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entitled 'Airline Ticketing: Impact of Changes in the Airline Ticket
Distribution Industry' which was released on July 31, 2003.
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Report to Congressional Requesters:
July 2003:
Airline Ticketing:
Impact of Changes in the Airline Ticket Distribution Industry:
GAO-03-749:
GAO Highlights:
Highlights of GAO-03-749, a report to congressional requesters
Why GAO Did This Study:
In 2002, when major U.S. airlines posted net operating losses of
almost $10 billion, they paid over $7 billion to distribute tickets to
consumers. Of these total distribution expenses, airlines paid
hundreds of millions of dollars in booking fees to global distribution
systems—the companies who package airline flight schedule and fare
information so that travel agents can query it to “book” (i.e.,
reserve and purchase) flights for consumers. Each time a consumer
purchases an airline ticket through a travel agent, the global
distribution system used by the travel agent charges the airline a set
booking fee. Concerns have been raised that the global distribution
systems may exercise market power over the airlines because most
carriers are still largely dependent on each of the global
distribution systems for distributing tickets to different travel
agents and consumers and therefore must subscribe and pay fees to
each. Market power would allow global distribution systems to charge
high, noncompetitive fees to airlines, costs that may be passed on to
consumers.
GAO was asked to examine changes in the airline ticket distribution
industry since the late 1990s and the effects on airlines, the impact
of these changes on travel agents and consumers, and what the
relationship between global distribution systems’ booking fees and
related costs suggest about the use of market power.
What GAO Found:
Since the mid-1990s, two major changes occurred in the airline ticket
distribution industry, and these have produced cost savings for some
major U.S. airlines. First, airlines developed less expensive Internet
ticketing sites that bypass global distribution systems and their fees
and encouraged passengers to book via Internet sites. Between 1999 and
2002, on average, the percentage of tickets booked on-line, including
airline-owned Websites and on-line travel agencies, grew from 7
percent to 30 percent. Second, in a related effort to trim costs,
airlines cut the commissions they traditionally paid to travel
agencies. However, these changes have not eliminated airline
dependence on global distribution systems.
These changes have had mixed effects on travel agents and consumers.
Very large travel agencies (those with more than $50 million in annual
air travel sales revenue) appear to have benefited from volume-based
incentive payments from airlines and global distribution systems,
while smaller travel agencies have closed or lost business, especially
to on-line travel Websites. Consumers who use the Internet have
benefited from lower internet-only fares. Travelers who do not buy
airline tickets on line may be at a disadvantage in not having access
to these fares.
Because we lacked access to proprietary company information, we could
not determine the precise relationship between global distribution
system booking fees and related costs, and thus could reach no
conclusions about potential exercise of market power by global
distribution systems in the airline ticket distribution industry.
Since 1996, booking fees and some costs related to the booking
function—computing costs and travel agent incentive payments—both
increased. However, we could not obtain data on all expenses related
to the booking function, and thus could not accurately compare these
costs to booking fees. DOT provided us with technical comments, which
we incorporated as appropriate.
www.gao.gov/cgi-bin/getrpt?GAO-03-749.
To view the full product, including the scope and methodology, click
on the link above. For more information, contact JayEtta Z. Hecker,
202-512-2834, HeckerJ@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Major Changes Occurred in the Use of the Internet and Travel Agent
Compensation in the Airline Ticket Distribution Industry:
Changes in the Airline Ticket Distribution Industry Appear to Have
Benefited Very Large Travel Agencies and Consumers Who Use the
Internet:
Sufficient Data Were Not Available to Determine the Relationship
between Booking Fees and Costs and the Presence and Use of Market
Power:
Concluding Observations:
Agency Comments:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Computing Cost Trends at Global Distribution Systems:
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Acknowledgments:
Figures Figures:
Figure 1: Summary of Historic Airline Ticket Distribution Relationships
Prior to CRS Rules:
Figure 2: CRS Relationships with Travel Agencies and Airlines:
Figure 3: Summary of Historic Airline Ticket Distribution Relationships
under the CRS Rules:
Figure 4: U.S. Domestic Booking Share of Global Distribution Systems
Bookings, 2002:
Figure 5: Average Airline Booking Costs Per Distribution Method, 1999-
2002:
Figure 6: Average Airline Bookings Per Distribution Method, 1999-2002:
Figure 7: Number of Airline Tickets Processed through and outside GDSs,
1999-2002:
Figure 8: Average Annual Airline Total Distribution Costs, 1999-2002:
Figure 9: Average Payments to U.S. Travel Agents by Each GDS, 1995-
2002:
Figure 10: Summary of Payment and Fee Flows in the Current Distribution
of Airline Tickets:
Figure 11: The Number of Travel Agencies, by Amount of Annual Revenue
and Volume of Air Travel Sales:
Abbreviations:
CRS: Computer Reservation System:
DOJ: Department of Justice:
DOT: Department of Transportation:
GAO: General Accounting Office:
GDS: Global Distribution System:
NCECIC: National Commission to Ensure Consumer Information and Choice
in the Airline Industry:
Letter July 31, 2003:
The Honorable Mike DeWine
Chairman,
Subcommittee on Antitrust, Competition Policy and Consumer Rights
Committee on the Judiciary
United States Senate:
The Honorable Herbert Kohl
Ranking Minority Member,
Subcommittee on Antitrust, Competition Policy and Consumer Rights
Committee on the Judiciary
United States Senate:
In 2002, when major U.S. airlines posted net operating losses of almost
$10 billion, they paid approximately $7.3 billion to distribute tickets
to consumers. Of these total distribution expenses, airlines paid
hundreds of millions of dollars in booking fees to global distribution
systems (GDS)--the companies whose computer systems display airline
flight schedule and fare information so that travel agents can query it
to "book" (i.e., reserve and purchase) flights for consumers. Although
distribution costs represent relatively small amounts of an airline's
total costs (labor and fuel represent nearly half an airline's
expenses), ensuring a competitive distribution system is important to
the industry because it represents the link between airlines and the
traveling public. In the United States, three domestic global
distribution systems dominate the industry. Traditionally, each time a
consumer purchases an airline ticket through a travel agent, the global
distribution system used by the travel agent charges the airline a set
booking fee. Concerns have been raised that the global distribution
systems may exercise market power over the airlines because most major
carriers are still largely dependent on each of the global distribution
systems for distributing tickets to different travel agencies and
consumers. Market power, which can arise where competition is lacking,
may result in high, noncompetitive fees charged for services or goods.
In this case, market power may be indicated by booking fees that bear
little relation to booking costs.
The precursors to global distribution systems, called computer
reservation systems (CRS), were owned by the airlines. Since 1984,
rules enforced by the Department of Transportation (DOT) have regulated
the conduct of these systems to prevent airline owners of computer
reservation systems from using their influence to benefit themselves by
reducing competition from other airlines, which could ultimately harm
consumers. DOT regulations, commonly referred to as the "CRS rules,"
were developed to prevent airlines that owned a computer reservation
system from biasing the information on flights and fares that consumers
received in order to impede competition. Effectively, the rules, which
apply to computer reservation systems and global distribution systems,
ended bias in the computer screen display of information that was used
by travel agents to book tickets and now require major U.S. airlines to
"participate" equally in each global distribution system. They also
require computer reservation systems to charge airlines similar booking
fees for similar levels of service, which limited airlines' ability to
negotiate over booking fees. As of July 2003, when most airlines have
sold off their shares in global distribution systems and the global
distribution systems have become independent entities, DOT was
reviewing the CRS Rules to determine if and how they should be revised.
Many parties provided comments with differing opinions to DOT.
Department of Justice officials stated that the global distribution
systems have had and continue to have market power over the airlines.
In light of the airlines' dependence on the global distribution systems
during this time of unprecedented financial losses, and in the context
of the ongoing debate on the CRS rules, you asked us to examine issues
related to the airline ticket distribution industry. As agreed with
your office, this report focuses on the following questions:
* What have been major changes in the airline ticket distribution
industry since the late 1990s, and how did these changes affect
airlines?
* How have these changes in the airline ticket distribution industry
affected travel agents and consumers?
* What does the relationship between global distribution systems'
booking fees and booking-related costs suggest about the presence and
use of market power?
