airlines, since the refusal of some European carriers to

participate in Sabre at the full availability level had injured Sabre's

marketing efforts with European travel agencies. Sabre also feared that

some foreign airlines might otherwise deny commissions to travel

agencies in the airlines' homelands if they used Sabre to make bookings

on the foreign flag carrier. Within the past year Sabre has

successfully invoked the parity clause against several foreign airlines

that participated at a high level in a competing system marketed by

those carriers while participating in Sabre at a relatively low level.

Although Sabre developed the parity and non-discrimination clauses

to protect its ability to market its services in foreign countries,

Sabre believes that a U.S. airline like Alaska with a large market

share in some regions could distort CRS competition by reducing its

level of participation in some systems but not others. If a carrier did

that, travel agencies in regions where that airline was a major airline

would be compelled to choose a system where the airline participated at

a higher level. American claimed, for example, that Sabre would have to

abandon the Seattle market if Alaska did not participate fully in the

system.

In a later meeting with our staff on the issue, Galileo stated that

four carriers had lowered their level of participation in its Apollo

system due to Sabre's threats to enforce the parity clause and that

Galileo believed more carriers would do so since Sabre had given a

number of carriers more time to decide how to respond to Sabre's

demands to either upgrade their participation in Sabre or downgrade

their participation in Apollo. Galileo believes that it is a leader in

developing higher-level functionality and that many airlines therefore

will choose to participate in Apollo at a higher level than in other

systems if they are free to do so.

The Need for a Rule Barring Airline Parity Clauses

After considering the comments, we have determined to propose the

rule requested by Alaska. As shown in our last rulemaking (and in the

Board's rulemaking), the CRSs have a substantial ability to impose

onerous contract terms on participating airlines, for the systems have

little need to compete for airline participants. Almost all major

airlines are compelled to participate in each system, even if the CRS

imposes unreasonable terms for participation. Thus a participating

carrier has little, if any, bargaining power on contract issues like

the airline parity clause demanded by Sabre.

We believe that the use of parity clauses should be resolved

through a rulemaking proceeding, rather than through enforcement. Since

three of the four CRSs in the United States use parity clauses, the

question of the legality of their use raises an industry-wide issue

more appropriately considered in a rulemaking proceeding. In a

rulemaking all potentially interested persons can submit factual

information and legal and policy arguments.

While we have been reluctant to regulate CRS contracts in detail,

the parity clauses substantially--and unfairly--restrict a non-vendor

airline's ability to choose the level at which it is willing to

participate in a system. Under those clauses, each vendor in effect is

stating that it refuses to do business with a customer unless that

customer buys the same level of services from it that the customer buys

from any competing system. Furthermore, the clauses used by some

systems bar an airline like Alaska from reducing its level of

participation even if the system imposing that requirement offers lower

quality service or charges higher prices. If Worldspan's charges for

participation at the full availability level, for example, were much

higher than Apollo's charges for the same level of service, the

Worldspan contract would still compel Alaska to maintain its Worldspan

[[Page 42202]]

participation at the full availability level, as long as Alaska

participated at that level in Apollo.

The contract clauses, moreover, unreasonably restrict Alaska's

ability to choose its participation level in different systems. Sabre's

contract with Alaska, for example, gives Alaska only three choices: it

can maintain its participation at the full availability level, since it

participates in other systems at that level; it can maintain its

participation at the full availability level in one or more of the

other systems and withdraw entirely from Sabre; or it can reduce its

level of participation in every system below the full availability

level. Alaska thus cannot respond to its changing distribution needs by

lowering its participation level in Sabre (and hence its costs) while

maintaining its participation at the full availability level in one or

more other systems.

Although the commenters claim that Alaska could easily resolve its

alleged dissatisfaction with Sabre's full availability level service by

withdrawing entirely from Sabre, see, e.g., American Response at 16,

Alaska explains that this is not a realistic option. Alaska depends on

travel agency bookings for the great majority of its total revenues,

and, if it withdrew entirely from Sabre, the many travel agencies using

Sabre as their primary system would find it so difficult to obtain

information on Alaska's services that its bookings from those agencies

would fall sharply. Alaska Reply Comments at 7-8. We found in our last

rulemaking that few carriers could afford to stop participating

entirely in a system, since a carrier taking that action would lose a

substantial portion of its bookings from that system's subscribers. 57

Fed. Reg. at 43783. None of the parties opposing Alaska's petition has

shown that complete withdrawal from Sabre would be an acceptable

business option for an airline like Alaska.

