Computer Reservations System (CRS) Regulations (Part 255)

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 255

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

RIN 2105-AC67

Computer Reservations System (CRS) Regulations (Part 255)

AGENCY: Office of the Secretary, (DOT).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Department is proposing to revise its rules governing

airline computer reservations systems (CRSs) by changing the rules'

expiration date from December 31, 1997, to March 31, 1999. If the

Department does not change the expiration date in the rules (14 CFR

Part 255), they will terminate on December 31, 1997. The proposed

extension of the current rules will cause those rules to remain in

effect while the Department carries out an extensive reexamination of

the need for CRS regulations. The Department tentatively believes that

the current rules should be maintained because they appear to be

necessary for promoting airline competition and helping to ensure that

consumers and their travel agents can obtain complete and accurate

information on airline services.

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

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ADDRESSES: Comments must be filed in Room PL-401, Docket OST-97-3057,

U.S. Department of Transportation, 400 7th St. SW., Washington, DC

20590. Late filed comments will be considered to the extent possible.

To facilitate consideration of comments, each commenter should file six

copies of its comments.

FOR FURTHER INFORMATION CONTACT: Thomas Ray, Office of the General

Counsel, 400 Seventh St. SW., Washington, DC 20590, (202) 366-4731.

SUPPLEMENTARY INFORMATION: The Department in 1992 adopted its rules

governing CRS operations--14 CFR Part 255--because CRSs had become

essential for the marketing of airline services for almost all airlines

operating in this country. 57 FR 43780, September 22, 1992. We

concluded that the rules were necessary to ensure that the owners of

the systems--all of which were airlines or airline affiliates--did not

use them to unreasonably prejudice the competitive position of other

airlines or to provide misleading or inaccurate information to travel

agents and their customers. CRS practices can injure airline

competition because travel agents rely on CRSs to provide airline

information and bookings for their customers and because almost all

airlines rely heavily on travel agencies to distribute their services.

Our rules will expire on their sunset date, December 31, 1997, unless

we readopt them or extend the expiration date. We have begun a

proceeding to determine whether the rules are necessary and should be

readopted and, if so, with what modifications. 62 FR 47606, September

10, 1997. We are proposing here to extend the expiration date for the

current rules to March 31, 1999, so that they will remain in force

while we conduct our overall reexamination of the rules.

We have set a short comment period of fifteen days so that we can

publish a final decision on this proposal before the rules' current

expiration date. We note that our advance notice of proposed rulemaking

has already given interested persons notice of our intent to propose an

extension of the rules' expiration date. 62 FR at 47610-47611.

The CRS Business

Four CRSs--each affiliated with one or more U.S. airlines--operate

in the United States. A CRS consists of a periodically-updated central

database that contains information on airline services and other travel

services sold through the system. The major users of the information

and transaction capabilities provided by CRSs are travel agents, who

access CRSs through computer terminals, which are normally leased from

the system. Consumers can also access a CRS through an on-line computer

service or an Internet website. A CRS enables travel agents and other

users to find out what airline seats and fares are available, book a

seat, and issue a ticket on each airline that ``participates'' in the

system, that is, that makes its services saleable through the CRS.

Each CRS obtains most of its revenues from airlines and other

travel suppliers participating in the system. An airline participant

pays a fee whenever the system is used to make a booking on that

airline (most of the systems also charge fees for related transactions,

such as booking changes and cancellations). Other travel suppliers pay

similar fees. While travel agencies subscribing to the system may also

pay fees, subscriber fees, unlike airline fees, are disciplined by

competition. Many travel agencies obtain CRS services at little or no

charge.

Regulatory Background

CRSs became essential for airline distribution in the early 1980s.

At that time each of the systems operating in the United States, with

one exception, was owned by a single airline (one system was owned by a

non-airline firm, but it had a small market share and was later sold to

an airline CRS). Each owner airline used its system to prejudice

airline competition and give consumers biased or incomplete information

in order to obtain more bookings. These factors caused the agency

formerly responsible for the economic regulation of airlines, the Civil

Aeronautics Board (``the Board''), to adopt rules governing the

operations of airline-affiliated CRSs. 49 FR 32540, August 15, 1984.

