Second Extension of Computer Reservations Systems (CRS) Regulations

DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 255

[Docket No. OST-99-5132; Notice No. 99-3]

RIN 2105-AC75

Second Extension of Computer Reservations Systems (CRS)

Regulations

AGENCY: Office of the Secretary, Department of Transportation.

ACTION: Notice of Proposed Rulemaking.

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SUMMARY: For the second time, the Department is proposing to revise its

rules governing airline computer reservations systems (CRSs), 14 C.F.R.

part 255, by changing the rules' expiration date from March 31, 1999,

to March 31, 2000. If the Department does not change the expiration

date in the rules (14 CFR part 255), the rules will terminate on March

31, 1999. The proposed extension of the current rules will cause the

rules to remain in effect while the Department carries out its

reexamination of the need for CRS regulations. The Department

tentatively believes that the current rules should be maintained

because they appear to be necessary for promoting airline competition

and helping to ensure that consumers and their travel agents can obtain

complete and accurate information on airline services. The rules were

previously extended from December 31, 1997, to March 31, 1999.

DATES: Comments must be submitted on or before March 12, 1999.

ADDRESSES: Comments must be filed in Room PL-401, Docket OST-99-5132,

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

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

To facilitate consideration of comments, each commenter should file six

copies of its comments.

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

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

SUPPLEMENTARY INFORMATION: In 1992 the Department adopted its rules

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

essential for the marketing of airline services for almost all airlines

operating in the United States. 57 FR 43780 (September 22, 1992). We

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

the systems--all of which were then airlines or airline affiliates--did

not use them to unreasonably prejudice the competitive position of

other airlines or to provide misleading or inaccurate information to

travel agents and their customers. We found that regulations were

needed because travel agents relied on CRSs to provide airline

information and bookings for their customers and because almost all

airlines received most of their bookings from travel agencies. Our

rules will expire on March 31, 1999, unless we readopt them or extend

the expiration date. 62 FR 66272 (December 18, 1997). By issuing an

advance notice of proposed rulemaking, we began a proceeding to

determine whether the rules are necessary and should be readopted and,

if so, whether they should be modified. 62 FR 47606 (September 10,

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

current rules to March 31, 2000, so that they will remain in force

while we conduct our overall reexamination of the rules.

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

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

expiration date. Our advance notice of proposed rulemaking has given

interested persons an opportunity to comment on whether the rules

should be maintained. Almost all of the commenters support a

continuation of the rules, albeit with changes, and virtually none urge

us to end the rules.

The CRS Business

The CRS business in the United States consists of four CRSs, each

of which is affiliated with one or more U.S. airlines. A CRS contains

information on airline services and other travel services sold through

the system and provides that information to system users. A CRS enables

travel agents and other users to find out what airline seats and fares

are available and book a seat on each airline that ``participates'' in

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

Travel agents--the major users of the systems--access a CRS through

computer terminals, which are normally leased from the system.

Consumers can also access a CRS through an on-line computer service or

an Internet website.

The fees paid by airlines and other travel suppliers participating

in a system generate most of the revenues received by each CRS. An

airline participant pays a fee whenever a booking on that airline is

made through the system (most of the systems also charge fees for

related transactions, such as booking changes and cancellations). Other

travel suppliers pay similar fees. Many, but not all, travel agencies

subscribing to a system also pay fees, but such subscriber fees, unlike

airline fees, are generally disciplined by competition.

Regulatory Background

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

when travel agents came to depend on the systems to find out what

services were available and to make bookings. At that time each of the

systems operating in the United States, with one minor exception, was

owned by a single airline, and each owner airline used its system to

prejudice competing airlines and to give consumers biased or incomplete

information in order to obtain more bookings. These practices caused

the agency formerly responsible for the economic regulation of

airlines, the Civil Aeronautics Board (``the Board''), to adopt rules

governing the operations of airline-affiliated CRSs. 49 FR 32540

(August 15, 1984). The Board found that regulations were essential to

keep the systems from causing substantial harm to airline competition

and to prevent consumers from being misled. The Board adopted its

regulations primarily under its authority under section 411 of the

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

unfair methods of competition and unfair and deceptive practices in air

transportation and the sale of airline transportation. The Board's

rules were affirmed on review. United Air Lines v. CAB, 766 F.2d 1107

(7th Cir. 1985).