While complete withdrawal from a system is not a practicable option

for a non-vendor airline, a reduction in its level of participation

might be a reasonable business strategy. While no major airline except

Southwest has chosen not to participate at all in one or more systems,

some major airlines have limited their participation in CRSs. Airline

Marketing Practices at 68. The parity clauses, as shown, unreasonably

restrict an airline's ability to choose this option.

American's claim that complete withdrawal from a system is an

acceptable alternative for a dissatisfied participating airline is

inconsistent with American's other claim that parity clauses are needed

to protect travel agencies from the loss of functionality in booking

airlines important to an agency's business. Obviously travel agencies

will become much more inefficient if such an airline withdraws

completely from a system than if it lowers its level of participation

in the system. Non-vendor airlines should be free to make their own

decisions on their level of participation in each system. In making

such decisions, those airlines will consider the impact of their

choices about CRS participation on the travel agencies' ability to

market their services.

Furthermore, the parity clauses discourage airlines from creating

direct electronic links between their own reservations systems and

travel agencies. As Alaska explains, if an airline otherwise willing to

bear the costs of establishing such links still had to pay the costs of

CRS participation at a high level, the airline would have less economic

incentive to create direct links. Alaska Petition at 10-11. By

discouraging airlines from creating direct links between travel

agencies and their internal reservations systems, the parity clauses

frustrate one of the major goals of our last rulemaking, making it

possible for airlines and travel agencies to develop alternative means

of transmitting airline information and making bookings. 57 FR at

43781, 43797. The parity clauses, moreover, reduce airline competition,

since the carriers owning the systems are restricting other airlines

from reducing their distribution costs by creating alternatives to full

CRS participation. If other airlines could reduce their participation

in one or more systems, they would reduce their booking fee costs. The

parity clauses prevent airlines like Alaska from lowering their costs

and improving their distribution methods by restricting their ability

to choose the level of CRS services best suited to their needs.

In addition to injuring non-vendor participating airlines like

Alaska, the parity clauses also injure CRS competition. As shown by

Galileo's comments, 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.

Indeed, the parity clauses imposed on participating airlines are

quite similar in effect to the parity clauses formerly imposed on

travel agency subscribers. Those clauses required an agency to use a

number of terminals for one system comparable to the number of

terminals used to access other systems. In our rulemaking we found that

the clauses discouraged agencies from using more than one system. We

therefore prohibited such clauses. 56 FR at 12624-12625; 57 FR at

43826.

Finally, we doubt that firms in any competitive industry could

unilaterally impose any similar requirement on their customers. While

purchasers often agree with suppliers in competitive industries to

requirements contracts or contracts requiring purchases in large

quantities or over long periods of time, in those situations the

purchaser typically obtains offsetting benefits, such as a guaranteed

supply or a lower price. Cf. Barry Wright Corp. v. ITT Grinnell Corp.,

724 F.2d 227, 237 (1st Cir. 1983) (Breyer, J.). Here the commenters

claim neither that participating airlines obtain any benefit from the

clauses nor that such airlines have obtained other benefits in exchange

for accepting the clauses.

Legal Authority for Adopting the Proposed Rule

Under 49 U.S.C. 41712, formerly section 411 of the Federal Aviation

Act (and codified then as 49 U.S.C. 1381), 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. That section, modelled on section 5 of the Federal

Trade Commission Act, 15 U.S.C. 45, does not confine unfair methods of

competition to those practices constituting a violation of the

antitrust laws. For example, we have the authority to ban practices

well before they become serious enough to violate the antitrust laws,

as the Seventh Circuit held when it affirmed the Board's adoption of

CRS rules, United Air Lines, 766 F.2d 1107, 1114 (7th Cir. 1985):

Although none of the airline owners of computerized reservation

systems has a conventional monopoly position in the market for that

service, and they are not accused of colluding, the Board found that

some of them, anyway, had substantial market power. This finding * *

* would bring their competitive practices within the broad reach of

section 411. We know from many decisions under both that section and

its progenitor, section 5 of the Federal Trade Commission Act, that

the Board can forbid anticompetitive practices before they become

serious enough to violate the Sherman Act.

We may therefore define a practice as an unfair method of

competition and prohibit it without finding that it is in fact a

violation of the antitrust laws. Nonetheless, we doubt that we could

[[Page 42203]]

prohibit a business practice on competitive grounds unless the practice

is comparable to practices that would violate the spirit or the letter

of the antitrust laws.

