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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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