[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
ARE ALL ONLINE TRAVEL SITES GOOD FOR THE CONSUMER: AN EXAMINATION OF
SUPPLIER-OWNED ONLINE TRAVEL SITES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
COMMERCE, TRADE, AND CONSUMER PROTECTION
of the
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JULY 18, 2002
__________
Serial No. 107-120
__________
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
__________
U.S. GOVERNMENT PRINTING OFFICE
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_____________________________________________________________________________
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COMMITTEE ON ENERGY AND COMMERCE
W.J. ``BILLY'' TAUZIN, Louisiana, Chairman
MICHAEL BILIRAKIS, Florida JOHN D. DINGELL, Michigan
JOE BARTON, Texas HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RALPH M. HALL, Texas
PAUL E. GILLMOR, Ohio RICK BOUCHER, Virginia
JAMES C. GREENWOOD, Pennsylvania EDOLPHUS TOWNS, New York
CHRISTOPHER COX, California FRANK PALLONE, Jr., New Jersey
NATHAN DEAL, Georgia SHERROD BROWN, Ohio
RICHARD BURR, North Carolina BART GORDON, Tennessee
ED WHITFIELD, Kentucky PETER DEUTSCH, Florida
GREG GANSKE, Iowa BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming BART STUPAK, Michigan
JOHN SHIMKUS, Illinois ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico TOM SAWYER, Ohio
JOHN B. SHADEGG, Arizona ALBERT R. WYNN, Maryland
CHARLES ``CHIP'' PICKERING, GENE GREEN, Texas
Mississippi KAREN McCARTHY, Missouri
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DeGETTE, Colorado
TOM DAVIS, Virginia THOMAS M. BARRETT, Wisconsin
ED BRYANT, Tennessee BILL LUTHER, Minnesota
ROBERT L. EHRLICH, Jr., Maryland LOIS CAPPS, California
STEVE BUYER, Indiana MICHAEL F. DOYLE, Pennsylvania
GEORGE RADANOVICH, California CHRISTOPHER JOHN, Louisiana
CHARLES F. BASS, New Hampshire JANE HARMAN, California
JOSEPH R. PITTS, Pennsylvania
MARY BONO, California
GREG WALDEN, Oregon
LEE TERRY, Nebraska
ERNIE FLETCHER, Kentucky
David V. Marventano, Staff Director
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Commerce, Trade, and Consumer Protection
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia DIANA DeGETTE, Colorado
Vice Chairman LOIS CAPPS, California
ED WHITFIELD, Kentucky MICHAEL F. DOYLE, Pennsylvania
BARBARA CUBIN, Wyoming CHRISTOPHER JOHN, Louisiana
JOHN SHIMKUS, Illinois JANE HARMAN, California
JOHN B. SHADEGG, Arizona HENRY A. WAXMAN, California
ED BRYANT, Tennessee EDWARD J. MARKEY, Massachusetts
GEORGE RADANOVICH, California BART GORDON, Tennessee
CHARLES F. BASS, New Hampshire PETER DEUTSCH, Florida
JOSEPH R. PITTS, Pennsylvania BOBBY L. RUSH, Illinois
MARY BONO, California ANNA G. ESHOO, California
GREG WALDEN, Oregon JOHN D. DINGELL, Michigan,
LEE TERRY, Nebraska (Ex Officio)
ERNIE FLETCHER, Kentucky
W.J. ``BILLY'' TAUZIN, Louisiana
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Cooper, Mark N., Research Director, Consumer Federal of
America.................................................... 37
Gilliland, Sam, President and Chief Executive Officer,
Travelocity.com............................................ 20
Ruden, Paul M., Senior Vice President for Legal and Industry
Affairs, American Society of Travel Agents................. 42
Wolff, Bruce, Chairman, TravelWeb, LLC....................... 28
Zuck, Jonathan, President, Association for Competitive
Technology................................................. 33
(iii)
ARE ALL ONLINE TRAVEL SITES GOOD FOR THE CONSUMER: AN EXAMINATION OF
SUPPLIER-OWNED ONLINE TRAVEL SITES
----------
THURSDAY, JULY 18, 2002
House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Commerce, Trade,
and Consumer Protection,
Washington, DC.
The subcommittee met, pursuant to notice, at 9:30a.m., in
room 2123, Rayburn House Office Building, Hon. Cliff Stearns
(chairman) presiding.
Members present: Representatives Stearns, Deal, Bryant,
Bass, Walden, Terry, Towns, DeGette, Markey, Rush, and Eshoo.
Also present: Representatives Boucher and Grucci.
Staff present: Ramsen Betfarhad, majority counsel; Mike
O'Rielly, professional staff; Brendan Williams, legislative
clerk; Jonathan Cordone, minority counsel; and Bruce Gwinn,
minority professional staff.
Mr. Stearns. Good morning. I would like to welcome all of
you to this hearing of the Subcommittee on Commerce, Trade, and
Consumer Protection, entitled, ``Are All On-Line Travel Sites
Good for the Consumer: An Examination of Supplier-Owned On-Line
Travel Sites.''
I would like to especially thank our witnesses on behalf of
the committee for their appearance today and their testimony.
Notwithstanding the hyper-enthusiasm for all things Internet
and electronic commerce of the recent past, the fact remains
that the Internet as an efficient ubiquitous communication tool
has substantially transformed in fundamental ways commerce as
we know it today.
Electronic commerce transversing the communications network
that is the Internet is real, substantial, and rapidly becoming
a key component of our economy. The hyperpredictions of not so
long ago that e-commerce would reach between $3 and $4 trillion
by the year 2003 may not have come true.
But by most estimates the value of business-to-business
commercial transactions that transpire on-line is well over $1
trillion today. More significantly, the rate of growth of such
business-to-business transactions is increasing unabated and it
is far in excess of the growth rate for off-line commerce.
Business-to-consumer e-commerce may also have not met the
glorious prediction of abundance who reigned during the .com
bubble, but the fact, my colleagues, remains that it has grown
substantially and it continues to grow at rates unmatched by
off-line commerce.
One of the more stellar examples of business-to-consumer e-
commerce growth is the on-line travel business. For example, in
just over 3 years, 15 percent of all airline tickets are now
being sold on-line, and the growth rate for such transactions
is still accelerating.
More significantly, increasingly consumers are seeking and
receiving more advanced travel services through on-line travel
sites; such as arranging multi-city, or even country trips,
involving a myriad of reservations for air travel, car, hotel
reservations, and tours.
During the dot.com bubble, it seemed that any and all
business models were tried as investors in their euphoric
state, vis-a-vis anything Internet, had the penchant to welcome
and accept them all.
However, as the dust settled and we learned that while
selling books on-line made sense, selling groceries didn't, a
sort of new business model has gained in appeal among dominant
suppliers, but only in certain industries.
That sort of new business model calls for the dominant
firms within an industry to collectively create an on-line
distribution network for their goods and services.
In practice, this business model has manifested itself in a
number of supplier owned, on-line distribution joint ventures,
where the participating companies tend to be the top 5 or 6 in
that industry.
These supplier-owned on-line distribution joint ventures
are now present across a number of industries, including air
travel, lodging, cosmetics, music, and even foreign currency
exchange.
Now, there is no question that such supplier-owned on-line
distribution systems engender economic efficiency and also
consumer benefits. At the same time there is also no question
that any time competitors come together in collaborative
efforts such as these joint ventures that there is a risk.
There is a risk for collusion activity that may impede
commerce and harm consumers. This hearing is meant to create an
educational forum simply to examine both the benefits and
possible risks that supplier-owned on-line distribution systems
hold for the American consumer.
As examining the supplier-owned on-line distribution system
across a multitude of differing industries within which they
appear is a tall order at this hearing to accomplish, but we
are going to try to focus on the online tavel business only.
This hearing will focus only on on-line joint ventures in
the air travel and lodging industries. We have before us some
great expert witnesses on these issues. We had hoped to have
Orbitz, and at least one of the five major airlines that are
involved with and own Orbitz, to speak on Orbitz's behalf.
Unfortunately, it did not work out, and they are unable to
attend. However, Gary Doernhoefer, Vice President and General
Counsel of Orbitz, LLC, has provided the subcommittee with
written testimony on behalf of Orbitz, which I now offer to be
included as part of the record, and without objection, it is so
ordered.
[The prepared statement of Gary Doernhoefer follows:]
Prepared Statement of Gary R. Doernhoefer, Vice President and General
Counsel, Orbitz LLC
Online distribution of travel is the Internet's greatest success
story. Travel is the most successful sector of Internet commerce. The
Internet has offered services to travelers that a great many of them
find convenient and informative, and so consumers of travel have given
the Internet their highest vote of confidence--they choose to use it,
they like it, and they choose to use it again.
At the same time, we all have to recognize that leading up to the
use of the Internet, the automated distribution of travel has long been
a sector troubled by insufficient competition, and that has resulted,
among other things, in the costs of selling through many of these
systems being unreasonably high. Those costs are paid in the first
instance by the airlines, but are ultimately paid for by consumers as
part of the cost of air travel.
The purpose of Orbitz is to bring new competition to automated
distribution: new price competition, new technology, competition in the
quality and content of the information provided, and new customer
service competition. We believe that the results to date speak for
themselves. We launched just 13 months ago, and since our launch (and
despite our relatively small size)
price competition has increased (with several of our larger
competitors for the first time engaging in price reductions on
the cost of making a booking),
technology and information quality has increased (with at
least one of our larger competitors moving to new search
technology), and
customer service at many websites, both online agencies and
individual airline websites, has improved considerably in
competitive response to improvements in customer service first
launched by Orbitz.
In short, as a result of new competition from Orbitz, competition
has increased, and competition is doing what it is supposed to do,
which is to reduce cost and improve products and services. The consumer
is better off for Orbitz having entered the market, whether or not that
consumer actually uses Orbitz.
Let me review each of these arenas of increased competition:
Price Competition
Automated distribution came to air travel two decades before the
Internet did. It came in the form of Computer Reservations Systems
(CRSs). These were enormous mainframe computer systems with terminals
placed in travel agencies. Typically a travel agent was placed under
contract by a CRS, that travel agent used only that one CRS, and there
were very few CRSs (there are only four in the world today). That meant
that any airline could only sell through the agents that used a
particular CRS by agreeing to pay whatever that CRS decided to charge
for each booking made. As every government agency that looked at the
issue found,1 that gave the CRSs the power to price their
services at levels far above what would exist in the case of a
competitive market.
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\1\ The federal agencies that so found were the Civil Aeronautics
Board, the Department of Justice, the Department of Transportation, and
the General Accounting Office.
---------------------------------------------------------------------------
Furthermore, what were excessive prices paid for CRS booking fees
15 years ago, have continued to climb every year since then, despite
the fact that computing and telecommunications costs have declined
dramatically over the years.
In 1984, federal rules were put in place to try to limit the
monopoly powers of the CRSs. In some instances, those rules have been
somewhat successful, as in limiting the display bias of the CRSs. But
the rules have been completely ineffective with respect to monopoly
pricing of CRS services, and so those excessive costs have been built
in to air transportation ever since, and get worse with each passing
year.
The coming of the Internet to air travel in the late 1990's brought
hope that this anti-competitive bottleneck might be opened up,
restoring competitive market forces. It was impossible to launch a new
CRS competitor, since they operated under contract to travel agents and
all the travel agents were locked up in existing contracts. But new
Internet sites were being launched every day. Users don't have
contracts with websites--they just use the website if they want to. The
hope was that the new open competition model of the Internet would
remedy the long-standing anti-competitive problems of the CRS business.
However, the biggest of the CRSs, Sabre, moved quickly to establish
its own dominance of the Internet. It used its unusually large profits
at Sabre to build the first major online agency, Travelocity. Every
booking on Travelocity was a booking on Sabre and imposed the same CRS
booking fee that Sabre charged off the Internet. Other online agencies
that came along followed the same model--their bookings went through a
CRS and charged the same CRS booking fee. Thus the Internet became a
branch office of the CRS oligopoly, rather than a competitive
alternative to it. And the hope of the Internet acting as a new source
of badly needed price competition was dashed.
That is where Orbitz came in. Orbitz was determined that the
Internet could provide price competition, and Orbitz has done so,
despite the fact that Orbitz also uses a CRS to make each booking.
Orbitz offers every airline two options;
It can pay the standard CRS booking fee, and make available to
Orbitz only the fares it makes available to all other websites
and CRSs, in which case Orbitz will give it no-bias display of
its schedules and services and will book its tickets, or
It can get a rebate equal to about one-third of its booking
fee, in return for an agreement that any fare the airline
chooses to sell to the general public through any other outlet,
it will also make available to Orbitz. If it accepts this
latter proposition, it can put that same fare anywhere else it
wants--Orbitz expressly does not limit what that airline may do
with that fare anywhere else, because this is an expressly non-
exclusive arrangement. And the airline also gets non-biased
display and booking capability. This lower priced option is has
been chosen not only by the 5 airlines who have invested in
Orbitz, but by 37 other airlines as well.
That is the basic offer to encourage price competition: pay us the
standard amount and give us only the standard fares to sell, or give us
a few more fares to sell and we will give you a discount on the price
of having your tickets sold by us. That is exactly what happens in any
competitive distribution market. We have not previously had price
competition in air travel distribution, so some of our competitors
neither recognize it nor welcome it. A few of them would like you to
help them get government to prohibit price competition in the
distribution of air travel. But that would not be in the interest of
competition or of consumers.
The results speak for themselves. The largest online agencies,
Travelocity and Expedia, caterwauled for months, alleging that Orbitz
had exclusive rights to webfares, or that we didn't, but the airlines
individually refused to make webfares available to them. What was
really going on was that these largest websites wanted to get the
webfares without engaging in the price-cutting competition to get them.
When government did not come to their rescue by requiring the airlines
to have these websites sell their webfares without regard to what the
websites charged for the selling of those fares, the websites did what
any business would do, which is engaged in price competition. They made
offers to airlines to charge less for selling tickets through their
website in return for availability of webfares, and the airlines
individually began accepting those deals. Travelocity and Expedia now
have webfares and advertise that fact. But they got them by finally
engaging in normal price competition.
Let there be no doubt or mistake. Orbitz' competitors are getting
the websfares now that they have begun to compete for them. Statistics
that Orbitz uses to track whether it can still substantiate the
marketing claim of ``the most low fares'' shows the unmistakable trend
toward common fare offerings by all of the major online travel agents.
Expedia clearly leads Travelocity in this competitive battle, and their
recent marketing proudly proclaims their access to webfares. But the
point is the same. Our competitors allowed us an advantage in having
better fares for about six months while they complained to Congress and
the regulators. Then they began to do what they should--compete. The
fact is that the complaints about Orbitz we have heard for nearly two
years simply are not being proven by the online travel marketplace.
Today it is increasingly apparent that the complaints are nothing more
than the efforts of competitors who dominated a market to hold on to
the past. Granting them their desires will unquestionably, immediately
and perhaps irrevocably harm consumers and raise airlines' costs at the
worst possible time.
Now the question is being replayed by the CRSs. They are
caterwauling that Orbitz has exclusive fares, or that we do not but
airlines are individually refusing to make webfares available to the
CRSs. What is really going on is that the largest CRSs want to get the
webfares without engaging in price competition to get them. The
question again is whether you will call for government to require
airlines to buy the distribution services of the CRSs without regard to
what the CRSs charge for that service. If you do, you would be ending
any hope of price competition in the automated distribution of air
travel. You would be granting a government-protected monopoly pricing
power to the CRSs.
When government requires party A to buy party B's service, without
regard to the price party B chooses to charge, party B may now price
with impunity. Why should that excessive cost be built into the price
of air travel? What public purpose could that possibly serve? Wouldn't
that, in this case, serve the interests of the largest CRSs at the
expense of the travelling public?
A few more points need to be made here.
First, Orbitz did not invent webfares. They were invented long
before Orbitz was even conceived. They came about because the CRSs had
raised their booking fees so high, that the cost of selling tickets
through a travel agent using a CRS became so high, that airlines could
no longer afford to sell their lowest fares through that increasingly
expensive channel. When the airlines developed their own individual
airline websites, and found that those websites were by far the
cheapest way to sell a ticket, they began putting their lowest fares
only on their own website. And those fares became known as webfares.
What Orbitz has done is take those webfares that were only available on
the airline's own website, and made them more widely available by
putting them also on Orbitz. And what the price competition brought by
Orbitz has done is to also take those webfares and, by pushing
Travelocity and Expedia to engage in price competition, made those
webfares even more widely available by putting many of them on
Travelocity and Expedia. And if competition is allowed to continue to
work, we expect that the CRSs will sooner or later start to engage in
price competition as well, and those webfares will show up on the CRSs
also.
So webfares are spreading. They are becoming more and more widely
available. But there is also the benefit of spreading price
competition. It is a double benefit for consumers.
Second, not only are airlines and consumers being harmed by
excessive CRS booking fees, but so are travel agents. The cost of
selling through a travel agent went up over the past decade not because
travel agents charged airlines more for their services, but because
CRSs kept charging airlines more for selling through a travel agent.
The travel agent was priced out of selling the lowest airline fares,
not because of any cost imposed by the travel agent, but because of
costs imposed by the CRSs, decisions over which travel agents had no
control. To the extent travel agents have been harmed by the inability
to sell the lowest fares through the CRS that has them under contract,
that travel agent is the collateral damage of the CRSs having been
allowed to excessively price their service for so many years. Travel
agents would benefit from competitive pressure on CRSs to more
reasonably price their services, because that would make travel agents
a more price-competitive way to sell airline tickets.
The high CRS booking fees that have burdened airlines and their
customers for years have now become a major problem for travel agents
as well. Agents are being priced out of selling the lowest airline
fares by costs that are decided by somebody else and are paid by
somebody else to somebody else.
Third, Orbitz has in fact not only offered to reduce the costs of
distribution as described above, but has also offered further cost
reductions well into the future. Orbitz has agreed to a specified
schedule of fees that are reduced every year for many years into the
future. With CRSs the airlines have seen their costs going up every
year. With Orbitz they see their costs going down every year. In
addition, Orbitz has offered every airline the option of using new
technology being developed by Orbitz to remove not only the search from
the CRS (which Orbitz has already done), but also the booking itself.
This would eliminate the CRS booking fee, rather than merely reduce it.
Thus airlines can see substantially greater cost savings in the future.
And fourth, the importance of the CRS booking fee is easy to
underestimate, and it is important not to. A typical CRS booking fee
today is about $4.30 per segment. So for a single connection each way,
round trip itinerary, the booking fee would be over $17. It doesn't
sound like much. But that equates to over $2 billion per year for US
airlines, and ultimately for their customers who pay for that in their
ticket prices. Distribution costs are the third biggest cost category
airlines have, after only labor and fuel. And that is in the context of
a US airline industry that lost $7.7 billion last year, an all-time
record worst year by far. So far this year airline losses have been
equally disastrous. There is no question that the airlines have a vital
interest in seeing price competition come to distribution costs.
Two numbers are particularly revealing: in the first quarter of
this year, US airlines had an operating profit margin of negative 14%.
Sabre, the largest CRS, had an operating profit margin of positive 26%,
extraordinary for any industry, let alone one that is presumably
suffering the consequences of post-9/11 downturn in the economy in
general and travel in particular.
Technology and Information Quality Competition
The CRS's were built on technology that was cutting edge technology
in its day. Unfortunately, that day was in the 1960's and 70's. CRSs
are built on mainframe computing technology, and built around
programming languages that few even know anymore. One of the
characteristics of a monopoly is that it stifles innovation. CRSs have
added features to their old platforms, but at a time when most of the
world has moved from mainframes to server-based computing, the CRSs are
the last bastion of the old mainframes.
Orbitz introduced to travel distribution the use of modern server-
based technology to do searches. No online agency had done that before.
It brought major new benefits to consumers in the form of improved and
expanded information, and it substantially lowered the costs of
building and operating the heart of the system.
The old mainframes were limited in the size of the search they
could do in response to a customers request. The Orbitz search is
unlimited. The websites that used CRS technology for their searches
typically returned only 9 or 12 options for the consumer to choose
from. Orbitz returns hundreds of options to choose from, and provides a
handy matrix by which the consumer can readily organize those options
by airline, by lowest fare, by elapsed time, and so on. The consumer on
Orbitz gets more information and gets it in a more readily
understandable and useable form--and that is good for competition in
and of itself.