See, e.g., E.I. Du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d

Cir. 1984). Here we find that we may proscribe the parity clauses,

because these clauses appear comparable 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.

CRS Market Power. As the predicate for the findings that the

contract clauses are similar to conduct prohibited by the antitrust

laws, we find that each of the systems has market power, which the

Supreme Court has defined as the power ``to force a purchaser to do

something that he would not do in a competitive market,'' Jefferson

Parish Hospital v. Hyde, 466 U.S. 2, 14 (1984); Eastman Kodak Co. v.

Image Technical Services, 504 U.S. 451, 464 (1992).

Each vendor has market power over other carriers, because most

carriers have no adequate alternative to the travel agency system for

efficiently distributing their services, because travel agents have no

alternative to CRSs for quickly and efficiently obtaining information

and bookings on airline services, because the great majority of

agencies use only one system (or predominantly only one system) at each

location, and because entry into the CRS business under current

conditions would be extremely difficult. As the Department of Justice

explained in our earlier rulemaking, each system as a practical matter

holds a monopoly over the carriers' access to its subscribers. See 57

FR at 43783-43784, quoting the Justice Department's comments on the

advanced notice of proposed rulemaking at 10-11. Since the economics of

the airline business make it difficult for a carrier to operate

successfully if its services cannot be readily marketed by a

significant group of distributors, each major airline must participate

in each system. 57 FR 43783-43784.

And, as discussed above, we believe the systems' ability to impose

the type of contract clause challenged by Alaska is itself evidence of

their market power. We recognize, however, that each vendor has made

major improvements to its system in recent years and that those

improvements have benefited participating airlines by giving travel

agents a greater ability to obtain current information and to complete

bookings and other transactions without errors or delays. Nonetheless,

the systems' development of improvements that benefit participating

airlines along with travel agents does not disprove our finding that

each system has market power. Cf. 57 FR at 43781.

As noted earlier, some recently-established low-fare carriers

compete while participating in none of the systems. The systems

nonetheless still have market power with regard to more established

airlines. And even Southwest apparently has found it necessary to

participate in one system, Sabre, albeit at a low level.

Tying Arrangements. Parity clauses are analogous to the kind of

tying contracts prohibited by the antitrust laws, since they 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 services. The Supreme Court held in Eastman Kodak Co.,

supra, 504 U.S. at 461-462 (1992), that 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. 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 a result of the parity clause, a system like Sabre will provide

no CRS services to a participating airline unless the airline purchases

at least as high a level of services from Sabre as it purchases from

other systems. Sabre, for example, would not allow Alaska to buy any

CRS services unless Alaska buys services at the full availability

level, as long as Alaska participates at the full availability level of

service in any other system. Sabre has taken that position even though

Sabre marketed the call direct level--and now Basic Booking Request--as

a separate product and sold it to other airlines, most notably

Southwest.

Monopolization. A vendor like Sabre essentially holds a monopoly

over the electronic provision of information and booking capabilities

on airline services to its subscribers, as explained above. 57 FR

43783; ASTA Answer at 2-3. By requiring an airline to participate in

Sabre at a higher level than it prefers, Sabre simultaneously

discourages the airline from creating alternative electronic channels

for information and bookings for Sabre subscribers and reduces its

subscribers' incentives to use alternative channels. Sabre achieves

this goal by requiring the airline to purchase a specified level of

services from Sabre without regard to price or quality. As a result,

the parity clause helps to maintain Sabre's existing monopoly over

electronic access to its subscribers. The clause accordingly is

comparable to conduct designed to maintain or create a monopoly, which

would be unlawful under section 2 of the Sherman Act.

The Essential Facility Doctrine. Under the essential facility

doctrine, a firm that controls a facility essential for competition

must give its competitors access to the facility on reasonable terms.

The firm's denial of access will violate section 2 of the Sherman Act.

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. See, e.g., Aspen Skiing Co. v. Aspen

Highlands Skiing Corp., 472 U.S. 585 (1985); Delaware & Hudson Ry. v.

Consolidated Rail Corp., 902 F.2d 174 (2d Cir. 1990), cert. denied, 111

S. Ct. 2041.

We concluded in our rulemaking that each of the systems is

comparable to an essential facility. Each system must therefore offer

airlines access to its services on reasonable terms. 57 FR at 43790.