To determine how the airline ticket distribution industry has changed
and the effects on airlines since the late 1990s, we analyzed
aggregated proprietary industry booking trend and cost data; examined
DOT documents; and interviewed officials with the global distribution
systems, several major airlines, and other industry experts. To
describe how changes in the airline ticket distribution industry have
affected travel agents and consumers, we analyzed travel agent and
consumer ticketing fee data; reviewed major airline and various travel
agency consumer fee policies; and interviewed travel agents, industry
group representatives, and DOT officials. To determine what the
relationship between global distribution systems' booking fees and
related costs indicated about the presence and use of market power, we
analyzed and compared data on global distribution system operating cost
data, certain booking-related costs, and booking fees. To protect the
confidential proprietary nature of individual global distribution
system and airline information, we reported all costs and fees in terms
of averages calculated from the companies that provided data. We
limited the scope of this review to the three major U.S. global
distribution systems--Galileo, Sabre, and Worldspan. These three
systems handle 92 percent of the U.S. bookings. We were limited in our
review because we did not have full access to proprietary airline,
global distribution system, and travel agent data. However, we reviewed
the comments submitted to DOT as part of its CRS rulemaking, including
those of the Department of Justice's (DOJ) Antitrust Division --
government antitrust experts who conducted a market structure analysis
of the ticket distribution system. We also discussed those comments
with officials from the Antitrust Division. Because of a lack of
historical data, we limited our review to the 4 years covering the
period 1999 through 2002. Appendix I contains additional information on
the objectives, scope, and methodology of this review.
Results in Brief:
Two major changes have occurred in the airline ticket distribution
industry as airlines began to sell their shares in the global
distribution systems in the mid-1990s, and these changes have helped
airlines to cut distribution costs.
* First, airlines have created and provided incentives to expand the
use of various types of Internet-based applications that can bypass
global distribution systems and their associated booking fees. These
include airline Websites (e.g., www.continental.com), which bypass
global distribution systems by using the airlines' own internal
reservation systems, and Orbitz, a travel technology company developed
by a consortium of large U.S. airlines that has recently developed
technology that allows it to book tickets without using a global
distribution system. Other Internet-based travel agencies (e.g.,
Expedia, Priceline, or Travelocity--a subsidiary of one of the global
distribution systems) use global distribution systems to book tickets
but nevertheless cost airlines less than traditional travel agencies.
Through various incentives, airlines have encouraged some passengers to
book a growing portion of tickets on less costly Internet-based booking
sites.
* Second, in another effort to cut distribution costs, airlines cut
their sales commissions to travel agents. In response to overtures by
the large travel agencies, on whom global distribution systems depend
to reach large numbers of consumers, global distribution systems
subsequently increased sales incentive payments to travel agencies. At
the same time, both large and small travel agencies began charging
consumers ticketing fees. Airlines, however, continue to provide
commission payments, particularly to the largest travel agencies--both
traditional and Internet-based.
These changes have helped major airlines to reduce their total
distribution costs by 25.8 percent, from 1999 to 2002, from an average
of $732.9 million to $543.6 million, or 43.6 percent on a per booking
basis. However, airlines continue to depend on global distribution
systems to reach consumers, because over 60 percent of bookings
(including the majority of all traditional travel agency bookings and
some Internet-based bookings), and nearly all the relatively high yield
business traffic, continue to be processed by global distribution
systems. Furthermore, airlines continue to need to subscribe to each of
the global distribution systems, and no new entry has occurred since
the enactment of the rules in the 1980s to reduce the market power of
each global distribution system.
These changes in the airline ticket distribution industry--the growing
significance of the Internet and shifts in the payments to travel
agents--appear to have benefited very large travel agencies (those with
more than $50 million in annual air travel sales revenue) and consumers
who use the Internet. Very large travel agencies--whose total annual
sales have almost doubled since 1995--appear to have benefited from a
combination of increasing global distribution system incentive
payments, some continued airline sales commission payments, and
customer service fees. In contrast, total annual sales at small travel
agencies (those with less than $2 million in annual air travel sales
revenue) decreased by 32 percent since 1995, driven in large part by a
shift toward on-line bookings by leisure consumers. Consumers who use
the Internet may benefit from being able to independently access and
compare airline ticket pricing and scheduling information, as well as
from being able to access special low fares available only on the
Internet. Consumers who do not use the Internet may be at a
disadvantage in not having access to Internet-only fares and in having
to pay relatively higher travel agent service fees. But they may have
more flexibility regarding schedule changes, and they may benefit from
travel agents' industry expertise.
Because we lacked access to proprietary company information, we could
not determine whether the relationship between global distribution
system booking fees and related costs suggest that global distribution
systems exert market power in the airline ticket distribution industry.
In response to your request, we found that global distribution system
booking fees rose by nearly 31 percent between 1996 and 2001. Of total
global distribution system costs, two costs available to us that relate
specifically to the booking function--computing costs (i.e., total data
center operating costs) and travel agency incentive payments--have
increased during the same time period. The precise rate of increase for
computing costs is difficult to determine because global distribution
systems do not report the data in the same way, but the incentive
payments to travel agencies by global distribution systems is
measurable and it has increased by an average of over 500 percent.
However, we could not obtain data on all expenses related to the
booking function (e.g., software development costs), and thus could not
accurately compare total booking costs to booking fees. Consequently,
we are not able to independently assess whether the booking fees are
indicative of the existence and use of market power by global
distribution systems over airlines. On June 9, 2003, the Department of
Justice, based on its antitrust analysis of the industry, offered
conclusions to DOT about the existence of market power in the industry
as part of its ongoing review of the CRS rules. Justice concluded that
despite recent growth of Internet ticket distribution, the GDSs
continue to have market power over the airlines and the CRS rules do
not prevent them from charging airlines fees above competitive levels.
DOT and DOJ provided us with technical comments, which we incorporated
as appropriate.
Background:
An airline "booking" occurs when a passenger reserves and purchases a
seat for a trip. In 2002 in the United States, an estimated 255 million
passengers flew more than 611 million flight segments (e.g., a traveler
who flew between Baltimore, Maryland, and Portland, Oregon, who
connected over Chicago both outbound and inbound represents a single
passenger that flew four flight segments). Information included in the
booking consists of the traveler's name; an address; price and billing
information; the full itinerary origins, destinations, and possible
connecting airport with flight numbers and times; and perhaps other
information as well, such as loyalty program (i.e., frequent flyer)
information, including program status or seat and meal preferences.
When a booking is entered in a computer system by a traditional travel
agent, it is created in a GDS. The GDS-generated booking is then sent
to the airline's internal reservation system.
The GDS charges an airline a "booking fee" based on the total number of
flight segments in the traveler's itinerary.[Footnote 1] For example,
if a booking fee is $4 per segment and a passenger reserves and
purchases an itinerary that consists of four flight segments (an
outbound flight that connects over an airline's hub to the ultimate
destination and two similar return flights), the airline will be
charged approximately $16 in booking fees. Changes made to the booking
may cost extra for the airline. For example, if a passenger changes the
day of his return flight, the airline may be refunded all but a
fraction of its booking fees for those segments, and charged again for
the booking of the new segments.[Footnote 2]
Sometimes, a passenger may book an itinerary with an airline through a
traditional travel agent, but may choose not to pay for the ticket
pending a final decision on the trip. Such cases are called
"speculative" or "passive bookings." In an effort to maintain the
booking as a service to the potential customer, a travel agent may
continue to cancel and re-book the itinerary.[Footnote 3] Each
cancellation and re-booking costs the airline (sometimes cancellations
and re-bookings result in "churn"). The final cost to the airline is
called a "net booking fee."[Footnote 4]
The precursors to GDSs, CRSs, first automated the selling of airline
seats and the tracking of flight and schedule information for use by
airline employees in the late 1960s. Beginning in the mid-1970s, these
systems were offered to travel agencies. These CRSs were owned by
(i.e., vertically integrated with) the airlines. American Airlines and
IBM jointly developed a system called Sabre (Semi-Automatic Business
Research Environment) to automate American's bookings. United Airlines
and TWA followed with:
Apollo and PARS, respectively.[Footnote 5] Delta and Eastern followed
with DATAS II and System One, respectively. These CRSs replaced manual
booking systems, and thus allowed the airlines to quickly and reliably
process a large number of transactions. By extending use of the systems
to travel agencies, airlines were able to reduce expensive telephone
calls from travel agencies to airline reservation offices and were able
to offer real time access to fares and inventory to its agency
partners, improving the marketability of their services.
Under airline ownership, certain CRS practices created competitive
disadvantages for some carriers and often did not expose consumers to
all available carrier options and prices. Before the industry was
deregulated in 1978, interline travel--a practice in which passengers
fly on more than one airline to reach a destination--was
common.[Footnote 6] To serve passenger needs, travel agencies also
needed CRSs to provide information and booking capabilities on all
airlines. However, CRSs did not treat every airline equally.
* An airline with its own CRS ("owner airline") did not pay fees for
booking passengers through that CRS, and it displayed schedule
information in a way that favored its own flights at the expense of
these other airlines--even if other airlines offered more direct
service between two cities at less cost to the traveler. Typically, an
owner airline would market its CRS to travel agencies in cities where
it flew a significant number of flights.
* In the early 1980s, to expand CRS-travel agent market share in cities
where they provided limited air service, owner-airlines developed "co-
host" programs with other airlines that had a significant presence in
targeted cities. In exchange for discounts on fees for bookings made on
that CRS and for more prominent display of its flight information on
the CRS computer screen, the co-host airline would market the owner
airline's CRS to its local travel agencies.