The Board found that regulations were essential to keep the systems

from causing substantial harm to airline competition. The Board adopted

its regulations primarily under its authority under section 411 of the

Federal Aviation Act, later recodified as 49 U.S.C. 41712, to prevent

unfair methods of competition and unfair and deceptive practices in air

transportation and the marketing of airline transportation. On review

the Seventh Circuit upheld the Board's rules. United Air Lines v. CAB,

766 F.2d 1107 (7th Cir. 1985).

The Board's major rules required each system to make participation

available to all airlines on non-discriminatory terms, to offer at

least one unbiased display, and to make available to each airline

participant any marketing and booking data from bookings for domestic

travel that it chose to generate from its system. The Board's rules

also prohibited certain contract terms that limited the travel

agencies' ability to choose which system to use.

We assumed the Board's responsibilities for airline regulation,

including its regulation of CRSs, after the Board's sunset on December

31, 1984. See United Air Lines, supra, 766 F.2d at 1109.

To ensure that we would reexamine the need for the rules and their

effects, the Board included a sunset date of December 31, 1990, in its

rules. To carry out that reexamination we held a rulemaking proceeding

to determine whether the rules should be readopted or modified. 54 FR

38870, September 21, 1989, (advance notice of proposed rulemaking); 56

FR 12586, March 26, 1991, (notice of proposed rulemaking); and 57 FR

43780, September 22, 1992, (the final rule). Since we did not complete

that rulemaking by December 31, 1990, the rules' original expiration

date, we extended that date to keep the rules in effect until the

rulemaking's completion. 55 FR 53149, December 27, 1990; 56 FR 60915,

November 29, 1991; 57 FR 22643, May 29, 1992. In the rulemaking we

relied in part on the findings made in the staff's study of the rules

and the CRS business. Secretary's Task Force on Competition in the U.S.

Domestic Airline Industry, Airline Marketing Practices: Travel

Agencies, Frequent-Flyer Programs, and Computer Reservation Systems

(February 1990).

In our rulemaking we concluded that CRS rules remained necessary:

market forces still did not discipline the price or level of service

offered participating airlines by the systems, CRS owners would still

use their control of the systems to prejudice airline competition if

there were no rules, and systems could still bias their displays of

airline services if there were no rules requiring unbiased displays. 57

FR at 43783-43787. We therefore readopted the Board's rules with

several changes intended to further promote competition in the airline

and CRS industries.

To ensure that we would reexamine the need for our rules and their

effectiveness, our rules, like the Board's rules, included a sunset

date, December 31, 1997. 14 CFR 255.12; 57 FR, 43829-43830, September

22, 1992. If we do not readapt the rules or extend their expiration

date, the rules will end on that date.

We recently published an advance notice of proposed rulemaking

asking interested persons to comment on whether we should readapt the

rules and, if so, with what changes. 62 FR 47606, September 10, 1997.

We did not issue the advance notice earlier due to

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the on-going study of the CRS business and the impact of the rules

being conducted by the staff, which was begun by Order 94-9-35

(September 26, 1994) and is examining such recent developments as the

growth in Internet booking services.

Since we adopted the rules, we have proposed two amendments to

them. One proposed rule would prohibit each system from imposing

contract terms on participating airlines that require an airline to

participate in a system at least as high a level as the airline

participates in any other system, at least when the airline participant

did not own or market a competing system. 61 FR 42197, August 14, 1996.

The second proposal would revise our rules on CARS displays to promote

airline competition and ensure that systems provide reasonable displays

of airline services. 61 FR 42208, August 14, 1996.

Our Proposed Extension of the CARS Rules

We are proposing to change the expiration date for our CARS rules

to March 31, 1999, so that the rules will remain in effect while we

conduct our reexamination of the need for the rules and the rules'

effectiveness. Given the time required for completing the overall

reexamination of our rules, including the need to give parties an

adequate opportunity to file comments and reply comments in response to

the advance notice of proposed rulemaking and to our future notice of

proposed rulemaking, we will not be able to complete that proceeding by

the current expiration date of our rules.

A temporary extension of the current rules will preserve the status

quo until we determine which rules, if any, should be adopted. Allowing

the current rules to expire could be disruptive, since the systems,

airlines, and travel agencies have been conducting their operations in

the expectation that each system will comply with the rules. Systems,

airlines, and travel agencies, moreover, would be unreasonably burdened

if the rules were allowed to expire and if we later determined that

those rules (or similar rules) should be adopted, since they could have

changed their business methods in the meantime.