While the Ninth Circuit ruled in a private antitrust suit, Alaska

Airlines v. United Air Lines, 948 F.2d 536 (9th Cir. 1991), that CRSs

were not essential facilities, its decision appeared to be inconsistent

with decisions by other circuits and in any event did not limit our

authority to determine that CRS practices constitute unfair methods of

competition which we may prohibit, as we explained in our last

rulemaking. 57 FR 43791.

We believe 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.

The Commenters' Defenses for the Airline Parity Clauses

The commenters opposing Alaska's rulemaking petition argue that we

should not prohibit parity clauses, since they allegedly promote CRS

competition and benefit travel agencies. American, supported by

Worldspan and System One Information Management, also contends that the

clauses are consistent with the antitrust laws. We have carefully

considered these parties' arguments, particularly those relating to the

proposed rule's impact on travel

[[Page 42204]]

agencies, but we believe that these arguments do not outweigh the

reasons for granting Alaska's petition. We will discuss first

American's antitrust arguments and then the arguments that the rule

would be harmful.

Before addressing these arguments, we will address the claims made

by American and other commenters that the clauses prevent

``discrimination'' and ``free-riding'' by participating airlines. In

making these claims, these commenters are effectively arguing that any

firm choosing one supplier over another is ``discriminating'' against

other suppliers and that a firm engages in ``free-riding'' by choosing

to buy one level of service offered by a supplier rather than a more

expensive level of service.

The discrimination claim is based on the theory that an airline

like Alaska would choose to distort CRS competition by participating in

a favored system at a higher level than it participates in one or more

other systems. See, e.g., American Response at 27. This could be of

concern, of course, if the airline were trying to promote the market

position of a system which it owned or marketed. That type of

discrimination caused us to adopt the mandatory participation rule for

carriers that directly or through an affiliate hold a significant

ownership position in a CRS.

Alaska, however, neither owns any share of a CRS nor promotes the

marketing of any CRS. Thus Alaska's so-called ``discrimination'' is

only its wish to exercise 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. This does not constitute

discrimination.

In an effort to cast doubt on the legitimacy of Alaska's approach

on reducing its distribution costs, American and System One Information

Management accused Alaska of ``free-riding''. According to them, when

Alaska planned to participate in Sabre only at the call direct level

and to provide direct electronic links between Sabre subscribers and

its internal reservations system, Alaska sought to use Sabre to provide

schedule and fare information to travel agencies while avoiding any

booking fee obligation, since the bookings would be made through the

direct link. American Response at 13-14, 18; System One Reply at 3-4.

This argument has an obvious flaw--Alaska must pay fees set by American

for its participation in Sabre at the call direct level. According to

Alaska, Sabre would then receive a booking fee whenever a travel agent

used Sabre to issue a ticket on Alaska, even if the booking was

initially made through a direct link. Alaska Reply at 16. Alaska

therefore will not be getting a free ride. Indeed Alaska would only be

doing what other airlines using the lower level of participation are

already doing.

American's ``free riding'' argument is thus refuted by its own

conduct. If American really thought carriers using the call direct

level of participation were free riders--carriers obtaining valuable

CRS services without paying their share of the system's costs--then

American presumably would never have offered that level of service or

would have charged carriers higher fees for using it.

Furthermore, while Sabre will not obtain the higher fee payable for

participation at the full availability level if Alaska lowers its level

of participation, Sabre also will not incur the cost of transmitting

booking messages. The systems must believe there is a significant cost

created by such message transmissions, since most U.S. systems now

charge participating carriers fees based on separate transactions

rather than a single fee per booking. Sabre in fact recently imposed a

cancellation charge for all levels of participation except Basic

Booking Request. As a result, the ``free riding'' claim is

unpersuasive.

American's Antitrust Defense. In arguing that the parity clauses

are consistent with the antitrust laws, American claims that the

clauses are not unusual, that they prevent discrimination, and that

they are pro-competitive. American Response at 24. American contends

that the clauses are legitimate even if analyzed under our past

findings on the CRS business and each vendor's market power, findings

with which American disagrees. American Response at 24.