* Other airlines that were not co-hosts ("subscriber airlines") would
pay higher fees for any booking made on that CRS and continued to be
disadvantaged by a bias in the display of their available flights.
In essence, airline owners of CRSs used them to gain an unfair
advantage in the marketplace, and struck deals with certain airlines
giving them competitive advantages over other airlines. Figure 1
illustrates the typical financial transactions that took place among
airlines, CRSs, travel agencies, and consumers prior to the enactment
of the CRS rules.
Figure 1: Summary of Historic Airline Ticket Distribution Relationships
Prior to the CRS Rules:
[See PDF for image]
[End of figure]
Owner airlines had an incentive to service as many travel agencies as
possible in order to gain greater booking share. This, in part, is
because CRSs benefit from economies of scale: CRS profits increase as
passenger traffic and bookings increase, and both of those depend on
access to more travel agents. While CRS market positions tend to be
strongest in specific geographic areas consistent with their airline
owners' markets (and any markets they were able to negotiate from
nonowner, or co-host, airlines), each U.S. GDS has developed a
national, and subsequently, global footprint. In addition, owner
airlines also recognized that travel agents' familiarity and comfort
with their CRSs produced something of a halo effect that gave owner
airlines a greater share of bookings. While airlines paid commissions
to travel agencies based on the value of the purchased tickets,
carriers also encouraged travel agents to make additional passenger
bookings by paying commission "overrides" to travel agencies for
surpassing set sales goals.[Footnote 7]
Though three domestic CRSs existed, an individual travel agent office
typically relied on only one system. This was due in part to the
multiyear, often exclusive, contracts under which they historically
operated with CRSs. Using more than one system was also inefficient
from the standpoint of most travel agents.
These structural relationships produced two major effects:
* Because airlines--dependent on the systems--paid the booking fees,
rather than the other users of the systems (travel agents and,
ultimately, consumers), there was no competitive pressure constraining
CRS booking costs.
* Airlines had little choice except to participate in each CRS, and
CRSs did not have to compete for airline participants. As DOJ stated in
comments submitted to DOT in 1989, each CRS constituted a separate
market for air carriers because of the near-exclusive relationship with
separate groups of travel agencies, and each is a monopolist with
market power over carriers that want to sell tickets in areas where the
CRS has a significant number of travel agencies. Thus, unless an
airline was willing to forego access to those travel agencies and the
consumers they served, it needed to participate in every CRS.
To illustrate, consider Sabre's relationship with American Airlines,
and Galileo's relationship with United Airlines. Because American has
significant operations in the Dallas/Ft. Worth area, many travel
agencies in Texas historically subscribed to Sabre, while United has
similarly significant operations in Chicago and many travel agencies
there likely were Galileo users. However, because American wanted to be
available to travel agencies located in United's traditional territory
that subscribe to Galileo, it had to use Galileo as a CRS, as with
other GDSs. Similarly, United wanted to be available to travel agencies
in what was historically dominated by American in Texas and therefore
had to be available on Sabre. Figure 2 illustrates the exclusive
relationships that CRSs had with travel agencies, and the airlines'
dependence on each CRS to reach the most number of travel agencies.
Figure 2: CRS Relationships with Travel Agencies and Airlines:
[See PDF for image]
[End of figure]
Prior to the enactment of the CRS rules, consumers only paid airfare,
regardless of the complexity of the itinerary. Presumably, those
airfares reflected the airlines' total costs, including overhead
expenses associated with ticket distribution.
In 1984, the Civil Aeronautics Board (CAB), in one of its last official
acts, adopted CRS rules to protect consumers and help ensure fair
competition among airlines. The goal of these rules was to dissipate or
constrain the power of the airlines and their CRSs to manipulate the
competition for passenger traffic. DOT inherited the CAB's duties, and
in 1992 found that the rules were still necessary. DOT concluded that
without them, CRS owners could use their control of the systems to
prejudice airline:
competition, and the systems could bias their displays of airline
services.[Footnote 8] Three main requirements in the CRS rules attempt
to ensure that each owner airline and its CRS would treat other
airlines equitably:
* Screens displaying flight information are not to favor one airline
over another ("unbiased screens");
* For the same level of service, prices for bookings must be the same
for all airlines, including owner airlines, eliminating differences
such as co-host or subscriber airlines ("price nondiscrimination");
and:
* The "mandatory participation" rule requires airlines with a 5 percent
ownership interest or more in a CRS ("owner airlines") to participate
in competing systems at the same level at which it participates in its
own system.[Footnote 9]
Figure 3 illustrates how the airline ticket distribution industry
changed after the implementation of the CRS rules.
Figure 3: Summary of Historic Airline Ticket Distribution Relationships
under the CRS Rules:
[See PDF for image]
[End of figure]
DOT's 1992 revisions to the CRS rules included a sunset date of
December 31, 1997, which DOT subsequently extended to January 2004. DOT
is currently reviewing additional possible revisions to the CRS rules.
As CRSs evolved as corporate entities, they added other lines of
business to the original airline ticket booking function. They
currently book not only airline reservations, but also hotel, rental
car, train, tour, and cruise reservations. CRSs also sell other
professional services to airlines, such as software and Information
Technology services for personnel and aircraft scheduling, and for
baggage handling. CRSs provide outsourced internal reservation systems
for airlines, as well. In the expansion of their activities they became
known as GDSs, reflective of the increasingly international and diverse
nature of travel they encompassed.
Since the mid-1990s, U.S. airline owners have sold their shares in
their GDS businesses. Three domestic GDSs have evolved to dominate the
U.S. travel agent market: Sabre, Galileo, and Worldspan. Sabre became a
separate legal entity of AMR Corp. (American Airlines' parent company)
in July of 1996, followed by an initial public offering of Sabre in
October 1996; it has since been fully divested by AMR Corp. In 1997,
Galileo International became a publicly traded company, and in 2001
became a subsidiary of Cendant Corp. Worldspan was sold in June 2003 to
private investors. These changes ended the vertical integration of
these airlines and GDSs. Figure 4 illustrates the GDS shares for all
U.S. domestic bookings that relied on a GDS in 2002.[Footnote 10]
Figure 4: U.S. Domestic Booking Share of Global Distribution Systems
Bookings, 2002:
[See PDF for image]
Note: All figures are approximations.
[A] "Other" refers to all internationally based GDSs, such as Amadeus,
Abacus, Axess, Infini, and Topas. Amadeus' booking share is about 8
percent, while the remaining international GDSs comprise less than 1
percent of total U.S. bookings.
[End of figure]
Major Changes Occurred in the Use of the Internet and Travel Agent
Compensation in the Airline Ticket Distribution Industry:
Since the airlines began selling their shares in the GDSs in the mid-
1990s, the ticket distribution system has undergone two major changes.
These changes have helped airlines, faced with generally high operating
expenses, cut distribution costs. First, airlines and others have
increasingly sold and processed tickets through Internet-based
applications (e.g., airline Websites, on-line travel sites), some of
which bypass GDSs. These distribution methods are less expensive to the
airlines than traditional travel agencies. Second, airlines have
reduced commission payments to travel agents. At the same time, in
response to overtures by large travel agencies, GDSs partially offset
that reduction in airline commission payments by significantly
increasing incentive payments to travel agents, on whom they depend to
reach a large number of consumers.[Footnote 11] In part, these changes
have enabled major airlines to reduce their total distribution costs by
25.8 percent from an average $732.9 million in 1999 to $543.6 million
in 2002, or 43.6 percent on a per booking basis.[Footnote 12] However,
these changes have not eliminated the airlines' dependence on the GDSs
for the selling of air tickets. Airlines continue to need to subscribe
to each GDS to reach the universe of travel agents and potential
consumers.
Internet Sites That Cost Airlines Less Are Increasingly Used to Book
Tickets, Some without the Use of Global Distribution Systems:
Airlines have developed new Internet-based ticket booking processes
that bypass GDSs and their associated booking fees. Others have
developed Internet-based travel agencies that use GDSs to book tickets
but whose bookings still cost airlines less than tickets booked through
traditional travel agents. An increasing percentage of tickets are
booked through the Internet, and an increasing percentage of bookings
are made without the use of GDSs.
Airlines are Using New Processes to Bypass the GDSs and their Fees:
The airlines have used the Internet to change the way bookings are
processed by creating ways to work around the GDSs and their booking
fees. Airlines have developed two basic ways to use the Internet to
avoid the cost burden associated with standard GDS booking fees.
First, airlines have developed their own Websites (e.g.,
www.continental.com) that allow consumers to reserve and book seats
directly with airlines. Bookings made through these sites do not use a
GDS booking function, and therefore do not incur booking fees. Rather,
airlines maintain pricing, flight, and seat availability in their own
internal reservation systems. For example, a booking made through
Continental's Website is processed by a data vendor that is not a GDS.