We tentatively find that a short-term continuation of the current

rules is necessary, primarily because of the need to protect airline

competition and consumers against unreasonable practices. Before

adopting our current rules we carefully considered the CARS business

and airline marketing, both as part of the Secretary's study of

domestic airline competition and through the rulemaking. We concluded

in that CARS rulemaking, completed in 1992, that CRSs were still

essential for the marketing of the services of virtually all airlines.

57 FR 43780, 43783-43784, September 22, 1992. Each airline's need to

participate in each system meant that market forces did not discipline

the terms offered by the systems for airline participation.

Although the staff has not completed its current study of the CARS

business and although we have only begun a rulemaking to reexamine the

need for the rules, we tentatively believe that the findings made in

our last CARS rulemaking on the need for CARS rules are still valid, at

least for the purpose of a short-term extension of the rules'

expiration date. If we continue the current rules, those regulations

will protect airline competition and consumers against the injuries

that might otherwise occur, given our earlier findings on the market

power of the systems and each airline owner's potential interest in

using its affiliated CARS to prejudice the competitive position of

other airlines. Continuing the rules in effect should not impose

significant costs on the systems and their owners, since they have

already adjusted their operations to comply with the rules and since

the rules do not impose costly burdens of a continuing nature on the

systems.

The need for the rules results from the airlines' dependence on

travel agencies, the agencies' dependence on CRSs, the use by most

travel agency offices of only a single CARS, the difficulty of creating

alternatives for CRSs and getting travel agencies to use them, and the

airlines' inability to cause agencies to use one CARS instead of

another. Because of these factors, almost all airlines must participate

in each CARS, and the CRSs have no need to compete for airline

subscribers.

In recent years seventy percent of all airline bookings in the

United States have been made by travel agencies, and travel agencies

have relied almost entirely on CRSs to determine what airline services

are available and to make reservations for their customers. 57 FR at

43782. Few travel agency offices make extensive use of more than one

CARS. 57 FR at 43783.

If an airline does not participate in one system, the travel agents

using that system must call the airline to obtain information and make

bookings, which is substantially less efficient than using a CARS.

Travel agents are less likely to book an airline when doing so is

significantly more difficult than booking a competing airline

participating in the agents' CARS. As a result, the non-participating

airline will receive fewer bookings than it would obtain if it

participated in the agents' system. The importance of marginal revenues

in the airline industry means that an airline's loss of a few bookings

on each flight is likely to substantially reduce its profitability. 57

FR at 43783-43784.

Most airlines do not have practicable alternatives to CARS

participation. An airline could try to mitigate the loss of bookings

caused by non-participation in a system by establishing a direct

electronic link between the travel agencies using that system and its

own internal reservations system, but doing so is expensive and

potentially less convenient for travel agents.

We doubt that any airline could successfully create a new CARS,

since doing so would be extremely costly. In addition, any new system

could not easily obtain a significant number of subscribers. Moreover,

due to the economies of scale in the CARS business, a system without a

large subscriber base is unlikely to be profitable. 57 FR at 43783-

43784. We recognize that U.S. Travel Agency Registry has announced a

plan to create a new CARS, but its system would apparently not be

available until late 1998, and a few industry sources have questioned

USTAR's plans. See Travel Distribution Report, vol. 5, no. 11, August

28, 1997, at 1, 4. We will welcome new competition in the CARS

business, but USTAR's plans do not undermine the apparent need for a

short-term extension of the rules.

Airlines could exert some competitive pressure on the systems if

they could encourage travel agencies to use one system instead of

another, but that has not been practicable. 57 FR at 43831.

In our recent notices of proposed rulemaking on airline parity

clauses and CARS displays, we tentatively concluded that market forces

did not discipline the terms offered by a system for airline

participation. See, e.g., 61 FR at 42198. The Department of Justice

filed comments in the parity clause rulemaking which supported our

tentative findings. The Justice Department thus stated, Justice Dept.

Comments at 2-3, Docket OST-96-1145 (footnote omitted):

Each CARS provides access to a large, discrete group of travel

agents, and unless a carrier is willing to forego access to those

travel agents, it must participate in every CARS. Thus, from an

airline's perspective, each CARS constitutes a separate market and

each system possesses market power over any carrier that wants

travel agents subscribing to that CARS to sell its airline tickets.