The positive consumer reaction to the Orbitz offer of more and
better information produced what it should have produced, which is
competitive pressure on others to improve their offerings. Expedia, for
example, after Orbitz launched, took its search function off the old
CRS mainframe and put it on modern servers. Furthermore, it borrowed
the matrix idea in a somewhat simpler version. Travelocity has also
said it intends to move off the mainframes, but has yet to do so.
This is technological competition doing exactly what it should do--
pushing everybody to get better. Not only are Orbitz customers better
off because Orbitz entered this market, but so are Expedia's customers.
However, while the technological innovations of Orbitz now look
like obvious improvements, at the time they were considered very risky.
No one had ever attempted to operate a CRS or an online agency using
anything other than mainframe technology. Some predicted that anything
other than mainframes would fail. In this environment, the only
investors willing to take the risk of investing in Orbitz were
airlines. They had both the knowledge of reservations systems to be
able to evaluate the technological risk involved, and their vital
interest as consumers of distribution services in increased
competition. The combination propelled them to be willing investors
when no one else was.
This is exactly the kind of situation the Department of Justice and
the Federal Trade Commission had in mind when they stated, in their
guidelines for business ventures that are collaborations of
competitors, that such collaborations by competitors can be pro-
competitive. In cases where it takes a collaboration of competitors to
create a new competitor in a field sorely lacking in competition, that
can be a very positive development both for competition and for
consumers. That is certainly the case with Orbitz.
Orbitz, however, has no interest in remaining a company with only
airline investors. We need to expand our pool of investors, and that
means going outside the world of airlines to find additional investors.
We have filed a registration with the SEC for a public offering. It is
our intent to make that public offering, and bring in public investors
and all the obligations that entails, as soon as market conditions
permit.
One other innovation we have brought to information quality, which
unfortunately has not been imitated by our competitors, is our no-bias
displays. The typical practice of the largest online agencies is that
they sell--or perhaps short-term rent would be more accurate--to
airlines a commitment ``to swing market share'' to one particular
airline at the expense of the others. What that means in practice is
that a large online agency commits to a particular airline that it will
get more consumers to buy that airline's tickets than would normally be
the case, in return for extra payment from that airline. Orbitz, by
contrast, has barred itself by contract from doing that. The Orbitz
displays are strictly zero-bias. Our strategy is to present to
consumers the most options, in the clearest format, with no bias among
any carriers (and we offer the schedules and fares of over 450
airlines). This is an especially important benefit for small and low-
fare airlines such as National Airlines and Midwest Express; as the DOT
Inspector General has recognized, ``their fares alone will define where
they are featured in the Orbitz display.''
On Orbitz any airline will get exactly the same display advantages
as any other--no better and no worse. And they don't have to pay extra
not to be biased against. And any consumer will get thorough and
unbiased information, without efforts to push them to one airline or
another. We believe that this approach offers a better deal both to
airlines and to consumers.
Customer Service Competition
Our view was that online agency websites before Orbitz offered lots
of schedules and lots of fares, but not much in the way of service
after the consumer bought a ticket. We decided that was an area where
consumers wanted more and we could deliver more. We built a series of
features we call Customer Care, designed to provide consumers that
follow-on service that was so lacking. When you book a ticket on
Orbitz, you have the option of signing up for follow-up information
about your flights. Orbitz will sent to you electronically continuous
update information about your flight: a delay, a change of gates, a
weather problem, congestion on the road to the airport, a delayed
connecting flight, a local problem with air traffic control delays,
alternative flights or hubs you might use to solve the problem, and a
great deal more.
We find that many of our customers love this service. They tell us
they often learn of problems from Orbitz before the airline informs
them of those problems.
Again, competition did what it was supposed to do. Our competitors
discovered that our customers loved this service, and they began
working on up-grading their post-booking service as well. As a result,
everybody has gotten better. In fact, many of the individual airline
websites have significantly improved the follow-on service they
provide. Competition works.
The Subcommittee
The Subcommittee needs to recognize that Orbitz is an issue not
because it has reduced competition, but because it has increased it.
And in particular, it has increased competition in an arena that has
not been accustomed to price competition in particular in many years.
The largest CRSs, Sabre in particular, are having a difficult time
adjusting to the fact that they, like other businesses in America, are
going to have to operate in a competitive marketplace. This is a new
development for them, and some of them are not adjusting well.
Orbitz is not the cause of an anti-competitive situation, it is
part of the remedy to an anti-competitive situation that has been
allowed to perpetuate itself far too long. Orbitz is part of the
process of the competitive marketplace returning to an arena from which
competitive forces have long been excluded.
Some in their effort to persuade government to block new
competition have alleged that Orbitz has such advantages that it will
sweep all before it and thus ultimately reduce competition. That
argument is as silly as it is self-serving.
Most fundamentally, Orbitz has no advantage that others cannot
duplicate if they choose to.
Orbitz got access to webfares, but only because it was willing
to engage in reduction of booking costs to get those fares. To
the extent others have been willing to do so (particularly
Expedia, and to a lesser extent Travelocity) they have gotten
webfares as well. CRSs have thus far not been willing to
compete on the basis of the booking fees they charge. But it is
clear that if they were willing to do so, they could get access
to webfares as well. So far they would rather preserve their
high booking fees. It is their choice.
Orbitz has better search technology, performed by modern and
far less expensive computers. The Orbitz approach of using the
Internet and modern server-based computers is an approach with
far lower costs of competitive entry than was the case with CRS
technology, in which new entry was fundamentally impossible and
never occurred. Orbitz has opened up the possibility of others
entering this marketplace by demonstrating that new technology
offers significantly lower barriers to entry. Any competitor
could make the same upgrade in technology and enjoy not only
better performance, but lower operating costs. It is their
choice.
Orbitz pushed the envelope in follow-on service to consumers,
but others can do that as well, and some have. It is their
choice.
Orbitz has offered airlines commitments of further cost
reductions going into the future, and has offered the option of
making most of their bookings without use of the CRS. Any other
competitor can offer that as well; they only have to make the
technology investment to make those advances possible. It is
their choice.
Orbitz offers consumers a no-bias display, with no pressure or
influence on the consumer to buy one airline over another.
Orbitz loses a potential revenue source by adopting this
approach, but in return it gains some customers who prefer the
no-bias approach. Any other competitor can adopt the Orbitz no-
bias approach as well, if they are willing to give up the extra
revenues that come from selling bias. It is their choice.
Where we are today is that CRSs sell about 70% of all airline
tickets by dollar volume. Orbitz sells less than 2%.
Orbitz launched in June, 2001, and quickly became the third
largest online agency, after Travelocity and Expedia. One year
later Orbitz's relative position to those two competitors is
virtually unchanged. Among the three, Orbitz had slightly less
than a third of that market a year ago, and that is what it has
today. There is no trend line of Orbitz gobbling up all before
it.
The Internet share of all air travel sold is growing, and is now at
about 15% by value. But over half of that is individual airline
websites, and those are growing faster than the online agency segment,
including Orbitz. Following these numbers through, that means that
Orbitz has less than 2 percent of the total distribution of airline
tickets in the U.S. Hardly the dominant position that our critics have
proclaimed.
Most basically, if, in some unforeseen and unlikely future, Orbitz
did start eliminating competition, we have federal agencies with more
than sufficient powers under the anti-trust laws and aviation statutes
to step in and stop it. We do not need to stop a new competitor today,
risking the elimination of clear consumer benefits, because someday, in
somebody's fevered imagination, Orbitz might become so successful as to
start eliminating competition itself.
In short, we do not engage in this country in anti-trust action
based on future speculation. We act in response to evidence of an
actual problem, not an imagined problem.
As the Department of Transportation recently concluded, ``. . .
government intervention in the marketplace should be designed to
correct a failure of market forces, not to replace or pre-empt them in
ways that could potentially stifle competition.''
Federal and state regulators who are charged with enforcing the
antitrust laws have reviewed Orbitz extensively, spanning more than two
years. And despite this extensive review, nothing has come to light
that has led any regulator to seek changes to the Orbitz business
model, agreements or structures. In contrast, the most definitive
conclusions the Department of Transportation has noted in its multiple
reviews is that Orbitz entry has led to material pro-competitive
advantages for consumers and the airlines.
In April, 2000, long before Orbitz launched, Orbitz went to the
Department of Justice and suggested that they review our agreements,
business plan, and the like. We provided to Justice all our agreements,
contracts, and other relevant documents. Justice has reviewed our
materials and continues to monitor our actual performance. In addition,
they have sought information from airlines and from our competitors. If
at any time before our launch or since they had concluded that our
approach, or any aspect of our arrangements, was anti-competitive, they
had full powers under the anti-trust laws to move to stop us or to
force us to modify our approach. They have never done so.
Similarly, at approximately the same time, we made the same
materials available to the Department of Transportation and to the
Inspector General of the DOT. Both have thoroughly reviewed our
agreements, contracts, business plans, and the like, and have sought
information from airlines and our competitors. DOT concluded before our
launch that there was no basis for using their authority to either
prevent us from launching or to direct us to modify any aspect of our
approach. They in fact found that on balance we offered both pro-
competitive and pro-consumer effects. Like Justice, they have continued
to monitor our actual performance. DOT recently issued a report on that
monitoring and found no basis for changing their original view. It is
clear that if they had found an anti-competitive problem, they have
both the legal authority and the will to act to prevent it. But they
did not.
Orbitz has been thoroughly scrutinized by both Justice and DOT, and
continues to be. We have passed every test to date. This Subcommittee,
if it wishes a careful review of Orbitz, need do nothing. That review
has been underway for years and continues, despite the fact that it has
found no anti-competitive problems.
Those agencies should be allowed to continue and complete their
work in a thorough and balanced way. No public interest is served by
one-sided calls for thorough scrutiny of Orbitz, and not of the CRS
problem.
Automated distribution of air travel has long-standing problems
with respect to adequate competition. We need to work toward a
restoration of competitive market forces in this arena. Reactionary
calls to artificially preserve an inadequately competitive status quo
do not serve the public interest and in fact work against both
competition and the consumer.
Mr. Stearns. I want to also add that in a Washington Post
article on June 19, I was quoted as saying that I intended to
hold this hearing on this subject prior to the August recess.
I attempted to accommodate some folks on this, and I was
willing to delay this hearing, but it did not work out. So we
are proceeding with our witnesses, and I want to thank them,
and I look forward, of course, to their testimony.
[The prepared statement of Hon. Cliff Stearns follows:]
Prepared Statement of Hon. Cliff Stearns, Chairman, Subcommittee on
Commerce, Trade, and Consumer Protection
Good morning. I would like to welcome you all to this oversight
hearing of the subcommittee on Commerce, Trade and Consumer Protection
entitled: ``Are all Online Travel Sites Good for the Consumer: An
Examination of Supplier-Owned Online Travel Sites.'' I would like to
especially thank our witnesses on behalf of the Committee for their
appearance and testimony.
Notwithstanding the hyper-enthusiasm for all things Internet and
electronic commerce of the recent past, the fact remains that the
Internet as an efficient, ubiquitous communications tool has
substantially transformed, in fundamental ways, commerce as we have
known it. Electronic commerce traversing the communications network
that is the Internet is real, substantial and rapidly becoming a key
component of our economy. The hyper-predictions of not so long ago that
e-commerce will reach $3 to 4 trillion dollars by 2003 may not have
come true, but by most estimates, the value of business-to-business
commercial transactions that transpire online is well over $1 trillion
today. More significantly, the rate of growth of such business-to-
business transactions is increasing unabated and it is far in excess of
the growth rate for offline commerce.
Business-to-consumer e-commerce may also have not meet the glorious
predictions of the pundits who rained during the .com bubble, but the
fact remains that it has grown substantially and it continues to grow
at rates unmatched by offline commerce. One of the more stellar
examples of business-to-consumer e-commerce growth is the online travel
business. For example, in just over three years, 15% of all airline
tickets are now being sold online and the growth rate for such
transactions is still accelerating. More significantly, increasingly
consumers are seeking and receiving more advanced travel services
through online travel sites, such as arranging multi-city or even
country trips involving a myriad of reservations for air travel, car
and hotel reservations and tours.
During the .com bubble it seemed that any and all business models
were tried, as investors, in their euphoric state vis-a-vis ``anything
Internet'' had the penchant to welcome and accept them all. As the dust
settled and we learned that while selling books online made sense,
selling groceries didn't, a ``sort'' of new business model has gained
in appeal among dominant suppliers in certain industries. That ``sort''
of new business model calls for the dominant firms within an industry
to collectively create an online distribution network for their goods
and services. In practice this business model has manifested itself in
a number of supplier-owned online distribution joint-ventures, where
the participating companies tend to be the top five or six in the
industry. These supplier-owned online distribution joint-ventures are
now present across a number industries, including the air travel,
lodging, cosmetics, music, and foreign currency exchange.
There is no question that such supplier-owned online distribution
systems engender economic efficiencies and consumer benefits. At the
same time, there is also no question that any time competitors come
together in collaborative efforts, such as these joint-ventures, there
exits the risk for collusive activity that may impede commerce and harm
consumers. This hearing is meant to create an educational forum to
examine both the benefits and possible risks that supplier-owned online
distribution systems hold for the American consumer. As examining
supplier-owned online distribution systems across the multitude of
differing industries within which they appear would have been a tall
order for one hearing. Therefore, this hearing will focus only on
online joint-ventures in the air travel and lodging industries.
We have before us great expert witnesses on the issue. We had hoped
to have Orbitz and at least one of the five major airlines that own it
to speak to Orbitz's business model directly. Unfortunately, due
scheduling conflicts they were unable to attend. However, Mr. Gary
Doernhoefer, Vice President and General Counsel of Orbitz, L.L.C. has
provided the subcommittee with written testimony on behalf of Orbitz,
which I now offer to be included as part of the record.
I thank the witnesses and look forward to their testimony.
Mr. Stearns. At this point, the ranking member is on his
way, and so I will ask the vice chairman of the subcommittee,
the distinguished member from Georgia, Nathan Deal.
Mr. Deal. Thank you, Mr. Chairman. There is no admonition
to trial lawyers that says that if the facts are on your side,
argue the facts. If the law is on your side, argue the law. If
neither the facts nor the law are on your side, pound on the
table.
I find it highly regrettable that this hearing has been
intentionally staged to provide a forum for parties who simply
want to pound on the table, since they have neither the facts
nor the law on their side.
It is even more regrettable that the company upon whom much
of this hearing is focused, Orbitz, was not afforded the same
respect and common courtesy with regard to notice and
opportunity to testify as those who will testify against it
here today.
It is not only regrettable in my opinion, but inexcusable,
that those of us on the subcommittee who believe that all
parties should be treated fairly and equally have likewise been
regarded as second-class committee members by the staff and by
some in leadership positions, and who apparently don't want
anyone to interfere with this public lynching of Orbitz in
absentia.
Since the pounding on the table will soon begin, let me
first set forth some facts. Automated distribution of airline
travel through large mainframe computers began two decades
before the Internet.
These are known as computer reservation systems, CRSs, and
there are only four of them in the world today. CRSs charge
airlines booking fees that average over $17 for a single
connection round-trip.
These booking fees cost U.S. airlines over $2 billion per
year. The largest CRS is Sabre, which owns Travelocity, and
today CRSs sell about 70 percent of all airline tickets,
whereas Orbitz sells less than 2 percent.
CRSs were considered so monopolistic that in 1984 Federal
rules were created to attempt to limit their powers. Even so,
the booking fees charged by CRSs have continued to rise every
year over the past 15 years, and since 1999 they have increased
4 to 7 percent every year, despite the falling costs of the
information processing and computer systems.
And 75 percent of Sabre's revenues are from booking fees,
which have increased an average of 5 percent per year for the
past 10 years. Thirteen months ago, five major airlines created
Orbitz in order to provide customers with better service and
cheaper travel costs.
Last year U.S. airlines lost $7.7 billion, and are carrying
debt burdens of $110 billion, and for the first quarter of this
year have an operating profit margin of negative 14 percent.
Sabre, the largest CRS, and the parent company of
Travelocity, had an operating net profit margin of positive 26
percent. Orbitz has been success by applying advance technology
and making its products user friendly for those who want to
book their flights on-line.
Travelocity, through its old CRS mainframes, are still
using those old mainframes, but wants Congress to protect it.
How can this subcommittee, which is charged with consumer
protection, condemn those who have been innovative, and attempt
to reward old monopolistic entities who refuse to modernize in
an effort to try to eliminate their competition through this
committee means.
Just as the facts are not on the side of those who
criticize Orbitz, neither is the law. Before Orbitz was
launched, it went to the Justice Department and asked them to
review their business plan and agreements, and DOJ did so, and
had they thought that Orbitz was anti-competitive, they had the
power to stop them, but they have not done so.
The Department of Transportation and the Inspector General
of the DOT have also monitored Orbitz and have likewise found
their practices to be not anti-competitive.
The recently released DOT report to Congress on Orbitz that
was engineered by some of the witnesses here today don't find
any violations either, and contain this statement, and I quote:
``Government intervention in the market place should be
designed to correct the failure of market forces, and not to
replace or preempt them in ways that could potentially stifle
innovation.'' That is good advice for this subcommittee.
Those are the facts and the law, and no amount of pounding
on the table is going to change them. By taking financial risks
and by employing innovative technology, Orbitz has lowered the
cost of air travel, has made booking of flights over the
Internet user friendly, and through the power of competition
has rattled the cages of some of this monopolistic opponents.
That is what this subcommittee should encourage and not
vilify. Thank you, Mr. Chairman.
Mr. Stearns. I thank my colleague, and I think your robust
testimony will provide advocacy for anyone who could not make
it in a very, very confident and able way. The gentleman from
Nebraska, Mr. Terry.
Mr. Terry. Thank you, Mr. Chairman. I want to thank you for
holding this hearing. My friend from Georgia is a trial lawyer,
and the adage is that if the facts are not on your side, argue
the law; and if the law is not on your side, settle and get out
of the case as fast as possible.
Otherwise, the other part of the adage is attack their
credibility, and I hope that is not what we are here to do
today as may be suggested. But I am one of those people who
signed the letter asking for this hearing, because I am worried
about what appears to be an attempt for on-line anti-
competitive behavior.
And I will submit my full statement for the record, only
highlight the two points that concern me, and why I want to
have this level of discussion here today. Any time you have an
entity, when there is vertical integration, and you have the
five major airlines that own this, the first thought can only
be that they want to control every facet of booking airlines.
Fortunately, as Mr. Deal has pointed out in his statement,
there is so much competition on-line anymore that it may just
be commercially impossible to dominate at the level that
probably they intended when they formed this.
The other issue that I think probably gives you credibility
where you can argue facts, and can argue law in a case like
this is the most favored nations clause that is in here that
gives those people that participate, started up Orbitz, the
self-serving lowest fares that others can't get.
So I want to talk about that. Now, fortunately, I think the
fact that they haven't been able to dominate the market
probably speaks well for the market. The fact that they intend
to go out for an IPO certainly lessens my concerns of the
vertical integration, that it is the five major airlines that
own this entity of Orbitz.
Mr. Chairman, I have a more complete statement that I wish
to enter into the record, but I am anxious to hear from the
witnesses, and I know that their time is short as well. So I
yield back.
[The prepared statement of Hon. Lee Terry follows:]
Prepared Statement of Hon. Lee Terry, a Representative in Congress from
the State of Nebraska
Thank you, Mr. Chairman, and I thank you for holding this hearing
on an issue of growing concern, not only in the airline industry, but
other sectors as well. As I noted in a letter to you May 16th
requesting this hearing, brick-and-mortar competitors in any industry
joining forces for an e-commerce venture raises serious concerns. We
have seen this trend extend past online travel and into the music and
hospitality industries, and I commend you for holding this hearing to
ensure members of your subcommittee are well informed on the issues
surrounding supplier-owned online ventures.
In April, I joined more than 20 of my colleagues in a letter to
Deputy Assistant Attorney General Hugh Pate, requesting the Justice
Department fully investigate the practices of Orbitz, a supplier-owned
online travel company. My concerns in this regard were twofold. First,
the owners of Orbitz are the five largest airline companies: United,
American, Northwest, Delta, and Continental. Moreover, representatives
of these companies sit on the board of directors of Orbitz. These facts
raise obvious concerns as to the completeness of information provided
to consumers about competing airlines when surfing Orbitz.com. Is it
coincidental these five airlines represent lowest fares on Orbitz
searches more than 70% of the time, whereas other online travel sites
return lowest fares for these same five airlines little more than 60%
of the time? I understand Orbitz soon will be offering an IPO, which
will diminish some of my concerns of it being owned by the five major
carriers, but will do nothing to ease my apprehensions it is still
being operated by the five largest air carriers.