Bookings made when a consumer telephones an airline's "call center"
(e.g., via a toll-free number such as Continental's 1-800-523-FARE) are
also routed through that same vendor.[Footnote 13] But, unlike call
centers that rely on personnel to process bookings, airline proprietary
on-line site bookings are processed electronically and therefore incur
lower labor costs.
Second, five major U.S. airlines collectively underwrote the
development of a travel technology company called Orbitz. Because
consumers can go to the Orbitz Website (www.orbitz.com) to query fare
and schedule information for most major airlines as well as to book and
purchase tickets, it performs similar functions as a travel agent.
Orbitz now has two methods by which it books tickets, one of which uses
a GDS and one of which bypasses GDSs and their associated booking fees.
Originally, and in many cases still, Orbitz uses the Worldspan GDS to
obtain airline availability data and to place the booking, and airlines
pay booking fees to Worldspan for tickets booked in this manner. Orbitz
receives volume-based rebates from Worldspan, flat transaction fees
(approximately $5.34 charter associate fee or $10 per ticket from
noncharter associates) from airlines, and it charges fees to consumers
($6 per ticket).
Through Orbitz, however, some airlines can generate significant cost
savings relative to traditional and on-line travel agent booking
methods.[Footnote 14] "Charter airlines" have negotiated special
arrangements with Orbitz, under which they receive rebates on a portion
of the booking fee.[Footnote 15] According to Orbitz officials, these
rebates generally save charter airlines about $3 of the approximate $16
paid in booking fees per ticket compared to bookings made through
traditional travel agencies. Airlines that are not charter members of
Orbitz pay the full Worldspan booking fee. These arrangements contrast
with the CRS rules requirement of price nondiscrimination and mandatory
participation, which have limited carriers' ability to negotiate
reduced booking fees with GDSs. Airlines are allowed to negotiate
special arrangements with Orbitz because DOT has not defined Orbitz as
a CRS, and thus did not extend the application of the CRS rules to
cover Orbitz.
Recently, Orbitz, with airline cooperation, has also developed
technology that enables it to book tickets by directly accessing each
participating airlines' internal reservation system, bypassing the GDS
and its booking fees. This technology, which (unlike the technology
used to access an airline's internal reservation system) can query and
get information from multiple airlines, functions similarly to the
technology used by GDSs. According to Orbitz officials, its new
technology, which is called "Supplier Link," could result in
participating airlines saving about $12 of the typical
$16 paid in booking fees per ticket.[Footnote 16] Since its
implementation in 2002, 11 major airlines have signed up to participate
in Supplier Link. As of July 2003, four airlines--America West,
American, Continental, and Northwest--have begun to use the technology.
Currently, these airlines process over 70 percent of their Orbitz
bookings through Supplier Link. These airlines' remaining Orbitz
bookings need to go through the Worldspan GDS because of their
complexity. Complex bookings that cannot at this time be handled by
Supplier Link might include bookings with itineraries that involve
trips flown by interlining airlines (i.e., two or more airlines that
collectively transport a passenger from origin to destination) or
international destinations.
In light of its new Supplier Link technology, Orbitz may be the first
entity in the U.S. to perform functions similar to GDSs since
finalization of the CRS rules in 1984. Furthermore, some believe that
Orbitz represents a new entrant into the GDS market.[Footnote 17]
However, Orbitz is a creation of the major airlines--as were the CRSs-
-and questions have been raised about whether Orbitz charter member
airlines could use Orbitz to gain a competitive advantage over other
airlines. DOT and DOJ have been involved in examining this issue. In
its June 27, 2002, report to Congress, DOT found that Orbitz is not
anticompetitive and more specifically, has shown no evidence of biased
presentation of airline services. However, DOJ has not yet commented on
the topic. As of July 2003, DOJ was continuing its review of Orbitz.
Internet-Based Travel Agencies That Use GDSs Also Book Tickets at a
Lesser Cost to Airlines than Traditional Travel Agents:
Other participants in the airline ticket distribution industry have
also developed Internet sites that, like traditional travel agencies,
book tickets through a GDS. Sabre entered the Internet market by
creating Travelocity, which is a web-based booking engine that uses the
Sabre GDS to query and book tickets. In general, Travelocity functions
as an on-line travel agent: airlines make payments to Travelocity as
well as pay booking fees to Sabre. As with other travel agencies,
consumers pay it ticketing fees. For accounting purposes, Sabre pays
Travelocity incentive payments, but the payments stay within the parent
company.
Independent on-line travel sites have also emerged to sell airline
tickets to consumers. One notable example is Expedia.com. In general,
the relationships and flow of payments among Expedia.com, its GDS
(Worldspan), airlines, and consumers resemble those of traditional
travel agencies. Major independent on-line travel agencies continue to
subscribe to a GDS and pay a subscription fee if they do not meet the
high volume requirements for fee waivers. In turn, the GDS pays the on-
line agency incentive payments for bookings, while charging airlines
booking fees. In addition, some airlines make payments to these
independent on-line travel agencies. Consumers also typically pay a $5-
$10 fee to the new on-line sites for each ticket. In Expedia's case,
since it is Worldspan's largest subscriber, it does not pay GDS
subscription fees. Furthermore, since it books in such high volumes, it
receives negotiated payments from its GDS and certain airlines.
Other independent on-line travel agencies, sometimes referred to as
"opaque" travel distributors, have also entered the airline ticket
distribution industry, typically offering low-cost tickets to consumers
in exchange for less flexibility or choice. Opaque travel distributors
book through GDSs to sell what the industry refers to as "distressed
inventory." Analogous to a deep discount store or an outlet store,
opaque distributors, such as Priceline.com, take bids from consumers
for airline tickets. However, the consumer will know neither the
carrier nor the exact departure times for his itinerary until after an
airline accepts the consumer's bid, and the ticket is bought and paid
for.
Despite the fact that airlines pay commissions and overrides as well as
GDS fees for these on-line travel agency bookings, these bookings cost
airlines less than bookings made through traditional travel agencies.
This is in part because on-line consumers generally must purchase the
ticket at the time of reservation, reducing "churn" that airlines claim
is costly, by not allowing repeated bookings, cancellations, and
rebookings prior to purchase. A traditional travel agent has the
capacity to make changes to a consumer's itinerary; however, for any
changes to a reservation, additional GDS processing is required. GDSs
charge the airlines a small amount for each cancellation and rebooking,
so each such change adds to total airline distribution costs.
In 1999, on average, each ticket booked via a traditional travel agent
cost an airline a total of $45.93, compared to $23.40 and $25.12 for
airline Website and on-line travel agency sites, respectively.[Footnote
18] Although costs associated with each of these distribution methods
have decreased, bookings made through traditional travel agencies
continue to cost much more than those made on line. From 1999 through
2002, the average cost to an airline for a booking made through a
traditional travel agency decreased by 33 percent to $30.66, while the
average cost to an airline for a booking on its own Website decreased
by 50 percent to $11.75. Over the same period, the average cost to
airlines for bookings made through on-line travel agencies decreased 23
percent to $19.43. Figure 5 illustrates the change in average airline
distribution costs by the different distribution methods.
Figure 5: Average Airline Booking Costs Per Distribution Method, 1999-
2002:
[See PDF for image]
[End of figure]
With Airline Encouragement, the Percentage of Airline Tickets Booked
through the Internet Has Increased, as Has the Percentage of Bookings
Processed without GDSs:
Airlines have taken steps to encourage travelers to book tickets
through less expensive, on-line distribution methods. Some airlines
have instituted a fee for travelers who receive a paper ticket through
a traditional travel agent. For example, Northwest charges a $50 fee
for a paper ticket as opposed to electronic tickets. Airlines may also
reward on-line bookers with loyalty incentives (i.e., frequent flyer
program bonuses). For instance, travelers booking on line with American
may earn up to 1,000 AAdvantage® Bonus miles. Airlines--both directly
and through on-line travel agencies--have also offered special
"Webfares" and last minute Internet-only deals to encourage consumers
to book tickets on the Internet.
While airlines continue to sell a significant proportion of their
tickets through traditional travel agencies, the number of tickets sold
through on-line distribution methods, including airline Websites and
on-line travel agencies, has increased rapidly since the late 1990s.
Between 1999 and 2002, on average, the percentage of tickets that
consumers booked through traditional travel agents fell from 67 percent
to 46 percent. By comparison, the percentage of tickets booked on line
(using both on-line travel agencies and airlines' own Websites)
increased from 7 percent to 30 percent from 1999 to 2002. Throughout
that same time period, airlines sold the remainder (roughly 25 percent)
directly to consumers via their call centers (1-800 numbers). Figure 6
illustrates the change in distribution methods between 1999 and 2002.