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

marketing

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practices since our last major CARS rulemaking, but we are reluctant to

change our existing regulations until we have completed our study of

the impact of those changes.

Many airlines and travel agencies and some CRSs now offer booking

sites on the Internet that consumers may use, but few consumers

currently book airline services through the Internet. Despite the rapid

growth in the number of consumers using the Internet for airline

bookings, airlines will probably remain dependent on travel agencies

for most of their revenues for at least the next few years.

Furthermore, many of the websites use a CARS for a booking engine, so

CRSs have captured a significant share of the Internet business.

In addition, several new low-cost airlines began operations without

making their services saleable through any CARS. Initially those

airlines' adoption of that strategy suggested that airlines could

compete successfully without CARS participation. However, some of these

low-cost airlines--Western Pacific and ValuJet, for example--have

recently announced plans to make their services available through CRSs,

and other low-cost airlines--Reno and Frontier, for example--have

always relied on CARS participation in their marketing. As a result,

while Southwest has managed to prosper without participating in any

CARS except Sabre, it appears that virtually no other airline has been

able to duplicate Southwest's method of operations enough to avoid CARS

participation.

Our tentative conclusion that CARS rules remain necessary, at least

on a short-term basis, is supported by current airline complaints about

CARS practices. For example, a number of airlines (including Delta, one

of the three largest airlines in the United States and a part-owner of

a CARS) have complained about the continuing increases in booking fees

and the airlines' inability to exert any check on those increases.

Justice Dept. Comments at 5, Docket OST-96-1145. There are also

disputes between some participating airlines and some systems over the

systems' imposition of booking fees on transactions that participating

airlines believe are of no benefit to them. See, e.g., Travel

Distribution Report, vol. 5, no. 2, April 24, 1997, at 1.

Finally, there is an additional basis for our tentative

determination that we should keep the current rules in place pending

our reexamination of the rules. Our goals of promoting airline

competition and preventing consumer deception were not the only bases

for our adoption of the rules. We also relied on our obligation under

section 1102(b) of the Federal Aviation Act, recodified as 49 U.S.C.

40105(b), to act consistently with the United States' obligations under

treaties and bilateral air services agreements. Many of those bilateral

agreements assure the airlines of each party a fair and equal

opportunity to compete. We have held that the fair and equal

opportunity to compete includes, among other things, a right to have an

airline's services fairly displayed in CRSs. Our rules against display

bias and discriminatory treatment help to provide foreign airlines with

a fair and equal opportunity to compete in the United States. 57 FR at

43791-43792. We note in that regard that the European Union, Canada,

and Australia, among other countries, have adopted rules regulating

CARS operations that help give U.S. airlines a fair opportunity to sell

their services in the countries covered by the rules.

Regulatory Process Matters

Regulatory Assessment

This rule is a nonsignificant regulatory action under section 3(f)

of Executive Order 12866 and has not been reviewed by the Office of

Management and Budget under that order. Executive Order 12866 requires

each executive agency to prepare an assessment of costs and benefits

for each significant rule under section 6(a)(3) of that order. The

proposal is also not significant under the regulatory policies and

procedures of the Department of Transportation, 44 FR 11034.

Maintaining the current rules should impose no significant costs on

the CRSs. The systems have already taken all the steps necessary to

comply with the rules' requirements on displays and functionality, and

operating in compliance with the rules does not impose a substantial

burden on the systems. Maintaining the rules will benefit participating

airlines, since otherwise they would be subjected to unreasonable terms

for participation, and will benefit consumers, who otherwise might

obtain incomplete or inaccurate information on airline services.

Several provisions of the rules, moreover, are designed to prevent

abuses in the systems' competition with each other for travel agency

subscribers.

When we conducted our last major CARS rulemaking, we included a

tentative regulatory impact statement in our notice of proposed

rulemaking and made that analysis final when we issued our final rule.

We believe that analysis remains applicable to our proposal to extend

the rules' expiration date. As a result, no new regulatory impact

statement appears to be necessary. However, we will consider comments

from any party on that analysis before we make our proposal final.

This rule does not impose unfunded mandates or requirements that

will have any impact on the quality of the human environment.

Initial Regulatory Flexibility Analysis

The Regulatory Flexibility Act of 1980, 5 U.S.C. 601 et seq., was

enacted by Congress to ensure that small entities are not unnecessarily

and disproportionately burdened by government regulations. The act

requires agencies to review proposed regulations that may have a

significant economic impact on a substantial number of small entities.