My second concern is the so-called ``most-favored nation'' clause
mandated by Orbitz for participating airlines. MFN requires
participating airlines to produce lowest fares and make them available
to Orbitz at all times. This clause provides a competitive advantage to
Orbitz, and consequently its five owners. Worst of all, this clause
makes consumers dependent on the company, rather than the company
dependent on consumers, which is the essence of a free market and open
competition. One question I would like answered at this hearing, Mr.
Chairman, is why the MFN clause is even necessary? It would seem to me
that a company engaging in ethical business practices with a solid
business plan could gain success through innovation and capturing the
attention of consumers, not artificially manufacturing its own market
by trapping its competitors. Orbitz's own general counsel, Gary
Doernhoefer, admitted in a July 12th CNET News interview that Orbitz's
MFN clause is not necessary for the company to be profitable. Why not,
then, let the market dictate survivability rather than contractual
clauses?
I want to be clear that I wholeheartedly endorse increased
competition. I also applaud Orbitz, Expedia, Travelocity, and a variety
of other online ventures for using technology to expand our economy,
and I'm pleased other sectors are doing the same. However, it is the
responsibility of this subcommittee in general and a matter of specific
concern to me that markets expand fairly; that consumer, not corporate,
behavior drives profitably; and that above all, competition is
preserved. I look forward to the testimony, and I yield back.
Mr. Stearns. I thank the gentleman, and your complete
statement will be part of the record, and the distinguished
ranking member of the committee, Mr. Towns, is recognized.
Mr. Towns. Thank you very much, Mr. Chairman. Let me begin
by thanking you for holding this hearing. I strongly believe
that companies using the Internet to reach more consumers and
to move their goods and services at inexpensive costs to
consumers--and I have consistently voted with other members of
this body to keep the Internet free from sales taxes and other
regulations would stifle the growth of on-line commerce.
I think by and large we have accomplished that we set out
to do, and that is to maintain competition in the on-line
marketplace. Often times I think there is more competition on-
line than off-line.
But I most admit to you, Mr. Chairman, that I have concerns
that certain aspects of these supplier owned business models,
the new controversy surrounds Orbitz, and which the carriers
have placed a significant investment.
And while I have no problem with the airlines seeking to
make more money, because that would preclude them from having
to borrow money from the government, I do have some concerns
regarding the competitive environment, or the perception of
anti-competitive environment that exists on on-line travel
sites.
Earlier this year, I signed on to a letter with my
colleagues, Mr. Boucher, and Mr. Grucci, which asked the
Justice Department to continue to monitor Orbitz and other on-
line travel sites which may be using unseemly practices to
squash competition.
It is my understanding that the airlines have a compelling
story to tell, and I wish, I wish, that they were here today to
discuss their side with us at this hearing. I say again, I
regret that they are not here. So I will be asking questions of
those assembled this morning, because it is my priority to
ensure that the Internet continues to be a competitive
marketplace, which benefits not only companies, but consumers
as well.
Let me add, Mr. Chairman, that I am somewhat confused on
why Orbitz is not here on their own accord today. I feel that
as always that in this committee we have tried to put together
a fair and balanced hearing, and don't understand why we have
zero representation from Orbitz or the carriers.
However, I look forward to hearing the testimony before us
today, Mr. Chairman, and hope to get more information on this
complicated subject, and I yield back, because this is the most
bipartisan committee in the U.S. Congress, and I want to let
you know that is directly affecting upon your leadership. Thank
you.
Mr. Stearns. I thank our distinguished colleague. We have
two members who do not serve on the subcommittee, and both of
these individuals have approached me, and wish to have an
opening statement, or to have an opportunity to comment.
Now, this cannot be done without unanimous consent of this
committee. So if there is any objection, you can voice it now.
The gentleman from Georgia.
Mr. Deal. Mr. Chairman, reserving the right to object, and
I will not object, certainly Mr. Boucher is an esteemed member
of the overall committee, and I am well aware of his position,
having also seen the letter that he and others have circulated
back in April asking the Justice Department to continue to
monitor Orbitz.
And I have no objection to Mr. Grucci also making a
statement. I would have, of course, much preferred that they
take the witness table so that they would be subject to being
asked questions about their positions, which in opening
statements first of all don't afford us that opportunity for
that dialog and interchange.
And of course by the virtue of their positioning in their
opening statements, they in effect have the last word. But I
will not object, and I welcome both members to this committee.
Mr. Stearns. I thank the gentleman, and by unanimous
consent, both of them will be able to offer their opening
statement, and at this point we will take Mr. Boucher, who is
recognized.
Mr. Boucher. Well, thank you very much, Mr. Chairman. I
appreciate the opportunity to participate in the hearing today,
and I want to thank the Chairman for accommodating my presence
here, as well as the presence of another member who also does
not serve on the subcommittee.
I have a very strong interest in the matter that will be
discussed today, and I want to comment you, mr. Chairman, for
focusing the attention of the subcommittee on how consumers are
affected by practices of supplier-owned on-line travel sites.
There is a growing and in my view disturbing trend of
companies in a given industry banding together to create a
website for distributing their products or services, and then
favoring that website with information or other benefits not
shared with other websites that compete with the industry owned
site.
The denial of this information or other benefit by those
exclusively in control of it to the web-based competitors of
the industry-owned website, directly hinders competition in
electronic commerce, by injuring the businesses of existing on-
line competitors, and by discouraging new entrants into the
market.
Consumers are hurt as the number of websites offering
products or services to them are restricted. Today, we examine
this practice as it exists in the airline reservations market.
I would point out to the members that troubling examples of the
same practice are also found elsewhere.
In the music industry, the five major record labels have
created two websites for the delivery of their music
inventories across the Internet. They have denied to the on-
line competitors of those websites comparable licenses for the
significant foreclosure of Internet-based competition and music
delivery.
And incidentally, I have introduced legislation that is
designed to address that practice by requiring non-
discriminatory licensing in that instance. Elsewhere, we
observe the creation of websites jointly owned by other
suppliers, from a hotel distribution system that is owned by
five major hotel groups, to Gloss.com, that is owned by three
leading beauty products manufacturers.
To MovieLink, that is owned by the six major motion picture
studios; to FX-All, for currency exchange, and that is owned by
17 leading international financial institutions. Now, while I
am not aware of the particular practices of these supplier-
owned ventures, I think that they may deserve this committee's
inquiry and attention at some future time.
Their creation clearly marks a trend of suppliers in a
broad range of industries participating in the creation of
websites that hold the potential of injuring commerce and
adversely affecting consumers, and I think they bear watching.
I am familiar with the practices of the industry that we
are focusing on this morning. Orbitz, jointly owned by the
largest air carries, in my view gets an unfair break. The
carriers give Orbitz their best fairs.
These lowest fairs are not available to the non-industry
affiliated websites, Expedia and Travelocity.com. The ability
of these independent companies to offer vigorous on-line
competition to Orbitz is injured by this practice.
Consumers of Internet-based travel sales are hurt as a
result. Orbitz gets yet another break. Its contract with its
carrier owners requires that all fares given by any carrier to
its own website, or to a third-party site, such as Expedia or
Travelocity, also be given to Orbitz.
So no carrier can enter into an exclusive promotion with a
third-party site that would offer exceptional bargains to the
public. Some of the best opportunities for inexpensive travel
used to come from these exclusive promotions. Not anymore.
As my constituents frequently say to me when they are
outraged about an obvious unfairness, there ought to be a law,
and in the off-line world, there is a law. The Department of
Transportation has a rule that airlines owning 5 percent or
more of a computer reservations system must give other computer
reservation system the same low fairs they give to the system
they partially own.
A rule like that I think is badly needed to address the
problems in the on-line world, about which we will learn more
during the course of this morning. Mr. Chairman, I thank you
for calling the committee's attention to what is an obvious
problem.
Consumers, I think, will be benefited by the work that your
subcommittee is undertaking, and I again thank you for the
opportunity to take part in the hearing.
Mr. Stearns. I thank my colleague. You can tell your
constituents to be careful what he asks for when he said there
ought to be a law. Mr. Grucci from New York is recognized.
Mr. Grucci. Thank you, Mr. Chairman. And let me thank you
and the ranking member, and the esteemed members of this
committee for giving me the opportunity to be here this
morning.
I am not a member of this subcommittee, nor am I a member
of the Commerce Committee, but I am a member of the Small
Business Committee where we had a similar hearing that dealt
with Orbitz, and airlines, and the issue dealt with the
unilateral decision by the airline industries to stop making
payments to the travel agents, while continuing to make
payments to organizations like Orbitz, which is owned by the
five major airlines.
This issue first came to my attention when a travel agent
in my district, a small businessman, came to my office to
explain the hardships that both on-line and traditional travel
agencies were facing because of the policies of the major
airlines.
He gave me examples of policies ranging from the recent
elimination of commissions to U.S. travel agencies, to limited
access to air fares. While many of his concerns were diverse in
nature, each one of them shared a common theme; the policies
were anti-competitive, anti-consumer, and anti-small business.
One need not look beyond the issue of Orbitz to highlight
the very airline practices my constituents spoke of. Orbitz is
a company that was started by the five major airlines; Delta,
United, Northwest, American, and Continental.
While the purpose for its creation is of some concern, the
greatest of problems lies within Orbitz's anti-competitive
practices. Please allow me to review some of these practices
with you. First, Orbitz receives airfares that are not
available on any other travel site or through any other travel
agency.
Orbitz refutes this claim by standing behind the technology
they use called ITA. An informal study by the owner of
OneTravel.com, which I would like to submit for the record,
Orbitz not only receives better fares than the average travel
site, but also the very technology it claims to receive these
fares from.
For example, a flight from New York to Dallas costs $255
through ITA, but $249 on Orbitz. Second, Orbitz is clearly
biased in favor of its own airlines. According to a report
recently filed with the Department of Transportation, 71.6
percent of bookings on Orbitz between July 1, 2001 and February
28, 2002 was for its owner airlines, known as the big five.
During that same period, 51.3 percent, 61.4 percent, and
62.7 percent were reported big five bookings on OneTravel,
Travelocity, and Expedia, respectively. Third, while the owner
airlines of Orbitz have chosen to eliminate commissions to
travel agencies in the United States, they continue to pay
$6.37 to Orbitz for every ticket purchased.
I may add that the other group of companies that airlines
have chosen to continue to pay commissions to, are travel
agencies in foreign countries. In closing, I might add that it
is greatly troubling that both Orbitz and the airlines are not
represented here today.
In a Small Business Committee hearing on this issue on May
2, the airlines also turned down invitations to testify. Oddly
enough, before Congress gave airlines $15 billion in financial
assistance, it was difficult to leave your office without
seeing airline executives and lobbyists.
Now when their true practices are being highlighted, as
travel agencies are forced to go out of business, these
airlines seem to be hiding. Again, Mr. Chairman, I want to
thank you for allowing me the opportunity to be here, and I
would ask that my complete statement be submitted for the
record, as well as the attachments.
Mr. Stearns. Without objection, it is so ordered.
[The prepared statement and attachment of Hon. Felix J.
Grucci follows:]
Prepared Statement of Hon. Felix J. Grucci, Jr., a Representative in
Congress from the State of New York
First, I would like to thank Chairman Stearns for inviting me to
today's hearing addressing the issue of supplier owned online travel
sites. I appreciate the committee's generosity in allowing me to be
here this morning.
This issue first came to my attention when a travel agent in my
district--a small businessman--came to my office to explain the
hardships that both on-line and traditional travel agencies were facing
because of the policies of the major airlines. He gave me examples of
policies ranging from the recent elimination of commission to U.S.
travel agencies to limited access to airfares.
While many of his concerns were diverse in nature, each one of them
shared a common theme: the policies were anti-competitive, anti-
consumer and anti-small business. I might also add that his concerns
were not specific to his company--since I have been involved in this
issue, hundreds of travel agencies have contacted my office mirroring
the very concerns expressed to me by my constituent.
One need not look beyond the issue of Orbitz to highlight the very
airline practices my constituent spoke of. Orbitz is a company that was
started by the five major airlines--Delta, United, Northwest, American
and Continental.
While many would argue that Orbitz was launched in 2001 in order to
drive Expedia and Travelocity out of the market, airlines claim that
Orbitz was created because of the high cost of the travel agency
industry. Despite the fact that they have eliminated commission to U.S.
travel agencies, airlines claim that the costs associated with the
Computer Reservation Systems--or CRSs--used by travel agencies are
growing too expensive.
Gary Doernhoefer, the Vice President and General Counsel to Orbitz,
recently stated in a Small Business Committee hearing that ``the
changes in the industry are bringing about needed relief to a
distribution system that is broken; a system that for years has boasted
leading edge technology--Computer Reservation Systems or CRSs--deployed
in a tragically inefficient, unnecessarily costly structure.'' He also
made reference to CRS costs later in his testimony, stating, ``as these
costs went up, fares had to go up as well.''
The great irony of this argument rests in the fact that the
airlines created, and until recently, owned each of the four computer
reservation systems. One of the CRSs, Worldspan, is owned by three of
the owners of Orbitz--Delta, American and Northwest. How can they argue
that the CRS' are charging too much money, when the airlines are the
ones responsible for setting rates for the CRS they own?
While the purpose for its creation is of some concern, the greatest
of problems lies within Orbitz' anti-competitive practices. Please
allow me to review some of these practices with you:
First, Orbitz receives airfares that are not available on any
other travel site or through any other travel agency. Orbitz
refutes this claim by standing behind the technology they use
called ITA. In an informal study by the owner of Onetravel.com,
which I would like to submit for the record, Orbitz not only
receives better fares than the average travel site, but also
the very technology it claims to receive these fares from. For
example, a flight from New York to Dallas costs $255 through
ITA but $249 on Orbitz.
Secondly, Orbitz is clearly biased in favor of its owner
airlines. According to a report recently filed with the
Department of Transportation, 71.6% of bookings on Orbitz
between July 1, 2001 and February 28, 2002 was for its owner
airlines--known as the big five. During that same period,
51.3%, 61.4% and 62.7% were reported big five bookings on
Onetravel, Travelocity and Expedia respectively.
Third, while the owner airlines of Orbitz have chosen to
eliminate commission to travel agencies in the United States,
they continue to pay $6.37 to Orbitz for every ticket
purchased. I may add that the other group of companies that
airlines have chosen to continue to pay commission to are
travel agencies in foreign countries--at the same time that
travel agencies are struggling to survive in the United States
because of commission cuts.
Orbitz has a series of restrictive provisions in its contract with
an airline that are heavily anti-competitive. Orbitz requires the
airline to give all fares available through the airline's own website
to Orbitz. It also requires airlines to give Orbitz any deal that the
airline reaches with other travel sites. Lastly, it requires the
airline to provide either marketing support valued at $14 million a
year or access to exclusive fares.
Mr. Chairman, I believe Michael Thomas of Onetravel said it best
when he said, ``It is as if GM, Ford and Chrysler decided to form a
super-dealership that would compete head-on with independently owned
car dealers, and would withhold certain automobiles from the
independents--the cars the public most desired.''
In closing, I might add that it is greatly troubling that both
Orbitz and the airlines are not represented here today. In a Small
Business Committee Hearing on this issue on May 2, the airlines also
turned down invitations to testify. Oddly enough, before Congress gave
airlines $15 billion in financial assistance, it was difficult to leave
your office without seeing airline executives and lobbyists. Now, when
their true practices are being highlighted--as travel agencies are
forced to go out of business--these airlines seem to be hiding.
Again, Mr. Chairman, thank you for allowing me to join you here
this morning and I look forward to hearing the testimony of the
witnesses and trying to find a way to eliminate the anti-competitive
practices of both the airlines and Orbitz that are forcing hard working
Americans with the travel agency industry--both on-line and off-line--
to look for new jobs.
Thank you.
Mr. Stearns. The gentlelady from Colorado.
Ms. DeGette. Thank you, Mr. Chairman. I just have a couple
of thoughts that I would like to share, and I don't come into
this hearing with a preconception about what I think we should
do about the issue, but let me say last night I decided to see
what Orbitz did for myself.
And so I went on to my computer, and I got some prices for
flights from my hometown of Denver to Washington and back, and
I went on some of the other travel sites and got comparable
fares.
And I did find with some of the fares that Orbitz was
cheaper, but I also found at the same time that Orbitz did not
feature flights from Frontier Airlines, which is our big
competitor in the Denver-Washington market.
So my question is that while Orbitz may be very helpful for
consumers right now, and because of its structure may be able
to really help consumers get low airfares, what happens in the
long run in markets like my market, which is a hub for United,
if sites like Orbitz don't feature some of the startup
competitors.
What happens to overall airline ticket prices in the long
run. On the other hand, does the availability of a supplier-
owned distribution system like this turn the concept of anti-
trust on its head, and do we really have anti-trust issues with
a company like Orbitz, which is an Internet company, and only
one of many Internet companies.
So I guess the question we need to ask is whether this
model is inherently anti-consumer or pro-consumer. Are these
businesses destined to inhibit competition in the long run, or
is there some way they could enhance competition in the long
run.
I think that from the consumer standpoint that this is
critically important to answer, because over time given
Orbitz's successful business model, this is not going to just
affect the airline industry, but all kinds of different
industries.
So I look forward to this hearing, and I thank the chairman
for having it, and I yield back the balance of my time.
Mr. Stearns. I thank the gentlelady. The gentleman from New
Hampshire, Mr. Bass, is recognized.
Mr. Bass. Thank you, Mr. Chairman, and I appreciate you
holding the hearing, and as a former member of the Aviation
Subcommittee and a licensed pilot myself, and I have been an
instrumented pilot now for 32 years, I would like to be back
thinking about aviation issues just for a couple of hours.
We are all aware of the boom and bust cycle of most e-
commerce enterprises over the past few years, but from the
beginning travel planning was among the very limited number of
industry sectors that could be profitable on-line. It could be
because it makes sense.
And for better or for worse, instead of calling a travel
agent for airline or hotel directly on the phone, you can now
do it yourself, and we all do that, sometimes directly with
airlines, and sometimes with intermediaries.
It has obvious consumer appeal, and you can check prices,
and it has really made the business of understanding airline
travel a lot easier. But more broadly, I think today's hearing
will be an opportunity to consider the consumer benefits of
moving outside proprietary networks into a more open
architecture.
So this is like Orbitz and TravelWeb represent a shift in
the technology S-curve, but interestingly enough, they are also
joint ventures of the old economy firms, airlines, and hotels.
Nevertheless, there is a certain need for oversight to
ensure that the issues of competitiveness and market power are
not abused. As such, I welcome the FTC's disclosure
requirements for websites that receive compensation from
supplies, and although none of us spilt many tears for buggy
whip manufacturers when the automobile arrived, small travel
agents across the Nation are facing a change in industry model,
and their significant power in small business America.
Nevertheless, I believe it is clear that the market
consumers have not yet spoken on which model they prefer. The
bottom line is that I appreciate this hearing, and I am
wondering where the beef is.
And we will hopefully get both sides of the issue here, and
let's stick up for the consumer, because I think it is a great
opportunity for consumers to get good deals for travel, while
at the same time maintaining a good strong economy hopefully in
the air. Thanks a lot, Mr. Chairman.
Mr. Stearns. And I thank the gentleman.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. W.J. ``Billy'' Tauzin, Chairman, Committee
on Energy and Commerce
Thank you, Mr. Chairman for calling this hearing. As a former
Subcommittee chair, I spent a great deal of time examining e-commerce
issues, particularly those impacting consumers and the long-term
development of e-commerce. Additionally, it is refreshing to examine a
segment of the economy that is growing and flourishing. Much of the
Committee's time and energy recently has been spent examining failing
industries or collapsing companies. While that is an important
function, it is sad to have to focus on such events. And so, I think
this is an important and beneficial hearing and look forward to the
testimony of the witnesses.
The online travel industry has grown by leaps and bounds in a short
amount of time. As one of the largest e-commerce success stories, it
highlights the great possibilities of the Internet and e-commerce.