In defending the parity clauses, American primarily relies upon a

decision holding that a monopolist health insurance company did not

violate the antitrust laws when it required physicians to give its

customers prices as low as those given customers of a rival insurance

firm. Ocean State Physicians Health Plan v. Blue Cross, 883 F.2d 1101

(1st Cir. 1989), cert. denied, 494 U.S. 1027. On the theory that the

Blue Cross conduct at issue represented a firm's efforts to prevent

discrimination against it, American alleges that its parity clause is

equally valid, since the clause is designed only to prevent

discrimination against Sabre. American Response at 25-26. See also 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).

American's reliance on Ocean State Physicians appears to be

misplaced. First, as Alaska has pointed out, the court's decision is

inconsistent with the Justice Department's position in two recent cases

that ``most favored nation'' clauses of the type at issue in Ocean

State Physicians are anticompetitive because they reduce price

competition. Alaska Reply Comments at 27, 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 F.R. 5210

(January 26, 1995) and 60 F.R. 47349 (September 15, 1994).

Furthermore, the parity clauses are not like the ``most favored

nation'' clause upheld in Ocean State Physicians. The court held that

the conduct challenged in Ocean State Physicians was not exclusionary

because it represented a buyer's insistence on obtaining the lowest

price, a practice which tended to further competition on the merits.

883 F.2d at 1110. The court additionally noted 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. Here, in contrast,

the parity clauses are imposed by sellers, not by buyers, and the

clauses do not act as a means of providing low prices to the affected

consumers, which here are the participating airlines. Instead, as

shown, the clauses require airlines to participate at a high level in a

vendor's system, merely because they participate in other systems at

that level.

American's other antitrust arguments are also unpersuasive.

American correctly notes that a firm with market power may legitimately

seek to increase its market share; a firm will not violate the

antitrust laws, for example, by developing new products. See, e.g.,

Foremost Pro Color v. Eastman Kodak Co., 703 F.2d 534, 544-546 (9th

Cir. 1983), cert. denied, 465 U.S. 1038. But a firm with market power

may not strengthen its market position by engaging in coercive conduct.

The parity clauses appear comparable to the kind of coercive conduct

prohibited by the antitrust laws. In contrast, of course, American is

free to continue improving Sabre without running the risk of antitrust

liability.

Furthermore, while American claims the clauses are not unusual, it

has cited no examples of similar contract restrictions in other

industries.

The Commenters' Other Justifications for Airline Parity Clauses:

CRS Industry Effects. In defending the parity clauses,

[[Page 42205]]

the commenters opposing Alaska's petition argue that the clauses

promote competition, at least in the CRS and travel agency businesses,

and benefit the public. We find these arguments unpersuasive.

Worldspan and System One Information Management claim the airline

parity clauses promote CRS competition by keeping airlines from

reducing their level of participation in the smaller systems, Worldspan

and System One. According to their comments, if a smaller system could

not impose contract terms preventing a participating airline from

reducing its participation in that system, some airlines would reduce

their level of participation in the smaller systems while maintaining a

higher level of participation in the larger systems, Sabre and Apollo.

The smaller systems would then be unable to offer subscribers as

complete a coverage of the airline industry as the larger systems and

would therefore lose subscribers to one of the larger systems.

However, the airline participants in a smaller system will continue

purchasing a high level of service from that system if it offered

attractive service and prices. Furthermore, even if an airline reduces

its participation in a system, the system presumably would still

provide information on the airline's schedules and other capabilities,

such as the ability to write tickets through the CRS.

The smaller vendors' own conduct indicates that the loss of

subscriber access to booking and ticketing capabilities on some

airlines may not damage CRS competition. As discussed earlier, in 1994

System One, Worldspan, and Apollo each changed its policies on the

treatment of carriers that chose not to participate in the system. As a

result, their subscribers found it much more difficult to obtain

information and make bookings on non-participating airlines. Southwest,

a major airline in many markets, does not participate in these systems

(but does participate in Sabre). Southwest accounts for more than ten

percent of domestic enplanements, although its share of travel agency

bookings for domestic travel is lower. The policy change by Apollo,

Worldspan, and System One should have made those systems much less

attractive than Sabre for many travel agencies. Even though Southwest,

the major non-participating airline, continued to refuse to participate

in these systems, the smaller systems--and Apollo--nonetheless went

ahead with the change in policy. If the smaller systems were willing to

take that action, we do not see how allowing airlines to reduce their

level of participation in a system could cause them significant

competitive harm.

The Commenters' Other Justifications for Parity Clauses: Travel

Agency Effects. The parties opposing Alaska's petition generally argue

that Alaska's proposed rule would harm many travel agencies. If a major

airline decided to reduce its level of participation in a system,

travel agencies using that system will have more difficulty obtaining

information and making bookings on that airline through their system.

