Computer Reservations System (CRS) Regulations

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 255

[Docket OST-96-1145 [49812]]

RIN 2105-AC35

Computer Reservations System (CRS) Regulations

AGENCY: Office of the Secretary (DOT).

ACTION: Final rule.

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SUMMARY: The Department is adopting a rule that will prohibit each

computer reservations system (CRS) from adopting or enforcing contract

clauses that bar a 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, if neither the carrier nor any

affiliate of the carrier owns or markets a CRS. The Department believes

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

airline industries, since the contract clauses at issue unreasonably

limit the ability of airlines without CRS interests to choose how to

distribute their services through travel agencies. This rule will allow

a CRS to enforce such a contract clause against an airline that owns or

markets a competing CRS or that has an affiliate that owns or markets a

CRS. The Department is acting on a rulemaking petition filed by Alaska

Airlines.

DATES: This rule is effective December 5, 1997.

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

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

SUPPLEMENTARY INFORMATION:

Introduction

Almost all airlines in the United States depend heavily on travel

agencies for the distribution of their services, and travel agencies in

turn rely heavily on computer reservations systems (CRSs) in responding

to their customers' requests for information on airline services and

for booking seats. The large majority of travel agencies use only one

CRS (the agencies using a system are called ``subscribers''). As a

result, virtually every airline must make its services available

through each of the four CRSs operating in the United States in order

to distribute its services through the travel agencies using each

system (the airlines that make their services available through a

system are called ``participating airlines''). Because each airline

must participate in each system, the systems do not compete with each

other for airline participants and have long been able to dictate the

terms for participation (in contrast, the systems compete for travel

agency users). Each of the systems is controlled by one or more

airlines or airline affiliates, which can use their market power over

airline participants to distort airline competition. We therefore have

rules regulating CRS operations. 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.

Alaska Airlines asked us to amend those rules by adding a

prohibition of parity clauses--contract terms imposed by three of the

four CRSs operating in the United States that require a participating

airline to purchase at least as high a level of service from it as the

airline does from any other system. We issued a notice of proposed

rulemaking that tentatively determined to adopt such a rule. 61 FR

42197, August 14, 1996. Our proposed rule stated: ``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.'' We tentatively determined that the

proposed rule would make airline operations more efficient and promote

competition in the CRS and airline industries.

However, airlines that own or market a CRS (or have an affiliate

that does so) may limit their participation in a competing system in

order to frustrate that system's ability to obtain travel agency

subscribers. Our notice therefore asked whether we should allow a

system to enforce a parity clause against an airline that owned or

marketed a competing system.

After considering the comments and reply comments, we have

determined to prohibit parity clauses, subject to an exception allowing

a system to impose such a clause on an airline that owns or markets a

competing system (this reference to airlines that own or market a

system, and other such references in this document, include airlines

with affiliates that own or market a system). Since the parity clauses

are currently injuring some carriers, we are making a final decision

now on Alaska's rulemaking petition rather than waiting for the

completion of other pending CRS proceedings.

As explained in more detail below, parity clauses cause airlines

either to buy more CRS services than they wish to buy from some systems

or to stop buying services from other systems that they would like to

buy, which creates economic inefficiencies and injures airline

competition. In addition, the clauses eliminate competition between the

systems for higher levels of participation. Without the clauses, such

competition would exist, since the airlines' need to participate in

systems does not compel them to buy the higher levels of service from

each system. For these reasons the Department of Justice, several

smaller airlines, and the CRS that does not use a parity clause,

Galileo, support our proposal.

We have considered the arguments made by the parties opposing the

proposal, but we have determined that the rule would benefit

competition and airline efficiency. None of the opponents denies that

the parity clauses compel airlines to buy services that they do not

want and that the clauses provide no significant benefit to airlines.

We also conclude that our rule will not adversely affect travel

agencies. Each airline's interest in facilitating travel agency sales

of its services should ensure that no important airline will reduce its

participation in any system by enough to seriously interfere with the

efficiency of travel agency operations.

By adopting this rule we are following our long-standing policy of

promoting the ability of airlines to choose how they will distribute

information on their services and enable travel agencies to carry out

booking and ticketing transactions through electronic means. Parity

clauses unreasonably interfere with the ability of individual airlines

without CRS ties to choose the level of CRS service they will buy and

to choose how best to communicate with travel

[[Page 59785]]

agencies in distributing their services, and this harm is not offset by

any competitive benefits. Our prohibition of airline parity clauses,

moreover, is consistent with our existing rule prohibiting the use of

parity clauses in travel agency CRS contracts, 14 CFR 255.8(b). We

prohibited parity clauses in travel agency contracts in order to

eliminate unreasonable restrictions on the travel agencies' ability to

change systems and use more than one system.

We have concluded, however, that entirely banning the use of parity

clauses would be unreasonable, since an airline that owns or markets a

CRS may limit its participation in other systems in order to compel

travel agencies in areas where it is the dominant airline to subscribe

to its own system. The apparent use of such tactics by some U.S.

airlines caused us to adopt a rule requiring significant owners of a

CRS to participate at equivalent levels in competing systems, 14 CFR

255.7 (``the mandatory participation rule''), and some foreign airlines

have apparently reduced their participation in a U.S. system in order

to frustrate that system's marketing efforts in the foreign carriers'

homelands. Our rule will therefore allow systems to enforce parity

clauses against airlines that own or market a competing system.

Finally, several parties have proposed other changes in our

mandatory participation rule and other CRS rules. We will consider

their proposals in our next major CRS rulemaking, not here.

Background

The Systems' Role in Airline Distribution

As we explained in the notice of proposed rulemaking, each CRS is

able to dictate its terms for airline participation because virtually

all airlines must participate in each system due to the role of travel

agencies in airline distribution and the agencies' reliance on CRSs. 61

FR at 42198. Almost all airlines depend heavily on travel agencies for

the sale of their services, and travel agencies sell about seventy

percent of all airline tickets. Travel agents primarily rely upon CRSs

to determine what airline services and fares are available, to book

seats, and to issue tickets for their customers. Travel agents use CRSs

for these tasks because the systems are the most efficient method of

carrying out these tasks. Ibid.

Travel agencies typically use only one CRS for obtaining airline

information and making bookings. As a result, an airline that wants its

services sold by a travel agency must make its services available for

sale in the CRS used by that agency. If the airline does not

participate in that system, that system's subscribers are likely to

make significantly fewer bookings on the airline, which will

substantially undermine the airline's ability to compete with other

airlines that do participate in the system. Given the importance of

marginal revenues in the airline industry, an airline's loss of a few

passengers on each flight will substantially reduce, and perhaps

eliminate, the airline's ability to operate profitably. 61 FR at 42198.

Because most airlines are therefore compelled to participate in

each system, the systems do not compete for airline participation and

their prices and terms for participation are not disciplined by market

forces. 61 FR at 42198. In contrast, the systems do compete for travel

agency subscribers, and travel agencies do not pay supracompetitive

prices for CRS services (indeed many agencies receive CRS services and

equipment for free). Saber Reply at 1, n. 1; Justice Dept. Comments at

5.

Some airlines, particularly Southwest, compete successfully without

participating in all of the systems. Southwest, for example,

participates only in Saber. As explained below, most airlines could not

duplicate Southwest's ability to avoid full CARS participation, so

Southwest's experience does not invalidate our finding that each system

has market power over almost all airlines. See 61 FR at 42198. We note,

moreover, that some airlines like Western Pacific and ValuJet have

recently decided to participate in CRSs.

The Systems' Different Participation Levels and the Parity Clauses

Each system offers several levels of participation in its system

and various enhancements to the different levels of participation. When

an airline uses a higher level of service, it must pay higher fees.

When an airline participates at the ``full availability'' level in a

system, the travel agents subscribing to that system can obtain a

display of the airline's schedules and fares, learn whether seats are

available, book a seat, and issue a ticket. However, if the airline

participates at a higher level, the travel agent can obtain realtime

availability information and make a booking in the airline's internal

reservations system. If the airline chooses to purchase the

enhancements offered by a system, travel agents can also issue boarding

passes and select specific seats on the basis of seat maps. Southwest,

on the other hand, uses a level of service offered by Saber called

Basic Booking Request. Saber does not display Southwest's availability,

so the travel agent must send Southwest an electronic message to find

out whether seats are available. 61 FR at 42199.

While almost all airlines must participate in each system at the

full availability level, participation at the higher levels does not

appear to be essential for many airlines. Moreover, higher-level

participation increases an airline's CARS fees. Many airlines

accordingly choose not to participate at higher levels, and, but for

the parity clauses, many would consider participating at a higher level

in some systems but not in other systems. The parity clauses, however,

deny airlines the ability to participate at different levels in

different systems. Three CRSs--Saber, Worldspan, and System One--impose

parity clauses on their airline participants, while the fourth system--

Galileo--does not. 61 FR at 42199.

The History of CARS Regulation

Each of the four systems is owned by or affiliated with one or more

airlines. American Airlines' parent corporation, AMR, controls Saber,

the largest system. United Air Lines, US Airways, several European

airlines, and Air Canada own most of Galileo, the second-largest

system, which is sold under the name Apollo in North America. Galileo

and Saber also have public shareholders. Delta Air Lines, Northwest

Airlines, Trans World Airlines, and Abacus, a partnership of several

Asian airlines, own Worldspan. System One is owned by Amadeus, which is

owned by Lufthansa, Air France, Iberia, and Continental Air Lines. 61

FR at 42198.

Each of the airlines that owns a system has the incentive to use

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

airlines. We therefore regulate CARS operations in order to protect

competition in the airline industry and help ensure that consumers

obtain accurate and complete information on airline services. 61 FR at

42198. Our current rules, adopted in 1992, modified the rules

originally adopted by the Civil Aeronautics Board (``the Board''), the

agency that had been responsible for the economic regulation of

airlines. 49 FR 32540, August 15, 1984, afield, United Air Lines, 766

F.2d 1107 (7th Cir. 1985). Both we and the Board adopted the CARS rules

under our authority to prevent unfair methods of competition and unfair

and deceptive practices in the marketing of airline transportation. 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. Since our rules

by their terms will expire at the end of 1997, 14 CAR

[[Page 59786]]

255.12, we will begin a major reexamination of the rules in 1997.

Two features of our 1992 rulemaking are relevant here. First, we

revised the rules to give airlines and travel agencies a greater

ability to use alternative electronic methods for communicating

information and conducting transactions. In particular, we stated that

a system could not bar a travel agency from using CARS terminals to

access other systems and databases with airline information, unless the

system owned the terminals. We intended this rule to make possible

direct links between the airlines' internal reservations systems and

individual travel agencies. 57 FR at 43796-43800. We had hoped that

this rule would avoid the need for more intrusive regulation. 57 FR at

43781. In addition, we prohibited several types of restrictive contract

clauses imposed by systems on subscribers--minimum use clauses, roll-

over clauses, and parity clauses--that unreasonably limited the travel

agencies' ability to switch systems or use multiple systems. 57 FR at

43822-43826.

Secondly, we found that some U.S. airlines with an ownership

interest in a CARS appeared to be limiting their participation in

competing systems to prejudice competition in the CARS business. If an

owner airline limited its participation in competing systems, travel

agencies in areas where that airline was the major airline would be

compelled to subscribe to its system in order to obtain the best

information and transactional capabilities on the airline. 56 FR at

12608; 57 FR at 43800-43801. We therefore adopted the mandatory

participation rule, which requires each airline deemed a ``system

owner'' to participate in other systems at the same level in which it

participates in its own system as long as the terms for such

participation are commercially reasonable. 14 CFR 255.7. An airline is

a system owner if it and its affiliates hold five percent or more of a

system's equity interest. 14 CFR 255.3. Since we focused on the

domestic CARS market in adopting the mandatory participation rule, we

excluded carriers with a small CARS ownership interest from the rule's

coverage, since those airlines appeared unlikely to have an incentive

to distort CARS competition within the United States. 57 FR at 43795.

We have also addressed CARS issues in other contexts. First, we

found in several proceedings under the International Air Transportation

Fair Competitive Practices Act (``IATFCPA''), 49 U.S.C. 41310(c), that

a foreign airline was apparently refusing to participate in a U.S.

system at an adequate level (or at all) in order to give a marketing

advantage to the system owned by that airline or an affiliate in the

airline's homeland. Complaint of American Airlines against British

Airways, Order 88-7-11 (July 8, 1988); Complaint of United Air Lines v.

Japan Air Lines, Order 88-9-33 (September 15, 1988); Complaint of

American Airlines v. Iberia, Lineas Aereas de Espana, Order 90-6-21

(June 8, 1990). We concluded in those orders that a foreign airline

would be engaging in unreasonably discriminatory conduct if it refused

to participate in a U.S. system in order to frustrate that system's

ability to compete with the foreign airline's own system, since that

would interfere with the right of U.S. airlines to a fair and equal

opportunity to compete. See also Complaint of American Airlines v.

Iberia, Lineas Aereas de Espana et al., Order 93-2-37 (February 17,

1993).