Figure 6: Average Airline Bookings Per Distribution Method, 1999-2002:
[See PDF for image]
[End of figure]
While business travelers generally continue to rely on traditional
travel agents, trends suggest that leisure travelers are adopting the
Internet as an alternative to traditional travel agents. The National
Commission to Ensure
Consumer Information and Choice in the Airline Industry
(NCECIC)[Footnote 19] reported in 2002 that business travel--usually
the highest yield traffic for airlines--is often contracted out to
travel agencies to manage. As a result, airlines report that
traditional travel agencies (and therefore GDSs) will continue to play
a vital role in the distribution of airline tickets. On the other hand,
an increasing percentage of leisure travel is now booked via the
Internet.
Bookings continue to be predominantly processed by GDSs, but since the
late 1990s the percentage of on-line booking processed through airline
internal reservation systems and Orbitz Supplier Link technology has
increased. However, the sales through traditional travel agents
continue to account for the majority of airline revenue, in large part
because higher-priced business travel continues to be managed through
traditional travel agencies. Figure 7 illustrates how the number of
major U.S. airlines bookings processed through GDSs and GDS bypasses
has changed from 1999 to 2002.
Figure 7: Number of Airline Tickets Processed through and outside GDSs,
1999-2002:
[See PDF for image]
Note: GDS bypasses include bookings made through Orbitz Supplier Link,
airline proprietary Websites, and airline call centers. GDS bookings
include those performed by traditional travel agents and on-line travel
sites that go through a GDS.
[End of figure]
Airlines Reduced Travel Agent Payments, While GDSs' Payments to Travel
Agents Increased:
Travel agent reimbursement patterns have shifted significantly since
the late 1990s. Much of the shift was caused by the airlines, which by
1998 reduced or ultimately ended the traditional practice of offering a
flat published "base" commission (traditionally a percentage of each
ticket price, which later was a flat fee for each ticket) to all travel
agents as a means of reducing distribution costs.[Footnote 20] Partly
the CRS rules do not govern airlines' relationships with travel
agencies, airlines were free to change their payments to travel agents
in a way they were not free to do with GDSs, and now use a system of
privately negotiated commission arrangements with individual travel
agencies. Not all travel agencies are able to negotiate such individual
commission arrangements, and the terms of such agreements vary among
travel agencies and among airlines. From 1999 to 2002, average annual
payments by airlines to travel agencies decreased by 57 percent, from
$370 million to $159 million, as airlines provided override commissions
predominantly to those travel agencies with high ticket sales.
Figure 8 illustrates the decline in average commission payments by
airlines to travel agencies in relation to total distribution costs.
From 1999 to 2002, on average, major airlines reduced their total
distribution costs by 25.8 percent, from $732.9 million to $543.6
million, or 43.6 percent on a per booking basis. Most of that reduction
occurred in the payments by airlines to travel agencies, which
decreased by 57 percent, from $370 million to $159 million. Despite a
decrease of 8.5 percent in passenger traffic between 2000 and 2002,
remaining distribution costs--which include rising GDS fees, as well as
overhead, personnel, advertising, and credit card fees--were
essentially unchanged over the period.
Figure 8: Average Annual Airline Total Distribution Costs, 1999-2002:
[See PDF for image]
Note: Amounts shown are in nominal dollars.
[End of figure]
The largest travel agencies--those with total annual revenues in excess
of $50 million--represent less than 1 percent of travel agencies, but
book almost 60 percent of total travel agent sales. By definition,
because of their large volumes of sales, these large travel agencies
are most likely to receive the majority of the airlines' override
commissions.
As airlines cut traditional travel agent ticket commissions, GDSs began
increasing incentive payments to travel agencies.[Footnote 21]
According to an official of a domestic GDS, since airlines (and,
subsequently, other travel suppliers) reduced travel agent commissions,
travel agencies sought out replacement sources of revenue, and GDSs
responded with incentive payment increases. Large travel agencies were
able to use their position in the industry between the GDSs and large
segments of the traveling public to convince the GDSs to provide some
form of incentive payment. At the same time, GDSs use incentive
payments to compete for travel agent market share and to incentivize
travel agents to book on their particular GDS. Generally, as with
airlines' override commissions, a GDS pays incentives to those travel
agencies with high booking volumes, as each booking results in the GDS
receiving a fee from the airline. Between 1995 and 2002, on average,
each GDS paid travel agencies an increasing amount of incentive
payments, from $22.3 million to $233.4 million (over 900 percent).
Figure 9 illustrates the average change in each GDS's payments to U.S.
travel agents since 1995.
Figure 9: Average Payments to U.S. Travel Agents by Each GDS, 1995-
2002:
[See PDF for image]
Note: Amounts shown are in nominal dollars.
[End of figure]
Shifts in travel agent payments have also occurred between travel
agents and consumers. After airlines ended automatic base commissions,
many travel agencies began to charge consumers service fees for booking
tickets--previously included in the ticket price in the form of a
commission that was invisible to the consumer. Figure 10 illustrates
the current flow of payments among the four participants in the airline
ticket distribution industry. Compared to figure 3, it illustrates some
changes that have taken place in the airline ticket distribution
industry since the late 1990s--particularly the advent of various
Internet booking methods, airline-initiated sites that bypass GDSs, the
new flow of payments to travel agencies, and new service fees imposed
on consumers.
Figure 10: Summary of Payment and Fee Flows in the Current Distribution
of Airline Tickets:
[See PDF for image]
[A] Consumers pay services fees.
[B] Airlines that subscribe to Orbitz Supplier Link pay less fees
(including the commission per transaction) than GDS booking fee.
[C] Airline commission and override payments vary and are based on
travel agencies meeting certain sales goals.
[End of figure]
Airlines Continue to Be Dependent Upon the GDSs:
While each change--increased use of the Internet to process and sell
tickets and reductions in airline payments to travel agencies--has
contributed to the lowering of overall airline distribution costs,
neither has reduced the effective requirement that nearly every major
airline participate in and pay booking fees to each GDS. As previously
stated, airlines continue to process over 60 percent of their tickets-
-mostly high yield business traffic--through the GDSs. Furthermore,
airlines continue to need to subscribe to each GDS in order to reach
all consumers. As DOJ described it in comments submitted to DOT during
a 1997 review of the CRS rules, from an airline's perspective, because
each CRS provides access to a large, discrete group of travel agencies,
each CRS constitutes a separate market. And unless the airline is
willing to forego access to those travel agencies and the consumers
they serve, it must participate in every CRS.
Changes in the Airline Ticket Distribution Industry Appear to Have
Benefited Very Large Travel Agencies and Consumers Who Use the
Internet:
Large travel agencies and consumers who use the Internet appear to have
benefited most from recent changes in the airline ticket distribution
industry.[Footnote 22] Small travel agencies and the consumers who
patronize them appear to have benefited least, if not been
disadvantaged. Since the late 1990s, the number of very large travel
agencies (i.e., those with total annual sales in excess of $50 million)
has stayed approximately the same, but their total annual air travel
sales have almost doubled.[Footnote 23] Because the largest travel
agencies sell more air travel than any other category of travel agency,
by definition they would likely qualify for both GDS incentive payments
and airline override commissions. During this same period, the number
of small travel agencies has steadily declined, as have their total
annual air sales. Figure 11 illustrates changes in the number of
different sized travel agencies and their sales of air travel over
time.:
Figure 11: The Number of Travel Agencies, by Amount of Annual Revenue
and Volume of Air Travel Sales:
[See PDF for image]
Note: Amounts shown are in nominal dollars.
[End of figure]
The increase in on-line bookings appears to have had a more negative
effect on smaller travel agencies than on large travel agencies because
of general differences in the nature of their clientele. Leisure
travelers increasingly book on line--usually well in advance with
simple itineraries. According to the DOJ, leisure travelers with
relatively simple itineraries are best suited to using the Internet.
On-line travel agencies sell most tickets to price-sensitive leisure
passengers.[Footnote 24] In contrast, business consumers, who often use
large travel agencies, are not likely to book on line because of
restrictive corporate policies and complex business itineraries that
are often subject to short notice changes. Those travel agencies also
may provide reporting and record keeping services for large business
customers.
According to officials from the NCECIC and the American Society of
Travel Agents, small travel agencies are confronting financial pressure
from both airlines and GDSs. First, small travel agencies may have
difficulty securing airline override commissions or GDS incentive
payments because of sales volume requirements. In addition, small
travel agencies often must pay for GDS service and equipment, while
these fees are frequently waived for agencies with high sales volumes.
To survive, many smaller travel agencies have become focused on niche
travel markets-for example, regional travel, hiking/biking travel, and
cruise line travel-and charge service fees to clients.
The availability of Internet distribution methods appears to have
positively affected Internet users. These methods provide fare and
schedule information to consumers, and provide consumers with a number
of Websites on which they can compare fare and schedule options.