If, for example, Alaska participated in Sabre at the Basic Booking

Request level, a travel agency in Alaska or the Pacific Northwest using

Sabre will have higher costs booking Alaska, an airline used by many of

its customers, since Alaska bookings would take longer and since the

CRS would no longer display availability information for Alaska. If

Alaska reduced its participation in another system to the equivalent of

the call direct level formerly offered by Sabre, an agency using that

system could not book Alaska through the CRS at all and therefore would

operate less efficiently than competing agencies using other systems.

The increased difficulty of obtaining information and conducting

transactions would not matter much if travel agencies commonly used

more than one system or if the vendors offered them short-term

contracts. Short-term contracts would enable agencies to switch systems

relatively soon after deciding that other vendors offered better

service. However, the vendors have traditionally insisted on long-term

contracts (usually five-year contracts) and on other contractual

restrictions which discourage the use of multiple systems. In

particular, most travel agencies obtain their CRS terminals from a

vendor, and each vendor commonly bars its subscribers from using the

terminals to access any other system or database. 57 F.R. at 43796,

43822-43824; Airline Marketing Practices at 85-91. While travel

agencies would be reluctant in any event to switch systems or to use

multiple systems due to the cost of doing so, Airline Marketing

Practices at 26, 87, the vendor contract clauses additionally

discourage travel agencies from switching systems or using several

systems.

ASTA and ARTA specifically complain that a rule barring airline

parity clauses will impair competition in the travel agency industry

and injure the business position of many agencies. They base this

contention on their expectation that the rule will cause some airlines

to reduce their participation in some systems below the full

availability level and thereby injure travel agencies by making their

operations less efficient, as explained above. An agency using a system

which no longer provides the ability to conveniently make bookings on a

significant airline in the agency's business area will be less able to

compete with agencies using other systems.

Tyee Travel, a travel agency in Wrangell, Alaska, complains that

Alaska's proposed reduction in Sabre participation to the call direct

level would be devastating for it. Tyee Travel has three years left on

its Sabre contract and cannot switch to another system. It also makes

many more bookings on Alaska Airlines than it does on all other

airlines combined. If the agency were forced to make its bookings on

Alaska by telephone, the agency's expenses would be much higher.

We are sympathetic to these concerns. However, we believe that

travel agencies will ultimately benefit if airlines--and travel

agencies--have a variety of options for electronic communications

between airline reservations systems and airline and travel databases,

on the one hand, and travel agencies, on the other hand. The rule

proposed by Alaska will promote that goal in the long run, since it

will make it easier for airlines to set up alternative methods of

providing information and transactional capabilities to travel

agencies. Although ASTA opposes Alaska's proposal, it agrees with the

principle that travel agencies will benefit if they have more

alternatives for obtaining travel information and making airline

transactions electronically. ASTA Answer at 2. Alaska, moreover, states

that its dependence on travel agencies for bookings will ensure that it

takes steps to offset the impact of its reduced level of participation.

Alaska Reply Comments at 2, 3. Alaska notes that 85 percent of its

bookings came from travel agencies in 1994. Id. at 22, n. 9.

Insofar as travel agencies using Sabre are concerned, Sabre's

replacement of the call direct level of service with Basic Booking

Request will substantially alleviate the loss of efficiency when a

major airline lowers its participation from the full availability

level. If the airline participates at the Basic Booking Request level,

an agent using Sabre can still obtain a display of the airline's

schedules and can book the airline electronically. This is more

efficient for travel agents than direct call would have been. Moreover,

although not critical to our analysis, Alaska has advised us that it is

not planning to reduce the level of its participation in Sabre,

although it does wish to avoid purchasing some

[[Page 42206]]

features from Sabre that it apparently purchases from other systems.

In addition, travel agencies using Apollo, Worldspan, or System One

recently had similar difficulties when each of those systems changed

its policies on non-participating carriers and thereby made it harder

for those agencies to obtain information and make bookings on

Southwest. Southwest created direct electronic links with some of the

affected travel agencies and has changed its procedures in other ways

(for example, by creating ticketless travel) to offset the impact of

its non-participation in the systems besides Sabre. Even so,

Southwest's non-participation reduces the efficiency of travel agencies

using Apollo, Worldspan, or System One. Nonetheless, we have never

required non-vendor airlines to participate in CRSs, even though an

airline's non-participation will decrease the efficiency of travel

agency operations. We do not believe that we should allow a CRS to

dictate a non-vendor airline's level of participation, even though that

could benefit travel agencies using that system.