In addition, we have completed two studies of the CARS business and

its impact on airlines. Airline Marketing Practices: Travel Agencies,

Frequent-Flyer Programs, and Computer Reservation Systems, prepared by

the Secretary's Task Force on Competition in the Domestic Airline

Industry (February 1990) (Airline Marketing Practices); and Study of

Airline Computer Reservation Systems (May 1988). We are currently

conducting another study, begun by Order 94-9-35 (September 26, 1994),

which will provide information for our review of the CARS rules.

History of This Proceeding

As we explained in detail in the notice of proposed rulemaking,

Alaska had been considering lowering its level of participation in

Saber while maintaining a higher level of participation in other

systems. When Saber learned of this, it told Alaska that any such

action would violate the parity clause in Alaska's CARS contract with

Saber. Saber also sued Alaska to enforce the parity clause. 61 FR at

42199-42200. After we issued our notice of proposed rulemaking, the

court dismissed Saber's suit on the ground that Saber's claims, all

based on state contract law, were preempted by federal law,

particularly in light of our tentative decision that parity clauses

should be prohibited as unfair methods of competition. American

Airlines v. Alaska Airlines, N.D. Tex. Civ. No. 4-94CV-595-Y (September

18, 1996 memorandum opinion).

In addition to defending itself in the litigation, Alaska

petitioned us for a rule prohibiting parity clauses. We published a

notice inviting comments on Alaska's petition. 59 FR 63736, December 9,

1994. American, Worldspan, and System One filed comments opposing

Alaska's petition, as did 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.

Galileo International Partnership submitted comments supporting

Alaska's petition.

While Alaska's rulemaking petition was pending, Saber told Alaska,

Midwest Express, and a number of other airlines that they were

participating in another system at a higher level than they were in

Saber, that each of them was therefore violating the parity clause in

its Saber contract, and that their continued participation in Saber

required each of them to either upgrade its participation in Saber or

downgrade its participation in the other systems. December 8, 1995,

Letter of Scott Alvis, included as Attachment D to Alaska's Reply. At

our request, Saber agreed to postpone enforcing this demand against

Alaska and Midwest Express for a short time to give us an opportunity

to rule on Alaska's petition. See 61 FR at 42201. We have not asked

System One or Worldspan to suspend enforcement of their clauses, which

to our knowledge have not recently generated as much controversy as

Sabre's clause.

We then issued a notice proposing to adopt the rule sought by

Alaska. 61 FR 42197, August 14, 1996. The basis for our proposal was

our tentative finding that parity clauses unreasonably interfered with

each airline's ability to choose the level of CRS services that it

would buy and injured competition in both the CRS and airline

industries. We recognized, however, that parity clauses could be a

legitimate tool against discriminatory conduct by airlines that own or

market a competing system. We therefore specifically requested comment

on whether we should include an exception in the prohibition so that a

system could enforce a parity clause against an airline that owned or

marketed a competing CRS. 61 FR at 42197, 42198, 42206.

In proposing the ban on parity clauses, we summarized our reasoning

as follows, 61 FR at 42198:

[T]he 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.

[[Page 59787]]

Thus, despite our reluctance to regulate CRS contracts, we proposed

to ban parity clauses because they ``substantially--and unfairly--

restrict a non-vendor airline's ability to choose the level at which it

is willing to participate in a system.'' 61 FR at 42201.

We further noted that the parity clauses injured CRS competition:

``[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.'' 61 FR at 42202. Galileo in fact had alleged that four

airlines had already lowered their participation level in Galileo due

to Sabre's threat to enforce the parity clause and that Galileo

expected more airlines would take such action. 61 FR at 42201.

Furthermore, the parity clauses could drive up a non-vendor

airline's costs by forcing it to buy more services from some systems

than it would otherwise purchase, without the offsetting benefit of

precluding a CARS vendor from compromising CARS competition. Alaska and

Midwest Express, for example, stated that Saber's demands that they

upgrade their level of participation would increase their CARS costs by

more than ten percent. 61 FR at 42201.

We tentatively determined that we could adopt the proposed rule

under our power to prohibit unfair methods of competition in the

airline industry, a power which authorizes us to prohibit conduct which

violates the letter or the spirit of the antitrust laws. 61 FR at

42202. We based that determination on our finding that each CARS has

market power over the airlines. Each system had market power because

the economics of the airline and travel agency businesses forced

airlines (with few exceptions) to participate in each system, no matter

how onerous the terms of participation. Because the systems have market

power, the parity clauses appeared to be analogous to conduct

prohibited by the antitrust laws, such as tying arrangements. 61 FR at

42203.

While we concluded that parity clauses appeared to unreasonably

restrict competition as to airlines that did not own or market a CARS,

we recognized that an airline that owned or marketed a CARS could

choose to lower its participation in competing systems in order to give

its own system a competitive advantage. In the past several foreign

airlines had lowered their participation in Saber or another U.S.

system in order to cause travel agencies in the foreign airline's

homeland to subscribe to its system. Saber represented that it had

recently used the parity clause against some Latin American carriers in

order to ensure that they participated in Saber at the same level that

they participated in the CARS they were marketing. 61 FR at 42206. We

therefore asked for comments on whether we should modify the proposed

rule to prevent unfair competition by barring airline parity clauses

except when enforced against a carrier owning or marketing another

system. 61 FR at 42197, 42198, 42206.

The Comments and Reply Comments

The Department of Justice; Galileo; several smaller airlines--

Alaska, America West, Midwest Express, and Reno; an association

consisting of smaller airlines, the National Air Carrier Association;

the American Automobile Association; and the European Civil Aviation

Conference filed comments supporting the proposed rule. Saber,

American, Worldspan, Delta, Northwest, TWA, Continental and System One,

the American Society of Travel Agents (ASTA), the Association of Retail

Travel Agents, and the United States Travel Agent Registry opposed the

proposal. In addition, several hundred travel agencies filed letters

opposing the prohibition against parity clauses (most of these letters,

however, followed form letters prepared by Saber).

We will discuss the arguments made by the commenters in the

following explanation of our decision to adopt a rule generally

prohibiting parity clauses but allowing their enforcement against

airlines that own or market a competing CARS.

Introduction to Our Decision

We have determined to adopt the proposed rule barring parity

clauses, subject to an exception allowing a system to enforce such a

clause against an airline that owns or markets a competing CARS. We

agree with the Justice Department's findings that the clauses injure

airline competition by making airline distribution less efficient and

by eliminating the possibility of competition among the CRSs for

higher-level participation by airline participants. We further find

that, subject to the exception for airlines owning or marketing a

competing system, prohibiting parity clauses will promote rather than

injure CARS competition and will not significantly injure travel

agencies. We are relying on the facts, undisputed by any party in this

proceeding, that parity clauses force airlines to buy CARS services

that they do not want, that airline participants in CRSs are compelled

to accept parity clauses, and that airlines receive no benefit in

return for the burdens imposed on them by the clauses.

The parties opposing our proposal base their position in large part

on the claim that an airline choosing to buy more service from one

system than from another is improperly ``discriminating'' against the

latter system. This claim has no merit as to airlines that neither own

nor market the favored system. If an airline without such CARS ties

chooses to favor one system over another, the airline is only

``exercis[ing] 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,'' as we stated in our notice of proposed

rulemaking. 61 FR at 42204. In that case the airline has decided that

the higher level of service offered by the favored system is more

desirable in terms of price, quality, or value than the comparable

services offered by other systems. If another system wants that airline

to upgrade its participation level, it should do what firms in

competitive industries do to win customers--lower its price or

otherwise make its service more attractive.

Moreover, while Saber has legitimately complained about foreign

airlines that discriminated against it in order to promote the system

they own, Saber's position in this rulemaking--that any airline's

participation in one system at a higher level than in other systems is

unreasonable discrimination--is inconsistent with Saber's own conduct.

Saber has established a marketing arrangement with Southwest Airlines,

a major U.S. airline that has long refused to participate in any other

system. Since Southwest does not participate at all in other systems,

those systems' parity clauses cannot affect Southwest. Southwest's

participation in Saber (and the airline's refusal to participate in any

other system) surely handicaps the other systems' ability to market

themselves in areas where Southwest is a major airline. Yet in response

to the other systems' argument that we should expand the mandatory

participation rule to cover airlines that market a CARS, not just

airlines deemed ``system owners,'' Saber says, ``[If a carrier elects

not to participate in a system at all, it should be allowed to act as

it deems appropriate, including marketing another system.'' Saber Reply

at 25.

In this proceeding we are not taking any steps to expand the

coverage of the mandatory participation rule, as

[[Page 59788]]

explained below, or finding Southwest's conduct improper. Southwest,

after all, refused to participate in the other systems long before it

agreed to market Saber. However, in our view Saber has not reconciled

its position that any airline's decision to participate at a lower

level in one system rather than another is discrimination with its

position that it is entirely proper for an airline marketing one system

to refuse to participate at all in other systems.

Saber wrongly complains that the proposed rule amounts to ``micro

management'' of the CARS business and is inconsistent with the

Administration's goal of eliminating unnecessary regulation. Saber

Comments at 2. Our rule is necessary--market forces do not

significantly discipline the systems' treatment of participating

airlines, and the systems have used their market power to impose

contract terms that reduce competition in the CARS and airline

industries and make airline distribution less efficient. This rule is

consistent with other actions we have taken to restrict the business

choices of CASS and their airline owners when doing so is necessary to

keep them from using a dominant market position to frustrate

competition. See, e.g., Complaint of American Airlines v. Iberia, Lines

Aereas de Espana, Order 90-6-21 (June 8, 1990) at 9-10; Complaint of

United Air Lines v. Japan Air Lines, Order 88-9-33 (September 15, 1988)

at 11-12.

Before setting forth the basis for our rule in detail, we will

explain why we are acting now rather than delaying our decision until

the completion of other pending CRS matters.

The Need to Resolve the Parity Clause Issue

Given the harm caused by parity clauses, and the lack of any

justification for their continuation as to airlines without CRS ties,

our decision to adopt a final rule prohibiting the clauses now is

clearly reasonable. Nonetheless, several of the opponents argue that we

should delay a decision on the parity clause issue, either because the

issue allegedly cannot be rationally resolved until the completion of

our pending CRS study and our planned consideration of all CRS

regulatory issues in our reexamination of the CRS rules, or because the

rule proposed by us would have no significant practical consequences.

We cannot agree that any delay is warranted.

First, all of the parties have had an ample opportunity to address

the issues in this proceeding, both by filing comments on Alaska's

petition and by filing comments and reply comments on our notice of

proposed rulemaking. The record in this proceeding, coupled with our

earlier analyses of CRS issues (which parties were free to dispute in

their comments here), provides more than an adequate basis for

resolving the issues in this rulemaking. Thus there is no need for us

to delay our decision here until the completion of our pending CRS

study.

Worldspan and others argue that the requests by several commenters

for changes in other rules, primarily the mandatory participation rule,

necessarily mean that this rulemaking should be postponed until we can

consider all of the commenters' requests for rule changes. See, e.g.,

Worldspan Reply at 2-3. Despite these arguments, we conclude that we

can rationally and fairly decide the parity clause issue without

deciding other issues or changing other CRS rules.

Several parties have urged us to reexamine the mandatory

participation rule applicable to airlines with a significant CRS

ownership interest, either by limiting the rule or by broadening its

scope, and we recognize that the mandatory participation rule involves

competitive and economic efficiency issues like those presented by the

parity clause issue. Even so, the relationship between the two rules is

not close enough to require them to be decided together. No one, for

example, has claimed that our adoption of the proposed rule on parity

clauses will make compliance with the mandatory participation rule more

burdensome for the airlines subject to that rule.

We disagree with ASTA's position that it would be unfair to travel

agencies for us to act on Alaska's petition without addressing the

travel agencies' contention that their CRS contracts will not allow

them to switch to a different system if the quality of a system's

service declines during the contract term because some airlines reduce

their participation levels in that system as a result of our rule.

Assertedly the travel agencies entered into contracts with systems in

the expectation that no airline participant could lower its level of

participation in one system while maintaining a higher level in other

systems. ASTA Comments at 2-3. However, travel agencies have never had

any implied guarantee that a system will not become less useful during

the term of the subscriber contract. For example, Galileo, Worldspan,

and System One changed their rules on non-participant airlines with the

result that their subscribers could no longer ticket Southwest through

the CRS. That change immediately made those systems less attractive for

agencies in areas where Southwest was an important airline. Similarly,

after a travel agency chooses a system because its owner is the major

airline in the agency's area, that airline may decide to drastically

reduce its operations in the area. See, e.g., Marketing Practices

Report at 24, n. 50. Moreover, travel agencies have more bargaining

leverage with the systems than the airlines do. That travel agencies

benefit from the systems' competition for their subscriptions is shown

by the systems' reliance on the suppliers of travel services for almost

all of their revenues; subscribers, in contrast, contribute only about

ten percent of CRS revenues. Justice Dept. Comments at 2, 5.

Deferring this proceeding until the completion of the major

rulemaking could also lead to a significant delay in remedying the

competitive harm addressed by this rule. While the reexamination of all

of the CRS rules is scheduled to be completed by the end of 1997, that

will probably not happen. Our last major reexamination of the CRS rules

took much longer than expected. We did not publish our revised rules

until September 1992, almost two years after the original deadline of

December 1990.