For purposes of this rule, small entities include smaller U.S. and

foreign airlines and smaller travel agencies. Our notice of proposed

rulemaking sets forth the reasons for our proposed extension of the

rules' expiration date and the objectives and legal basis for that

proposed rule.

In addition, we note that keeping the current rules in force will

not modify the existing regulation of small businesses. Our notice of

proposed rulemaking in our last major CARS rulemaking contained an

initial regulatory flexibility analysis on the impact of the rules, and

we discussed the comments on that analysis in our final rule. Our

analysis appears to be valid for our proposed extension of the rules'

termination date. Accordingly, we adopt that analysis as our tentative

regulatory flexibility statement and will consider any comments filed

on that analysis in connection with this proposal.

The continuation of our existing CARS rules will primarily affect

two types of small entities, smaller airlines and travel agencies. To

the extent that airlines can operate more efficiently and reduce their

costs, the rule will also affect all small entities that purchase

airline tickets, since airline fares may be somewhat lower than they

would otherwise be, although the amount may not be large.

Continuing the rules will protect smaller non-owner airlines from

certain potential system practices that could injure their ability to

operate profitably and compete successfully. No smaller airline has a

CARS ownership interest. Market forces do not significantly influence

the systems' treatment of airline participants. As a result, if there

were no rules, the systems' airline owners could use them to prejudice

the

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competitive position of other airlines. The rules provide important

protection to smaller airlines. For example, by prohibiting systems

from ranking and editing displays of airline services on the basis of

carrier identity, they limit the ability of each system to bias its

displays in favor of its owner airlines and against other airlines. The

rules also prohibit charging participating airlines discriminatory

fees. The rules, on the other hand, impose no significant costs on

smaller airlines.

The CARS rules affect the operations of smaller travel agencies,

primarily by prohibiting certain CARS practices that could unreasonably

restrict the travel agencies' ability to use more than one system or to

switch systems. The rules prohibit CARS contracts that have a term

longer than five years, give travel agencies the right to use third-

party hardware and software, and prohibit certain types of contract

clauses, such as minimum use and parity clauses, that restrict an

agency's ability to use multiple systems. By prohibiting display bias

based on carrier identity, the rules also enable travel agencies to

obtain more useful displays of airline services.

The Regulatory Flexibility Act also requires each agency to

periodically review rules which have a significant economic impact upon

a substantial number of small entities. 5 U.S.C. 610. Our rulemaking

reexamining the need for the CARS rules and their effectiveness will

constitute the required review of those rules.

Our proposed rule contains no direct reporting, recordkeeping, or

other compliance requirements that would affect small entities. There

are no other federal rules that duplicate, overlap, or conflict with

our proposed rules.

Interested persons may address our tentative conclusions under the

Regulatory Flexibility Act in their comments submitted in response to

this notice of proposed rulemaking.

The Department certifies under section 605(b) of the Regulatory

Flexibility Act (5 U.S.C. et seq.) that this regulation will not have a

significant economic impact on a substantial number of small entities.

Paperwork Reduction Act

This proposal contains no collection-of-information requirements

subject to the Paperwork Reduction Act, Pub. L. No. 96-511, 44 U.S.C.

Chapter 35.

Federalism Implications

The rule proposed by this notice will have no substantial direct

effects on the States, on the relationship between the national

government and the States, or on the distribution of power and

responsibilities among the various levels of government. Therefore, in

accordance with Executive Order 12812, we have determined that the

proposed rule does not have sufficient federalism implications to

warrant preparation of a Federalism Assessment.

List of Subjects for 14 CFR Part 255

Air carriers, Antitrust, Consumer protection, Reporting and

recordkeeping requirements, Travel agents.

Accordingly, the Department of Transportation proposes to amend 14

CFR Part 255, Carrier-owned Computer Reservations Systems, as follows:

PART 255--[AMENDED]

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

follows:

Authority: 49 U.S.C. 1301, 1302, 1324, 1381, 1502.

2. Section 255.12 is amended to read as follows:

Sec. 255.12. Termination.

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

Issued in Washington, D.C. on October 27, 1997.

Rodney E. Slater,

Secretary of Transportation.

[FR Doc. 97-29001 Filed 10-31-97; 8:45 am]

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