In any event, we currently believe that we should not protect the

short-term interests of travel agencies by allowing vendors to restrict

the distribution options of non-vendor airlines. We are also unwilling

at this point to propose ASTA's solution for this problem, a rule

giving travel agencies the right to terminate their CRS contract on

short notice so they can switch to a system offering better service. We

recognize that longterm subscriber contracts keep travel agencies from

switching systems even if their existing system becomes less desirable

for any reason. However, we considered this issue at length in our last

rulemaking and determined that longer term contracts could be

economically efficient and enable travel agency subscribers to obtain

lower CRS prices. 57 FR at 43825. We prefer not to reopen that issue,

at least not until after we complete our current study of the CRS

business and related airline marketing issues.

Potential Unfair Conduct by Foreign Airlines. American has raised a

legitimate concern over one possible effect of Alaska's rule proposal.

American contends that the parity clauses increase CRS competition in

international markets by keeping foreign airlines from reducing their

participation in a U.S. system in order to promote the marketing of

systems affiliated with those foreign airlines. As an example, American

cites Avensa, a major Venezuelan airline, which is reducing its

participation in Sabre to the call direct level while participating in

a competing system at the full availability level, allegedly in order

to promote the other system that Avensa is marketing in Venezuela. This

will cause Venezuelan agencies to prefer the latter system over Sabre.

American Response at 9-10.

When American met with our staff, it stated that Sabre has recently

invoked the parity clause to resolve problems with some other Latin

American airlines that were marketing competing CRSs. As in the Avensa

example, the airlines participated in Sabre at a low level while

participating at a substantially higher level in the systems they

sponsored in their home countries. After Sabre invoked the parity

clause, these airlines upgraded their participation level in Sabre.

We sympathize with this effect of the parity clause, for several

foreign airlines in the past have limited their participation in a U.S.

system in an apparent effort to deny the U.S. system a fair opportunity

to compete in their homelands against systems they owned. The foreign

airlines' conduct injured the competitive position of the U.S. airline

marketing its system. See, e.g., Complaint of American Airlines against

British Airways, Order 88-7-11 (July 8, 1988). While the past cases

each involved a foreign airline with an ownership interest in the CRS,

a foreign airline responsible for marketing a system in its homeland

would have the same incentive to reduce its participation in the U.S.

system. Although we may impose countermeasures under the International

Air Transportation Fair Competitive Practices Act against a foreign

airline whose discrimination denies a U.S. airline a fair and equal

opportunity to compete, a vendor's use of contract terms preventing

that kind of discrimination can be more effective and more likely to

prevent disputes between the United States and foreign governments. 57

FR at 43819. Our mandatory participation rule, moreover, only covers

airlines owning five percent or more of the equity of a system

operating in the United States.

We are unwilling to deny Alaska's petition to preserve Sabre's

ability to prevent unfair practices by foreign airlines, since the

parity clauses injure CRS and airline competition within the United

States. Nonetheless, allowing a system to enforce a parity clause

against airlines that own or market a competing CRS may be reasonable.

We ask for comments on whether the proposed rule should be modified to

prevent the potential harm cited by American, perhaps by barring

airline parity clauses except insofar as they apply to a carrier

affiliated with another system as an owner or marketer. In addition,

commenters should address whether the rule should exclude any airline

with a CRS ownership interest rather than only system owners, carriers

defined by our rules as owning directly or indirectly five percent or

more of the equity of a CRS that operates in the United States.

Allowing a CRS to enforce a parity clause against an airline that

owns or markets a competing CRS would be consistent with one of our

rules, section 255.7(a). That rule requires carriers with a significant

ownership interest in a U.S. CRS to participate in each other system

and each of its enhancements (to the extent that such carrier

participates in those features in its own system). Our adoption of a

rule barring a system from contractually requiring airlines that

neither own nor market a system to participate in the system at a

higher level would not conflict with our existing mandatory

participation rule, which covers only airlines with significant CRS

ownership interests. American accordingly is completely wrong in

suggesting that we excluded airlines with a small ownership share from

the mandatory participation rule since the vendors through contractual

means could prevent such airlines from discriminating against a system.