Furthermore, delaying the completion of this rulemaking would

postpone the beginning of potential competition among the systems for

airline purchasers of higher levels of CRS service. Equally

importantly, it could create substantial risks for Alaska and Midwest

Express, since Sabre has told them that it considered them in violation

of the parity clause and that they would be excluded from Sabre if they

did not upgrade their level of participation in Sabre (or reduce their

level of participation in other systems). Sabre agreed not to enforce

the parity clause against them only for a short period, not

indefinitely. 61 FR at 42201; Alaska Reply at 5.

Sabre has argued that the parity clause issue is too insignificant

to warrant prompt action. Sabre bases this argument in part on its

contention that its clause only applies when the fees and quality of

service offered by Sabre are comparable to those offered by the system

in which the airline is participating at a higher level. Sabre Comments

at 3-4. Sabre's contention, however, does not accurately characterize

the contract clause, as explained below. But even if the

characterization were accurate, the clause should still be prohibited

due to the competitive harm it causes.

Sabre asserts that the parity clauses cannot have any significant

impact, since the airlines operating the great

[[Page 59789]]

majority of domestic service are subject to the mandatory participation

clause and since the amount of revenue obtained by Sabre as a result of

the parity clause is so small that a prohibition of parity clauses

would have no significant impact on U.S. airlines. Sabre Reply at 2-3.

We disagree. Even though this rulemaking will not change the

applicability of our mandatory participation rule to airlines with CRS

ownership interests, Alaska and Midwest Express have estimated that

Sabre's most recent threat to enforce the clause against them would

have increased their CRS expenses by more than ten percent. 61 FR at

42201. Galileo has stated that at least four airlines reduced their

participation levels in Galileo as a result of Saber's recent threats

to enforce the parity clause and that other airlines are likely to do

so if we do not issue a final rule in this proceeding. Galileo Comments

at 2-3. And, as shown by the Justice Department's comments, the

systems' recent enforcement of the parity clauses has thwarted efforts

by Reno Air and at least one other airline to improve the efficiency of

the distribution of their services. Justice Dept. Comments at 6-7, 8-9.

While the increased CRS expenses imposed on an airline by the parity

clause may be small, even small expenses are important because of the

thin margins in the airline business. 57 FR at 43783. In addition,

airlines like Alaska must lower their expenses since they increasingly

face competition from Southwest and other low-fare carriers that have

lower distribution costs. See 61 FR at 42199; United Comments at 6-7.

The Systems' Market Power

Airlines must accept parity clauses as part of the price for

obtaining any services from three of the systems. The systems can

compel airlines to accept the clauses because each system has market

power over airline participants, as we have found in our past

rulemakings and CRS studies. 56 FR at 12591-12600; 57 FR at 43783-

43784; Airline Marketing Practices at 44, 76-77, 83-84, and 91-93. The

Justice Department thus states, Justice Dept. Comments at 2-3 (footnote

omitted):

Each CRS 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 CRS. Thus, from an

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

each system possesses market power over any carrier that wants

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

See also Midwest Express Comments at 4; Alaska Reply at 16.

Our conclusion that each system has market power is consistent with

the Supreme Court's analysis in Eastman Kodak Co. v. Image Technical

Services, 504 U.S. 451 (1992). There the Court explained that market

power is the power ``to force a purchaser to do something that he would

not do in a competitive market,'' 504 U.S. at 464, quoting Jefferson

Parish Hospital v. Hyde, 466 U.S. 2, 14 (1984), and ``the ability of a

single seller to raise price and restrict output.'' 504 U.S. at 464,

quoting Fortner Enterprises, Inc. v. United States Steel Corp., 394

U.S. 495, 503 (1969).

The Court's definition of market power fits the systems' imposition

of parity clauses, since there is no evidence that an airline would

accept an obligation like the parity clause in a competitive market. We

noted in the notice of proposed rulemaking that no one had given us an

example of any comparable practice by a seller in a competitive

industry (while Sabre cites the most favored nations clauses imposed by

buyers in some markets, those clauses are different from the parity

clauses imposed on buyers by the systems, as discussed below). 61 FR at

42202.

In addition, the clauses demonstrate the systems' ability to raise

prices or restrict output by forcing airlines to choose between paying

higher CRS fees for unwanted services or reducing their purchase of

services from a competing system.

In Eastman Kodak the Court also noted that market power is usually

inferred from the seller's possession of ``a predominant share of the

market.'' 504 U.S. at 464. Insofar as electronic access to travel

agency subscribers is concerned, each system effectively holds a

monopoly market share. Justice Dept. Comments at 2-3. See also 57 FR at

43783-43784, quoting the Department of Justice's analysis in the last

comprehensive CRS rulemaking.

Sabre nonetheless contends that no system has market power. Sabre,

however, does not argue that any airline has an alternative means for

electronically giving travel agencies the ability to obtain information

on its services and conduct booking and ticketing transactions. Sabre

similarly offers no analysis showing that market forces limit in any

way a system's ability to raise the fees charged participating

airlines. While Sabre submitted an affidavit from Dr. Gary Dorman, an

economist, in an attempt to refute our findings of market power, his

affidavit is unpersuasive. He claims that the relationships between

airlines and CRSs ``closely resemble those found between suppliers and

distributors throughout the economy.'' Dorman Affidavit at 1. He

provides no support for this assertion. He suggests that the Justice

Department's rationale--that each system has a monopoly over electronic

access to its subscribers--would be irrational if applied to grocery

stores. Id. at 2-3. We agree--the grocery store business is quite

competitive. The Justice Department, however, based its rationale on

its analysis of the airline and CRS businesses, and Dr. Dorman

submitted no analysis of his own. While he asserts that the Justice

Department has failed to show that the CRS fees charged participating

airlines are at supracompetitive levels, id. at 3, he has presented no

analysis indicating that Sabre's booking fees do not exceed the

system's costs. The Justice Department's conclusion, on the other hand,

is consistent with our past findings on the systems' ability to charge

airlines fees that are unrelated to their costs. 57 FR at 43785.

While Sabre additionally argues that the systems cannot have market

power since Southwest has prospered while participating only in Sabre,

Sabre Comments at 23, we think Southwest's experience does not disprove

the systems' possession of market power over airline participants.

Southwest itself has chosen to participate in Sabre, the system with

the largest market share in the United States. More importantly,

Southwest's operations are substantially different from those of other

airlines. Southwest operates as a low-fare carrier relying heavily on

direct sales to consumers, not on travel agency sales. For these and

other reasons, few other airlines can copy Southwest's experience and

thereby avoid depending on CRSs for the distribution of their services.

Alaska Reply at 16; Midwest Express Comments at 7. As the Justice

Department points out, while some new entrant airlines have tried to

bypass CRSs by creating alternative methods for bookings, ``the vast

majority of tickets are still booked through travel agents using a

traditional CRS, and airlines that desire access to consumers who

purchase through such channels must participate in each CRS.'' Justice

Dept. Comments at 3, n. 2.

While Sabre claims that airlines can avoid depending on CRSs due to

the growth in use of the Internet for airline bookings, Sabre Comments

at 23, the Internet cannot enable airlines to avoid CRS participation,

at least not in the near future. ASTA Comments at 3-4. The great

majority of airline tickets are

[[Page 59790]]

still sold by travel agents, not through direct purchases by consumers.

Thus, despite the existence of some alternative means of

distribution, most airlines depend on travel agencies for distribution,

so the systems have market power over those airlines. The systems have

used that power to impose parity clauses on airline participants which

reduce competition in the airline and CRS businesses and make airline

operations more inefficient, as explained next.

The Inefficiency and Reduced Competition Caused by the Parity

Clauses

Because of the parity clauses, the systems need not compete on

price and service quality to obtain higher-level participation by

airlines. Such competition might well exist otherwise (although

somewhat limited for airlines subject to our mandatory participation

rule). While virtually all airlines must participate in each system at

the full availability level, the competitive demands of the airline

business do not compel them to participate in the highest levels of CRS

service. Alaska and Midwest Express, for example, have chosen not to

purchase some of the enhancements offered by Sabre, a decision that led

to Sabre's threats to exclude them entirely from the system. Alaska

Reply at 5.

In a competitive market, each system would compete to obtain higher

levels of participation by airlines, in order to make the system more

attractive to the travel agencies doing business in regions where those

airlines have a significant market share. See, e.g., Justice Dept.

Comments at 2. Systems would also compete for higher levels of

participation in order to increase revenues, since airlines pay higher

fees for higher levels of participation.

The parity clause, however, reduces or eliminates the systems'

competition for higher level participation by airlines, as the Justice

Department has explained, Justice Dept. Comments at 5:

Without the parity provision, each CRS would likely have to

respond competitively to a large booking fee decrease offered by one

of its competitors to airlines. With the parity provision, however,

each CRS knows that a participating carrier cannot be induced by

price to upgrade its service level in a competing CRS without also

upgrading in its own. Thus, there is little reason for any CRS to

lower booking fees to induce participating carriers to upgrade their

service levels. [footnote omitted]

In addition, the Justice Department states that the parity clauses

have kept the systems from working with airlines to create levels of

service that will meet their needs. The Justice Department cites Reno

Air's experience as an example. When Reno Air, which participates in

all four systems, wanted a system to develop a level of service that

would meet its distribution needs, none of the systems would work with

it. In contrast, when Southwest wanted Sabre to develop a participation

level that suited Southwest's needs, Sabre was willing to create such a

product. Southwest, unlike Reno, is not bound by the parity clauses

since it participates in only one system, Sabre. Justice Dept. Comments

at 6-7.

Furthermore, as shown by the Justice Department, the parity clauses

reduce the systems' incentive to provide satisfactory service to

participating airlines. Because each airline must participate in each

CRS, the airline's only credible response to poor service would be a

threat to lower its participation level. The parity clause, however,

prevents an airline from taking such action, unless it simultaneously

lowers its participation level in the other systems. Justice Dept.

Comments at 7-8.

Finally, of course, parity clauses create inefficiency by

compelling non-vendor airlines, which have no incentive to skew CRS

competition, to buy a higher level of service from the systems than

they would otherwise choose. Without the clauses an airline might well

decide that participation at a higher level in some systems but not

others would be the most efficient method for distributing its

services. Justice Dept. Comments at 8-9; Midwest Express Comments at 3-

5; Alaska Reply at 19-20; America West Reply at 2-4.

The parties opposing our proposal argue that the parity clauses do

not injure airlines and, even if airlines were injured, the clauses

provide competitive benefits that outweigh any possible injury. We find

these arguments unpersuasive.

According to Sabre, parity clauses do not give it the power to

increase airline fees due to the impact of our rules. One rule, 14 CFR

255.6(a), requires fees to be nondiscriminatory, while the mandatory

participation rule requires system owners to participate in competing

systems only if the terms for participation are commercially

reasonable. Sabre contends that these two rules in combination

``severely'' restrict a system's ability to raise prices. Sabre

Comments at 16-18. Sabre's contention is contradicted by the systems'

ability to impose fees on airlines for CRS services that are unrelated

to the costs of providing CRS services. 57 FR at 43785. We doubt that

the systems' fees would be so high if our rules had the effect

suggested by Sabre. Moreover, airlines have increasingly complained

about the continuing series of fee increases imposed by the systems in

recent years. See, e.g., Justice Dept. Comments at 5.

Sabre further contends that a rule allowing airlines to

``discriminate'' against one or more systems will lead to higher levels

of concentration in the U.S. CRS market. Assertedly the United States

CRS market is one of the most competitive in the world ``largely

because airline discrimination against CRSs is rare,'' whereas in

foreign markets discrimination is much more likely. Sabre Reply at 17.

We think that the U.S. market is more competitive than foreign markets

primarily because the United States had five large airlines (American,

United, TWA, Eastern, and Delta) that each had the resources to create

a CRS when the CRS business was developing. However, even if Sabre's

analysis were correct, our mandatory participation rule already

prevents any of the largest airlines in the United States from

selectively lowering its participation in competing systems because

each of those airlines holds a significant CRS ownership interest and

is covered by that rule.

Sabre argues that parity clauses are essential for ensuring

competition in the CRS market, since otherwise carriers could

discriminate against one or more systems, as shown by past experience.

Sabre Comments at 9-10, 19-20. As discussed below at greater length,

however, the anticompetitive discrimination that has occurred has

involved decisions to reduce or end participation in competing systems

by an airline that either itself or through an affiliate owned or

marketed a system. Those kind of abuses should be prevented by our

mandatory participation rule and the exception included in this rule

that allows a system to enforce a parity clause against an airline that

directly or indirectly owns or markets a competing system.

Sabre also repeats the argument made by others earlier in this

proceeding that eliminating the parity clauses will make it more

difficult for the smaller CRSs to survive. Sabre Comments at 14. We

concluded that this claim was unpersuasive--a smaller system can obtain

higher-level participation by airlines if it offers attractive prices

and service. 61 FR at 42205. Moreover, System One, previously the

smallest U.S. system, is now part of Amadeus, one of the largest

systems in the world. In addition, as we explained earlier, the smaller

systems' past conduct indicates that they do not view the ability to

offer competitive functionality on all

[[Page 59791]]

significant airlines as crucial to their ability to survive in the U.S.

market, since they changed their policies on the treatment of non-

participating airlines and thereby ended their subscribers' ability to

issue tickets on Southwest through the CRS. 61 FR at 42205. Although

Southwest had never been willing to pay for CRS services in those

systems--Worldspan and System One--or in Galileo, each of those systems

nonetheless had displayed some information on Southwest's flights and

allowed travel agents to write Southwest tickets using the system until

1994. Because of Southwest's continuing refusal to pay for CRS

services, each of those systems then decided to change its policies on

the treatment of non-participating airlines and thus to remove

Southwest flight information from its displays and to bar the system's

use for writing Southwest tickets. These steps greatly reduced the

efficiency of travel agencies subscribing to one of those systems when

they were located in regions where Southwest is an important airline.