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

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

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

participant any marketing and booking data from bookings for domestic

travel that it chose to generate from its system. The rules also

prohibited certain contract terms that limited the travel agencies'

ability to switch systems or use more than one system.

We assumed the Board's responsibilities for airline regulation

after the Board's sunset on December 31, 1984. See United Air Lines,

supra, 766 F.2d at 1109. To ensure that the rules would be reexamined,

the Board?s rules contained a sunset date, December 31, 1990. We

reexamined the rules and

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adopted revised rules. 57 FR 43780 (September 22, 1992). To maintain

the Board?s rules in effect pending the completion of that

reexamination, we extended their expiration date. 55 FR 53149 (December

27, 1990); 56 FR 60915 (November 29, 1991); 57 FR 22643 (May 29, 1992).

We readopted the rules with revisions, because we found that the

rules were still necessary: (1) Market forces did not discipline the

price or level of service offered participating airlines by the

systems, (2) CRS owners could use their control of the systems to

prejudice airline competition if there were no rules, and (3) systems

could bias their displays of airline services if there were no rules

requiring unbiased displays. 57 FR at 43783-43787.

Our rules, like the Board's rules, included a sunset date, December

31, 1997. 14 CFR 255.12; 57 FR at 43829-43830 (September 22, 1992). To

begin our current reexamination of the rules, we published an advance

notice of proposed rulemaking asking interested persons to comment on

whether we should readopt the rules and, if so, with what changes. 62

FR 47606 (September 10, 1997). Shortly after issuing that advance

notice, we amended the rules twice to further promote competition. 62

FR 59784 (November 5, 1997); 62 FR 66272 (December 18, 1997). We

adopted those amendments largely because market forces did not appear

to discipline CRS firms insofar as terms for airline participation were

concerned.

Almost all of the parties responding to our advance notice of

proposed rulemaking have urged us to maintain CRS rules, although these

parties also argued that various changes should be made to the rules,

mostly to strengthen them. No party urged us to eliminate the rules,

and few disputed the need for the continued regulation of the CRS

business. Thus we believe that an extension of the current rules

pending completion of the current reexamination of those rules would be

consistent with the positions already taken by the commenters.

Previous Extension of the Rules' Sunset Date

Because we were unable to complete our reexamination of the rules

by the original sunset date, December 31, 1997, we amended the rules to

extend them until March 31, 1999. 62 FR 66272 (December 18, 1997). We

found that the extension was necessary to prevent the potential harm

that would arise if the CRS business were not regulated and that it

would not impose substantial costs on the industry. The only party that

commented on the proposed extension, America West Airlines, supported

it.

Our Proposed Extension of the CRS Rules

We are again proposing to change the expiration date for our CRS

rules to March 31, 2000, so that the rules will remain in effect while

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

effectiveness. The completion of our overall reexamination of our

rules, including the need to give parties an adequate opportunity to

file comments and reply comments in response to our future notice of

proposed rulemaking, will require substantial time and cannot be

finished by the current expiration date, March 31, 1999.

We regret our inability to complete the reexamination of the rules

by our target date, since the Department is fully aware of the

importance of maintaining rules governing CRS operations that reflect

current industry conditions, but the process has taken more time than

anticipated. In addition, the Department has had to address other

airline competition issues that appeared to be more urgent, such as the

development of enforcement guidelines on unfair exclusionary behavior,

63 FR 17919 (April 10, 1998) and the exercise of the Department?s

responsibility to review the competitive effects of the three alliances

between major U.S. airlines that were announced in early 1998.

Furthermore, several recent developments in airline distribution, such

as the growth of Internet services and the cuts in travel agency

commissions made by major airlines for bookings made both by

traditional travel agencies and Internet services, are requiring

additional study by the staff.

We recognize that a number of parties contend that there is a

compelling need for certain additional CRS regulations, such as rules

limiting airline booking fees and giving travel agency subscribers

additional rights to cancel CRS contracts. See 62 FR 60195 (November 7,

1997), requesting comments on a petition filed by America West, and the

Emergency Petition for Rulemaking filed on November 18, 1998, by the

Association of Retail Travel Agents, Docket OST-98-4775. We are

considering whether some issues are of such overriding importance that

they should be addressed before the completion of the overall

reexamination of the rules.