Consumers have certainly found cause to take advantage of the myriad of
web sites offered to improve their travel experiences. The Internet
practically has turned each and every consumer into his or her own
travel agent, with travel sites offering various business models to
meet consumer demand and interest. From the bidding mechanisms of
Priceline.com, to web auctions, to the new independent sites like
Expedia and Travelocity, and to the supplier-owned site of Orbitz, we
are seeing some refreshing developments. These results are being
duplicated throughout the entire travel industry, including the lodging
industry. This innovation isn't stopping with how the travel services
are offered but extends to what is being offered as well. Online travel
companies are developing some of the most creative consumer attentive
services imaginable all with the goal of obtaining consumer loyalty and
consumer attention.
However, this portrait is not completely rosy. As consumers
continue to use the Internet for travel purposes and transparency
continues to improve, some business approaches will fail. Furthermore,
some traditional services, such as the old role of the travel agent,
may no be longer necessary. It used to be that when a person wanted to
travel to a distant city they called their local travel agent and
booked the best plan for their needs. Such a function may be no longer
applicable, forcing the travel agent of yesterday to adapt to a new
role. I believe this is exactly what travel agents are preparing to do.
Technology advances eliminate old-style jobs all the time. We no
longer have Blacksmiths and candle makers to name a few. This is the
traditional debate captured in the children's tale of Paul Bunyan. We
probably ought not try to protect jobs supplanted by new technologies
or failed business models. However, there may be legitimate concern if
such technology advances are coupled with creative relationships that
could mask old-time trickery, funny business, or collusion.
Supplier-owned distribution systems in the online world within
various industries have generated some heated debate in both the
academic and practical worlds. As a group such sites, which go beyond
just the travel industry, raise some interesting questions. I will
admit that it is quite unusual to see the biggest industry players
within an industry--longtime fierce competitors in the off-line world--
come together in one happy family to jointly sell services or products
online.
Orbitz and Travelweb hold out the many potentially positive
benefits for their owners such as lowing the operating costs, creating
a new avenue for unloading excess supply of travel services or
products, creating new relationships with end-consumers, and promoting
efficiency. There is legitimate concern when the controllers of supply
also get a major role in distribution. A remaining question is whether
the creation of these sites by the suppliers was done or is operating
with malicious intent to block new entrants from getting their foot in
the door. This remains the crux of this debate for which I will reserve
judgment. I will say that I would be concerned if Orbitz and Travelweb
are contemplating becoming the new OPEC of the online travel industry.
Mr. Stearns. Now I welcome our panel. Mr. Sam Gilliland,
President and Chief Executive Officer of Travelocity.com; Mr.
Bruce Wolff, Chairman, of Travelweb, LLC; Jonathan Zuck,
President, Association for Competitive Technologies; Dr. Mark
N. Cooper, Research Director, Consumer Federal of America; and
Mr. Paul M. Ruden, Senior Vice President for Legal and Industry
Affairs, the American Society of Travel Agents.
I welcome all of you, and we will start with you, Mr.
Gilliland, for your opening statement.
STATEMENTS OF SAM GILLILAND, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, TRAVELOCITY.COM; BRUCE WOLFF, CHAIRMAN, TRAVELWEB,
LLC; JONATHAN ZUCK, PRESIDENT, ASSOCIATION FOR COMPETITIVE
TECHNOLOGY; MARK N. COOPER, RESEARCH DIRECTOR, CONSUMER FEDERAL
OF AMERICA; AND PAUL M. RUDEN, SENIOR VICE PRESIDENT FOR LEGAL
AND INDUSTRY AFFAIRS, AMERICAN SOCIETY OF TRAVEL AGENTS
Mr. Gilliland. Chairman Stearns and Congressman Towns, I am
Sam Gilliland, President and CEO of Travelocity.com, the
Nation's most popular on-line travel site.
I want to thank you for the opportunity to testify. This
hearing is an excellent opportunity for you to begin examining,
and I hope reversing, a dangerous e-commerce trend across a
growing number of industries.
Travelocity, along with many others, has been an
outstanding critic of Orbitz, a joint venture owned by five of
the Nation's largest airlines, which together account for 80
percent of the Nation's airlift.
It is very troubling from both an anti-trust and e-commerce
perspective when the overwhelming majority of suppliers in an
industry band together to coordinate distribution strategies.
Still, Travelocity has never argued that Orbitz should be
restricted from entering the on-line travel market. There is
certainly room for other competitors. We have instead focused
on certain anti-competitive features of the Orbitz contract,
the so-called most favored nations and exclusivity provisions.
These clauses, which provide Orbitz's long term contractual
access to the full array of major airlines' fares and inventory
threaten all independent travel retailers and consumers that we
serve.
We believe that Orbitz should be required to compete on the
merits of its technology, its customer service, and marketing
ability, and not on contractual guarantees that deter airlines
from offering their lowest fares to more consumers.
As Orbitz grows larger, consumers are being denied a choice
in travel agents. They are required to pay increasing service
fees on Orbitz that major independent on-line sites do not
currently charge, and are losing the benefits of airline
competition that the independent websites have fostered.
The on-line travel market is the fastest growing e-commerce
category. With the rise of the Internet, independent travel
agents are increasingly using this distribution channel to
benefit consumers. I believe the role played by such
independent agents is critical in maintaining and enhancing
effective competition.
The travel sector of e-commerce has tremendous upside
potential. The product that we sell is a virtual one, ideally
suited to the Internet. Travelocity can help people dream about
travel, and give them reliable tools to book their trips.
Even the paper ticket, the last physical product in travel
distribution, has largely given way to the increasingly popular
e-ticket. At Travelocity, we don't need to maintain warehouses
or take return shipments.
However, independent travel agents can have the latest
technology tools, but it makes little difference without the
full array of fares and inventory to sell. The Orbitz strategy
is about choking off the flow of critical content to
independent travel distributors, a strategy that has a long
checkered history in travel distribution, and one that led to
the imposition of rules of fair play in the mid-1980's.
These so-called CRS rules, which have now been updated by
the DOT for 10 years, do not apply to Internet sales, a
loophole that Orbitz exploits every single day. And yet the
very same conduct that the CRS rules restrain, where airline
owners use their control to harm airline competition and
consumers, is the exact conduct that Orbitz is engaging in
today.
We believe that the rules should be updated to create
regulatory parity. Orbitz and Orbitz alone has received wave
after wave of web fares from its airline owners, often for
discounts across their entire network of flights.
Our research shows that web fares account for a whopping 60
percent of Orbitz's total airfare sales, and those fares were
generally denied to other travel retailers, to the detriment of
consumers.
The data also shows that Orbitz is hardly a friendly site
for most low fare and smaller airlines, which consistently sell
a lower percentage of tickets in Orbitz than in the independent
sites, a growing threat to their ability to compete.
On June 27, the DOT issued a report to Congress that raised
the concerns about Orbitz, but was essentially inconclusive
about what should be done, deferring instead to DOJ, which
continues to pursue its own longstanding investigation.
Of course, consumers in competition are suffering while the
agencies delay action. They fail to tackle these problems and
it may be necessary for Congress to act. Now, the remedy is
simple.
DOT and DOJ should remove the contract provisions that give
Orbitz an unfair advantage and force Orbitz to compete on its
own merits. Mr. Chairman, the rise of the Internet has
initiated a true revolution in the travel industry. It holds
the promise of greater efficiency and enhanced competition at
all levels.
And as a policy matter and as a legal matter, we do not
believe that suppliers should be able to engage in collective
action to withhold information from independent distributors.
This is an obstacle to consumer choice that this committee
should strive to remove.
Thank you again for the opportunity to testify, and I look
forward to your questions.
[The prepared statement of Sam Gilliland follows:]
Prepared Statement of Sam Gilliland, President and Chief Executive
Officer, Travelocity.com
introduction
Chairman Stearns, Ranking Member Towns, I am Sam Gilliland,
President and CEO of Travelocity.com, the nation's most popular online
travel site. I want to thank you for the opportunity to testify today.
This Subcommittee has shown great leadership on many critical
electronic commerce and consumer protection issues, ranging from
privacy to cyber-crime to restraints on digital trade. We at
Travelocity share your commitment to facilitating public policy that
will create an online environment that is good for business and good
for consumer welfare. The focus of this hearing on the consumer
implications of online, supplier-owned travel agency joint ventures is
an excellent opportunity for you to begin examining, and I hope
reversing, a dangerous e-commerce trend across a growing number of
industries.
Travelocity (along with other independent travel retailers,
business travelers, consumer groups, several small and low cost
airlines, a large and growing number of Members of Congress, and other
government officials) has been an outspoken critic of Orbitz, the joint
venture owned by five of the nations' largest airlines. Travelocity has
never argued that Orbitz should be restricted from entering the market;
to the contrary, there is room for more competition in online travel.
Our concern has instead been focused on certain features of the Orbitz
contract which we believe unnecessarily restrict the ability of
airlines to provide consumers better access to the lowest fares in the
marketplace. These features are the so-called ``most favored nations''
(MFN) provisions and exclusivity incentives. These clauses, which
provide to Orbitz long-term contractual access to a full array of the
major airlines' fares and inventory, threaten all independent travel
retailers and the consumers we serve.
We hope that this hearing will help catalyze the continuing efforts
of Congress, the Department of Justice, the Department of
Transportation, and other government officials to find a workable
solution to the Orbitz problem. We have called on them to remove these
anticompetitive clauses and require Orbitz to do what all other travel
retailers do everyday--compete on the merits of their technology,
customer service and marketing ability--and not on contractual
guarantees that insulate Orbitz from true competition and serve as a
deterrent to airlines from offering their lowest fares to a greater
number of consumers. We have also called on the DOT to update and
modernize the CRS rules to address the Orbitz issues--for the sole
reason that the rules were last revised 10 years ago and therefore do
not apply to airline-owned online travel retailers, but only to
traditional computer reservation systems marketed to travel agents.
Mr. Chairman, this hearing before this subcommittee is critical,
because it is consumers and their welfare that this debate is all
about. We believe that much is at stake for consumers now, and much
more profound harm is in store for them if Orbitz' plan is executed
without restraint. Consumers are increasingly being denied a choice in
travel agents, both online and offline, as they are being forced to go
to Orbitz, through the operation of Orbitz' MFN and exclusivity
provisions, for full access to the major carriers' lowest fares.
Consumers are required to pay an across the board service fee on Orbitz
that the major independent online sites do not currently charge, and
this fee will almost certainly rise as Orbitz accounts for an ever
larger share of airline ticket sales. Orbitz and the Orbitz MFN are
actually catalysts for transferring the costs of distribution directly
to consumers--although it is highly unlikely that consumers will see
equivalent reductions in airfares as Orbitz' service fees will
undoubtedly increase. With the ascendancy of Orbitz, consumers are
losing the benefits of airline competition that the independent travel
web sites have until now fostered both by forcing the major carriers to
compete with each other and by giving new entrant and low cost
carriers--the major force for keeping airfares low--a better
opportunity to compete with the majors. Left unchecked, the operation
of the anti-competitive provisions of the Orbitz agreement will
inevitably lead to less consumer choice, less airline competition and
higher consumer prices for air travel.
The online travel market in which Travelocity.com participates is
growing at a rapid pace and, according to the research firm
PhoCusWright, ``is the fastest growing e-commerce category.'' With the
rise of the Internet, independent travel retailers--both brick-and-
mortar and online--are increasingly using this distribution channel to
expand the richness and reach of their product and service offerings to
the ultimate benefit of consumers, who benefit from the more robust
airline competition the independents foster.
A key component to the continued growth and consumer gains in the
Internet travel market is fair access to information from travel
suppliers and, in particular, access to travel suppliers' lowest fares
and corresponding inventory. It is of no benefit to companies that
distribute airline tickets if they develop the best low fare search
technologies but are denied access to the full range of airfare
inventory. At Travelocity, while we are focused on providing the best
technology and customer service, we are also focused on giving our
customers--both business and leisure--the most comprehensive access to
the lowest fares and rates available. After all, that is what consumers
demand and rightly so.
You will hear from Orbitz that it offers the carriers lower
distribution costs in exchange for the guaranteed contractual access to
their inventory that Orbitz alone enjoys. This is simply not true.
Independent retailers, like Travelocity, have repeatedly offered to
meet or beat Orbitz's economics, and yet have been denied equal access
to the low fare inventory Orbitz receives. On July 11, American Express
stated that for the last six months or so it had offered to pay a
portion or all of the airlines' distribution costs relating to certain
fares and inventory only provided to Orbitz, but thus far no airlines
have accepted American Express' proposal.
We strongly believe that the denial of fair and open access to
travel information to independent travel agents raises substantial
public policy questions that Congress, the Department of
Transportation, the Department of Justice and other government
officials must address.
travelocity.com and the online travel distribution channel
Travelocity.com is an Internet commerce pioneer. Since our initial
launch in March 1996, our customer base has grown to more than 34
million members. We have built this successful business and a solid
brand by constantly innovating and creating new products that take
advantage of Internet technologies to bring benefits to consumers and
travel suppliers alike. We believe we are changing the way consumers
can shop for and buy travel. Some of our web site's innovations and
features include: (i) Alternate Airports--which provides alternative
city fare information (often bypassing hub airports) in response to a
given fare request; (ii) ``Dream Maps''--which offers leisure travelers
on a limited budget the ability to view ``theme'' vacations (i.e.,
beach, ski or national park packages) that compare and select among the
best fares for multiple destinations, and (iii) Best Fare Finder--a
revolutionary product that shows consumers calendar-based fare
offerings, so that they know precisely when advertised low fares are
really offered.
While travel suppliers are understandably focused on maximizing the
amount of revenue they receive with each sale of inventory, at
Travelocity.com we are focused not only on giving travel suppliers an
excellent, low-cost selling channel but perhaps more importantly, on
providing consumers with what they want, which, more often than not, is
the lowest available fare. We have invested heavily to improve the
speed and functionality of our site. As noted by one airline industry
analyst, ``the philosophy [of independent travel web sites] is to push
the price lower--a complete reversal of the aims of an airline's own
yield management team.'' 1
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\1\ Reuters Finance (Feb. 23, 2000) at .
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Travelocity.com creates a global storefront for consumers to see,
experience, research and buy their travel in one place. As such,
Travelocity is the ``front-end'' or user interface through which
consumers access a vast virtual warehouse of travel information, such
as supplier inventory, prices and schedules.
Just like any other travel agency in the world, Travelocity
contracts with one of four computer reservation systems (CRS) for
access to this supplier information. Travelocity's agreement for these
``back engine'' services is with Sabre, the CRS owned by Sabre Holdings
Corporation, Travelocity's parent. CRSs are closely regulated by DOT
(and also by DOT's counterparts in Canada and the European Union). One
of the bedrock principles of these rules is the requirement that the
airlines that own CRS's participate in the other CRS's to the same
extent they participate in the systems they own, so long as the other
CRS's offer the airlines commercially reasonable terms. These are rules
of fair play designed to protect competition and consumers and they
have stood the test of time.
Currently, the CRS rules in the United States, unlike the rules in
Canada and the European Union, do not apply to the distribution of
airline information directly to consumers via the Internet. The CRS
rules were last amended in any significant way in 1992 (before the
Internet became a major channel for e-commerce) and were scheduled to
sunset in December 1997. It was over five years ago that DOT first
solicited comments on how the rules should be updated to reflect the
multitude of changes in the travel distribution landscape that had
already occurred since the regulations were revised in 1992.
Ten years ago, all CRSs were owned and controlled by large
airlines. Today, two of the four traditional CRSs, including Sabre, are
free of all airline ownership. This structural change has effected
substantial modifications in the fundamental incentives and business
goals of those independent CRS enterprises. Further, in 1992, the
Internet was in its embryonic stage as a tool for the distribution of
airline products, with only a handful of airline sales made online. At
present, roughly 15% of all airline tickets are sold through the
Internet and the percentage is growing rapidly. If these rules are to
remain in effect, these rules need to be modernized.
I understand that a draft of the rules has been completed and is
under review at the Office of Management and Budget. The revised rules
must sufficiently and appropriately address the most critical issues
facing travel distributors today, including the ability of travel
distributors to obtain access to the lowest fares of travel suppliers
that own competing travel agent sites, as exemplified by the airline-
owned site Orbitz (we are not seeking to have these rules apply to data
that the carriers put only on their proprietary single carrier web
sites). In revising these rules, DOT must strive for fairness. It makes
no sense to have rules insuring fair competition and consumer
protection for the offline environment that are not applicable to the
online environment. For example, core antitrust principles are not
solely applicable in the offline environment, but govern all commerce.
Either the rules should apply to both, or not at all. Further, even
after five years of delay, it makes no sense for DOT to attempt to
regulate until it receives critical inputs from the Commission Congress
chartered two years ago and DOT just recently formed to study the
plight of travel agents, and until the Inspector General completes the
separate study on Orbitz Congress required as part of last year's
Appropriations bill. These exercises are directly relevant to how the
rules should be modernized, as the DOT itself has acknowledged. In
short, DOT should not put the regulatory cart before the horse.
how orbitz operates--though mfn and exclusivity
Evidence of how Orbitz operates in the online travel channel may be
found in its ``Airline Charter Associate Agreement.'' Based on the most
favored nations language in this agreement, airline participants may
not undercut the prices they post on Orbitz, either by putting lower
prices on their own web sites or by running promotions (even one day
sales) with online competitors of Orbitz. The MFN specifically requires
that any published fare posted on the airline's own web site or on any
third party site be given immediately to Orbitz. Under the agreement,
``published fares'' are broadly defined and include the overwhelming
majority of fares in a given airline's inventory.
In addition, the owners agreed among themselves to impose annual
in-kind promotional support obligations on carriers, with one of the
ways carriers could meet this obligation being to offer their lowest
fares exclusively through Orbitz. It works this way: Each participating
carrier is obligated to provide Orbitz with substantial ``In-Kind
Promotions,'' which can run into the millions of dollars. Among other
things, these obligations can be satisfied by offering ``exclusive
promotions or fares available only on'' Orbitz or the participating
airline's own Internet travel site. Orbitz can withhold certain rebates
if the carrier and Orbitz fail to develop a mutually acceptable
promotional plan and/or if the carrier fails to adhere to the terms of
that plan.2 Moreover, Orbitz' requirement that all
participants immediately provide to Orbitz all promotions and fares
that are offered using alternative distribution methods will undercut
any incentive by Orbitz to innovate by developing and packaging special
promotions from suppliers.
---------------------------------------------------------------------------
\2\ The non-equity owning carriers can also apparently satisfy
these requirements by providing Orbitz with ``passenger database
information'' and ``competitive purchaser names'' (e.g., e-mail
addresses of passengers who booked travel through another online
agency).
---------------------------------------------------------------------------
These very unusual contract provisions were the subject of much
controversy in 2000 and early 2001 as the Department of Transportation
and Department of Justice considered what safeguards might be required
up front, before Orbitz' launch. DOT (and DOJ) nonetheless allowed
Orbitz to launch without any limitations on its ability to enforce the
MFN clauses and exclusivity incentives. An analysis of that DOT
decision, and an examination of the events of the months since Orbitz
began operation, leads only to the conclusion that if there were ever a
basis for permitting Orbitz to enforce either of these provisions, it
evaporated long ago.
In and of themselves, the terms of the Orbitz agreement with its
participating carriers have impaired the ability of consumers to have
broader access to lower airline fares. This harm to the competitive
airline process has materialized with even more severe, long-term harm
inevitable. In its April 13, 2001 letter to Orbitz, DOT acknowledged
that ``critics argue that the MFN clause undermines the ability of
individual airlines to make clandestine deals with other Internet
travel sites--deals that they rightly contend have a pro-competitive
effect on pricing . . . Thus, there is some potential impact on the
market dynamic.'' 3
---------------------------------------------------------------------------
\3\ DOT Letter at 4.
---------------------------------------------------------------------------
While ``under the radar'' sales by airlines on independent travel
agents have slowed, the volume of immediately detectable web fares
offered on Orbitz has exploded. Orbitz's strict most favored nations
requirement, which it strongly polices, ensures that price discounts
are immediately detectable by all carriers at the same time every
working day. To the detriment of consumers, this environment acts to
discourage discounting, because there is no way for carriers to create
even a temporary advantage over competitors.