61 FR at 42198. We recognize the claims that each system's action was a

rational response to Southwest's continuing refusal to pay CRS fees,

Worldspan Comments at 9-10, but their action still undermines Sabre's

argument that a system must provide functionality on all important

airlines that is comparable to the functionality available from

competing systems.

Sabre additionally disputes our competitive analysis by arguing

that the elimination of parity clauses could cause the systems to limit

the number of different levels of service offered participating

airlines because the systems ``might find it necessary'' to phase out

the lower levels of service or to reduce the price differentials

between the various levels of service in order to limit the airline

participants' ability to discriminate against the system. Sabre

Comments at 16-17; Sabre Reply, Dorman Affidavit at 4. Sabre does not

explain why the systems would reduce the number of options available to

airline participants when airlines have a greater ability to choose the

level of service they wish to purchase. Sabre also does not explain why

eliminating the lower levels of service would solve its alleged

discrimination problems. If Sabre eliminates the less costly levels of

service, it might also discourage smaller airlines from participating

at all in Sabre. If Sabre's arguments were accurate, that could hamper

the system's ability to obtain subscribers. But if Sabre in fact

reacted to our decision by reducing the levels of service available to

participating airlines, that would seem to confirm that it believes

that it has the power to control the distribution choices of the

airlines that used the eliminated service levels.

The Broad Applicability of the Parity Clauses

In concluding that the parity clauses unreasonably deny airlines

the ability to choose how much CRS service they wish to purchase, we

read the clauses as requiring an airline to upgrade its participation

in a system if it is already participating at a higher level in another

system, even if the system requiring the upgraded participation offers

inferior service or charges higher prices than the system whose higher-

level service is already being used by the airline. 61 FR at 42201-

44202.

Sabre and Worldspan now contend that we mischaracterized their

parity clauses. Sabre claims that its parity clause requires upgraded

participation only when Sabre offers the higher-level service at a

price and on terms comparable to those offered by the system in which

the airline is already participating at the higher level. Sabre Comment

at 18. Worldspan similarly contends that it enforces its parity clause

only when Worldspan's service is comparable in price and quality to the

higher-level service purchased by the airline participant from a

competing system. Worldspan Reply at 5-7. The record does not support

these claims.

Sabre's clause states, ``[A]ny improvements, enhancements, or

additional functions to Participating Carrier's reservations services

offered to end users of any [CRS] will be offered by Participating

Carrier to SABRE Subscribers on the same terms and conditions as are

agreed to with such [CRS].'' Alaska Reply at 22. Alaska contends that

the clause appears to impose an obligation on the participating

airline, not on Sabre, to use the same terms and conditions; the clause

does not imply that the airline is excused from the higher level of

Sabre participation if Sabre's terms and conditions are different. In

addition, Alaska points out that Sabre's current interpretation is very

new: Sabre did not interpret the clause as requiring a higher level of

participation only when Sabre offered comparable price and terms until

after we issued our notice of proposed rulemaking. Neither Sabre's

comments on Alaska's rulemaking petition nor its pleadings in its suit

against Alaska stated that Sabre's price and terms for higher-level

participation had to be comparable to those offered by the system in

which the airline was already participating at a higher level. Alaska

Reply at 22-23. See also Galileo Reply at 4-5.

We also note that Sabre's reading of its clause would make the

clause difficult to implement, since different systems use different

pricing methods and do not offer the same levels of service.

Sabre, for example, makes much less use of transaction pricing than

the other systems. As Alaska notes, Sabre has had to read the word

``same'' in its contract clause as ``comparable'' in order to make its

interpretation plausible, but the resulting interpretation is

inconsistent with the contract's literal language. Alaska Reply at 22,

n. 7.

Worldspan, unlike Sabre, does not contend that the language of its

clause requires an airline to increase its participation in Worldspan

only when Worldspan's prices and services are comparable to the higher-

level service already being purchased by the airline from another

system. Worldspan instead claims only that it does not enforce its

clause against airlines unless Worldspan's price and quality are

comparable. However, Worldspan's parity clause in no way limits

Worldspan's ability to enforce the clause, whether or not its price and

quality are comparable. Worldspan's clause, included as an attachment

to Alaska's rulemaking petition, reads as follows, ``Participating

Carrier will provide Worldspan users with any improvements,

enhancements, or functions related to Participating Carrier's

reservations services as offered to users of any other CRS.'' The

clause would not block Worldspan from changing its enforcement policy

in the future.

As a result, we conclude that our notice of proposed rulemaking

correctly interpreted the scope of the parity clauses. Moreover, even

if the interpretation now offered by Sabre and Worldspan were correct,

airline participants would have little protection, since Sabre or

Worldspan would decide whether the price and quality of the competing

system's service were comparable to the service offered by itself.

Midwest Express Reply at 5.

More importantly, even if the parity clauses were limited as

claimed by Sabre and Worldspan, allowing systems to enforce them

against airlines with no CRS ownership or marketing interest would

still be contrary to the public interest. Parity clauses eliminate

price and service competition among the systems for higher levels of

CRS service and make airline distribution less efficient. If the

clauses were limited as proposed by Sabre and Worldspan, the

[[Page 59792]]

systems would still have no need to improve their prices and services

relative to their competitors. For example, parity clauses of the type

proposed by Sabre and Worldspan would still eliminate any need by a

system to respond to Reno Air's request for a new level of service that

would match Reno's distribution needs. And airlines would still be

forced to either buy more CRS services than they wanted or reduce their

purchase of services from some systems in order to avoid violation of

the parity clauses imposed by other systems. Midwest Express Reply at

4-5.

For these reasons, we also find unacceptable Sabre's proposal that

we modify our rule to allow a system to enforce a parity clause against

an airline as long as the system's price and other terms for

participation are comparable to those offered by the system in which

the airline already participates at a higher level.

The Systems' Claims of Discrimination by Airline Participants

In arguing that parity clauses are essential for fair CRS

competition, Sabre characterizes an airline's decision to participate

at a higher level in one system than in another as ``discrimination.''

We cannot agree with Sabre's view with respect to airlines that do not

own or market a system. An airline is not engaging in

``discrimination'' when it decides to participate at a higher level in

one system than in other systems. 61 FR at 42204. When a firm in a

competitive industry chooses to buy more service from one supplier than

another, no one characterizes that choice as ``discrimination.''

In arguing the contrary with respect to airline choices on their

levels of CRS participation, Sabre complains that an airline's decision

to participate at a lower level in one system than in other systems

will handicap the former system's ability to compete in regions where

the airline is a major carrier. For example, Sabre alleges that it

might be forced to withdraw from the Pacific Northwest and State of

Alaska CRS markets if Alaska Airlines downgraded its participation in

Sabre. Sabre contends that Alaska's choice of a lower participation

level would make using Sabre less efficient for travel agencies in

those regions, where Alaska is a principal airline, and thus end

Sabre's ability to obtain subscribers in those regions. Sabre Comments

at 7-8.

If Sabre's claims were true, however, Southwest's participation in

Sabre and refusal to participate at all in other systems should have

eliminated those systems from regions like California where Southwest

is a major airline. We have no evidence that Sabre has driven Galileo,

Worldspan, and System One from those regions. And the continuing policy

of those systems not to allow their subscribers to use the CRS to issue

tickets on Southwest further suggests that a system's failure to

provide as much information and booking capability on a significant

airline as do other systems is not a fatal competitive handicap. 61 FR

at 42205.

In any event, if Alaska participates in Sabre at at least the full

availability level, as is its stated intent, Alaska Comments at 4,

Sabre agencies could obtain schedule, fare, and availability

information on Alaska's services, make bookings on Alaska, and issue

Alaska tickets through Sabre. We doubt that Alaska's choice of a lower

participation level in Sabre than in other systems would drastically

reduce Sabre's competitiveness in Alaska and the Pacific Northwest.

Even if Sabre were correct in claiming that a regionally-important

airline's decision to participate at a lower level in one system than

in other systems is a substantial competitive handicap, the proper

remedy would not be the system's use of market power to compel the

airline to buy a higher level of service than it wanted, when the

airline neither owns nor markets a competing system. The system instead

should make its price and service more attractive so that the airline

will determine that the system's higher level of service is

economically worthwhile. Midwest Express Reply at 3.

We note, moreover, that Galileo believes that it can obtain an

adequate number of airline users of its higher-level services by

offering better service. Galileo, whose contracts contain no parity

clause, asserts that airlines are willing to participate in its higher-

level features because of their superiority. Galileo Comments at 2.

Sabre suggests that an airline that neither holds a CRS ownership

stake nor has a contract compensating it for marketing another system

may still choose to lower its participation level in a system in order

to distort competition in the CRS business. Sabre Comments at 10-11.

Sabre has provided no evidence of such conduct, and we consider such a

scenario unlikely. Given the importance of CRS participation to an

airline's ability to distribute its services efficiently and the

significant differences in fees between different levels of CRS

participation, we see no reason why an airline that neither owns nor

markets a competing system would base its decision on extraneous

factors instead of an assessment of its distribution needs and costs.

Even if such an airline might choose a lower level of participation in

one system for illegitimate reasons, the slight possibility of such an

occurrence cannot justify the systems' elimination of the ability of

all other non-owner airlines to choose their level of participation in

each system. We will, however, add an exception to the rule so that a

system can enforce a parity clause against airlines that own or market

another system.

Finally, in an effort to bolster its discrimination claims, Sabre

asserts that Alaska's motive for lowering its participation level in

Sabre was Alaska's interest in obtaining payments from Galileo under an

arrangement between Alaska and Galileo for switching travel agencies

from Sabre to Galileo. Sabre Comments at 11. Alaska, Galileo, and

Galileo's marketing affiliate, Apollo Travel Services, have each denied

that any such arrangement ever existed or was considered.

Alaska Reply at 12-13; Galileo Reply at 4; Apollo Travel Services

Reply. Sabre's charge seems implausible--Sabre only made the charge at

a late stage in this proceeding, and the affidavits submitted by Sabre

largely rely on speculation and hearsay. But if Sabre's charge were

true, our rule would allow Sabre to enforce the parity clause against

Alaska--or any other participating airline--that had a marketing

arrangement with another system.

Impact on Travel Agencies

In proposing the rule prohibiting parity clauses, we tentatively

determined that such a rule would not significantly harm travel

agencies. We noted that airlines like Alaska rely on travel agencies

for their distribution and so would not likely take steps that would

deny travel agencies the ability to obtain information and make

bookings electronically. 61 FR at 42205-42206. In addition, travel

agencies using any system other than Sabre were already handicapped,

since they could not use their system to issue tickets on Southwest, a

major airline in many domestic markets, since 1994. 61 FR at 42206.

We find unpersuasive the arguments by Sabre, ASTA, and several

other parties that the rule will harm U.S. travel agencies, although we

recognize that most travel agencies use only one system and thus

largely depend on that system to electronically obtain airline

information and conduct booking and ticketing transactions.

[[Page 59793]]

First, the largest airlines are CRS owners and thus subject to the

mandatory participation rule. Secondly, the claims that U.S. travel

agencies will be injured essentially assume that one or more important

airlines without CRS ownership or marketing ties will reduce their

participation in some systems below the full availability level, with

the result that travel agents using that system could neither obtain

availability information nor make bookings and issue tickets on those

airlines through the CRS. No one has shown that airlines are likely to

use the rule to do that. Airlines participate in the systems, after

all, to make their services readily saleable by the agents using each

system, and no airline (other than Southwest and some other low-fare

airlines) is likely to reduce its participation level in any system to

an extent that would keep the airline from being booked through the

system. See, e.g., Alaska Comments at 5-6.

We assume that airlines without CRS ownership or marketing ties

would use the rule to avoid buying higher levels of participation from

one or more systems--in other words, those airlines will participate at

the full availability level but may choose not to participate in direct

access or all of the enhancements offered by a system. While an

airline's non-participation in these features may cause some

inconvenience to the travel agents using that system, the amount of

inconvenience should not cause substantial inefficiencies. Furthermore,

if the systems could maintain parity clauses, airlines could respond by

lowering their participation in systems that they would otherwise

participate in at a higher level. Galileo thus states that some

airlines have lowered their participation in its system as a result of

Sabre's threats to enforce its parity clause. Galileo Comments at 2-3.

The Justice Department states that Reno Air reduced its participation

level in the systems as a result of the systems' enforcement of the

parity clause. Justice Dept. Comments at 7. And the American Automobile

Association believes that our rule will lead to a greater degree of

airline participation in CRSs, not less participation.