We tentatively conclude that we should amend the rules to change

the sunset date from March 31, 1999, to March 31, 2000. As we stated in

proposing the earlier extension, a temporary extension of the current

rules will preserve the status quo until we determine which rules, if

any, should be adopted. Allowing the current rules to expire could be

disruptive, since the systems, airlines, and travel agencies have been

conducting their operations in the expectation that each system will

comply with the rules. Systems, airlines, and travel agencies,

moreover, would be unreasonably burdened if the rules were allowed to

expire and we later determined that those rules (or similar rules)

should be adopted, since they could have changed their business methods

in the meantime.

The primary basis for extending the rules is the need to protect

airline competition and consumers against unreasonable practices. Our

past examinations of the CRS business and airline marketing caused us

to conclude that CRSs were still essential for the marketing of the

services of almost all airlines. 57 FR 43780, 43783-43784 (September

22, 1992). We found that rules were needed because the airlines

depended on travel agencies as their principal distribution arm,

because travel agencies relied on CRSs, because most travel agency

offices used only one CRS, because creating alternatives for CRSs and

getting travel agencies to use them had been difficult, and because

airlines were unable to cause agencies to use one CRS instead of

another. 57 FR at 43783-43784, 43831. If an airline did not participate

in a system used by a travel agency, that agency was less likely to

book its customers on that airline. Since marginal revenues are

important in the airline industry, an airline could not afford to lose

access to a significant source of revenue. An airline (or other firm)

could not practicably create a system that could compete with the

existing systems. Almost all airlines therefore had to participate in

each CRS, and CRSs did not need to compete for airline participants. 57

FR at 43783-43784.

We doubt that industry developments since our last major rulemaking

have undermined our earlier findings. We believe that most airline

bookings in the United States are still made by travel agencies, that

travel agencies still rely almost entirely on CRSs to determine what

airline services are available and to make bookings, and that few

travel agency offices make extensive use of more than one CRS. For

example, while several low-fare airlines initially operated without

participating in any system, most of those airlines have concluded that

they need to participate in each system. 62 FR at 47608. While consumer

use of the Internet to make bookings is growing dramatically,

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Internet bookings still make up a very small percentage of total

airline bookings. Moreover, Internet sites (except airline sites)

typically use a system as their booking engine.

As noted above, almost all of the parties that responded to the

advance notice of proposed rulemaking stated that the rules remained

necessary, and most urge us to strengthen them further to protect

airlines and travel agencies against potential abuses by system owners.

Thus, while our staff has not completed its current study of the

CRS business and we have not issued a notice of proposed rulemaking

finding that the rules should be readopted, we tentatively believe that

our past findings on the need for CRS rules are still valid, at least

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

date. If we continue the current rules, those regulations will protect

airline competition and consumers against the injuries that would

otherwise occur, given our earlier findings on the market power of the

systems and each airline owner's potential interest in using its

affiliated CRS to prejudice the competitive position of other airlines.

Continuing the rules in effect should not impose significant costs on

the systems and their owners, since they have already adjusted their

operations to comply with the rules and since the rules do not impose

costly burdens of a continuing nature on the systems.

Finally, there is an additional basis for our tentative

determination that we should maintain the current rules in effect

pending our reexamination of the rules. We adopted the rules in part to

carry out our obligation under section 1102(b) of the Federal Aviation

Act, recodified as 49 U.S.C. 40105(b), to act consistently with the

United States' obligations under treaties and bilateral air services

agreements. Many of those bilateral agreements assure the airlines of

each party a fair and equal opportunity to compete. We have held that

the fair and equal opportunity to compete includes, among other things,

a right to have an airline's services fairly displayed in CRSs. Our

rules against display bias and discriminatory treatment help to provide

foreign airlines with a fair and equal opportunity to compete in the

United States. 57 FR at 43791-43792. The European Union, Canada, and

Australia, among other countries, have adopted rules regulating CRS

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

their services in the countries covered by the rules.