In its June 27, 2002 Report to Congress, DOT recited the concerns
of those smaller low-fare carriers opposed to Orbitz because, among
other things, ``they do not want to lose their ability to selectively
engage in deals with other online agencies and distribution channels
without the obligation to also give these deals to Orbitz.'' Even more
telling, one such carrier stated the in-kind advertising commitment was
``designed to burden small low-fare carriers with higher distribution
costs.'' 4
---------------------------------------------------------------------------
\4\ DOT Report at 13.
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exclusivity and web fares
In the April 13, 2001 letter, DOT expressed its rationale for
allowing Orbitz to launch with contractual incentives to provide
content to Orbitz exclusively. The Department expressed strong
misgivings, saying:
We have serious concerns about incentives toward exclusivity,
however limited. While we are prepared to reserve judgment
until we see how this provision operates in the marketplace, we
will monitor these developments closely. Allowing a new entrant
with no sales or market share to offer financial incentives to
get exclusive access to a very limited portion of supplier
inventory may be a legitimate means of overcoming entry
barriers. (emphasis added)
As predicted by many of its critics, in the months following its
launch the owners of Orbitz made available to Orbitz--and Orbitz
alone--wave after wave of web fares, often for discounts across all or
much of their entire network of flights 5. The
representations made by Orbitz to induce DOT to allow it to commence
operations unfettered by standard rules of fair play--namely, that web
fares would represent only ``1/10th of one percent'' of the fares
offered 6--have proven to be completely false. To the
contrary, our research indicates that web fares account for at least
60% of Orbitz' total airfare sales, and those fares were generally
unavailable for negotiation (as American Express and others can attest)
and therefore denied to other travel retailers to the ultimate
detriment of consumers.
---------------------------------------------------------------------------
\5\ Of course, Travelocity welcomes low fares and the more the
better. However, because the largest carriers in the U.S. have withheld
comparable low fares from any of the tens of thousands of offline and
online travel agencies that compete with the agency they jointly own--
Orbitz--they have distorted competition in the field of airline ticket
distribution and have also injured those millions of consumers and
businesses who, for all sorts of valid reasons, choose to deal with
travel agencies that are independent of the big carriers.
\6\ See DOT Letter at 7.
---------------------------------------------------------------------------
Importantly, these Orbitz web fares are not simply last-minute
weekend travel fares on flights that have an unusually high number of
empty seats; they are instead wide swaths of the airlines' fares on
flights and available for more advanced booking. On February 26, 2002,
Karl Peterson, CEO of Hotwire, a travel web site owned by four of the
five Orbitz owners succinctly described the transformation of the uses
of web fares by large airlines, noting:
``[N]o longer are web fares surgical. They are closer to a
published fare sale than they've ever been . . .''
Because of this guaranteed access to low web fares on the Big
Five--and not because of any technological innovation or high level of
customer service--Orbitz has become one of the top three online sellers
of airline tickets.7
---------------------------------------------------------------------------
\7\ Orbitz claims that it does not have ``exclusive'' fares because
most of these fares are also available on the individual carriers' web
sites. While Orbitz engages in such semantic games, this form of self-
dealing is hardly the type of robust competition a free and fair
marketplace would demand.
---------------------------------------------------------------------------
In recent months, some of the Orbitz carriers have started to
provide limited access to some web fares to some independent retailers.
This has not, however, solved the problems raised by the Orbitz MFN or
leveled the playing field. For example, Orbitz has now confirmed
publicly that it has 10 year contracts with its owners that, among
other things, guarantee Orbitz access to all these web fares.
A key premise of the DOT's decision allowing Orbitz to proceed was
that a ``very limited portion of supplier inventory'' would be made
available to Orbitz on an exclusive basis. In other forums, Orbitz
executives had asserted that these special web fares to which it alone
would have access would not account for any significant portion of the
lowest fares it offered. In a May 22, 2001 speech to the Aero Club,
Jeff Katz said:
``We estimate that about 99% of the time that Orbitz produces a
lower fare, it will be [sic]not be because we had access to a
fare others did not, but because we found a fare that everybody
had access to, but not everybody could find. Or not everyone
chose to display.''
As any observer of Orbitz will know, this statement has not proven
to be accurate. Instead, in the 13 months since Orbitz commenced
operation it has offered numerous ``web only'' discounts that the five
Orbitz owners made available on Orbitz, but denied to all of Orbitz's
independent competitors, online and offline.
smaller carriers have consistently poorer sales in orbitz
There is more data that should concern consumers, evidence that has
ominous overtones for the future of airline competition and e-commerce.
A number of concerned parties predicted in 2000 and early 2001 that
Orbitz would be designed and operated in ways that would neutralize the
ability of the small, discount carriers to achieve a premium share of
ticket sales in the independent web sites. For example, Orbitz's
refusal to allow airline advertising in the airline displays was seen
by many as an attempt to deprive smaller airlines of a very useful,
point-of-sale technique that touted their bargain fares. Through banner
ads promoting their fare specials, smaller carriers had been able in
the independent sites to overcome their lack of name recognition and to
attract needed incremental business.
In short, the data show that the small discount carriers do attract
a substantially higher share of sales in the independent sites and that
in Orbitz the major airlines have succeeded in nullifying that
phenomenon.
As forecasted by many, the hard sales data for the months since
Orbitz's launch show that smaller and low fare carriers do much more
poorly in Orbitz than in the two largest independent web sites. These
low-fare carriers achieve a percentage of total bookings that is 15% to
more than 200% larger in the independent sites than in Orbitz.
Simply put, the data concerning how smaller airlines do in Orbitz
are a bad omen of what the future holds for them and consumers.
Moreover, they are a stark reminder of what the world was like for
smaller carriers in traditional CRSs before the Civil Aeronautics Board
adopted rules in 1984 to governing the operation of airline-controlled
CRSs.
In response to this uneven competitive playing field, many travel
retailers have responded by shifting their focus away from the sale of
scheduled air, where they have long been positive forces for airline
competition, to the sale of other products, such as hotels, package
vacations and cruises. Lowestfares.com recently announced that it was
discontinuing selling airline tickets entirely. In contrast, Orbitz's
recently filed S-1 reveals that almost 90% of its 2001 revenues came
from the sale of air transportation. As Orbitz becomes a larger seller
of air transportation, this is not likely to be helpful for small and
low-fare carriers (such as JetBlue and Southwest, neither of which
participate in Orbitz), nor for the consumers who look to them to serve
as a competitive spur for lower fares. As independents shift their
focus away from the sale of scheduled air service, consumers lose
choice as well as the competitive pressure that comes from agents who
have historically provided them with tools to help them find the best
deals. Orbitz, as an airline joint venture, has little incentive to
provide or improve upon these tools particularly as competition from
independent, non-airline owned sites diminishes.
should orbitz be permitted to operate?
Travelocity has never asked that Orbitz be blocked from operating.
Instead, we have expressed concern over the consumer harm and
competitive implications of DOT not taking action while Orbitz
implements a business plan predicated on exclusive access to the lowest
fares of the five largest carriers in the U.S. Orbitz did not have to
compete or negotiate for that access, but was simply given (and
guaranteed) that access--which is not indicative of a competitive
marketplace. We have urged the government to address this risk head-on,
certainly allowing Orbitz to exist and engage in competition with the
rest of us, but to be mindful of the ``rules of the road'' in any
competitive marketplace and to consider the lessons learned from prior
airline owned distribution ventures. This simply means removing the
anticompetitive contract clauses and modernizing the CRS rules. These
are surgical actions that can be taken and in no way constitute
``regulating the Internet'' as Orbitz has asserted.
what should be done?
We believe DOT or DOJ should act now to ban the use by Orbitz of
the two contract provisions that require carriers to collectively
provide ``most-favored nations'' treatment to Orbitz with respect to
fares and inventory. The agencies should also void the provisions of
the Orbitz Agreement that collectively give carriers financial
incentives to confer fares and other content on Orbitz on an exclusive
basis. DOT's June 27, 2002 Report to Congress raised concerns about
Orbitz, but failed to reach conclusions on what should be done,
deferring instead to DOJ, which continues to have open a long-standing
investigation, which has no timetable for conclusion. If the agencies
fail to tackle these problems, it may be necessary for Congress to step
in and come up with a solution.
Unfortunately, DOT has not addressed the ``sea changes'' in the
industry that have occurred over the past ten years. The limited scope
of the U.S. CRS rules, which apply only to computer reservations
systems to the extent these systems are used by travel agents, may have
made sense in 1992. However, at a time when tickets sold online
directly to consumers are approaching 15% of all sales, it is
nonsensical to say that stringent rules banning the withholding by
airline owners of key flight data are essential elements of public
policy in the case of the four traditional CRSs (two of which are no
longer airline owned), but that a ticket distribution system like
Orbitz that is backed by the combined strength of the five biggest
airlines, gets a free pass. This is bad public policy.
In fashioning the appropriate response to the competitive harm of
Orbitz, DOT should be mindful of the policy underpinnings of the rules.
In 1984, the CAB found that regulation of airline owned or marketed
CRSs was necessary because, it concluded, airlines that owned the
electronic distribution outlets for airline tickets had both the means
and the incentive to use that control to advance their fortunes as
airlines. DOT found a documented halo effect in terms of sale of
tickets sold through the systems that favored major carriers that owned
distribution outlets at the expense of smaller carriers.
In 1992, DOT affirmed that view and also found that airlines had an
inherent incentive and power to favor the distribution outlets they
owned over all others. No good reason exists today to believe that
these fundamental dynamics in the airline industry have changed. In the
face of those facts, it is difficult to see how rules designed to
prevent abuses by even a single carrier owning a traditional CRSs
offered to travel agencies are not applicable to this scenario where
the five largest air suppliers form a joint venture to operate a
distribution web site targeted at consumers.
DOT should promptly take the steps needed to apply with respect to
Orbitz the same regulatory safeguards that it found long ago were
necessary to protect competition in the case of traditional airline-
owned CRSs.
conclusion
Based on its MFN and exclusivity provisions that lead to exclusive
access to web fares on the nation's five largest airlines--fares that
predominate its listings despite its earlier representations to the
contrary to DOT--Orbitz has gone from nowhere to become the one of the
largest Internet travel agencies, and has achieved this position
without having to compete for this favored access to fares and
inventory. This is perhaps the most troubling aspect and key issue in
supplier owned joint ventures--the danger of distorting competition and
creating an uneven playing field which ultimately harms consumers and
competition.
Action is needed now to prevent Orbitz from continuing to benefit
from its supplier-owned structure and favored access to inventory--
which it did not obtain through competition--and protect the
competitive dynamic and promise of Internet distribution to bring lower
prices and more innovative technology and tools into the reach of more
consumers. If the MFN provisions were ever justifiable in April 2001
because Orbitz had ``few sales and no market share'' and if the
exclusivity incentives might have been defended as a legitimate means
to ``overcome entry barriers,'' those reasons for DOT or DOJ to stay
its hand have disappeared completely.
The rise of Internet commerce has initiated a true revolution in
the travel distribution industry, and holds the promise of greater
efficiency and enhanced competition at all levels. As a policy matter,
and as a legal matter, we do not believe suppliers should be able to
engage in collective action to withhold information from independent
distributors. This is an obstacle to e-commerce that this committee
should strive to remove.
In this country, laws and rules exist that prevent such boycotts
from occurring--and it's time to enforce them now. Consumer choice,
robust airline competition, and access to low fares are at stake here;
broader issues of e-commerce and consumer harm hang in the balance as
the Orbitz model is replicated by other suppliers in other industries.
Thank you for the opportunity to testify and I look forward to
answering your questions.
Mr. Stearns. Mr. Wolff, we welcome you.
STATEMENT OF BRUCE WOLFF
Mr. Wolff. Chairman Stearns, thank you, too, for the
opportunity to testify before this committee. First, in the
interest of brevity, I have submitted a complete summary of
this complex issue, and an attachment which I would like to
include for the record.
Mr. Stearns. By unanimous consent, it is so ordered.
Mr. Wolff. My name is Bruce Wolff, and I am Chairman of the
Board of Pegasus LLC, and I am also senior vice president of
Marriott Intentional, and a member of the board of directors of
Pegasus Solutions, two of the founding members of TravelWeb.
Today I am testifying on behalf of the Chairman of
Travelweb. There is no doubt that TravelWeb sites can provide
enormous benefit for American consumers. However, these
websites should be viewed as one option among many for
consumers.
Some consumers will find them absolutely right for their
needs, and others will not. The increased use of travel
websites and general customer satisfaction are evidence of the
benefits that websites provide to some of America's busy and
discerning customers.
In a few minutes, I would like to address the specific
concerns that might be raised about the fact that TravelWeb is
owned by hotel companies. For a moment, let me just say that
owners of TravelWeb go toe-to-toe in the market every day
trying to out-market each other and outsell each other.
We compete on price, location, frequent stay programs,
travel agent incentive programs, and many other facets.
TravelWeb will not change that powerful dynamic. However,
TravelWeb allows us to achieve some economies of scale and some
operational efficiencies for consumers without undermining in
any way vigorous competition among the owners of TravelWeb,
which drive down prices.
For that reason, we feel confident that TravelWeb is good
for consumers. The initial owners of TravelWeb include five
hotel chains; Hilton Hotels, Hyatt Corporation, Marriott
International, Six Continents, Starwood Hotels and Resorts, and
Pegasus Solutions, the leading technology provider to the hotel
industry.
In the aggregate, these chains control only a small portion
of hotel properties that carry their brand name. They are
affiliated with many more properties that are independently
owned, and although the hotel exchange and Pegasus are owners,
TravelWeb is an entirely separate company, with its own board
of directors and employees.
TravelWeb will specialize in on-line distribution of
discount hotel rooms; that is, hotel rooms that are sold
through what the industry calls their Merchant model. These
rooms tend to be sold at prices below regular rates, primarily
because of excess capacity.
We also operate TravelWeb sites to consumers called
TravelWeb.com, which is accessible to the public. We view that
as an important part of our business, but our primary effort is
offering discounted rooms to TravelWeb site companies.
Let me now turn to some of the potential concerns about
supplier-owned travel websites. I cannot address these concerns
for other websites, but I can discuss them specifically for
TravelWeb. First is privacy.
As with any website, concerns about privacy are legitimate
and important. Travelweb is strongly committed to protecting
private personal data collected in the process of a
transaction, which may include customer's name, address, credit
card information, and other important information.
TravelWeb is fully committed to adhering to all applicable
Federal and State laws protecting privacy, and we are very
sensitive to international laws on privacy. Now I would like to
turn to the competition issue. One question is whether
competition or whether competitors who own TravelWeb could
collude to raise prices.
As I will discuss, this market makes it almost impossible
to collude, and TravelWeb is carefully structured to prevent
even the unlikely possibility of collusion. First, it is
important to realize that only about 4 percent of hotel rooms
are sold on-line.
In distributing rooms on-line, we compete with every other
way of distributing hotel rooms. People can call directly, and
they can call their travel agent, and various other ways.
Although we don't have hard numbers, we believe about 5
percent of rooms sold on-line are sold through the merchant
model. Companies that sell through this channel are also in
competition with rooms sold through other traditional channels.
On-line sales of rooms through the merchant model represent
less than 1 percent of the rooms sold. TravelWeb's share of
this market is tiny. We currently hope to grow it over time,
but TravelWeb is really a latecomer to the market that is
dominated by other large companies.
Even if two were to achieve a 10 percent market share that
would mean that we would have less than one-tenth of 1 percent
of approximately the $108 billion annual hotel market, hardly a
prescription for market domination.
In addition, it is also important to focus on the structure
of the hotel industry. Individual hotel properties are
overwhelmingly independently owned. The combination or the
combined share of all hotel rooms in the U.S. which carry the
brand names of our owners is 29 percent.
However, about 80 percent of those properties that carry a
national brand name are owned by franchisees, and therefore,
they make their own business and pricing decisions.
I see that my time is up, and allow me to summarize by
saying that we are an industry of very fierce competition. We
are highly fragmented and unconcentrated. We are a non-
homogeneous product. We entered into this venture to add choice
to the consumers for on-line distribution of discount rooms.
We are very careful in structuring the organization so that
care would be taken that even the appearance of collusion would
be carefully monitored. I look forward to answering questions
from all of you.
[The prepared statement of Bruce Wolff follows:]
Prepared Statement of Bruce Wolff, Chairman of the Board, TravelWeb LLC
Mr. Chairman and members of the Subcommittee, thank you for holding
this hearing and for giving me the opportunity to testify on supplier-
owned travel websites. My name is Bruce Wolff, and I am Chairman of the
Board of TravelWeb LLC (``TravelWeb''), a joint venture of six
companies in the hotel industry, which distributes hotel room
reservations online. I am also Senior Vice President of Marriott
International and a Director of Pegasus Solutions, which are both
founding members of TravelWeb. Today, I am testifying in my capacity as
Chairman of TravelWeb.
There is no doubt that travel websites can provide enormous
benefits for American consumers. However, these websites should be
viewed as one option among many for consumers. Some consumers will find
them absolutely right for their needs; others will not. But the fact
that they have this choice is certainly a benefit. Travel websites
offer incredible convenience by allowing consumers to obtain a wealth
of travel-related information in minutes. They can see photos, learn
about the nearby attractions, and compare prices from the comfort of
their homes in minutes, often saving hours of effort. In addition, by
achieving efficiencies in distribution, websites reduce costs and allow
consumers to benefit from some of the most competitive rates available.
The increasing use of travel websites and general customer satisfaction
are evidence of the benefits that websites provide to some of America's
busy, and discerning, consumers.
New, efficient methods of doing business sometimes mean that
companies using traditional methods lose customers. That is a painful
process, but it is the hallmark of a free enterprise system. The issue
is not the effect of travel websites on other businesses that compete
in distributing hotel rooms, however. It is the effect on consumers.
Thus, it is perfectly appropriate for this Subcommittee to examine
whether supplier ownership of TravelWebsites is good for consumers. In
a few minutes, I want to address the specific concerns that might be
raised by the fact that TravelWeb is owned by hotel companies. For the
moment, let me just say that the owners of TravelWeb go toe to toe in
the market every day, trying to outmarket and outsell each other. We
compete on price, location, service, frequent stay programs, travel
agent programs and many other factors. TravelWeb will not change that
powerful dynamic. However, TravelWeb allows us to achieve some
operational efficiencies for consumers, without undermining in any way
the vigorous competition among the owners, which helps to drive down
prices. For that reason, we feel very confident that TravelWeb is good
for consumers.
travelweb
TravelWeb is an independent company created in February 2002 to
provide online marketing of hotel rooms and is only now ramping up
operations. The initial owners of TravelWeb include five hotel chains--
Hilton Hotels, Hyatt Corporation, Marriott International, Six
Continents Hotels, and Starwood Hotels and Resorts--and Pegasus
Solutions, a leading technology provider to the hotel industry. In the
aggregate these chains own only a small portion of the hotel properties
that carry their brand name, and they are affiliated with many more
properties that are independently owned. Pegasus provides central
reservation system and other services to many hotels in the U.S., and
its Utell subsidiary provides marketing and reservation services to a
network of hotel properties. I should note that, although these hotel
chains and Pegasus are owners, TravelWeb is an entirely separate
company, with its own board of directors and employees. While the board
members set general policy, the management of TravelWeb makes
independent business decisions focused on achieving success for
TravelWeb. Under the agreement governing TravelWeb, the hotel company
owners of TravelWeb, including myself, do not have access to certain
information and cannot participate in certain decisions.
Hotel properties other than those of the founding members are
invited to participate in TravelWeb by supplying room inventory for
distribution. Many properties of other chains already participate in
TravelWeb, and we expect increased participation by additional chains
and independent properties as we become more established. In the long
run, our customers will primarily be other travel website companies,
not consumers themselves. We will specialize in the online distribution
of discounted hotel rooms, that is hotel rooms that are sold through
what the industry calls the ``merchant channel.'' These are rooms that
tend to be sold at prices below regular rates primarily because of
excess capacity in the market.
TravelWeb will compensate participating hotels for inventory in an
amount that is based on market conditions and negotiations between
TravelWeb and the hotel property. TravelWeb in turn will add a markup
to that base rate when it makes inventory available to other travel
websites. The room will be offered to consumers at a rate determined by
TravelWeb, and the travel website who ``sells'' the room will receive a
commission.