In addition, while each airline must participate in every system,

most travel agencies can choose between systems. The systems compete

for travel agency subscribers--indeed, according to Sabre, some

agencies receive cash bonuses in exchange for agreeing to use a system.

Sabre Reply at 1, n. 1. Thus travel agencies should have some ability

to influence systems to make higher levels of functionality attractive

to non-owner airlines.

Furthermore, our CRS rules include several provisions that give

travel agencies the ability to use two or more systems. In 1992, for

example, we prohibited parity clauses and minimum use clauses in travel

agency contracts, gave travel agencies the right to use their own

equipment, stated that equipment owned by a travel agency could be used

to access any database, CRS, or internal reservations system of any

airline, and required systems to offer travel agencies three-year

contracts. 57 FR at 43822-43826. Thus, a travel agency should have some

ability to protect itself if one system offers unsatisfactory

information and booking capability on an airline important to the

agency.

ASTA further contends that our proposed rule is unfair, since

travel agencies will have no protection if their chosen system becomes

less efficient due to an important airline's reduction in its

participation level. As noted, we doubt that airlines will use the rule

to drastically downgrade their participation in any system. Travel

agencies, moreover, have never had a guarantee that all important

airlines not covered by the mandatory participation rule will

participate in each system. Indeed, as shown, Southwest has only

participated in Sabre, so agencies using one of the other three systems

have never been able to obtain availability information on Southwest's

flights or to book Southwest through their CRS. Nonetheless, many

travel agencies were willing to subscribe to one of those systems.

We have also received a large number of letters from travel

agencies opposing our proposal. We recognize, as shown by these

letters, that travel agencies would prefer to obtain the best possible

information and functionality on all airlines from each of the systems.

However, that result would require us to allow the systems to continue

using their market power to force some participating airlines to buy a

higher level of service than they wish, a result that would be

inconsistent with our policy of enabling airlines (and travel agencies)

to benefit from CRS competition.

In addition, a large portion of the travel agency letters are form

letters solicited by Sabre, according to Alaska's reply comments.

Alaska Reply at 8-9. Moreover, the letters using Sabre's suggested form

predict that airlines will lower their participation in a system in

order to injure travel agencies. Given the airlines' reliance on the

agencies for distribution, we do not believe that an airline will be

taking steps just to injure travel agencies; an airline will only

change its level of participation if it decides that doing so is cost-

effective. We also note, as explained by Alaska, that the material used

by Sabre to obtain the letters did not accurately describe the CRS

business. Alaska Reply at 8-9.

Worldspan contends that the rule would hurt travel agencies by

reducing the systems' ability to compete for subscribers in areas where

an important airline lowered its participation level in some systems

but not others. Worldspan Comments at 7. As discussed, a system can

compete for higher-level participation by airlines. And Worldspan's

prediction, even if correct, could not justify the continuation of a

regime where the systems use their market power to force airlines to

buy more services than they want. Furthermore, our ban on airline

parity clauses essentially duplicates our ban on parity clauses in

subscriber contracts. 57 FR at 43826.

Legal Authority for Adopting the Proposed Rule

The adoption of the rule prohibiting parity clauses is clearly

within our statutory authority. As we explained in our notice of

proposed rulemaking, 61 FR at 42202-42203, 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. 49 U.S.C. 41712, formerly section 411 of the Federal

Aviation Act (and codified then as 49 U.S.C. 1381). Our authority,

modelled on section 5 of the Federal Trade Commission Act, 15 U.S.C.

45, allows us to define and prohibit as unfair methods of competition

practices that do not violate the antitrust laws. See, e.g., United Air

Lines, 766 F.2d 1107, 1114 (7th Cir. 1985). We may not prohibit a

practice as an unfair method of competition, however, if the practice

does not violate the letter or the spirit of the antitrust laws. See,

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

1984).

In the notice of proposed rulemaking, we tentatively concluded that

the parity clauses were comparable to antitrust violations on several

grounds, based on our finding that each of the systems had market power

over airline participants. We reasoned that the parity clauses were

analogous 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. 61

FR at 42203.

Sabre's parity clause--and the similar clauses used by Worldspan

and System

[[Page 59794]]

One--violate antitrust principles because they deny an airline the

ability to choose for itself the level of service it will buy from each

system. As the Supreme Court has stated, ``A restraint that has the

effect of reducing the importance of consumer preference in setting

price and output is not consistent with [the] fundamental goal of

antitrust law'' that price and output should respond to consumer

preference. NCAA v. Board of Regents, 468 U.S. 85, 107 (1984). NCAA

also undermines Sabre's contention that the parity clause merely allows

Sabre to compete on an equal footing with other systems, for the Court

rejected a similar defense by the NCAA. The NCAA had argued that its

restraints were necessary since its preferred product--tickets for

college football games--would not attract enough consumers without

limits on televised games. The Court reasoned this justification was

inconsistent with the basic policy of the Sherman Act. 468 U.S. at 116-

117.

Only Sabre objected to our tentative conclusion that our legal

authority enables us to adopt a rule prohibiting parity clauses, and

Sabre has not shown that our analysis was invalid.

Significantly, Sabre has not challenged several key points in our

reasoning. We stated our doubt that firms in any competitive industry

could unilaterally impose a requirement like the parity clauses on

their customers. We noted that purchasers typically obtained offsetting

benefits, such as a guaranteed supply or a lower price, when they

agreed with suppliers in competitive industries to requirements

contracts or contracts requiring purchases in large quantities or over

long periods of time. Cf. Barry Wright Corp. v. ITT Grinnell Corp., 724

F.2d 227, 237 (1st Cir. 1983) (Breyer, J.). As we pointed out, no one

in this proceeding had claimed that participating airlines obtained any

benefit from the clauses or obtained other benefits in exchange for

accepting the clauses. 61 FR at 42202. Neither Sabre nor any other

party argues the contrary, nor has Sabre or any other party cited

comparable business practices in competitive industries (while Sabre

contends that the most favored nation clauses used by some health

insurers are comparable, we find that they are not, as explained

below).

In arguing that we have no legal authority to prohibit parity

clauses, Sabre disputes our finding that each system has market power

over airline participants, but, as discussed above, after reviewing the

comments, we have determined that the systems do have market power.

Sabre further contends that we may not prohibit parity clauses,

because the clauses allegedly have no impact on airline competition and

our authority to prohibit unfair methods of competition runs only to

practices that reduce airline competition. Sabre is mistaken in arguing

that the clauses have no impact on airline competition. The clauses

force airlines with no CRS ownership interest to buy a higher level of

service than they would buy if they had the freedom to choose what

level of service to buy from each system. The clauses thereby increase

the costs of the airlines competing with the system owners and injure

those airlines' ability to compete effectively. See, e.g., Midwest

Express Comments at 6; National Air Carrier Ass'n Comments at 2-3. See

also Justice Dept. Comments at 6-7, 8-9.

Sabre in any event errs in contending that our authority is limited

to practices that interfere with airline competition. The statute

expressly authorizes us to prohibit ``an unfair method of competition

in * * * the sale of air transportation.'' 49 U.S.C. 41712. Parity

clauses clearly affect ``the sale of air transportation'' and affect

competition among the systems in distributing airline information and

booking capabilities. The clauses thus are within our authority over

unfair methods of competition. By requiring airlines to purchase

services they do not want (or to avoid the purchase of services they do

want), the clauses drive up airline costs and thus increase airfares.

Judicial Rulings on Most Favored Nation Clauses

Sabre's principal challenge to our legal analysis is its argument

that the courts have approved practices that allegedly resemble the

parity clauses--most favored nation clauses imposed by buyers--as pro-

competitive. Sabre cites such cases as Ocean State Physicians Health

Plan v. Blue Cross, 883 F.2d 1101 (1st Cir. 1989), cert. denied, 494

U.S. 1027; and 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). Sabre analogizes the most favored nation clauses imposed by

buyers with its clause, which protects a seller against a buyer's

decision to buy more service from another supplier. As a result, Sabre

argues, we cannot conclude that the clauses are an unfair method of

competition.

Sabre made this same argument in its response to Alaska's

rulemaking petition, and we found it unpersuasive. As we explained, in

the cases cited by Sabre, the courts upheld a buyer's insistence on a

most favored nation clause which assured the buyer that its supplier

would not give any other customer a lower price. The courts reasoned

that a most favored nation clause imposed by a buyer represented the

buyer's insistence on obtaining the lowest price and thus was a

practice which tended to promote competition on the merits. Such a

clause benefited consumers by giving them lower prices. 61 FR at 42204.

We concluded that the most favored nation clause cases did not

support Sabre's position. Unlike the most favored nation clauses

imposed by buyers, the parity clauses imposed by the CRSs on their

airline customers do not promote efficiency, do not lead to lower

prices for airline participants, and cause consumers to pay higher

prices, as we explained in our notice of proposed rulemaking. 61 FR at

42204. And we pointed out that the Justice Department believed that

most favored nation clauses imposed by buyers could violate the

antitrust laws. Ibid., 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 FR 5210, January 26, 1995, and 59

FR 47349, September 15, 1994.

Sabre has not shown that our earlier analysis of the most favored

nation clause cases was incorrect. Sabre again cites the court cases

that held that a health insurer's insistence on ``most favored nation''

clauses did not violate the antitrust laws, e.g., Ocean State

Physicians Health Plan and Blue Cross & Blue Shield, and additionally

cites E.I. Du Pont de Nemours & Co. v. FTC, 729 F.2d 128 (2d Cir.

1984). In Du Pont the Second Circuit reversed an FTC order that held

unlawful several practices used by the major suppliers of lead

additives for gasoline, one of which was a ``most favored nation''

clause given purchasers. Sabre Comments at 21-22.

Sabre has again failed to show that the health insurer clauses

upheld by the courts are equivalent to the parity clauses imposed by

the systems on their airline customers. In particular, Sabre has not

shown that the parity clauses provide consumer benefits like the ``most

favored nation'' clauses used by health insurers. In Ocean State

Physicians the First Circuit held 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 (``the antitrust laws seek to

encourage'' a buyer's efforts to minimize its costs). Unlike the health

insurer clauses, the parity clauses do not enable any consumers to

receive lower prices. The clauses instead force airlines to buy

[[Page 59795]]

services they neither need nor want, and the resulting increase in

airline costs can cause consumers to pay higher fares or receive less

service. Furthermore, one court has indicated that most favored nation

clauses may injure competition. Willamette Dental Group P.C. v. Oregon

Dental Service Corp., 882 P.2d 637, 642-643 (Or. App. 1994).

Sabre does not attempt to show that parity clauses result in lower

costs for airline participants or their customers, the travelling

public. Instead, Sabre initially claims that a most favored nation

clause has the same effect whether imposed by a seller or a buyer.

Sabre Comments at 21. But a seller's insistence on most favored nation

treatment, unlike a buyer's demand for such treatment, is unlikely to

result in lower prices. Sellers, after all, are typically interested in

obtaining higher revenues, which typically does not result in lower

prices.

Equally unavailing is Sabre's theory that its parity clause is

comparable to the health insurer clauses, because the parity clause

ensures that Sabre receives the same information as competing CRSs.

Sabre Comments at 22. This theory again ignores Sabre's position as a

seller of the service, not a buyer. Significantly, Sabre has made no

showing that its airline participants benefit as a result. Sabre's

parity clause operates as a means of saving Sabre the trouble of

competing to entice airlines to purchase a higher level of CRS

service--the clause enables Sabre to compel such participation if an

airline participating in Sabre chooses to participate at the higher

level in another system without regard for the price and quality of

Sabre's service or the airline's need for the increased functionality

in Sabre.

Sabre argues that we may not rely on the Justice Department's

position, reflected in the consent decrees cited in our notice of

proposed rulemaking, that the ``most favored nation'' clauses

unreasonably restrain competition. Allegedly we cannot prefer the

Justice Department's position to the holdings of the courts. Sabre

Comments at 22-23. This argument misconstrues the scope of our

authority to prohibit unfair methods of competition. We may outlaw

conduct that the courts would find permissible under the antitrust

laws. United Air Lines, 766 F.2d at 1114. And Sabre wrongly implies

that the courts necessarily disagree with the Justice Department's

position. The Seventh Circuit, for example, amended its opinion in Blue

Cross & Blue Shield to state that it had not rejected the Justice

Department's view that ``most favored nation'' clauses may be anti-

competitive in some cases--the court noted instead that there was no

evidence of an anti-competitive effect in the case before it. 65 F.3d

at 1415. And one district court recently refused to dismiss a Justice

Department suit against a most favored nation clause imposed by a

health insurer. United States v. Delta Dental of Rhode Island, 943

F.Supp. 172 (D.C. R.I. 1996).

The Du Pont case cited by Sabre is also consistent with our

analysis. That case involved an FTC decision that invalidated several

pricing practices used by manufacturers of lead additives for gasoline;

one of the practices was a most favored nation clause protecting the

manufacturer's customers against other customers obtaining lower

prices. In reversing the FTC's decision, the Second Circuit found that

the competitive conditions in the gasoline additive industry, which

were far different from those in the CRS business, did not support the

FTC's conclusion. Although the gasoline additive industry was an

oligopoly, its participants did not have monopoly power and competed

with each other: ``Notwithstanding the highly concentrated structure of

the industry, there was substantial price and non-price competition

during the 1974-1979 period that is the subject of the [FTC's]

complaint.'' 729 F.2d at 132. In the CRS business, on the other hand,

there has been no price or non-price competition on providing services

to airlines. Furthermore, the Court held that the FTC could invalidate

a business practice as unfair on ``proof of a violation of the

antitrust laws or evidence of collusive, coercive, predatory, or

exclusionary conduct * * *.'' 729 F.2d at 140. The Court reversed the

FTC in part because there was no evidence of coercive conduct. Ibid.