American Response at 8. We instead stated that an airline with a small

ownership share in one system should have little incentive or ability

to limit its participation in a competing system in order to promote

the marketing of the former system. 57 FR at 43795.

Evidentiary Basis for Our Proposed Rule

As noted above, we are relying in part on our last study of airline

marketing issues, Airline Marketing Practices, and our findings in our

last CRS rulemaking. We believe that the CRS and airline businesses

have not changed in ways that would undermine the findings made in the

study and the rulemaking that are relevant to this rulemaking. We note,

moreover, that none of the comments in this proceeding contends that

changes in these industries have affected our earlier conclusions. If

any parties believe that developments over the last three years have

affected those findings, they may, of course, say so in their comments.

We have also decided to act on Alaska's petition without waiting

for the completion of our current study of airline marketing practices,

the CRS business, and the rules adopted in 1992, which was begun by

Order 94-9-35 (September 26, 1994). Since the parity

[[Page 42207]]

clauses seem to frustrate competition without a legitimate reason, we

doubt that our ultimate decision on Alaska's petition would be affected

by the findings of our study. Any party, of course, may present any

relevant information to us in its comments.

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 procedures of the Department of

Transportation, 44 FR 11034.

The proposed rule should benefit competition and innovation. It

would give non-owner participating airlines a greater ability to choose

the distribution methods that best meet their needs. The proposed rule

also would not require any CRS to change its business methods in a way

which impose a significant cost burden on the system. The rule would

merely give participating carriers more flexibility in choosing among

the participation levels offered by a vendor, although the exercise of

that flexibility could reduce the revenues of a system. We doubt that

our rule will significantly affect the vendors' revenues, since an

airline lowering its level of participation in a system will still be

paying fees to that system, and the system will incur lower costs

serving that airline. It also seems unlikely that many airlines will

choose to radically lower their participation level in some but not all

systems.

If some airlines used the rule to reduce their level of

participation in one or more systems, the travel agencies using those

systems would be affected, since their operations would be somewhat

less efficient. However, we expect that an airline reducing its level

of participation will take steps to offset much of the impact on travel

agencies. If a system offers a level of service like Sabre's Basic

Booking Request, moreover, the agencies using that CRS could still make

bookings through the CRS on the airline. The only agencies that would

be seriously affected would be agencies in regions where the airline

accounts for a substantial portion of the area's airline service. And

again, we doubt that many airlines will choose to exercise this option

to drastically reduce their level of participation. Alaska itself has

decided not to reduce its level of participation in Sabre, although it

prefers not to purchase some enhancements from Sabre that it may wish

to purchase from other systems.

The Department does not believe that there are any alternatives to

this proposed 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.

The costs and benefits of the proposed rule appear to be

unquantifiable. The Department asks interested persons to provide

information on the costs and benefits.

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 consideration of Alaska's

rule proposal and the objectives and legal basis for our proposed rule.

The proposed rule will, as explained above, give more flexibility

to smaller non-owner airlines by barring the use of airline parity

clauses. When a system imposes a parity clause, the clause prevents an

airline participating in the system from participating in that system

at a lower level than its participation level in any other system. If

we make the clauses unlawful, airlines could choose different levels of

participation in different systems. Smaller non-owner airlines would

then have a better opportunity to choose how they will distribute their

services and thus a greater ability to control their costs.

Although the proposed rule would not directly affect travel

agencies, it could 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,

since they will be unable to obtain as much information and conduct

transactions as efficiently as before. 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. Since the system almost certainly would still be able to

provide some information and enable the agency to conduct some

transactions through the system, the agency would still obtain some of

the efficiency advantages of using a CRS as to that carrier.

Furthermore, we do not expect many airlines to substantially reduce

their participation level, so the likelihood that many travel agencies

would be significantly affected appears small.

In addition, the proposed 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.

Our proposed rule contains no direct reporting, record-keeping, 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, Public Law 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 in 14 CFR Part 255

Air carriers, Antitrust, Reporting and recordkeeping requirements.

Accordingly, the Department of Transportation proposes to amend 14

[[Page 42208]]

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 255.6 is amended by adding paragraph (e) to read as

follows:

Sec. 255.6 Contracts with participating carriers.

* * * * *

(e) 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.

Issued in Washington, DC, on August 8, 1996.

Federico F. Pena,

Secretary of Transportation.

[FR Doc. 96-20737 Filed 8-13-96; 8:45 am]

BILLING CODE 4910-62-P