We also operate a travel website for consumers called
TravelWeb.com, which is accessible to the public. That site has been in
operation for some time and provides another choice for consumers
alongside many other travel websites. Through that website, TravelWeb
operates as a retailer and deals directly with consumers. We view that
as an important part of our business, but our primary effort is
offering discounted rooms through other travel website companies.
potential concerns
Let me turn now to some of the potential concerns about supplier
owned travel websites. I cannot address these concerns for all
websites, but I can discuss them in connection with TravelWeb.
1. Consumer Privacy Protection
As with any website, consumers are legitimately concerned about
privacy. TravelWeb is strongly committed to protecting the private
personal data collected in processing a transaction, which may include
a consumer's name, address, credit card information, and other
important information. TravelWeb acts as both a ``wholesaler,'' by
selling through other travel websites and as a ``retailer.'' Whenever
TravelWeb is furnished personal information by consumers, it transmits
only the information necessary to complete a transaction. In addition,
TravelWeb may use other information voluntarily submitted by the
consumer in order to evaluate his or her travel preferences and to make
better recommendations. TravelWeb may also aggregate certain
information, e.g., zip code data, for its own market research or for
advertisers. Other than these uses, TravelWeb does not sell, lease, or
share personal financial information with other parties and is fully
committed to adhering to all applicable federal and state laws
protecting the privacy of consumers. We are also sensitive to
international privacy laws requirements.
2. Competition Issues
Now I want to turn to competition issues. Let me say at the outset
that TravelWeb provided background material to both the Department of
Justice and the Federal Trade Commission prior to our formation in
February. We have offered to meet with and brief appropriate officials
in both agencies regarding our structure and operations. We have not
been contacted by either agency but we stand ready to cooperate with
them.
possibility of collusion
One question is whether the competitors who own TravelWeb could
collude to raise prices. As I will discuss, the market makes it almost
impossible to collude, and TravelWeb is carefully structured to prevent
even that unlikely possibility.
First, it is important to realize that only about 4% of hotel rooms
are sold online. In distributing rooms online, we compete with all
other ways of distributing hotel rooms--directly from the hotel,
through 800 numbers, through travel agents, and so on. Although we
don't have hard numbers, we believe about 5% of rooms sold online are
sold through the merchant channel. Companies that sell through this
channel are also in competition with rooms sold through traditional
channels. Online sales of rooms through the merchant channel represent
less than 1% of all rooms sold.
TravelWeb's share of online merchant channel sales is tiny. We
certainly hope it grows over time, but TravelWeb is really a ``late-
comer'' to a market segment that is dominated by other, large
companies. A recent industry analysis stated: ``The hotel industry is
too complex and unwieldy for [TravelWeb] to wrestle away the top spot''
from our competitors.1 But, even if we were to achieve 10%
of this category, that would mean that we will sell less than .1% of
the approximately $108 billion in annual hotel bookings in the U.S.--
hardly a prescription for market domination.
---------------------------------------------------------------------------
\1\ Henry Harteveldt, New Portal Leader Won't Dislodge Current
Leaders, Forrester Consumer Technographics North America Brief, Feb.
20, 2002.
---------------------------------------------------------------------------
In addition, it is also important to focus on the structure of the
hotel industry. Individual hotel properties are overwhelmingly
independently-owned. The combined share of all hotel rooms in the U.S.
which carry the brand names of one of our owners is 29%. However, about
80% of the properties that carry a national brand name are owned by
franchisees that make their own, independent business decisions and
establishes its own prices. Neither TravelWeb nor our individual owners
compel these properties to participate in TravelWeb or to comply with
any centralized price-setting system. In other words, the hotel
industry is highly fragmented, with literally thousands of independent
actors. Even at the local level, there are usually hundreds of
independent hotel properties in any large metropolitan area and dozens
in small areas. Finally, hotel rooms are not homogeneous. Hotel rooms
vary greatly in size, quality, amenities, and location. Consumers shop
around for the combination of room rate, location, and amenities they
want.
The combination of the highly unconcentrated industry structure,
the large number of independent actors, and the lack of homogeneity
make collusion extremely unlikely. In order to guard against even a
remote possibility of collusion, TravelWeb was advised by antitrust
counsel throughout the formation process and continues to be advised on
an ongoing basis. TravelWeb has adopted a number of restrictions on our
own operations to ensure its continuing compliance with the antitrust
laws. The management of TravelWeb does not share pricing information
with any participating hotel or chain, including the owner chains. For
example, even though I am Chairman of the Board, TravelWeb does not
provide me with the base rates charged to TravelWeb by any individual
property. We do not discuss rooms rates or any other sensitive
competitive terms offered by individual properties at any of our
meetings or in any documents. In short, TravelWeb believes that
collusion in this industry is exceedingly unlikely, and we have taken
steps to ensure that it is impossible within the TravelWeb structure.
exclusivity
Questions have been raised about the possibility that TravelWeb
could have exclusive access to discounts offered by participating
properties. That is not the case. Each participating property is free
to offer discounted rooms through other websites or through any other
channels. In fact, it is typically the case that the same room is made
available simultaneously through multiple websites and is removed from
the inventory only after it is sold. No independent property of a
participating chain is required to participate with TravelWeb, and
participating properties are not required to offer any particular
portion of their inventory--either rooms offered at regular rates or
``discount'' rooms--through TravelWeb.
``most favored nations'' clause
Another question concerns TravelWeb's ``most favored nations''
(MFN) clause. We have included a narrow MFN in our contracts with
participating properties. Our MFN provides that, if hotel properties
offer inventory to be sold through TravelWeb, they agree that they will
make available to TravelWeb the lowest price that they make available
to any other independent travel website for comparable inventory.
However, hotel properties are free to offer even lower rates directly,
through travel agents, through their own websites, or through any
another outlet. There are no incentives to properties to induce them to
offer discounted rooms only through TravelWeb or necessarily to offer
their lowest rates through TravelWeb. Thus, the MFN gives us some
assurance that we are competitive with other independent travel
websites, but it does not mean that we have any ``corner'' on the
lowest rates offered by hotel properties.
conclusion
TravelWeb is a new entrant in a market with vigorous competition.
The hotel industry is composed of thousands of participants that
compete every day for consumers. TravelWeb is a very small participant
in that large market. We believe that the merchant channel is a
valuable part of this market because it adds yet another way that rooms
are sold. Frankly, we felt that the merchant segment of the market was
not as competitive as it could be, and that is the reason we, that is,
the hotel companies that own TravelWeb, decided to enter. We don't have
all the answers, and no doubt we will learn better how to serve
consumers over time. However, we are confident that TravelWeb will be a
valuable addition to the market, one which promotes competition, rather
than limits it. Thank you again for the opportunity to testify and I
would be pleased to answer any questions.
Mr. Stearns. I thank the gentleman, and Mr. Zuck, we
welcome you and your opening statement.
STATEMENT OF JONATHAN ZUCK
Mr. Zuck. Thank you. One sure sign that consumers are
seeing increased benefits is the presence of entrenched vendors
on Capital Hill claiming that consumers need to be protected.
Mr. Chairman, and members of the subcommittee, it is a
pleasure to be here again to help tell the electronic commerce
story on behalf of the more than 3,000 members of ACT,
including many who do business online, and most of whom are
small businesses.
Thank you for holding these proceedings, and I am
optimistic that the clear light of realism resulting from your
efforts and scrutiny today will reveal the Whitford campaign
for what it is, hypocritical, entrenched marketing incumbents
looking for protection from real competition.
Improvements in technology and specifically the Internet,
have proven a tremendous boon to consumers who are beginning to
enjoy greater convenience, better selection of goods and
services, and lower prices.
At the same time, these increased efficiencies represent a
serious threat to a large segment of our economy, middle
management. It is estimated that the cost to consumers of
entrenched middle management is something close to $15 billion
annually.
The situation as far as lobbying at the Federal and State
level, and business practices designed to stifle competition
has become so severe that the FTC has recently announced a
workshop to look into this problem.
We see inefficient middlemen attempting to stifle
innovation and consumer choice on the net from multiple
sectors, including cars, auctions, contact lenses, real estate,
and of course air travel.
Something that is really important is let's agree at the
outset that if consumer choice brought about the end of third-
party travel distribution that it wouldn't be the end of the
world. There is only a market for distributors as long as there
is value added to the suppliers and consumers.
This is not a guaranteed marketplace. Nothing could be
worse for consumers or small businesses than a fourth
distribution channel. That said, it is far more likely that
multiple channels of distribution will remain for a long time
to come.
Power fliers will buy directly off of airline sites based
on hub and route knowledge. Knowledgeable fliers might use
Orbitz, Expedia, or Travelocity, and still others will continue
to value the hand-holding that a travel agency is able to
provide.
In fact, the recent Forrester report found that the
majority of travel booked through brick and mortar agencies is
premium travel. Remember again that those bookings currently
make up 70 percent of the market; whereas, Orbitz, by way of
example, has 2 percent.
Value added travel agencies will be the No. 1 beneficiaries
of the elimination of valueless simple resellers and pressure
on CRS rates. The Department of Transportation has found that
there is no evidence that consumers can be herded into a single
channel. The switching costs are simply far too low.
Throughout the economy distribution channels have created a
secondary market with its own pitfalls, latencies, and costs to
both suppliers and consumers. The evolution of the Internet has
provided an alternative to these inefficiencies and an
opportunity for suppliers to cut costs and to pass at least
some of these savings on to their customers.
The obvious at first blush is to sell direct and the second
is to combine suppliers and reintermediate in a more efficient
manner. This is pro-competitive activity for which specific
guidelines exist from the Department of Justice, and it has
nothing to do with price competition between suppliers.
Ironically, the No. 1 recommendation of consumer groups
during the fiasco brought about by the likes of Sabre before
was that an industry-wide CRS system be created, and perhaps
one like Orbitz, which serves over 40 airlines, is part of the
answer.
Third-party distribution generally does not promote
surprise competition between suppliers, but instead simply
increases costs to consumers. That's fine if there is
additional value being provided, and silly if there isn't.
The experiments with supplier initiated re-intermediation
on the web today are good for e-commerce and good for
consumers, and they will succeed or fail on their own merits.
Orbitz, like so many e-commerce sites before it, has
delivered to the consumer better information, better services
and lower prices, while at the same time saving the suppliers
money, which in-turn benefits consumers.
They went to the Department of Justice and the Department
of Transportation before even starting to get a review of their
business plan. They have been under constant scrutiny by both
agencies for the past 2 years, and in both chambers of the
Congress, and at no time has there been any hint of a problem
with their business model.
To the contrary, the Department of Transportation has
concluded that they have helped competition in the travel
booking market by following the DOJ guidelines. So-called web
fares are now more widely available and more competition exists
in the distribution channel.
The notion that the deals that exist are in fact
exclusivity deals is a ridiculous one as we see advertising
from many sites now saying that they have web fares. I hope the
question gets asked what kind of deals are being cut to get
them.
The notion that there has been any additional exclusive
deals, or fare bias, is ridiculous. Those were already in place
with folks like Travelocity, who were paid off to bias their
listing.
Instead, there has been marketing increases and
transparency with the Orbitz entry. The presence of Orbitz in
the marketplace has been a boon to consumers, period. As a
local theater owner, I am compelled to use a movie metaphor.
In the movie, Minority Report, we see the pitfalls
associated with preemptive enforcement, such as might be
suggested by some of the folks here at this table today, and it
is very important that we don't engage in this kind of psychic
behavior, but instead allow the market to work itself out.
So while I may seem to be providing the minority report
here at this table, I, for sure, represent the majority view.
Thank you, Mr. Chairman, and I look forward to questions.
[The prepared statement of Jonathan Zuck follows:]
Prepared Statement of Jonathan Zuck, President, Association for
Competitive Technology
The issue before this committee today transcends the air travel
industry. The current situation in this industry is part of the natural
struggle between entrenched business models and the ongoing drive
toward greater efficiencies and consumer benefits through innovation in
the marketplace and on the Internet. The Association for Competitive
Technology (ACT) has always supported the creation of innovative e-
commerce technologies and business models such as the one developed by
its member company Orbitz. In the online travel space, Orbitz has
created a new, lower-cost technology platform that provides consumers
with easy access to a broader selection of low fares in a guaranteed
unbiased display. The fastest growing IT organization in Washington,
ACT represents over 3,000 technology companies and professionals. The
bulk of our membership is comprised of small and mid-size companies and
their executives
Following a worldwide trend, Orbitz represents a move away from
inefficient proprietary networks toward more open and cost effective,
open, Internet-based networks. Orbitz uses superior server-based
technology to provide consumers with more information about all
available fares. Their technology is better than first generation
search engines, thus it can search billions of flight-options to find
more choices. Moreover, the server technology can handle the huge
volume needed to search billions of airline routings at a much lower
cost, allowing Orbitz to charge the airlines less to distribute their
tickets.
Since the launch of Orbitz, consumers have been given a much larger
set of choices when searching for fares. In addition, there has been
significant distribution cost savings for airlines and other travel
suppliers at a most critical time for them. Orbitz is providing the
first real downward pressure on one element of distribution costs in
particular; booking fees charged by the dominant Computer Reservation
Systems (CRS), which average nearly $14.00 per ticket. These CRS's have
thus far refused to invest in Internet-based technologies that could
help bring these costs down.
beyond the investigations
It is time to move past the seemingly interminable investigative
process. By way of background, Orbitz has been scrutinized by more
government agencies and congressional committees than any other online
venture. Not one of these reviews has asked for any change in the
Orbitz business model. Moreover, each review has noted the pro-
competitive impact that Orbitz brings to travel consumers. The
Department of Transportation report released last month found Orbitz
implementation has been consistent with plans and that current evidence
shows that no Orbitz charter associate airline has provided exclusive
fares to Orbitz. The Department of Justice review has been ``open'' for
more than two years. We are confident if there were any problems with
Orbitz structure or joint ownership, the DOJ would have acted. Despite
the results of the investigations, the chorus of Orbitz detractors
continues the ``Most Favored Nation (MFN) Indignation'' refrain. Simply
put, the MFN is a necessary part of the Orbitz business model that
benefits consumers. James DeLong, senior fellow with the Competitive
Enterprise Institute's Project on Technology and Innovation, noted in a
paper prepared for the CATO Institute, that:
``if good information [regarding airfares] is to exist, each
participant must bind itself to provide Orbitz with its lowest
fare. That is why the Orbitz charter contains, and must
contain, a [MFN] clause whereby each participant makes
available to Orbitz all fares that are made to the general
public.'' 1
---------------------------------------------------------------------------
\1\ James V. DeLong,, ``Online Travel Services: The Antitrust
Assault on Orbitz--and on Consumers, CATO Policy Analysis, June 6, 2002
at p.10. The full paper is attached to this testimony as Appendix A.
---------------------------------------------------------------------------
Despite this logic and without regard to the fact that Orbitz
charter is consistent with the DOJ collaboration
guidelines,2 some of Orbitz's protectionist competitors
continue to insist that the DOT and DOJ pursue investigations without
demonstrating in any way that competition would be hindered or that
consumers would not benefit. Indeed, these same competitors continue to
complain about their lack of access to special deals and fares while
making public announcements about airline fare deals they havle
negotiated, including deals for web-only fares, and specially
negotiated fares that give those two sites exclusive fares that Orbitz
does not have.
---------------------------------------------------------------------------
\2\ Department of Justice, ``Antitrust Guidelines for
Collaborations Among Competitors.'' April, 2000.
---------------------------------------------------------------------------
state of competition in the online travel space
Despite the wild claims that Orbitz means the end of all other
online travel services, the industry is healthy and competition alive
and well. The travel market is $140 billion annually. Online travel
bookings are on the rise. Online bookings comprise 13% of total
bookings. Forrester Research estimates that online travel spending will
grow to $60 billion in 2006. Currently, there are over 25 independent
online travel sites vying for consumer dollars and eyeballs.
It is difficult to overestimate the challenges facing the travel
market. Forrester estimates that 60% of consumers have no loyalty to
any one travel site and often choose among several. Clearly it's a case
of ``what have you done for me lately?'' This fact means that the
online travel space can, and does, support multiple competitors with
varying business models and value propositions. Indeed, Neilsen/Net
Ratings noted that the consumer's ability to easily comparison shop for
fares means that there can be several tiers of contenders.
Turning to the stories of these ``contenders,'' you can see the
promise of the online travel market for producing consumer value.
SideStep.com, a Santa Clara, California company has produced a web
application that is devoid of graphics and rich content. The premise is
that SideStep.com can deliver a consumer a list of fares faster than
Orbitz or the individual airline web site. Consumers with dial-up
Internet access would be particularly well served by this approach.
SideStep.com was launched in 2000 and produced a profit in April of
2002. Following the natural evolution of e-commerce, Qixo, a San
Francisco company, has developed an application that searches across
numerous sites including online travel, carrier and specialty sites.
This application takes advantage of the fact that the carriers time to
send the data to sites like Orbitz from their servers. This data can be
mined before it can be posted to Orbitz. The goal is to find the
cheapest fare no matter where it may be hiding. Finally, AgentWare,
based in Atlanta, provides travel agents with all fares from online and
offline sties. AgentWare is a $40 per month alternative to Sabre. At a
recent meeting of the National Commission to Ensure Consumer
Information and Choice in the Airline Industry in San Francisco,
Commissioner Patrick Murphy stated that government intervention, in the
face of technological innovation, is ``very challenging indeed.''
Without question, this level of innovation and competition has produced
manifold benefits for consumers.
the consumer's endgame: efficient intermediation
The Orbitz machinations are part of a larger issue. This is what is
to become of intermediaries or ``middlemen'' who provide little or no
added value. The Progressive Policy Institute (PPI) has studied this
issue and published the seminal paper in this field.'' 3 In
the paper, PPI estimates that American consumers pay a minimum of $15
billion more annually for goods and services as a result of such e-
commerce protectionism by middlemen. The CRS's and many of the ``brick
and mortar'' travel agents fall squarely into this category. Rather
than adapting to a changing marketplace, they have mounted a campaign
to stifle the growth of online travel services.
---------------------------------------------------------------------------
\3\ Robert D. Atkinson, ``Revenge of the Disintermediated: How the
Middleman is Fighting E-Commerce and Hurting Consumers.,'' Progressive
Policy Institute Policy Paper, January 2001. This paper is attached to
this testimony as Appendix B.
---------------------------------------------------------------------------
Without a doubt, traditional travel agents have provided consumers
value by serving as a buffer between them and the airlines. However, as
more and more consumers book their travel through online travel sites
and directly through the carriers' sites, travel agents fear the
elimination of their business model. For online buyers, it's not just
about saving a few dollars per ticket. It's more about the control,
information, and convenience consumers get by online searches for
schedules, routes, and fares, then buying an e-ticket--in the middle of
the night, when all the travel agents are asleep.
Technology has repeatedly enabled new information distribution that
takes market power away from existing middlemen. (e.g., real estate,
books, stock brokers, and car dealers).
``Survival of the fittest'' favors those travel agents who find
ways to charge consumers for the value they provide in counseling
consumers and booking their travel. And many travel agents are learning
how to survive--even thrive. In 2001, travel agents accounted for $63
billion in sales an increase of 40%. These travel agents account for
nearly 70% of all airfares, as compared to 2% for Orbitz. This does not
take into account the fact that traditional travel agents still process
90% of cruises and 95% of tours. The American Society of Travel Agents
has acknowledged that while consolidation has taken place, the total
amount of business remains constant. Arguments of mass unemployment are
specious indeed.
More important than the absence of erosion, travel agents who do
embrace technological change can still add value to a consumers travel
experience. For example, in areas underserved by the Internet, these
agents could offer to search fares, research and build customized
vacation packages, add some mark-up and hire a delivery person to bring
a person their e-ticket print out (while including brochures on
activities to do while on the trip). The possibilities are endless.
Traditional travel agents make baseless claims that the online
distribution models are ``anti-consumer'' because they take away
``truly independent choice.'' This completely misses the point. The
fact of the matter is that airlines pay between $22 and $32 per ticket
in distribution fees to travel agents. In 2001, this totaled $380
million. This cost is passed through to consumers. Online distribution
models can cut this cost to $6-$8 per ticket. A simple equation
follows: A cheaper distribution model equals a cheaper ticket. The
disruption of costly and inefficient distribution channels is part of
the ``creative destruction'' process of technology-driven innovation
and must be acknowledged. It is now being applied to the travel space.