Here, in contrast, there is such evidence--the system refuses to

provide any CRS services to an airline unless the airline agrees to buy

at least as high a level of service from the system as the airline buys

from any other system.

We therefore conclude that the most favored nation clause cases

cited by Sabre do not support its argument that we may not prohibit

parity clauses. We will instead make final our tentative conclusion

that we may define the parity clauses as unfair methods of competition,

since a parity clause is equivalent to an unlawful tying agreement, a

denial of access to an essential facility on reasonable terms, and an

attempt to maintain monopoly control over electronic access to each

system's subscribers. We will begin with our conclusion that the parity

clauses are equivalent to a tying arrangement prohibited by the Sherman

Act.

Tying Arrangements

We viewed parity clauses as analogous to the tying arrangements

prohibited by the antitrust laws, since the parity clauses 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 service. 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. Eastman Kodak Co.,

supra, 504 U.S. at 461-462 (1992). 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 the Court has explained, ``The essential

characteristic of an invalid tying arrangement lies in the seller's

exploitation of its control over the tying product to force the buyer

into the purchase of a tied product that the buyer either did not want

at all, or might have preferred to purchase elsewhere on different

terms.'' When a seller imposes a tying arrangement on a buyer,

``competition on the merits in the market for the tied item is

restrained * * *.'' Jefferson Parish Hospital, 466 U.S. at 12. A

tying arrangement can well cause consumers to pay higher prices, a

result that violates the goals of the antitrust laws. Eastman Kodak

Co., 504 U.S. at 478.

A parity clause is like a tying arrangement, because the clause

represents the system's use of its market power to force each airline

participant to buy at least as much service from the system as it buys

from any other system. Like the tying arrangements proscribed by the

Sherman Act, the CRS clauses restrict competition on the merits for the

tied service--the higher levels of service offered by each system--and

cause the systems' airline participants to pay higher prices. Since

each system offers several different levels of participation, as well

as various enhancements, the parity clause is akin to a tie, since the

system will not sell an airline any service unless the airline buys a

specified level of services.

Sabre does not challenge our reasoning that the parity clauses have

the effect of a tying arrangement. Instead, Sabre objects that there is

no tie, since each level of service is

[[Page 59796]]

mutually exclusive and thus each level of service is being sold

separately rather than in combination. Sabre Comments at 24.

Sabre's position is obviously flawed--even if each level of service

is mutually exclusive, Sabre's parity clause operates in practice like

a prohibited tying arrangement. An airline can not obtain the services

included within the lower level of service if it buys a higher level of

service from any other system, even though Sabre otherwise offers the

lower level of service as a separate product to airline participants.

As explained above, the parity clause has the same effects as an

unlawful tying arrangement--the parity clause restrains competition in

the tied product, the higher levels of service, and the clause causes

airlines to pay higher fees.

In addition, while Sabre sells different levels of service as

separate items, Sabre also sells enhancements as additions to the

various levels of service. Alaska Comments at 2, n. 1. Enhancements

also operate as tied products. Indeed the pending dispute between

Sabre, on the one hand, and Alaska and Midwest Express, on the other

hand, involved the two airlines' failure to buy enhancements. Midwest

Express Comments at 11.

The Essential Facility Doctrine Secondly, we tentatively determined

that the parity clauses are comparable to a violation of the essential

facility doctrine. That doctrine requires a firm that controls a

facility essential for competition to give its competitors access to

the facility on reasonable terms. The firm will violate section 2 of

the Sherman Act if it denies access (or imposes unreasonable conditions

on access). 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. 61 FR 42203, citing Aspen

Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985); and

Delaware & Hudson Ry. v. Consolidated Rail Corp., 902 F.2d 174 (2d Cir.

1990), cert. denied, 111 S. Ct. 2041.

In our last major rulemaking we determined that each of the systems

is comparable to an essential facility and must therefore offer

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

tentatively concluded in this proceeding 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. 61 FR 42203.

Sabre objects on several grounds to our reliance on the essential

facility doctrine. According to Sabre, we may not consider a CRS to be

an essential facility because the Ninth Circuit held in a private

antitrust case, Alaska Airlines v. United Air Lines, 948 F.2d 536 (9th

Cir. 1991), that CRSs were not essential facilities. As we explained in

both the notice of proposed rulemaking in this proceeding and in our

last major CRS rulemaking, the Ninth Circuit's decision does not

preclude us from basing our CRS rules on an analogy with the essential

facility doctrine. 57 FR at 43791; 61 FR at 42203.

Sabre further claims that, if anything is ``essential'', it is the

information provided by important airlines, since otherwise the CRS

cannot provide adequate information to travel agents and so cannot

obtain subscribers. Sabre Comments at 25. But the relationship between

the systems and airline participants indicates that an airline's

control over its information does not give it any power over the

systems. Participating airlines have had little or no ability to

bargain over a system's terms for participation. The systems instead

have been able to impose terms on airlines that are not disciplined by

market forces.

Sabre's primary defense is its argument that the essential facility

doctrine allows the owners of essential facilities to impose reasonable

non-discriminatory conditions on access to the facility and that the

parity clause is such a reasonable non-discriminatory condition. Sabre

Reply at 21-22. We disagree--the clause is not a reasonable condition.

The clause forces airlines to either buy more service than they want

from some systems or less service than they would like from other

systems. The airlines, moreover, obtain no benefits in return.

In arguing that the clause is a reasonable condition for access,

Sabre alleges that the clause carries out the same goal as our

mandatory participation rule, which requires system owners to

participate in competing systems at the same level that they

participate in their own system. Sabre Reply at 21. However, as shown,

the parity clauses, unlike our rule, do not require that the service be

offered on commercially reasonable terms. More importantly, we adopted

the mandatory participation rule to keep system owners from distorting

CRS competition by unreasonably limiting their participation in

competing systems. Airlines like Alaska have no incentive to distort

CRS competition, since they have nothing to gain from doing so if they

neither own nor market a system.

Monopolization

Finally, since, as shown, most travel agencies subscribe to only

one CRS, the system used by those agencies will essentially hold a

monopoly over the electronic provision of information to the agencies

and the agencies' ability to carry out booking and ticketing

transactions electronically. If an airline established a direct link

between its internal reservations system and a travel agency, the

agency could obtain some information and conduct some transactions

without using the CRS. A parity clause, however, requires an airline to

participate in a system at a higher level than it prefers (and to pay

higher fees than it would otherwise pay for CRS services). The parity

clause thereby reduces the travel agencies' incentive to accept and use

an alternative channel and the airline's ability to fund an alternative

channel. Establishing direct links is costly, and an airline will have

little incentive to incur that cost if it must still participate in

every system at a high level (and pay the higher CRS fees). Alaska

Reply at 27-28; Midwest Express Reply at 5-6.

By discouraging the creation and use of alternative methods of

electronically providing travel agencies with information and booking

capabilities, the parity clause helps to maintain the system's existing

monopoly over electronic access to its subscribers. We found that the

clause is comparable to conduct designed to maintain or create a

monopoly, which would be unlawful under section 2 of the Sherman Act.

61 FR at 42203.

Sabre asserts that the parity clauses cannot be comparable to

unlawful monopolization since the systems have a legitimate business

reason for adopting the clauses--preventing exclusionary tactics by

other systems. Sabre Comments at 26. The clauses, however, apply to all

airline participants, not just those with ties to a CRS, and thus are

not legitimate insofar as they restrict the choices of non-owner

airlines.

Sabre and Worldspan also attack our analysis of an airline's

incentives for creating a direct link with travel agencies. They claim

that an airline will have a greater incentive to find alternatives for

CRSs if its costs go up, so the systems' enforcement of the parity

clauses will give airlines the incentive to find alternatives such as

direct links, since the clauses increase their CRS costs. See, e.g.,

Sabre Comments at 26; Worldspan Comments at 6. We disagree--while

airlines always

[[Page 59797]]

have an incentive to avoid higher CRS fees, the parity clause in

practice seems likely to discourage airlines from creating such links,

given the cost of doing so and the agencies' reduced incentive for

using them.

The Exception for Owners and Sellers of Other Systems

While we have determined that parity clauses are an unfair method

of competition when imposed on airlines that have no CRS affiliation,

we agree with the Justice Department, Sabre, Worldspan, Delta, TWA, and

System One/Continental that parity clauses can provide an effective

means of countering some forms of discriminatory conduct by airlines

that own or market a competing CRS. As suggested in our notice of

proposed rulemaking, we will therefore create an exception in our rule

allowing a system to enforce a parity clause against an airline that

owns or promotes a competing system. We are not adopting the much

broader exception sought by Sabre, which would apply to any airline

with ties of any kind with a CRS-owning airline, such as a code-sharing

relationship. Sabre has not shown that that exception is necessary, and

it would virtually destroy the prohibition against parity clauses.

Discriminatory Conduct by Airlines with CRS Affiliations

As we stated in our notice of proposed rulemaking, 61 FR at 42206,

in the past we have considered cases where a foreign airline apparently

reduced (or ended) its participation in a U.S. system in order to

frustrate the U.S. system's ability to market itself in the foreign

carrier's homeland. See, e.g., Complaint of American Airlines against

British Airways, Order 88-7-11 (July 8, 1988). We have been prepared to

take countermeasures against foreign airlines that deny U.S. systems a

fair chance to compete in the foreign airline's homeland, thereby

interfering with the right of the U.S. airlines affiliated with those

systems to a fair and equal opportunity to compete. Furthermore, in our

last major CRS rulemaking we concluded that there was evidence that

U.S. airlines had limited their participation in competing CRSs in

order to promote the system that they owned, a conclusion which caused

us to adopt the mandatory participation rule. 56 FR at 12608; 57 FR at

43800. That rule requires each airline with a significant ownership

interest in a CRS operating in the United States to participate in

other systems at at least as high a level as it participates in its own

system, assuming the terms for participation are commercially

reasonable. 14 CFR 255.7.

Sabre, moreover, has stated that it created its parity clause to

keep other airlines from engaging in unfair competition by

participating at a high level in their affiliated system while

participating at a low level in competing systems like Sabre, and that

it has successfully used the parity clause in recent years to stop

foreign airlines from discriminating against Sabre and in favor of a

system affiliated with the foreign carrier. 61 FR at 42206.

In recognition of the apparent value of the parity clauses in

preventing discrimination by airlines affiliated with a competing CRS,

we specifically requested parties to comment on whether a rule

prohibiting parity clauses should include an exception allowing a

system to enforce a parity clause against an airline that owned or

marketed a competing CRS. 61 FR at 42197, 42198, 42206.

The Parties' Comments

In response to our request for comments, the Justice Department,

Sabre, Worldspan, Delta, TWA, and Continental/System One stated that

they supported an exception that would allow a system to use a parity

clause against airlines owning or marketing a competing system. Galileo

opposes any such exception, while Midwest Express does not object to

the enforcement of parity clauses against foreign airlines that own or

market a system. Alaska opposes any exception allowing enforcement of a

parity clause against an airline without an ownership interest in a

system, even if the airline markets a system.

The Need for the Exception

We have determined to allow systems to enforce parity clauses

against airlines that own or market a competing system. As shown by our

own experience with both U.S. and foreign airlines, an airline that

owns a CRS may well decide to limit its participation in other systems

in order to encourage travel agencies in areas where it is a major

airline to use the system that it owns. While our past experience has

involved airlines that either owned or were affiliated with an owner of

a system, the same incentive to downgrade participation in competing

systems could well exist in an airline that is marketing a system.

Sabre has cited cases where some South American airlines reduced their

participation in Sabre in order to create a marketing advantage for a

system that they marketed but did not own. See 61 FR at 42206.

Galileo claims that discrimination is unlikely, as shown by the

decisions of some of Galileo's airline owners and marketers to

participate in other systems at a higher level than they participate in

Galileo. Galileo Comments at 5-6. While this indicates that many

airlines with CRS ties do not discriminate, it does not show that

discrimination never occurs or is so unlikely that we should deny a

system a useful tool for ending such discrimination. Indeed, Worldspan

and its owners complain that Egyptair, which markets Galileo, is

discriminating against Worldspan in order to promote Galileo. Worldspan

Comments at 8-9; TWA Comments at 3. Continental and System One

similarly complain that the TACA carriers in Central America, which are

associated with American, are discouraging Central American agencies

from using System One. System One/Continental Comments at 4-5.

Galileo and Alaska argue that any potential discrimination problem

does not warrant creating an exception from the ban on parity clauses,

because there are other means available for preventing discriminatory

conduct by a foreign airline, in particular, the complaint procedures

established by the International Air Transportation Fair Competitive

Practices Act (``IATFCPA''), codified as 49 U.S.C. 41310(c). Sabre and

Worldspan, however, point out that the statutory remedy has a number of

restrictions that limit its effectiveness, including the requirement

that the complaint be filed by a U.S. airline rather than a system. In

addition, a system's use of the private contractual remedy has other

advantages, including the avoidance of a dispute between the United

States and the foreign government. Sabre Reply at 8-10; Worldspan Reply

at 8-9. See also 57 FR at 43819.