Regulatory Process Matters

Regulatory Assessment

This rulemaking is a nonsignificant regulatory action under section

3(f) of Executive Order 12866 and has not been reviewed by the Office

of Management and Budget under that order. Executive Order 12866

requires each executive agency to prepare an assessment of costs and

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

The proposal is also not significant under the regulatory policies and

procedures of the Department of Transportation, 44 FR 11034.

Maintaining the current rules should impose no significant costs on

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

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

complying with those rules on a continuing basis does not impose a

substantial burden on the systems. Maintaining the rules will benefit

participating airlines, since otherwise they would be subjected to

unreasonable terms for participation, and will benefit consumers, who

might otherwise obtain incomplete or inaccurate information on airline

services. The rules also contain provisions that are designed to

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

agency subscribers.

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

tentative regulatory impact statement in our notice of proposed

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

We believe that analysis remains applicable to our proposal to extend

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

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

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

This rule does not impose unfunded mandates or requirements that

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

Small Business Impact

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

enacted by Congress to ensure that small entities are not unnecessarily

and disproportionately burdened by government regulations. The act

requires agencies to review proposed regulations that may have a

significant economic impact on a substantial number of small entities.

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

foreign airlines and smaller travel agencies. Our notice of proposed

rulemaking sets forth the reasons for our proposed extension of the

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

proposed rule.

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

not modify the existing regulation of small businesses. Our final rule

in our last major CRS rulemaking contained a regulatory flexibility

analysis on the impact of the rules. As a result of that analysis, we

determined that this regulation did not have a significant economic

impact on a substantial number of small entities. Our analysis appears

to be valid for our proposed extension of the rules' termination date.

Accordingly, we adopt that analysis as our tentative regulatory

flexibility statement and will consider any comments filed on that

analysis in connection with this proposal.

The continuation of our existing CRS rules will primarily affect

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

the extent that airlines can operate more efficiently and reduce their

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

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

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

Continuing the rules will protect smaller non-owner airlines from

certain potential system practices that could injure their ability to

operate profitably and compete successfully. No smaller airline has a

CRS ownership interest. Market forces do not significantly influence

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

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

the competitive position of other airlines. The rules provide important

protection to smaller airlines. For example, by prohibiting systems

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

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

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

rules also prohibit charging participating airlines discriminatory

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

smaller airlines.

The CRS rules affect the operations of smaller travel agencies,

primarily by prohibiting certain CRS practices that could unreasonably

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

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

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

party hardware and software, and prohibit certain types of contract

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

agency's ability to use

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multiple systems. By prohibiting display bias based on carrier

identity, the rules also enable travel agencies to obtain more useful

displays of airline services.

Our proposed rule contains no direct reporting, recordkeeping, or

other compliance requirements that would affect small entities. There

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

our proposed rules.

Interested persons may address our tentative conclusions under the

Regulatory Flexibility Act in their comments submitted in response to

this notice of proposed rulemaking.

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

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

significant economic impact on a substantial number of small entities.

Paperwork Reduction Act

This proposal contains no collection-of-information requirements

subject to the Paperwork Reduction Act, Pub. L. 96-511, 44 U.S.C.

Chapter 35.

Federalism Implications

The rule proposed by this notice will have no substantial direct

effects on the States, on the relationship between the national

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

responsibilities among the various levels of government. Therefore, in

accordance with Executive Order 12812, we have determined that the

proposed rule does not have sufficient federalism implications to

warrant preparation of a Federalism Assessment.

List of Subjects for 14 CFR part 255

Air carriers, Antitrust, Consumer protection, Reporting and

recordkeeping requirements, Travel agents.

Accordingly, the Department of Transportation proposes to amend 14

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

PART 255--[AMENDED]

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

follows:

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

2. Section 255.12 is revised to read as follows:

Sec. 255.12 Termination.

Unless extended, these rules shall terminate on March 31, 2000.

Issued in Washington, DC on February 22, 1999, under authority

delegated by 49 CFR 1.56a (h) 2.

Charles A. Hunnicutt,

Assistant Secretary for Aviation and International Affairs.

[FR Doc. 99-4780 Filed 2-25-99; 8:45 am]

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