Moreover, consumers who use the Internet have access to less expensive
webfares offered by the airlines. Airlines use such fares to encourage
consumers to use Internet travel sites, as they are less expensive to
the airlines. For instance, the results of a 2001 Forrester
Research[Footnote 25] survey of Internet users, which the NCECIC
included in their 2002 report to Congress and the President, found that
people who booked on line preferred doing so because they can readily
compare various on-line travel sites, as well as access more diverse
fares (i.e., webfares) than they can through a traditional travel
agent. Furthermore, on-line customers may also avoid the higher
ticketing fee that some travel agencies now charge (up to $50),
although many on-line travel agencies may charge their own smaller
ticketing fees ($5-$10). Finally, the public perceives that booking on
line is less expensive than booking through a traditional travel agent.
Conversely, consumers purchasing tickets on airline Websites may not
have complete and unbiased information when booking flights, which is
important in a competitive industry. For example, Orbitz.com does not
include schedule and fare information for certain low fare airlines,
such as Southwest and JetBlue because these airlines have chosen not to
participate.
Travelers who choose not to buy airline tickets on line, or who do not
have Internet access, may be at a relative price disadvantage.
Travelers using a traditional travel agent may pay a service charge of
up to $50. In addition, travelers who do not choose to use the now
standard "electronic ticket" may be charged an extra fee by the airline
for a paper ticket.[Footnote 26] And as noted before, a travel agent
may not have access to special webfares.[Footnote 27] But travelers who
do use traditional travel agents may benefit from the added flexibility
of being able to change their reservation. An on-line travel agency
booking is often difficult to change, especially if it is a low fare
that is nonrefundable or subject to other restrictions. On the other
hand, with the power to change a booking through the GDS, travel agents
say they act as the consumer's advocate with an airline, with consumers
benefiting from the detailed knowledge and personal interaction that a
travel agent can provide.
Business travelers are continuing to use traditional travel agencies to
manage their travel because of corporate travel policies, including
negotiated "private fares."[Footnote 28] According to the National
Business Travel Association, less than 10 percent of corporate travel
is booked through the Internet and many corporations forbid their
employees from booking travel on the Internet, even if employees find a
lower fare through that distribution method. Corporate travel policies
can limit the employees' ability to use the Internet in booking travel
because they often require employees to use a contracted travel agency,
through which they are booked on corporate contract carriers.[Footnote
29]
Sufficient Data Were Not Available to Determine the Relationship
between Booking Fees and Costs and the Presence and Use of Market
Power:
Because we lacked access to proprietary company data on costs and
revenues, we could not develop the sort of evidence that would allow us
to determine whether GDSs exert market power in the airline ticket
distribution industry.[Footnote 30] Booking fees charged by GDSs to
airlines have risen over the past several years. From 1996 to 2001, the
typical booking fee paid by a major airline has increased by 30.9
percent, from $3.27 in 1996 to $4.28 in 2001, a change greater than the
overall inflation rate (as measured by the Gross Domestic Product
chain-type price index) of 9.4 percent during this same time period.
According to GDS officials, during this time period, the services and
products offered by GDSs were enhanced and deliver substantial benefits
to airlines (e.g., e-ticketing). Furthermore, one GDS official
estimates that about 40 percent of its self-reported software
development costs are meeting supplier (e.g., airlines) needs.
Because much financial information is proprietary,[Footnote 31] we were
therefore unable to obtain a full breakdown of GDSs' costs in order to
isolate the specific costs directly associated with the booking
function ("transaction costs"). However, two GDS-reported costs
associated with the booking function for which we were able to get data
both rose between 1996 and 2002: GDS computing costs (i.e., total data
center operating costs) and travel agent incentive payments.
* Computing costs have increased but because of inconsistent data
reported by the GDSs, we were unable to determine the precise increase.
However, the GDS computing cost increase is in contrast to general
industry computing cost trends, which decreased by over 60 percent
since the mid-1990s. According to officials with the GDSs, their
computing costs per booking rose relative to commercial sector
computing costs because (1) bookings have become more complex,
requiring more processing to complete and (2) the volume of
transactions shopping for low fares that do not result in a booking has
risen, especially for on-line travel agencies used by consumers. They
stated that the additional processing required offset any general
decrease in computing costs.[Footnote 32] For example, airlines have
offered more types of fares to consumers (e.g., "private fares"
available to large corporate clients, government fares, and conference
specials). Many of these fares are stated as a percentage of the full
coach fare, which airlines can change several times daily. GDSs must
quickly match the correct fare with each customer for each specific
flight. Moreover, GDS officials also stated that airlines are keeping
more detailed Passenger Name Records with all reservations. The amounts
of data that the GDSs track with these records have also increased over
time, as airlines have made efforts to better serve passengers (e.g.,
frequent flyer accounts and seating preferences). It is unclear how
much of this increasing GDS functionality, the costs of which are
presumably passed on to the airlines through increases in booking fees,
adds value for the airlines. Some airlines have complained that they do
not need certain elements of the increased functionality (e.g., seat
maps) and are paying for something they do not want at a time when they
are struggling financially.
* As discussed above, GDSs' incentive payments to travel agencies have
increased. GDSs provide incentive payments to travel agencies to reward
them for using their system. The largest travel agencies were able to
use their position in the industry between the GDSs and large segments
of the traveling public to convince the GDSs to provide increased
incentive payments. On average, incentive payments from GDSs to travel
agencies increased by over 500 percent from 1996 to 2002, rising from
$34.9 million to $233.4 million.
Computing costs and travel agent incentive payments do not encompass
all airline ticket booking-related costs, and we were unable to get
financial data on other costs (e.g., booking-related hardware costs)
related to GDSs' airline ticket booking function, which might have
allowed us to determine a relationship between booking fees and related
costs and to consider what the relationship indicated about the
presence and possible exercise of market power by the GDSs.
To identify other information about the possible existence and use of
market power, we reviewed the comments submitted to DOT since its
November 2002 Notice of Proposed Rulemaking of the CRS rules. GDSs
stated that they do not have market power. However, some airlines
contend that they do operate under GDS market power. For example,
America West contends that each CRS exercises monopoly power over it.
In its June 9, 2003, comments to DOT, DOJ concluded based on its market
structure analysis that despite the recent growth of Internet
distribution, GDSs continue to have market power over
airlines.[Footnote 33] DOJ found no evidence that existing regulations
designed to erode that power had succeeded in the past or are likely to
improve the situation in the future. Rather, they concluded that many
of the existing regulations have been ineffective in reducing GDS
market power, which derives from the inability of most airlines to
withdraw from any GDS. DOJ noted that while the CRS rules have been
effective in eliminating discriminatory pricing (charging different
fees to target specific airline competitors), it has not prevented GDSs
from charging fees above competitive levels. Nevertheless, DOJ
concluded that recent changes in the industry have eliminated the need
or utility for most of the CRS rules and that anticompetitive practices
be enforced through case-by-case antitrust investigations.
Concluding Observations:
A competitive airline ticket distribution industry, which includes the
airline, GDSs, and travel agent industries, continues to be important
because noncompetitive practices may adversely affect airlines and
consumers. Originally, the CRS rules were focused on reducing the
market power of airline-owned CRSs to prevent owner airlines from using
the CRSs to gain a competitive advantage over nonowner airlines. With
the GDSs now independent from the airlines, questions have been raised
regarding the GDSs' exercise of market power over all airlines. Among
other things, because GDSs do not compete with each other for airline
business, airlines and consumers may be subject to prices that are
higher than in more competitive markets. While our limited ability to
get complete booking cost and fee data from the GDSs did not allow us
to independently evaluate whether GDSs currently exercise market power,
the market position of large travel agencies or the overall performance
of the industry, evidence that we developed in this review provides
suggestions of both a functioning market and competitive flaws.
On the one hand, our review provides some indications of a market that
is functioning and adaptive. For example, the use of the Internet has
grown significantly, and overall prices for airlines for each form of
distribution have fallen. In addition, the development and evolution of
Orbitz and expansion of direct airline Internet booking reflects that
at least some lower-cost substitutes for GDSs have emerged. Airlines
and other participants in the ticket distribution system have developed
an ability to use Internet innovations to limit distribution expenses.
Similarly, the Internet's ability to provide consumers with access to a
wide variety of, often low cost fares (i.e., transparency) has arguably
benefited them.
On the other hand, our review also highlights issues that suggest the
continued possibility of GDS market power as well as the growing power
of large travel agencies. The structure of the industry, in which
airlines are dependent upon the GDSs to obtain ultimate access to large
portions of travel agents and potential passengers (especially high
yield business traffic), perpetuates the potential for the existence
and exercise of market power by GDSs. Although Orbitz may offer a
technological substitute that mitigates the market power of GDSs for
some airlines, Orbitz' relationship with major airlines has raised
different concerns about the potential for owner airlines once again
using their ownership position to distort airline competition. Our
review also indicates that the largest travel agencies, upon whom both
airlines and GDSs depend to reach a large percentage of the higher-
paying business travelers, currently have considerable leverage in the
industry. This leverage is reflected by their ability to obtain rising
incentive payments from GDSs as well as commission and override
payments from airlines.