The Scope of the Exception

Despite our willingness to create an exception in the rule that

will protect the legitimate interests of U.S. systems, we do not wish

to create an exception that will swallow the rule. We are therefore

unwilling to accept Sabre's argument that a system should be entitled

to enforce a parity clause against any airline whose reduced

participation would arguably harm the system's ability to obtain

subscribers. Sabre Comments at 32-33. In addition, as discussed below,

Sabre has not shown that a broader exception is essential.

Sabre argues that a system could pay a regionally-important airline

without any CRS ownership interest to lower its participation in

competing systems and that the airline's discriminatory

[[Page 59798]]

lowering of its participation level would prejudice the marketing

efforts of the competing systems. According to Sabre, a system owned by

the dominant airline in a country has many ways to induce smaller

airlines in that country to create a marketing advantage for itself.

The system and its owner could secretly compensate a non-owner airline

for lowering its participation level by giving it better pro-rates for

interline travel, discount ground-handling services, lower prices for

reservations services, and slots or space at crowded airports. Sabre

Reply at 10-11.

We appreciate Sabre's concerns, but the broad exception urged by

Sabre would destroy the ban on parity clauses. We note, for example,

that Alaska has a code-sharing relationship with Northwest, one of

Worldspan's owners; thus, if we created the broad exception sought by

Sabre, we would deny Alaska the benefit of the general prohibition

against parity clauses. Similarly, Alaska and Midwest Express are

hosted in Sabre, so an exception allowing systems to enforce parity

clauses against airlines hosted in another system would deny those two

airlines the ability to lower their participation level in any system

but Sabre.

At the same time, the expansive exception sought by Sabre seems to

be unnecessary, for every case of discrimination cited by Sabre or

otherwise known to us has involved either an airline that owned a

system (British Airways, Iberia, and Japan Air Lines), an airline that

was affiliated with an owner of a system (Air Inter and Iberia's

domestic affiliates), or an airline that was marketing a system

(Egyptair, the South American airlines cited by Sabre, and the TACA

carriers cited by Continental and System One). We are unaware of any

case where an airline without any affiliation with the owner or

marketer of a system reduced its participation in another system in

order to prejudice that system's ability to market itself to travel

agencies.

Sabre claims that a number of small airlines hosted in Amadeus have

been unwilling voluntarily to participate in Sabre at the same level

that they participate in Amadeus. Sabre Reply at 11. However, Sabre has

neither named the airlines nor explained how their levels of

participation varied or why a small airline's presence in Sabre would

significantly affect Sabre's ability to market itself in foreign

countries. Our rule will allow Sabre to enforce the parity clause

against all airlines that own or market a competing system, such as

Amadeus, a category that should include the critical mass of airlines

in the countries where Sabre is being marketed. In addition, even if we

allowed Sabre to enforce the parity clause against airlines hosted in a

system but not otherwise affiliated with that CRS, those airlines,

unlike U.S. airlines, might well decide to withdraw entirely from

Sabre, which would put them out of reach of the parity clause.

We are at this time also skeptical of Sabre's assertion that a

system and its owner airlines could secretly pay an unaffiliated

airline to lower its participation level in Sabre. Furthermore, given

the importance of CRS use to airlines, it seems doubtful that an

airline would change its level of participation in a system in exchange

for unrelated benefits. And Sabre would presumably become aware of any

efforts by the unaffiliated airline to market the system itself.

However, we are willing to reconsider the issue in our next major

CRS rulemaking, if Sabre can show that unaffiliated airlines will

change their participation level in order to distort CRS competition

and can suggest a rule modification that would alleviate that problem

without making the overall prohibition of parity clauses ineffective.

In the meantime, we have the ability to address specific issues or

problems with our foreign counterparts.

Having determined that systems should be allowed to enforce parity

clauses against airlines promoting a different CRS, we must craft a

rule that will allow systems to counteract discrimination by airlines

owning or marketing a competing system without allowing them to coerce

the participation level choices of airlines with no CRS interests.

Midwest Express and Alaska have suggested we should give the systems

the ability to enforce a parity clause against foreign airlines but not

U.S. airlines. Alaska Reply at 11; Midwest Express Comments at 10-11.

Because of the United States' international agreements, we may not

discriminate against foreign airlines. If we adopted such an exception

allowing the enforcement of parity clauses only against foreign

airlines, we would be violating our obligation to treat U.S. and

foreign airlines the same. See also Continental/System One Reply at 2,

n. 3; Galileo Comments at 7, n. 4. Although Midwest Express has noted

the CRS market in the United States differs in important respects from

the CRS market in many foreign countries, Midwest Express Reply at 13-

15, we doubt that those differences would justify a rule allowing

systems to enforce parity clauses against all foreign airlines but no

U.S. airlines.

The Justice Department has proposed that we allow enforcement of a

parity clause against airlines that themselves or through affiliates

own or market a system and that we define ``market'' as ``to cause,

encourage, or persuade a person or entity to subscribe to a particular

foreign or domestic system in return for some material benefit that is

conditioned upon the number of subscriptions received.'' Justice Dept.

Comments at 11. Two commenters would accept the Justice Department's

proposal if the phrase ``that is conditioned upon the number of

subscriptions received'' is struck, for they believe that a system

could easily compensate an airline for marketing on some basis other

than the number of subscriptions received. TWA Reply; System One/

Continental Reply at 6.

We have decided not to adopt the Justice Department's proposed

definition of ``to market'' or otherwise attempt to define that term in

the rules. We are concerned that a system seeking to enforce a parity

clause may have difficulty proving that an airline received a

``material benefit'' for marketing a competing system. We do not,

however, intend to give the systems broad authority to assert that an

airline participant is marketing a competing system. For example,

neither a code-sharing relationship between a non-owner airline and an

owner airline nor a hosting agreement between a non-owner airline and a

system can cause the non-owner airline to be deemed a marketer of a

system, unless the non-owner airline is specifically engaged in

promoting the system to travel agencies. We appreciate the concern

raised by Alaska that any exception for airlines marketing a system

phrased in general language will give the systems too much discretion.

Alaska Reply at 10-11. See also Midwest Express Reply at 13-15. But,

given past and current problems with discrimination by airlines that

market a CRS, some exception to our general ban on parity clauses seems

necessary. However, we will reexamine the language of our rule if the

systems attempt to use the exception to enforce a parity clause against

airlines uninvolved in marketing another system.

Furthermore, we will impose a fourteen days notice requirement on

the enforcement of a parity clause. A system may not enforce a parity

clause against an airline without first giving us and that airline

fourteen days written notice of its intent to take that action. The

notice requirement would give the airline time to complain if it

considered the system's action unauthorized by our rule and give us

time to intervene if necessary. We included a similar requirement in

our rule excusing a

[[Page 59799]]

system from complying with our rules if a foreign airline owns or is

affiliated with a system that discriminates against U.S. airlines.

Section 255.11; see 57 FR at 43829, 56 FR at 12637.

As provided by the Justice Department's proposed language, the

exception in the rule will allow enforcement of a parity clause against

an airline that markets a CRS in foreign countries, even if that CRS

does not do business in the United States.

Inclusion of Enhancements

We will modify the rule's language to clarify its applicability to

enhancements, as requested by Alaska. The language proposed by us would

prohibit a system from requiring any airline to maintain ``any

particular level of participation in its system'' on the basis of the

airline's level of participation in another system. Alaska and Midwest

Express ask us to revise the language to make it clear that a system

also cannot use a parity clause to force an airline to purchase

enhancements from it on the ground that the airline is purchasing those

enhancements from another system. Alaska Comments at 4-5; Midwest

Express Comments at 11-12. Galileo supports this proposal, Galileo

Reply at 5-6, but Worldspan claims that it was not included in the

notice of proposed rulemaking, Worldspan Reply at 4.

Both logic and policy support our inclusion of enhancements within

the scope of the prohibition of parity clauses. First, the systems have

used parity clauses to require airlines to purchase enhancements, not

just to require them to upgrade their level of participation. Indeed,

when Sabre at the beginning of 1996 threatened to use the parity clause

against Alaska and Midwest Express, Sabre was demanding that the two

airlines buy some enhancements from Sabre because their level of

participation in one or more other systems allegedly included those

enhancements. Alaska Comments at 3; Midwest Express Comments at 11. In

addition, according to Alaska, Sabre's lawsuit against Alaska also

argued that the parity clause applied to enhancements. March 8, 1995

Alaska Reply at 3-4. And we noted in the notice that Alaska's current

interest in the parity clause issue involved its wish to avoid

purchasing some enhancements from Sabre that it bought from other

airlines. 61 FR at 42207.

Furthermore, the reasons for our findings that parity clauses

reduce CRS and airline competition and make airline distribution less

efficient are fully applicable to the systems' use of parity clauses to

force airlines to buy enhancements. Whether a system is forcing an

airline to buy an enhancement or to upgrade its overall level of

participation, the system is using its market power to force an airline

to buy unwanted services (or to cancel its purchase of services from

another system that it did want to buy).

Thus, when we proposed to prohibit parity clauses, we intended to

prohibit any use of the clauses, whether the system wanted to force an

airline to upgrade to a higher level of participation or to buy

enhancements that the airline preferred not to buy. As noted by Alaska,

however, the proposed rule did not expressly refer to enhancements. We

will therefore modify it to make that clear.

Worldspan opposes Alaska's proposal. It argues that including

enhancements in the rule would substantially change the proposal, since

enhancements allegedly had not been included in the proposal, and could

not be included without a new notice of proposed rulemaking. Worldspan

Reply at 4. Worldspan, however, has not explained why a prohibition

against the use of parity clauses for enhancements would involve any

new or different issues. The analysis of the benefits and harm caused

by the clauses is the same in either case. Moreover, this proceeding

resulted in large part from Sabre's use of its parity clause to make

Alaska and Midwest Express buy enhancements, so the use of parity

clauses to require airlines to buy enhancements was inherently at issue

when we issued our proposal. Every party in the proceeding should have

understood that the use of the clauses as to participation in

enhancements would be an issue. We note in that regard that no one else

has supported Worldspan's position on enhancements.

The Parties' Proposals for Other Rule Changes

Our request for comments on our proposal to prohibit parity clauses

generated a number of requests for changes to other provisions in our

CRS rules, especially the mandatory participation rule.

Galileo, Worldspan, Delta, Northwest, TWA, and System One/

Continental urge us to amend the mandatory participation rule, 14 CFR

255.7, so that it requires airlines that market a system, not just

airlines with a significant CRS ownership interest, to participate in

other systems. Such an amendment would require Southwest to participate

in Galileo, Worldspan, and System One, if it continues to promote

Sabre. Southwest opposes this suggestion, as does Sabre.

United argues that we should eliminate the mandatory participation

rule, since CRS owner airlines should be able to choose the level of

CRS participation needed for distributing their services. Delta also

favors the elimination of the mandatory participation rule if it is not

extended to cover airlines marketing a system. TWA, on the other hand,

supports extending the mandatory participation rule to airlines that

market a system, but asserts that the rule should require only

participation at the full availability level, not at higher levels.

Delta suggests that we should bar systems from contractually tying

non-travel agency services to participation in agency services. Under

Delta's proposal, an airline could choose whether to participate in the

information and booking functions provided by a system to Internet

sites.

Worldspan asks us to amend the rule authorizing a system to take

countermeasures against foreign airlines affiliated with a CRS, 14 CFR

255.11, so that a system would have broader authority to react to

discriminatory treatment.

Finally, ASTA and USTAR contend that, if we adopt the parity clause

prohibition, we should allow travel agencies to cancel their CRS

contracts if the quality of a system's service is greatly reduced by a

carrier's decision to lower its participation in that system.

We have decided not to proceed on any of these suggested changes

before the next major rulemaking, which is scheduled for this year. We

could not in any event adopt any of these proposals without a new

notice of proposed rulemaking, since none of them were proposed in our

notice of proposed rulemaking. We have issued an advanced notice of

proposed rulemaking on the CRS rules, since, as discussed above, those

rules will expire at the end of 1997 unless extended. 62 FR 47606,

September 10, 1997. The suggestions for additional rule changes made by

the parties can be considered in the coming rulemaking.

Procedural Issues

We have considered Alaska's request for a rule barring parity

clauses through informal rulemaking procedures. Those procedures, which

included the opportunity to file comments and reply comments on our

notice of proposed rulemaking, have enabled every party to fully

present its position on the legal and factual issues.

Our use of informal rulemaking procedures here follows our

consistent past practice. When we reexamined and readopted the Board's

rules, we used

[[Page 59800]]

informal rulemaking procedures. No one asserted that those procedures

were improper or unfair, 57 FR at 43792, although American had

initially argued that a formal hearing should be held to resolve

factual disputes. See 56 FR 12586, 12603, March 26, 1991. In an earlier

proceeding we used informal rulemaking procedures to amend the CRS

rules as part of a package of rules designed to reduce airline delay

problems. 52 FR 34056, September 9, 1987.