Traditional travel agents who do not incorporate Internet distribution
models risk being held hostage by the CRS. The CRS distribution model
supported biased display and kept information away consumer. In fact, a
Consumer Federation of America paper from 1999 complained that:
``Traffic is diverted to the dominant incumbents through a number of
marketing mechanisms that extends market power over travelers: . . .
deals with travel agents to divert traffic, . . . and manipulation of
computerized reservation systems.'' 4 This era is over. It
is irrefutable that consumers enjoy the control, information and
convenience achieved through booking online. Travel agents should shed
the CRS shackle or they will sit idly by while consumers move further
and further toward the near perfect choice model provided by the
Internet.
---------------------------------------------------------------------------
\4\ Freeing Public Policy from the Deregulation Debate: The Airline
Industry Comes of Age (and should be held accountable for its
anticompetitive behavior), at p.7. Http://www.consumerfed.org/
abaair1.pdf.
---------------------------------------------------------------------------
conclusion
ACT vigorously supports any competitor that invests in information
technology to serve consumers better, faster, and cheaper. ACT is just
as vigorous in opposing the use of government regulation to prohibit
competition on the merits of investment and innovation. As you
contemplate the issue of Internet-based distribution, I urge you to
focus on promoting robust competition and meeting the needs of
consumers, not the protection of business models that are threatened by
new technology and changing consumer preferences.
Mr. Stearns. I thank the gentleman.
Dr. Cooper, welcome.
STATEMENT OF MARK N. COOPER
Mr. Cooper. Thank you, Mr. Chairman. In my testimony, I
describe two clear examples of what we consider to be
restraints on trade in cyberspace. One deals with the sale of
cheap seats on airlines, and the other with expensive products,
new automobiles.
Now, I choose these two examples from the ends of the
spectrum of what can be sold in cyberspace to underscore an
important point, and one that is the theme of this hearing.
Anti-competitive practices from the old economy can rob
consumers of the benefits of the Internet, just as surely as
closed platforms and incompatible operating systems, and
balkanized applications that we so frequently hear about.
We believe that Orbitz reduces the supply of cheap seats to
independent merchants, a good word. It imposes and facilitates
uniformity and diminishes the tendency to undercut price
leadership, which is so clear in this oligopolistic industry.
There is a reason for that the cyber auction has become
sort of the essential symbol of the Internet. The essence of
the pro-competitive, consumer friendly, Internet is the ability
to conduct many to many transactions. Many people interacting
with many suppliers increases efficiency, and drives prices
down.
When the five largest suppliers jointly commit to
guaranteeing the lowest price on their website and nowhere
else, they interdict that many-to-many characteristic. They
drive the Internet back toward the few-to-many, which is the
old economy model.
Two years ago, at an FTC roundtable, we identified a series
of characteristics that we said should sound the alarm about
potential anti-competitive effects. Orbitz trips every one of
those wires. It has a large market share, 80 percent of the
main suppliers; direct ownership, restriction on supply;
coercive participation rules, and clear information exchange
that creates uniformity.
These are characteristics that frustrate the Internet's
ability, and I might briefly mention the other industry to Mr.
Boucher, who said that there ought to be a law. As we pointed
out in our testimony, it is illegal to sell cars directly to
the public in virtually every State in this country, including
Virginia.
It is illegal to sell comparison shopping even in some
States, but that is considered a dealer function. It is illegal
for auto manufacturers to use website hits to direct customers
to their best dealers.
So unfortunately we have laws. We have State laws that are
frustrating the benefits that the consumer could get from the
Internet. The Internet is a revolutionary means of
communications in commerce that can direct dramatically and
directly enhance consumer soverignity and empower citizens, but
only if public policy keeps it open.
A decade-and-a-half of our experience in the Internet and
hi-tech software industries leads us to believe that the
consumer and the economy are best served by open standards and
unfettered commerce.
These afford consumers maximum choice and citizens maximum
voice. They stimulate audacious competition, and encourage use
and expression, and promote unfettered innovation.
The Internet is a disruptive technology and entrenched
interests will seek to preserve their market niches and market
power, no matter how high the cost to consumers. The most
important antitrust case of the Internet century has its
origins in the observation of a CEO that the Internet
threatened to commoditize his product, the PC operating system.
Commoditization is the consumer's best friend, and
empowerment with information and the ability to execute
transactions directly turns products into commodities.
Producers will resist by fair means or foul. I applaud you for
holding these hearings that highlight this important aspect of
the Internet that is so frequently overlooked here in
Washington. Thank you.
[The prepared statement of Mark N. Cooper follows:]
Prepared Statement of Mark Cooper on Behalf of The Consumer Federation
Of America
Mr. Chairman and Members of the Committee, ny name is Dr. Mark
Cooper. I am Director of Research of the Consumer Federation of
America. The Consumer Federation of America (CFA) is the nation's
largest consumer advocacy group, composed of two hundred and eighty
state and local affiliates representing consumer, senior, citizen, low-
income, labor, farm, public power and cooperative organizations, with
more than fifty million individual members. CFA is online at www.
consumerfed.org.
I appreciate the opportunity to appear before you today to share
our thoughts on the potential anticompetitive effects of joint ventures
and other producer restraints on trade on the Internet. The Consumer
Federation of America, founded over 30 years ago, was one of the first
consumer groups to become involved in public policy affecting high-
tech, consumer-oriented industries.
The Internet is a revolutionary means of communications and
commerce that can dramatically enhance consumer sovereignty and empower
citizens, but only if public policy keeps it open. A decade and a-half
of experience in Internet and software industry policy reaffirms our
belief that consumers and the economy are best served by open standards
and networks. These afford the consumer maximum choice and the citizen
maximum voice, stimulate audacious competition, encourage use and
expression, and promote unfettered innovation by both consumers and
producers.
a technical and consumer policy map of cyberspace
I believe that the Internet can best be understood by seeing it as
a communications platform consisting of four layers--the physical
layer, the logic layer, the applications layer and the content layer.
It is a platform because the layers are strong complements; they need
to be tightly integrated and coordinated. In each layer there are
``digital economy'' issues that stem from its unique characteristics.
We hear a great deal about the physical layer, which is the medium
over which Internet messages are transmitted. In this layer the primary
concern is with owners of facilities--like cable operators and
telephone companies--who refuse to allow service to have
nondiscriminatory access to their telecommunications networks.
We hear a great deal about the logic layer, which is where code and
protocols allow communications equipment, computers and display devices
to interconnect and interoperate. In this layer the concern is with
dominant software firms--like Microsoft--who can undermine the
compatibility of competing code and lock out competition.
We hear a lot about the applications layer, where programs execute
a sequence of steps to solve a problem or perform a task for the user.
Here the concern is with applications--like instant messaging or
identity verification--that refuse to interoperate, undermining
universal availability and creating walls in cyberspace.
The issue before the Committee today deals with the content layer--
the specific products or services delivered through the platform--but
it is not the usual content debate we hear about. We frequently hear
about this layer as a debate over digital content--digital rights
management demands by content owners, on one side, who treat all
consumers as thieves and want to hardwire antitheft devices into the
fabric of cyberspace, and consumers on the other side, who demand fair
use rights to enjoy the content they purchase when, where and how they
desire.
The issue the Committee raises today is different.
old economy problems migrating into cyberspace
This hearing highlights a very familiar old economy problem with
very real implications for the new economy of the Internet. Traditional
commercial restraints on trade can rob consumers of the benefits of the
Internet, just as surely as do closed proprietary networks,
incompatible operating systems, or balkanized applications. Classic
restraints on trade, unilateral or collusive, can limit the
availability of products, restrain price competition, or negate the
beneficial effects of the Internet in enhancing consumer search.
The ability to gather and process information that is greatly
facilitated by the Internet is a two edged sword. It can strengthen the
ability of producers to control and manipulate the markets, just as
easily as it can enhance the ability of consumers to shop and open
distribution channels that increase competition.
This hearing makes it clear that we must be vigilant to prevent
plain old dirty business practices from migrating into cyberspace, if
we are to preserve the procompetitive, consumer-friendly promise of the
Internet. To demonstrate how important this view of the content layer
is, I will make the point with reference to two very different
examples. The first involves highly perishable, low costs services--
cheap seats on airplanes. The second involves very durable, expensive
products--new automobiles.
cheap seats
A couple of years ago, the airlines showed a willingness to make
low value, high margin seats available to online discounters. These are
low value seats in the sense that they involve unsold seats close to
the time of departure. They are like overripe fruit on the grocery
shelf that cannot be sold at full price. Since the incremental cost of
that unsold seat is virtually zero, any incremental revenue is pure
profit.
Acting independently, the airlines cannot resist making them
available at a low, ``name your own price'' level. The information
exchange about these tickets in a cyber auction increases the
likelihood of their being sold and allows supply to meet demand in a
more efficient manner. Only the Internet (or an equally ubiquitous.
accessible information environment) could bring this immense real time
market into existence on a massive scale for consumers to directly
choose what to buy in the way of discount tickets.
The side effects were not to the liking of the airlines
collectively, however. As long as William Shatner was able to make
people think they could name their own price, he was creating price
resistance on the demand-side. As long as these tickets pop up in the
chaos of this new cyberspace type of auction, he creates uncertainty on
the supply-side. It is more difficult for airlines to know how many
seats are being offered at what prices with this sort of arrangement.
It is easy to make secret deals with the discounters to fill your
planes at the expense of rivals. In an oligopolistic industry that has
developed the most precise mechanisms of price discrimination in memory
and an intricate systems of fortress hubs to exercise market power over
increasingly captive traffic, this web-based discounting sound
suspiciously like competition.
The response by the industry as a whole is to try to control this
unruly behavior. By organizing their own online broker over which they
have greater control, they may still sell many of the seats, but
eliminate the price disciplining effect of unaffiliated discounters. At
a minimum, they could reduce the supply of discount seats the
discounter can offer. Diminishing their ability to make the ``name your
own price'' promise, or even the lowest price available claim, will
eventually degrade their ability to discipline price.
Depending on how they organize the site, the airlines can guarantee
a reduction in supply of discounted seats by requiring members to make
seats available. Airlines may have better information about the
availability and price of seats when they control their own site.
They may also have rules--formal, or more likely informal--about
making seats available on multiple sites.
I use the ``name your own price'' model as an example, because it
exploits the information environment most intensively and has the
cheapest seats. Orbitz may not be directly targeted at it, but it is
certainly targeted at the next tier of cheap seats that are offered by
Travelocity, Expedia and travel agents and it certainly has an effect
on all discounters.
Obviously, we are skeptical of the proconsumer intent and impact of
this sort of coordinated industry activity, especially when an
independent undertaking came first. In more general terms, these types
of producer joint ventures raise the fundamental problems of horizontal
concentration and vertical integration disguised as consumer friendly
e-commerce applications.
Every time firms that are supposed to compete in the
marketplaces have a meeting in cyberspace or physical space, it
enhances the chances of collusion.
Every time firms exchange information about input prices or
the price and quality mix of their product line, they can
increase the likelihood of anticompetitive parallelism.
Every time they create ventures that diminish the availability
of inputs, they may raise barriers to entry for potential
competitors and raise the costs of the actual rivals.
Every time they create ventures that coordinate their sales to
the public, they reduce the likelihood that independent action
will lower prices.
In other words, the efficiency that these ventures promise by
lowering input costs is only in the public interest if it does not have
any of these anticompetitive side effects. Of course, the industry
insists this is not the purpose, nor would it engage in such activity,
but it is the job of the antitrust and consumer protection agencies to
prevent the anticompetitive outcomes. The problem could be massive in
cyberspace and the ability of enforcement authorities to detect and
prevent it is limited. As the chances of being caught are diminished,
the likelihood of the violation increases.
One possibility is to have a huge increase in the funding for the
regulatory agencies charged with policing this type of potentially
anticompetitive activity. There is little chance that will happen. In
the alternative, we need clear measures to prevent anticompetitive
arrangements before they are executed. An ounce of prevention is worth
a pound of cure. The antitrust authorities are familiar with such
mechanisms. A rule of reason should apply with heightened scrutiny and
consent decrees that ban specific practices.
Market Share thresholds: Arrangements that account for a
significant share of the suppliers in a market should be subject to
specific investigation.
Ownership Matters: Profit sharing between firms should be
discouraged, since this diminishes the incentive to compete. Firms
should not generally appear on both sides of a transaction, since this
aids in the manipulation of the availability of a product or its price.
Restriction of supply: Restriction of supply either by requiring
certain quantities to be offered or preventing participants from
selling outside of the arrangement at attractive prices may restrict
supply to the market and have the effect of undermining rivals or
reducing competition for consumers. Such arrangements should not be
allowed.
Participation Rules: If the ventures that invite the public to
participate as buyers or sellers, then rules about who can make product
available to or purchase product from the venture should not be unduly
discriminatory or exclusionary.
Information exchange: Joint venture participants should not gain
access to information on competitors' costs (of inputs) or quantities
and prices of output sold through the venture. This requires anonymous
transactions executed by a site administrator.
Oversight of informal behavior and compliance with conditions:
Joint venture operations provide significant opportunity for exchange
of competitively sensitive information in informal ways. These joint
ventures should be required to have an Ombudsman to be present at all
official functions and to monitor operations. A finding by the
Ombudsman that anticompetitive activity has occurred should become a
rebuttable presumption of a violation of the antitrust law.
expensive products
At the start of what has been called the ``Internet Century,''
there can be no better symbol of the transformation of the economy than
a battle over automobile sales on the Internet. The automobile is not
only the quintessential symbol of the industrial economy of the
twentieth century; it is also the second largest expense on a consumer
durable that most households make. Moreover, the distribution network
that typifies the industry has important and unique elements that make
it a potentially intense battleground when the new economy meets the
old. The automobile is an expensive, long-lived commodity that requires
post-purchase maintenance. Historically, this created a unique
relationship between the dealer and the consumer. The dealerships have
traditionally involved substantial investment. Automobile dealers are
the quintessential old economy middlemen.
Some believed that these unique characteristics would prevent or
slow Internet-based transactions from penetrating the distribution
chain. The automobile was believed to be a type of commodity that is
not well suited to Internet sales. Cars were not considered a good
candidate because consumers needed to ``kick the tires'' before buying
a car.
In fact it was not consumers who resisted the Internet when it
comes to new auto sales. Consumers are perfectly willing to turn to the
Internet for information about autos and tell the salesman exactly what
they want based on online research. They would probably buy direct over
the Internet, without going to a show room in many cases, if they
could. Unfortunately, they have not been able to test this distribution
chain because state laws protecting dealers will not let them. Direct
sales over the Internet are illegal in virtually all states.
The cost of distribution of new automobiles approaches $100 billion
per year. The distribution chain is ripe with inefficiencies and local
monopolies that are perpetuated by state laws. Instead of the build-to-
inventory system of the 20th century, which causes new cars to sit on
lots for two or three months, a 21st century build-to-order system
could get exactly the car the consumer wants into his or her driveway
in two or three weeks. The savings for consumers and the economy would
be immense. But this would dramatically reduce the role of the dealers
as middlemen. The acres and acres of inventory by which they defined
their very being would be irrelevant and uneconomic.
As the capability to deliver information expands and access to
multimedia, interactive information applications improves, an
environment in which producers and consumers can interact directly for
automobiles could be created, just as it was for the ``name your own
price tickets.'' These changes would result in more effective shopping
by consumers, better targeting of marketing efforts, personalized
design of products, and reduced inventory/holding times for the
delivery of goods.
Higher and higher quality visual and video images that can be
tailored and modified during the transaction, promise a quantum
leap in the quality of marketing and consumer information
gathering.
Increasing integration of production with consumer preferences
identified through on-line transactions can both dramatically
reduce marketing and inventory costs and increase customer
satisfaction.
Personalized selling and flexible production can combine with
interactive scheduling to reduce the amount of time that goods
must be held in storage or spend in transit, sharply reducing
delivered costs on big ticket items like automobiles.
To achieve these potential gains, however, major institutional
changes must come about. Not only is it illegal to sell a car on the
Internet, it is even illegal for manufacturers to distribute the hits
on their home pages to the best dealers in the consumers' area. In some
states it is illegal to sell comparison-shopping information to the
public. These anticompetitive barriers to use of the Internet may be
costing consumers $20 to $40 billion in the cost of new autos.
Moreover, once the sale of autos is pulled out of the showroom and put
into the competitive context of the Internet, financing, warranty work,
and after market services would become much more competitive,
potentially saving consumers tens of billions of dollars more.
Congress was quick to prevent the states from taxing the Internet,
but much more harm is being done to consumers by these anticompetitive
statutes that prevent them from utilizing the Internet for full effect.
Congress needs to require states to allow the direct sale of cars over
the Internet.
conclusion
These two examples from the opposite ends of the spectrum of
consumer goods and services that could be sold over the Internet remind
us how vigilant we must be if we are to ensure that the Internet
continues to operate in a procompetitive, consumer-friendly fashion.
The Internet is a disruptive technology and entrenched interests will
seek to preserve their market niches and market power, no matter how
high a cost that imposes on the public. I applaud you for holding these
hearings that highlight this important but overlooked aspect of public
policy for the Internet.
Mr. Stearns. I thank the gentleman.
Mr. Ruden.
STATEMENT OF PAUL M. RUDEN
Mr. Ruden. Thank you, Mr. Chairman. The short answer to the
question posed in the title of this hearing is no. E-commerce
in fact in travel is in grave danger of being dominated by the
joint market power of the largest airlines.
Perhaps uniquely the Internet has penetrated and influences
the travel market place more than any other line of commerce.
The potentials of this technology has been actively exploited
by several non-airline entities, the most prominent of which
are Travelocity and Expedia, but there are many others.
These firms are examples of the much maligned middleman, a
firm that operates between the producer and the end-consumer,
living off the value delivered to both the ultimate seller and
the ultimate user of the product or service.
Many smaller firms have also entered the Internet space,
using it to transmit information and to communicate with
consumers. The variety of approaches by retailers to the use of
the Internet is imposing. The latest buzz word is convergence,
signifying the merging of Internet and traditional business
methods by parties at all points along the spectrum between
what were once seen as pure Internet firms, and pure brick and
mortar business models.
We refer to the middleman as much maligned because it is an
article of faith among Internet proponents that the technology
as Dr. Cooper said is disruptive, a disruptive force that
eliminates what are described as wasteful middlemen by enabling
more efficient transactions directly between producers and
consumers.
The premise is that e-commerce meets all relevant consumer
needs for access to information, and enables consumers to make
decisions and act on them without assistance from anyone.
While there is no doubt that technology works fine for many
consumers, the inference that it can meet all needs simply is
not supported by the available facts. The truth is that for
most consumers most of the time direct contact with a human
being, with knowledge and expertise in travel, remains
essential.
The consumer either lacks the credit or the information, or
the wherewithal, or the comfort, to do his business on the
Internet. You have heard about Orbitz, and I am not going to go
on at great length about Orbitz.
They claim to have the greatest array of low fares
available anywhere. They can make that claim because of
preferential arrangements with the five largest airlines in the
world, and 38 other airlines that give them preferential access
to fares that other competitors on-line and off-line do not
receive.
When Orbitz testified before a Congressional committee not
long ago, they described themselves as just another startup
travel agency. That, of course, was just testimonial snake oil.
In reality, Orbitz was given a promotion budget unmatched in
the history of retailing.
The Orbitz campaign reinforced in the minds of many
consumers the concept that the Internet always delivers lower
prices. Yet, virtually everyone who has tested Orbitz's actual
performance in a systematic way, including Consumer Report's
travel letter, has found that a substantial part of the time
the on-line agencies produce better prices.
And the so-called traditional agents are still out there,
showing consumers how to get better value for their money
through alternate routings and other tactics known only to the
professionals, and overlooked entirely by consumers working on
their own.
Information and knowledge are very different concepts, and
the information delivery potential of the Internet, while
great, cannot replace the knowledge and experience of humans
acquainted with the tricks and traps oft his complicated
network.
The airlines would have the consumer believe that the on-
line marketplace, through that marketplace, they mean to give
consumers the lowest possible prices for air travel. Can that
be so? Are the airlines, which constantly remind us of their
slim to none profit margins over the years, and their
staggering current losses, really in the business of selling
their service for the lowest possible price. We think not.
The goal and the strategy of the airlines on the Internet
is to dominate that space to such an extent that the flow of
information will essentially be in their control, rather than
under the control of the independent firms, and in that way
their yield management systems will cease to run interference
from neutral third-party retailers, whose first priority must
always be to serve their customers.