The innovation that has occurred in the airline ticket distribution
industry--particularly the growth of the Internet--is noteworthy. These
innovations occurred under the framework of federal regulations, which
DOT is currently reviewing. DOJ stated that some of these rules have
failed to accomplish their goals and therefore need to be removed. At
the same time, DOJ's antitrust review of Orbitz continues. Thus, the
federal interaction with the industry continues on both an industry-
wide and case-by-case basis. At the same time, it will be important to
continue monitoring how developments in the industry affect competition
and consumers.
Agency Comments:
We provided a draft of this report to DOT for review and comment. DOT
provided us with technical comments, which we incorporated where
applicable. We also provided relevant sections of this report to DOJ,
the three major U.S. GDSs, Orbitz, and most major U.S. airlines for
review. These organizations provided technical corrections, which we
incorporated as appropriate.
We will send copies of this report to the Honorable Norman Mineta,
Secretary, Department of Transportation. We will make copies available
to others on request. In addition, the report will be available at no
charge on our Website at www.gao.gov.
If you or your staff have any questions about this report, please call
me at (202) 512-2834. I can also be reached at HeckerJ@gao.gov, or
Steve Martin at MartinS@gao.gov. Appendix III lists key contacts and
key contributors to this report.
JayEtta Z. Hecker
Director, Physical Infrastructure Issues:
Signed by JayEtta Z. Hecker:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
This report examines three questions:
* What have been major changes in the airline ticket distribution
industry since the late 1990s, and how did these changes affect
airlines?
* How have these changes in the airline ticket distribution industry
affected travel agents and consumers?
* What does the relationship between global distribution system's
booking fees and booking-related costs suggest about the presence and
use of market power?
We limited the scope of this review to the three global distribution
systems (GDS) that handle over 90 percent of U.S. airline bookings.
These three GDSs are Galileo, Sabre, and Worldspan. We excluded other
GDSs that operate predominantly in other countries. Those excluded from
this review include Abacus, Amadeus, Axess, Infini, and Topas. In
addition, we did not have access to the individual contracts between
the various industry entities; and therefore, the descriptions of the
relationships are generalizations.
To determine how the airline ticket distribution industry has changed
and the effects on airlines since the late 1990s, we analyzed industry
booking trend and cost data (e.g., airline and GDS payments, annual
airline expenditures per distribution method). These data are
proprietary, so we agreed to aggregate them so that no private company
materials or information would be publicly disclosed in an identifiable
form. Consequently, all data are reported in averages. Furthermore,
since these data are proprietary, we were unable to independently
verify them because we have no authority to require access to the
underlying data. However, we applied logical tests to the data and
found no obvious errors of completion or accuracy. Along with our use
of corroborating evidence, we believe that the data were sufficiently
reliable for our use. In addition, we examined documents from the
Department of Transportation (DOT). We interviewed DOT officials,
Department of Justice (DOJ) officials, industry experts, the three
domestically based GDSs, seven major airlines, and four travel agencies
(e.g., a small traditional travel agency, and the three leading on-line
travel sites--Travelocity, Expedia, and Orbitz). We attempted to
interview all of the major travel agencies, but the top three would not
agree to meet with us. In addition, we were unable to obtain any
airline or GDS cost data related specifically to those travel agencies.
To describe how changes in the airline ticket distribution industry
have affected travel agents and consumers, we analyzed travel agent
data (e.g., sales and revenues). We obtained these data from the
National Commission to Ensure Consumer Information and Choice (NCECIC),
a commission authorized under Section 228 of the Wendell H. Ford
Aviation Investment and Reform Act for the 21ST Century (P.L. 106-181,
AIR-21) to study two distinct issues--first, the current state of the
travel industry, and the impact of changes in the industry on
consumers; and second, the potential for impediments to distribution of
information to cause injury to agencies and consumers. We contacted the
Airline Reporting Corporation (ARC), the source of the NCECIC travel
agent data, to clarify the nature of the data and thus we decided the
data were reliable for our purposes. Lastly, we interviewed travel
agents, industry group representatives, and officials from the NCECIC.
To determine the relationship between GDSs booking fees and booking-
related costs and what it may suggest about the presence and use of
market power, we analyzed GDS booking fee and cost data (e.g.,
computing costs and travel agent incentives). We obtained these data
from the three U.S. GDSs. Since these data are proprietary, we agreed
to aggregate them so that no private company materials or information
would be publicly disclosed by us in an identifiable form.
Consequently, all data are reported in averages. Furthermore, since
these data are proprietary, we were unable to independently verify them
because we have no authority to require access to the data. However, we
applied logical tests to the data and found no obvious errors of
completion or accuracy. We believe that the data are sufficiently
reliable for our use. We analyzed specific booking fee-related costs
that were available to us--computing costs and travel agent incentive
payments. Computing costs are based on data center operations costs,
including hardware, software, leases, and personnel costs. We compared
trends in these computing costs with industry computing cost trends
using mainframe data center costs from the Gartner Group, a well-known
research and advisory firm that helps its clients understand technology
and drive business growth.
We were limited in our review because we did not have full access to
proprietary data. One of the GDSs (Worldspan) is privately held and
does not file financial data with the U.S. Securities and Exchange
Commission (SEC). Although Sabre and Galileo are publicly held and file
financial data with the SEC, they are not required to disaggregate cost
data. Moreover, it is difficult to compare even the data that Sabre and
Galileo did provide, since they may report their costs differently, as
the Generally Accepted Accounting Principles allow companies to
allocate costs in various ways. Therefore, we were not able to obtain
complete and detailed data from the GDSs on all costs directly related
to booking transactions. However, we did review the comments that were
submitted to DOT regarding its review of the CRS rules. Prominent among
those were the June 9, 2003, DOJ comments, which were based on DOJ's
expert, market structure analysis. We also discussed with DOJ the
comments they submitted. In addition, we sought cost and booking data
that dated from 1978 to the present. However, no airline was able to
provide data for a time earlier than 1996. Consequently, we limited our
review to the 4 years covering the period 1999 to 2002.
We conducted our review between September 2002 and July 2003 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Computing Cost Trends at Global Distribution Systems:
According to the Gartner Group,[Footnote 34] overall mainframe data
center costs continued to decrease every year from 1994 through
1998.[Footnote 35] The Gartner Group found that on a per-millions-of-
instructions-per-second (MIPS) basis (a common measure of usage), data
center costs have decreased during the same time period. Our analysis
of the global distribution systems (GDS) per MIPS computing cost (cost
per MIPS) suggests that GDS per MIPS costs also decreased from 1995
through 2002. Thus, on a per MIPS basis, the general trend of computing
costs incurred by the GDSs seem to be consistent with the industry
trend reported by Gartner Group for the years 1994 through 1998.
For technology-based companies like GDSs, an important cost measure is
the computing cost per booking. This measure is significant because
GDSs generate revenue largely based on the volume of booking
transactions processed. On an annual basis, we found that the computing
cost per booking increased slightly over the years 1996 and 2001, the
years for which we had relevant data from most of the GDSs. According
to the GDSs, the per-booking computing cost has risen because each
booking has become more complex over time, requiring more processing--
more MIPS--to complete a booking, thereby more than offsetting any
decrease in per MIPS computing costs. One way to explain the increasing
complexity of bookings is through the number of messages that are
required to complete a booking. A message is typically a single command
typed by a travel agent in a GDS reservation system. A message is sent
every time a travel agent types a command and hits the Enter key on the
keyboard. For example, for one GDS, the number of instructions needed
to process each message increased by 58 percent from 1999 to 2002. For
that GDS, the average number of messages required for each booking
increased by 118.6 percent from 1993 to 2002. In addition, a message
can be very simple (e.g., what gate is flight 442 scheduled to arrive
at in Dallas today) or very complex (e.g., what is the cheapest
itinerary available to fly roundtrip between Los Angeles International
Airport and any of New York City's three major airports, departing next
Tuesday morning).
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
JayEtta Z. Hecker (202) 512-2834 Steven C. Martin (202) 512-2834:
Acknowledgments:
In addition to those individuals named above, Naba Barkakati, Triana
Bash, Carmen Donohue, Brandon Haller, David Hooper, Joseph Kile, Sara
Moessbauer, and Alwynne Wilbur made key contributions to this report.
(544055):
FOOTNOTES
[1] Travel agents and consumers shop using a GDS without charge. Much
data processing occurs to support this shopping process, which may or
may not result in a booking.
[2] Airlines may be refunded for a cancelled segment by all but 40
cents of the booking fee. Using the above example (four flight segments
for $16), a change to the passenger's return date (i.e., a change to
two segments) would finally cost the airline $16.80.