Most importantly, when the Board adopted the original CRS rules, it

did so in an informal rulemaking proceeding over United's objections,

and the Seventh Circuit affirmed the Board's procedural decision in

United Air Lines v. CAB.

Sabre nonetheless argues that we may not adopt the proposed ban on

parity clauses without holding a formal hearing. Sabre Reply at 18-20.

Sabre's objection has no merit.

Sabre recognizes that the Seventh Circuit held that the Board could

adopt comprehensive CRS rules without a formal hearing. Sabre Reply at

19. Sabre, however, suggests that the Court decided the United Air

Lines case incorrectly, because the language of the statute authorizing

us to define and prohibit unfair methods of competition and unfair and

deceptive practices, 49 U.S.C. 41712, allegedly requires the holding of

a formal hearing. Sabre Reply at 19, n. 20. We disagree. As the Seventh

Circuit explained in rejecting the same contention made by United, the

statute clearly authorizes the use of informal rulemaking procedures

for prohibiting unfair methods of competition and unfair and deceptive

practices. United Air Lines, 766 F.2d at 1111-1112.

Sabre wrongly contends that this rulemaking is so different from

the rules upheld in United Air Lines that the Seventh Circuit's

decision is inapplicable here. Sabre argues that we cannot use informal

rulemaking procedures since our decision necessarily involves a

determination on the ``nature and validity of past conduct.'' Sabre

Reply at 19. Most rulemaking decisions made by regulatory agencies,

however, involve findings about the reasonableness of the private

parties' past conduct, as did the Board's original CRS rulemaking. Cf.

United Air Lines, 766 F.2d at 1107. Moreover, like the Board's CRS

rules, this rule imposes no sanctions on anyone for past conduct.

Sabre similarly errs in arguing that a formal hearing is needed

here because the allegations made by the parties are unsupported and

``under cross-examination would be exposed as seriously flawed.'' Sabre

Reply at 19. Most rulemaking decisions require the resolution of

disputed issues of material fact, but that does not force the agency to

hold a formal hearing. The Administrative Procedure Act, after all,

expressly authorizes agencies to adopt rules without such a hearing.

Indeed we may decide adjudicatory cases without holding a formal

hearing, even when there are material factual issues in dispute. See,

e.g., City of St. Louis v. DOT, 936 F.2d 1528, 1534, n. 1 (8th Cir.

1991). We are satisfied, moreover, the record here amply supports our

findings in this rule.

According to Sabre, however, this proceeding is also different from

the Board's original rulemaking because our proposed rule ``may also

retroactively alter some expectations,'' since the rule would allegedly

``disrupt'' the expectations of the systems and their subscribers.

Sabre Reply at 19-20. The Board's rules in fact were much more

disruptive. See Republic Airlines versus United Air Lines, 796 F.2d 526

(D.C. Cir. 1986), where the Court held that a system could require an

airline to pay higher fees for CRS participation, since the Board's

rules invalidated the contract allowing the airline to pay lower fees.

We are not interferring here with any party's reasonable contract

expectations. But, even if we were disrupting existing contracts, we

could still act by rulemaking. As the Court stated in Republic, 796

F.2d at 528, ``There is of course no question that the CAB had the

power, as a matter of federal law, to render the violative CRS

contracts entered into by the airlines unenforceable from the effective

date of the rule.''

Finally, Sabre alleges that a hearing is necessary since we cannot

adopt rules prohibiting unfair methods of competition without first

finding that antitrust violations have occurred, a step which would

require a formal hearing, according to Sabre. Sabre Reply at 19, n. 20.

Sabre's allegation is plainly wrong, for we need not find that anyone

has violated the antitrust laws as a condition for prohibiting a

practice as an unfair method of competition. 49 FR at 32545. Cf. United

Air Lines, 766 F.2d at 1119-1120.

Worldspan asserts that we cannot fairly rely on our past analyses

of the CRS business and its impact on airlines, both because those

findings are now several years old and because we allegedly did not

specifically identify which of the past findings are relevant to our

proposed rule. Worldspan Comments at 4. Our use here of our earlier

rulemakings and studies is neither unfair nor irrational. We relied on

our past findings on the basic structure and operation of the CRS and

airline businesses, and their structure and operation have not changed

significantly since our last rulemaking. The past findings on which we

relied were identified in the notice of proposed rulemaking. If

Worldspan believed that our past findings were outdated or inaccurate,

it had the chance in its comments to argue that those findings were no

longer valid, as we specifically said in our notice. 61 FR at 42206.

Cf. 57 FR at 43793.

The other procedural issues concern the motions by the Department

of Justice and America West for leave to file pleadings after the due

date for comments or reply comments and the late submission of letters

from a number of travel agencies and from the European Civil Aviation

Conference (ECAC). The Justice Department filed its comments soon

enough to give other parties the ability to address its arguments in

their reply comments. While America West filed its reply comments long

after the applicable deadline, its reply responds to the points in the

initial round of comments and contains no new factual or legal

arguments. The late travel agency letters, which were largely generated

by Sabre, primarily used Sabre's form response and thus duplicated the

views stated in the timely letters. ECAC's comment states its position

but does not present new arguments and evidence. Thus the acceptance of

the late comments and letters will not prejudice anyone. We will

therefore accept the Justice Department's comments, America West's

reply comments, ECAC's comments, and the late letters from travel

agencies.

Finally, we note that Sabre has tried to persuade the Departments

of State and Commerce, the United States Trade Representative, and the

Office of Management and Budget to keep us from adopting a rule

prohibiting parity clauses. Our ex parte docket contains OMB's outline

of Sabre's meeting with OMB officials.

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

[[Page 59801]]

procedures of the Department of Transportation, 44 FR 11034.

Our notice of proposed rulemaking stated our tentative conclusions

that the rule would benefit competition and innovation and give non-

owner participating airlines a greater ability to choose the

distribution methods that best meet their needs. We further stated that

we did not think the rule would significantly injure travel agencies or

affect the systems' operations. Among other things, no airline appeared

likely to use the rule to lower its level of participation in any

system below the full availability level. We found that the costs and

benefits of the proposed rule appeared to be unquantifiable, but we

asked interested persons to provide information on the costs and

benefits. 61 FR at 42207.

After reviewing the comments and reply comments submitted in

response to our notice of proposed rulemaking, we have determined that

the rule should provide significantly more benefits than costs. We do

not have data, however, that would enable us to accurately quantify the

benefits of the rule for airlines and airline passengers and the costs

of the rule for systems and travel agencies, although we had asked for

such data. We are therefore providing a qualitative assessment of the

rule's costs and benefits.

The rule will benefit airlines that do not own or market a CRS

because it will allow them to choose the level of service purchased

from each system. The rule will thereby enable each such airline to

choose the most efficient method for distributing its services.

Airlines can also avoid purchasing services they do not need, which may

save them significant amounts of money. Alaska and Midwest Express, for

example, had estimated that Sabre's most recent threat to enforce the

parity clause against them would raise their booking fee expenses by

more than ten percent. 61 FR at 42201.

The rule should also cause the systems to compete for airline

purchasers of higher-level services. Although virtually all airlines

must participate in each system at the full availability level, many

non-owner airlines do not need to purchase higher levels of service

from each system (our mandatory participation rule generally requires

airlines with significant CRS ownership interests to buy an equivalent

level of service from each system). Since a system's services will be

more attractive to travel agencies if more airlines participate at

higher levels, and since higher-level participation by more airlines

will produce more revenue for a system, the systems should compete for

higher-level participation by offering better service and perhaps lower

fees.

In addition, if airlines can operate more efficiently, they can

reduce their costs, which should lead to lower fares for airline

travellers. However, while CRS costs are relatively large in relation

to airline profit margins, they are relatively small in relation to

total operating costs, so lower CRS costs are unlikely to result in

large fare decreases.

We do not expect the rule to impose a substantial burden on the

systems. The rule will not require the systems to change their method

of operations. If the systems compete for higher-level airline

participation, they are likely to incur additional marketing and

developmental expenses, but nothing in the record indicates that those

expenses would be significant. The systems may also have to lower their

fees for higher-level participation. However, since the fees charged

airlines do not currently appear to be disciplined by market forces,

any marketplace discipline on the systems' fees would be economically

beneficial.

The rule should not significantly affect travel agencies. We doubt

that any significant airline that currently participates in CRSs will

reduce its level of participation in any system below the full

availability level, so travel agents using any system should continue

to have the ability electronically to obtain information on the

airline's schedules, fares, and availability, to make bookings, and to

issue tickets. While some airlines are likely to reduce their level of

participation in some systems, the operations of the travel agents

using those systems should not become significantly less efficient,

since the higher-level participation does not appear to greatly affect

the efficiency of agency operations. Furthermore, if the systems could

continue to enforce the parity clauses, airlines that would otherwise

prefer to buy a higher level of service from one or a few systems would

have the option of reducing their level of participation in those

systems rather than upgrading their level of participation in the other

systems. Thus the rule should not cause a significant reduction in the

efficiency of travel agency operations.

Barring the systems from enforcing a parity clause against airlines

that own or market a competing system would reduce CRS competition,

since some airlines with CRS ties might well choose to discriminate

against competing systems in order to create a marketing advantage for

the system that they own or promote. Since our rule will allow systems

to continue enforcing a parity clause against airlines that own or

market a system, our rule should not cause any distortions in CRS

competition.

The Department does not believe that there are any alternatives to

the 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 Sec. 255.7(a)) the ability to choose

its level of participation in each system.

Some parties have suggested that we should adopt a rule allowing a

system to enforce parity clauses when the price and quality of its

higher level of participation are comparable to those of the systems

from which the airline is already purchasing the higher level of

service. That proposal, however, would neither promote price and

service competition among the systems for higher-level participation

nor give participating airlines the ability to choose what service

levels were most efficient for them.

This rule does not impose unfunded mandates or requirements that

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

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 airlines and

travel agencies. The notice of proposed rulemaking contained our

initial regulatory flexibility analysis. This rule and our notice of

proposed rulemaking set forth the reasons for our adoption of Alaska's

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

A number of the commenters submitted their views on our proposal's

impact on small entities. We considered their comments in deciding

whether to make final our proposed ban on parity clauses final.

The rule 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.

[[Page 59802]]

The rule, as explained above, will give smaller non-owner airlines

the ability to choose the level of service they will buy from each

system by barring the use of airline parity clauses. Smaller non-owner

airlines will be able to choose how they will distribute their services

and thus be better able to operate more efficiently.

The rule will not directly affect travel agencies but may 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 or as efficiently as some of

the agencies' competitors. 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 and

if the reduction in the level of participation made it substantially

more difficult for an agent to book the airline's services. We doubt

that any significant airline currently participating in the systems

will drastically reduce its level of participation in any system, so

changes in participation levels are not likely to significantly

interfere with the efficiency of travel agency operations. Furthermore,

the parity clauses give airlines the option of either reducing their

level of participation in the favored system or upgrading their level

of participation in other systems. Since a participating airline may

well choose to reduce its participation level in the favored system,

parity clauses do not ensure that every airline will participate at a

high level in all systems. For these reasons, we conclude that the rule

will not significantly harm travel agencies.

In addition, the 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.

The only alternative rule suggested by the commenters was Sabre's

proposal that we allow each system to enforce a parity clause as long

as that system's terms for the higher level of participation or

enhancement were comparable to the terms offered by the competing

system in which the airline was already participating at a higher

level. As discussed above, we decided against adopting this proposal,

since it would not promote competition in the CRS and airline

industries and would force airlines without any CRS affiliation to buy

more services than they considered desirable.

Our 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.

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 rule contains no collection-of-information requirements

subject to the Paperwork Reduction Act, Public Law 96-511, 44 U.S.C.

Chapter 35.

Federalism Implications

The rule we are adopting 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 rule does not have sufficient

federalism implications to warrant preparation of a Federalism

Assessment.

This rule does not impose unfunded mandates or requirements that

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

List of Subjects for 14 CFR Part 255

Air carriers, Antitrust, Reporting and recordkeeping requirements.

Accordingly, the Department of Transportation amends 14 CFR Part

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

PART 255--[AMENDED]

1. The authority citation for part 255 is revised to read as

follows:

Authority: 49 U.S.C. 40101, 40102, 40105, 40113, 41712,

recodifying 49 U.S.C. 1301, 1302, 1324, 1381, 1502 (1992 ed.).

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 (other than a carrier that owns

or markets, or is an affiliate of a person that owns or markets, a

foreign or domestic computerized reservations system) to maintain any

particular level of participation or buy any enhancements in its system

on the basis of participation levels or enhancements selected by that

carrier in any other foreign or domestic computerized reservations

system. A system may not compel a carrier that owns or markets, or is

an affiliate of a person that owns or markets, a foreign or domestic

computerized reservations system, to maintain a particular level of

participation or buy an enhancements in its system on the basis of

participation levels or enhancements selected by that carrier in

another foreign or domestic computerized reservations system, until 14

days after it has given the Department and such carrier written notice

of its intent to take such action.

Issued in Washington, D.C. on October 28, 1997.

Rodney E. Slater,

Secretary of Transportation.

[FR Doc. 97-29295 Filed 11-4-97; 8:45 am]

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