[3] The inventory has already been deducted from the carrier host
system, so the travel agent enters the flight segment data into the CRS
using transaction codes that may not generate a message to the carrier
advising of the sale. The travel agent must then notify the carrier
either by phone or by sending a GDS message that they now have control
of the booking.
[4] Airlines can avoid churn by requiring payment at the time of the
original booking, but some airlines make a business decision to allow
passive bookings with traditional travel agents in order to potentially
secure the passenger's business.
[5] By 1988, five CRSs were in use by travel agents: Sabre, owned by
American Airlines; Apollo, principally owned by United with a
consortium of other airlines; PARS, owned by TWA and Northwest; System
One, owned by Texas Air Corp., which acquired Eastern Airlines and its
system; and DATAS II, owned by Delta Air Lines. Apollo since became
Galileo. PARS and DATAS II since became Worldspan. System One was
acquired by Amadeus, the largest foreign-based GDS. Since the mid-
1990s, all major airlines have fully sold their interest in the GDSs.
[6] Interline agreements between airlines provide for the mutual
acceptance by the participating airlines of passenger tickets, baggage
checks, and cargo waybills, as well as establish uniform procedures in
these areas. These agreements are common, but not universal, among the
major U.S. airlines. Interline agreements typically do not include
reciprocal frequent flyer and airport lounge rights.
[7] An override commission is a payment made based on the travel agency
meeting a set goal of sales.
[8] 57 Fed. Reg. 43780, September 22, 1992.
[9] The mandatory participation rule does not preclude nonowner
airlines from participating in CRSs to varying extents. Fees paid per
booking depend on an airline's participation level. For instance,
according to information from Sabre, its simplest participation level-
-"Basic Booking Request"--costs an airline $2.12 per segment. Sabre's
highest level of participation--"Direct Connect Availability"--costs
an airline $4.39 per segment.
[10] The scope of this report is focused on domestic global
distribution companies and we therefore do not include foreign
companies, such as Europe-based Amadeus, in our review. For more
information on the scope of our review, see app. I.
[11] We do not have access to the individual contracts between various
travel agents and airlines. Therefore, these descriptions are general
and may not be the case for all airlines.
[12] Examples of other airline cost-cutting efforts include a reduction
of labor costs.
[13] Some airlines' internal reservation systems are "hosted" by
various GDS' data processing systems. Reservations and other
transactions initiated by the hosted airline's employees and the
airline's branded Websites (e.g., AA.com) are covered by a separate
technology services agreement different from the agreement that covers
the distribution of the airline's inventory to the GDS agency
subscribers (i.e., Participating Carrier Agreement). The compensation
to the GDS for such technology services is separate from the booking
fees described earlier and may take several forms, including a fee per
transaction, a fee per computer message and a fee per information
technology capacity unit utilized and also include separate charges for
software development services.
[14] When airline flights are booked through Orbitz, airlines pay
booking fees to GDSs, commissions or transaction fees to Orbitz, and
other distribution costs. Airlines' costs can vary. For airlines that
enter into agreements with Orbitz (i.e., charter airlines), Orbitz
rebates the net booking fee by 60 percent of the total Orbitz rebate
received from Worldspan, or up to $3, and the transaction fee paid to
Orbitz by the charter airlines for each ticket is $5.34. (The
transaction fee for tickets that are more than $150.00 is $5.34, and
$2.67 for tickets that are less than $150.) In comparison, airlines
that do not enter into agreements with Orbitz do not receive the $3
rebate and pay a higher commission of about $10 per ticket to Orbitz.
[15] A charter airline, or Airline Charter Associate, is an airline
that enters into an agreement with Orbitz. Under the Charter Associate
Agreement, Orbitz provides discounted distribution costs in return for
an assurance that it would have access to airlines' publicly available
fares, including web fares. Charter airlines account for 93 percent of
all airlines that book through Orbitz. These airlines include all of
the largest U.S. airlines (excluding low fare carriers Southwest and
JetBlue) and most of the regional carriers. Other airlines that
participate in Orbitz but are not charter associates include AirTran
and ATA.
[16] All airlines that participate with Supplier Link, which must be a
charter associate, pay Orbitz the same transaction fee as before ($5.34
or $2.67 depending on price of ticket) and a Supplier Link fee ($4 per
ticket), but do not pay booking fees. However, there are start-up costs
for airlines that choose to participate with Supplier Link. Orbitz
charged $200,000 for a "first in type" Supplier Link connection. This
fee covers the development costs for the interface between Orbitz'
system and an airline internal reservation system. Subsequent
implementations connecting other airlines that use the same data
processing company to "host" their internal reservation system costs
those airlines $75,000. According to Orbitz, its messaging costs are
inconsequential. But, the airline may be charged by its internal
reservation system owner for internal messaging costs both for bookings
and for the "polling" queries necessary to maintain Orbitz'
availability cache.
[17] As noted earlier, other GDSs operate predominantly in foreign
countries and have not penetrated the U.S. domestic market to any
significant extent. These include Abacus, Amadeus, Axess, Infini, and
Topas.
[18] Throughout this report, we report the data in averages. We
calculated the averages by aggregating data provided by a number of
entities, and dividing that total by the number of entities providing
data. See app. I for additional information on the scope and
methodology.
[19] NCECIC was authorized by Section 228 of the Wendell H. Ford
Aviation Investment and Reform Act for the 21st Century (P.L. 106-18)
on April 5, 2000.
[20] Airlines continue to pay service fees, in essence ticket
commissions, for each booking made by certain on-line travel sites, and
override commissions to travel agents that reach an established sales
goal. Override commission policies vary from airline to airline. For
instance, Delta no longer offers a flat base commission to all travel
agents in the U.S. for its ticket sales, but instead negotiates private
relationships to provide financial incentives that reward key travel
agencies for their sales.
[21] We do not have access to specific agreements between GDSs and
travel agents, and are therefore limited in our ability to detail
overall financial flows between GDSs and travel agents.
[22] For additional information, see U.S. General Accounting Office,
Domestic Aviation: Effects of Changes in How Airline Tickets Are Sold,
GAO/RCED-99-221 (Washington, D.C.; July 28, 1999).
[23] For the purposes of categorization, very large travel agencies
generate more than $50 million annual revenue. Midsize travel agents
generate between $2 million and $50 million annual revenue. Very small
travel agencies generate less than $2 million annual revenue.
[24] Reply Comments of the Department of Justice to DOT on the Notice
of Proposed Rulemaking Computer Reservation System Regulations, June 9,
2003, p. 16.
[25] Forrester Research is a firm that identifies and analyzes trends
in technology and their impact on business.
[26] Travel agency customers who accept electronic tickets would not
pay a fee for paper tickets, but would still pay a service fee to the
travel agent.
[27] Some airlines are offering traditional travel agents access to
their "webfares." Through American Airlines' EveryFare® program, a
travel agent can access full fares in exchange for the travel agent
picking up some of the GDS booking fee. In addition, GDSs have created
similar programs in an effort to provide travel agents with greater
access to airlines' special fares. For instance, Sabre has created its
"Direct Connect Availability 3 year Option," which rolls back
approximately 12.5 percent off 2003 booking fee rates and freezes those
rates for 3 years in exchange for full content of the participating
airlines' fares.
[28] See app. II for more discussion of the effect of private fares on
GDS costs.
[29] On-line business travel management services, such as Sabre's
GetThere.com, are emerging. These services manage company travel,
including compliance with travel policies.
[30] The link between the price of a product and the cost of producing
it is an important element in determining the level of competition or
exercise of market power. Generally speaking, in competitive
industries, revenues are closely related to costs (including a
reasonable profit margin). Conversely, in industries that are less
competitive, prices tend to be higher than costs (including a
reasonable profit) and output tends to be less than in competitive
industries. As demonstrated by their Horizontal Merger Guidelines
(United States Department of Justice and Federal Trade Commission
Revision to the Horizontal Merger Guidelines, Apr. 8, 1997), the
Department of Justice and others who analyze competition and market
power would also examine the structure of the market, including the
number of competitors, the ease with which new competitors could enter
the market, and other contributing or mitigating factors in forming a
conclusion about competition or market power.
[31] See app. I for more information on limitations associated with
obtaining proprietary data.
[32] See app. II for further discussion of how GDS computing costs
compare to commercial sector computing costs.
[33] Reply Comments of the Department of Justice to DOT on the Notice
of Proposed Rulemaking Computer Reservation System Regulations, June 9,
2003, p. 2.
[34] The Gartner Group is a well-known research and advisory firm that
helps its clients understand technology and drive business growth.
[35] For the years 1994 through 1998, the Gartner Group analyzed the
costs of operating a typical mainframe data center using a budget model
that included seven key areas: hardware, software, business resumption,
occupancy, operations, technical services, and finance and
administration.
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