Then the price discounts that Orbitz touts today will be
entirely in the airlines' control, and largely non-existent.
Orbitz's offer to be the next computer reservation system for
travel agents, jointly owned and jointly managed by airlines,
but uncontrolled by government regulation, is like a dinner
invitation from Don Corleone, an offer everyone should refuse.
The small travel agencies of this country, on whose
services the airlines relied for decades, and upon whom the
majority of air travelers still depend, are being crushed by
the market power of the airlines. Orbitz is the fighting ship
that they are using to lead that charge.
The Federal Government, Mr. Chairman, bears a large part of
the responsibility for the problem the agency industry now
faces. Travel agents are still largely locked into long term
contracts with severe penalties for failing to achieve book air
segment thresholds.
Their ability to efficiently adapt to Internet technology
is impaired by those contracts, and those contracts are
permitted by the CRS regulations last adopted in 1992, and
scheduled for review 5 years thereafter.
For 5 more years, the Department of Transportation has
failed to address those regulations, leaving agents trapped
between the CRS vendors and the airlines, the CRS's former and
present owners, and the owners of Orbitz.
In addition to the elimination of commissions, the launch
of Orbitz, the withholding of Internet fares from CRS displays,
there is now even talk of the shifting of segment booking fees
to travel agents, as well as credit card merchant fees.
The Internet could have and perhaps still can be a vibrant
place in which all manner of travel commerce is conducted by
firms large and small, as opposed to the path which the
airlines have set out.
But that result will not emerge by itself. The government
is going to have to take some swift and strong action to stop
the trend toward airline domination of this space. So the
question then of whether airline ownership of all on-line
travel sites is in the interest of consumers, ASTA says no, not
when the airlines are permitted to collectively own and control
sites, such as Orbitz.
And do not be mislead by the effort Orbitz has put forth to
have a public offering. If you read the public offering
statement, it makes absolutely clear that the five airline
owners intend to indefinitely maintain complete, 100 percent
control of the management of Orbitz.
We have no objection, no objection, to individual airlines
operating independently of each other, and doing on their own
websites what their marketing philosophies and attitudes
warrant.
Traditional travel agents and the new on-line agents, and
all of the hybrids in between will find their way with
consumers, in a marketplace where each firm is making
independent decisions about how and where to sell its services.
Orbitz is the antithesis of independent decisionmaking, and
consumers, like travel agents, can expect no good to come of
it. Thank you very much.
[The prepared statement of Paul M. Ruden follows:]
Prepared Statement of Paul M. Ruden, Senior Vice President for Legal &
Industry Affairs, American Society of Travel Agents, Inc.
The American Society of Travel Agents (``ASTA'') offers this
testimony on the Subcommittee's deliberations on the question whether
all supplier-owned online travel sites are good for the
consumer.1
---------------------------------------------------------------------------
\1\ The presenter, Paul M. Ruden, is a Commissioner on the National
Commission to Ensure Consumer Information and Choice in the Airline
Industry, created by HR 1000 in the 106th Congress. This testimony is
presented in his capacity as a representative of the American Society
of Travel Agents and not in his capacity as Commissioner. This
testimony does not reflect any position of the Commission which is
still holding public hearings and will file its report in November,
2002.
---------------------------------------------------------------------------
The short answer is ``no.'' ASTA believes that e-commerce in travel
is in grave danger of being dominated by the joint market power of the
largest airlines, with the result that the short term ``deals'' and so-
called unbiased information that are now promised to consumers will be
replaced with higher prices and restricted or distorted information
that will make it more difficult for consumers to make optimum
purchases of travel either online and offline.
Perhaps uniquely, the Internet has penetrated and influences the
travel marketplace more than any other line of commerce. By expanding
drastically and at low unit cost the ``reach'' of any information
provider or seller, the Internet creates the potential for significant
market expansion by many players of all sizes and configurations. By
enabling consumers to cheaply and relatively quickly find and compare
information, the Internet potentially increases the competitiveness of
the marketplace along with possible stimulation of demand.
The potential of this technology has been actively exploited by
several non-airline entities, the most prominent of which are
Travelocity and Expedia. These firms are examples of the much maligned
``middleman,'' a firm that operates between the producer and the end-
consumer, living off the value delivered to both the ultimate seller
and the ultimate user of the product or service.
Many firms that did not have the investment capital available to
the major name players have also entered the Internet space, using it
to transmit information and to communicate with consumers. Typically
these firms do not provide transaction capability on their Internet
sites, but use them as advertisement, information and communication
tools.
The variety of approaches by retailers to the use of Internet
technology is imposing and defies most attempts to categorize. The
latest buzz word is ``convergence,'' signifying the merging of Internet
and traditional business methods by parties at points all along the
spectrum between what were once seen as ``pure Internet'' firms and
``pure brick-and-mortar'' business models.
We refer to the middleman as ``much maligned'' because it is an
article of faith among Internet proponents that the technology is a
``disruptive'' and ``disintermediating'' force that eliminates
``wasteful'' middlemen by enabling more efficient communication and
business transactions directly between producers and consumers. The
premise of this view is that e-commerce meets all relevant consumer
needs for access to information and enables consumers to make
decisions, and act on them, without assistance from anyone.
There can be no argument for that some consumers, some of the time,
this is true. There is no denying the rapid growth of travel purchasing
on the Internet. ASTA believes that virtually all of the growth in air
travel sales by travel agencies nationwide is accounted for by sales on
the Internet. Air travel sales by travel agencies, collectively
considered, have been essentially flat for several years and no change
in that pattern can be foreseen. To that extent, consumers are speaking
with their hands, choosing the Internet to buy a substantial amount of
air travel through direct access to the producer or through an online
travel agency.2 Recent reports indicate that airline
websites are now growing even more rapidly than the online agencies.
---------------------------------------------------------------------------
\2\ A major qualification to that point is that travel agents have
for some time been buying air travel on the Internet for their clients.
We are aware of no reliable way to measure the extent to which Internet
sales growth is a product of that shift of booking from traditional
computer reservations systems by travel agents.
---------------------------------------------------------------------------
The problem is that the foregoing facts lead many observers to
conclude that the Internet is the complete answer to virtually all
travel consumers' needs for convenient, low cost, trustworthy access to
the national air transportation system. While there is no doubt that
the technology works fine for many consumers, the inference that it can
meet all needs simply is not supported by the available facts.
The truth is that for most consumers, most of the time, direct
contact with a human being with knowledge and expertise in travel
remains essential. Many air travel transactions are simply too complex
for a consumer to successfully negotiate them over the Internet. Some
transactions that seem simple on their face have complex aspects in the
fare conditions and in the existence of alternative purchasing choices
that will not be known to the average buyer. Many consumers of air
travel do not have practical access to the Internet, do not have credit
cards that are essential to buying online, or simply lack the
wherewithal or comfort level necessary to buy online successfully.
These people either need or strongly desire to continue using
traditional travel retailers for the purchase of air tickets and
ancillary travel services.
Normally, one might say this is a fine and proper division of
supply and demand. The Internet, one might say, has simply added a new
alternative for consumers and now each consumer can decide for himself
which channel he wants to use.
But that is not what is happening. In ASTA's view the e-commerce
marketplace for travel services is being distorted and misused by
airlines who seek collectively to dominate the Internet space, and
indeed all distribution channels, while throwing roadblocks in the way
of competitors, actual and potential, who would challenge their
hegemony.3 The airlines have seen the power of retailers on
the Internet, in contravention of the conventional wisdom, and now seek
to lock them out of that competitive space with collective action that
can only harm consumers in the long run.
---------------------------------------------------------------------------
\3\ ASTA has detailed its views on this process in numerous fora,
including testimony before the National Commission to Ensure Consumer
Information and Choice in the Airline Industry. With the Subcommittee's
approval, we will submit a copy of that document for the record in
these hearings
---------------------------------------------------------------------------
We speak, of course, of Orbitz, the joint airline-owned website,
owned by five of the largest airlines in the world. Orbitz claims to
display the largest array of the lowest fares available anywhere, a
claim they make because of preferential arrangements with the five
owners and thirty-eight other airlines that give Orbitz access to low
Internet fares that are denied to other retailers through the computer
reservation systems on which they are dependent for access to fare and
schedule information. That dependency was fostered, indeed virtually
insisted upon by the very airlines that now own and control Orbitz.
When Orbitz first testified before a Congressional committee not
too long ago, its president described it as Ajust another travel
agency.'' But of course that humility was just testimonial snake oil.
In reality Orbitz was given a promotion budget probably unmatched
in the history of travel retailing. It managed to lose $153 million in
its first year and a half of operations but rose in less time than that
to a very close third in business volume behind the two larger and
theretofore better known online agencies.
The Orbitz campaign reinforced in the minds of many consumers the
concept that the Internet always delivers lower prices. It also
reinforced the idea that buying air travel is as simple as inputting a
few simple pieces of information and getting a result that is always
right, always the best price. Yet virtually everyone who has tested
Orbitz' actual performance in a systematic way, including Consumer
Reports Travel Letter, has found that a substantial part of the time,
the online agencies produce better prices. In reality, no one firm has
a monopoly, yet, on the distribution of low priced air travel. Indeed
some firms, among them Southwest Airlines, have refused to allow Orbitz
to publish or use their schedules. The Department of Transportation,
while giving Orbitz pretty much everything it wants in every other way,
has admonished Orbitz that it cannot claim to have all the lowest
fares.
And of course the so-called traditional travel agents are still out
there, albeit in reduced numbers, showing consumers how to get better
value for their money through alternative routings and other tactics
known largely to the professionals and often overlooked by the consumer
working on his own. Traditional travel agents often produce the lowest
price for a consumer by applying knowledge of travel opportunities that
consumers often never consider. Information and knowledge are two very
different concepts and the information delivery potential of the
Internet, while very great indeed, cannot replace the knowledge and
experience of humans well acquainted with the rules, tricks and traps
of our very complicated air travel network.
The airlines would have the consumer believe that through the
online marketplace they mean to give consumers the lowest possible
prices for air travel. Can this be so? Are the airlines, which
constantly remind this august body of their slim-to-none profit margins
over the years and their staggering current losses, really in the
business of selling their service for the lowest possible price? We
think not.
The goal of the airlines' strategy on the Internet is to dominate
that space to such an extent that the flow of information will
essentially be in their control rather than the control of independent
firms. In this way their yield management systems will cease to run
into interference from neutral third party retailers whose absolutely
mandatory first priority must be to serve their customers. Then the
price discounts that Orbitz touts will be entirely in the airlines'
control and largely non-existent.
Orbitz will tell you, of course, that it is actually the friend of
travel agents and consumers. It will say that travel agents are free to
book on Orbitz today and to charge a fee to their client for the
service of finding them what Orbitz says is the lowest possible fare.
And that statement would be true in one limited sense but false in most
ways that matter. It is certainly the case that a travel agent can book
on Orbitz, masquerading as his client. But the complete reality is that
the agent then gives up management of the transaction thereafter, which
is often one of the main reasons the client used the agent in the first
place. To create a manageable record in his own back-office accounting
system, all the data has to be reentered. Moreover, almost all travel
agents have in their computer reservations systems contracts a clause
specifying a minimum monthly air segment count that must be booked.
Failure to achieve that booking level results in a financial penalty.
Bookings on Orbitz do not count toward CRS segment count thresholds.
Orbitz goes one better, however. It has now announced that it
intends to become a CRS in its own right, offering its services to
travel agencies in a more robust, but unspecified, manner, provided, of
course, that it is freed of the DOT regulations that apply to the four
existing CRS's. Thus, Orbitz, owned by five airlines, all former owners
of CRS's and three of whom own another CRS now (Worldspan), portends a
return to the times prior to 1984 when there were no CRS regulations.
In that environment the airlines biased the CRS displays to benefit the
owners and their co-host partners and otherwise distorted air
transportation competition so badly that the Civil Aeronautics Board,
in the final throes of deregulation, was forced to enact regulations.
It is, we respectfully suggest, simply not plausible to believe
that the joint operation of websites by the airlines are going to
produce consumer benefits for the long run. The Orbitz offer to be the
next CRS, jointly owned and managed by airlines but uncontrolled by
government regulation, is, like a dinner invitation from Don Corleone,
an offer everyone should decline.
The small travel agencies of this country, on whose services the
airlines relied for decades, and upon whom the majority of air
travelers still depend, are being crushed by the market power of the
big airlines. In the space of seven years those airlines have
eliminated travel agent base commissions and are clearly committed to
diverting as many of the agency customer base as possible to their
websites. Orbitz is the fighting ship they are using to lead the
charge. Keep in mind that, among its other blessings, Orbitz is favored
by the 43 participating airlines with guaranteed compensation that
insulated Orbitz from the final rounds of airline commission cuts faced
by Orbitz' competitors.
The federal government bears a large part of the responsibility for
the problem that the travel agency industry now faces. Travel agents
are largely still locked into long term contracts, with severe
penalties for failing to achieve booked air segment thresholds. Their
ability to efficiently adapt to Internet technology is impaired by
those contracts that are permitted by the CRS regulations last adopted
in 1992 and scheduled for review five years thereafter. For five more
years the Department of Transportation has failed to address those
regulations, leaving the agents trapped between the CRS vendors and the
airlines (the CRS's former and/or present owners and the owners of
Orbitz). In addition to the elimination of commissions, the launch of
Orbitz, and the withholding of Internet fares from CRS displays agents
need to conduct their businesses, there is now talk of the CRS's
shifting segment booking fees to travel agents, as well as credit card
merchant fees.
The Internet could have, and still could be, a vibrant place in
which all manner of travel commerce is conducted by firms large and
small, as opposed to the path on which the airlines have set out,
which, if not halted, will leave the Internet, and all other retail air
travel distribution, dominated by a handful of powerful producers. But
that result will not emerge by itself. The government is going to have
to take some swift and strong action to stop the trend toward airline
domination of this space.
To the question, then, of whether all airline ownership of online
travel sites is in the interest of consumers, ASTA says ``no, not when
the airlines are permitted to collectively own and control such sites
as Orbitz.'' We have no objection to airlines' operating their own
sites as extensions of whatever marketing policies they individually
develop. Traditional and online agencies will find their way with
consumers in a marketplace in which each firm, including each airline
firm, is making independent decisions about how and where to sell its
services. Orbitz is the antithesis of independent decision making and
consumers, like travel agents, can expect no good to come of it.
There is another issue before the Subcommittee: the question is
essentially whether the joint hotel website, now called Travelweb, is
materially different than Orbitz in terms of issues raised for e-
commerce. As it functions today, travelweb.com appears to operate quite
differently from Orbitz. We have very little hard information about the
internal arrangements, but viewing the website, there is little
similarity. The only function that seems to work simply gives the
inquirer a list of hotel chains to whose individual websites the
inquirer must go, one at a time, to seek rates and dates. The ``Click-
It'' function that claims to offer comparative prices for weekend stays
does not seem to do anything. Hotels.com is a principal competitor of
travelweb.com. We were unable to understand the manner in which this
site displays properties and rates.
But in neither case are we aware that there is a ``most favored
nation'' clause that entitles the websites to all the rates that the
hotels publish elsewhere. If such arrangements exist, we are entirely
opposed to them. We are also concerned about any situation in which
large competitors engage in cooperative marketing that includes price
setting. While the neutral operation of a ``posting board'' for hotel
rates from different properties is unobjectionable in general, it would
be far better for e-commerce, indeed for all commerce, and consumers if
the opportunities for abuse in these sites were eliminated by having
them operated by independent third parties.
ASTA appreciates the opportunity to have presented its views, and
remains at the Subcommittee's disposal to assist in any way it can.
Mr. Stearns. I thank the gentleman. I will start the
questioning to the panel, and let me just say as an overview
that as Mr. Boucher, from Virginia, mentioned that this is a
broad understanding of what happens, and the implications for
the consumers, and that our role in this Commerce, Trade, and
Consumer Protection Subcommittee is to determine what nuances,
what problems, would exist if five airlines, for example--you
have United, American, Delta, Continental, and Northwestern--
who own an online site such as Orbitz.
But then you have TravelWeb, which is Marriott, Hilton,
Hyatt, Sheraton, and Holiday Inn. Now, they might have some
holding company names, but those are the major chains. And when
these five large companies get together and have a website, do
they provide efficiency that benefits the consumer, or do they
thwart competition, and that is what we are looking at in terms
of this hearing, and trying to see whether this model is also
applicable to other industries.
But I would like to start with Mr. Gilliland. The
Department of Transportation reported last month that they did
an investigation, and they found no Orbitz charter airline has
provided exclusive fares to Orbitz. Please comment.
In other words, that report would collaborate what Orbitz
is saying, which is that basically they are competitive, and
they are providing a good service, and they are not doing
anything wrong. So the Department of Transportation said that,
and so the question would be to you to say why is the
Department of Transportation wrong.
Mr. Gilliland. Well, I think it comes back to the basic
question of what we have been talking about here, which is this
Orbitz MFN, or most favored nations, clause. And I might just
describe that here briefly.
There are two important components of that MFN. First, the
third-party MFN, where every fare given to a third-party site,
like Travelocity, by an airline must also be given to Orbitz.
And then the airline website component of that MFN, where
ever fare on the airlines' website must be given to Orbitz.
Now, you must ask, okay, so what is the implication of that.
Well, it is a serious deterrent to airlines offering price
discounts to independent distributors like Travelocity.
And so prior to Orbitz's launch, airlines could and did
post exclusive fares on their own websites and occasionally
gave those same web fares----
Mr. Stearns. But, Mr. Gilliland, would not the Department
of Transportation in their study take that into account and
actually look at that? I mean, they understand the clause just
as well as you do, and not as well as I do, but it would seem
that they looked at it and found that there wasn't a problem.
Mr. Gilliland. I would suggest that they give it further
and deeper examination.
Mr. Stearns. Okay. Mr. Wolff, you stated that this most
favored nations clause, ``ensures that we are competitive with
other independent travel websites.'' How is this intended to
keep you competitive with others--you might explain that--with
other independent travel sites.
And do other independent websites have such agreements with
the member companies of TravelWeb? For example, as I understand
it, Hilton has their own site, and Marriott has their own site.
And you have these other hotel companies having their own
sites. So I could go to those websites, and for example,
Marriott, and get a fare, or I could go to TravelWeb. So you
might provide how that----
Mr. Wolff. Okay. This is complex and I will try to be very
careful in the answer. First of all----
Mr. Stearns. Make it simple.
Mr. Wolff. We all compete very fierciously, and we all have
our own independent websites where we try to attract----
Mr. Stearns. The obvious question for the consumers is that
if Marriott has their own site, why do you have to have a site
like TravelWeb, and it is just those five?
Mr. Wolff. And on behalf of Marriott, we would like the
consumer to go to Marriott.Com.
Mr. Stearns. Okay.
Mr. Wolff. However, what we have noticed is that there are
consumers who would like to go to sites with multiple brands on
it. That's why Travelocity, and that's why there are several
sites--HRN, Hotels.com, et cetera.
So we are creating a site with various hotels on it,
TravelWeb. Now, is it a site that will have a lot of hotels? I
was very interested in Gentlewoman DeGette's concern about
competitors.
Mr. Stearns. Frontier Airlines.
Mr. Wolff. Frontier Airlines, and having run a sales
marketing customer service for a small startup airline
competing through the CRS's and everything, I am very sensitive
to that issue.
TravelWeb's position is that we are inviting all hotel
companies to participate, and while we are founded by the
TravelWeb members that you have mentioned, we are going to
other hotel chains and independents, and encouraging them to
participate in our website also, which will just be one
additional manner in which a customer can get a fare.
They can go to Marriott.com, and if they feel more
comfortable going to a site with multiple brands, they can go
to this site, and they can go to Travelocity, Hotels.com, a
variety of sites.
Mr. Stearns. Thank you. My time has expired. The ranking
member, Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman. Let me begin
with you, Mr. Ruden. In the early 1980's, the Department of
Transportation wrote CRS rules, forcing the carriers to produce
the same low fares to travel agents that gave to customers who
called the airlines directly.
I have heard that applying these rules to the on-line world
is technically not feasible as a business model. Is this true,
and should the rules be rewritten to apply to the on-line
world, as well as the off-line world?
Mr. Ruden. Well, Congressman, I don't think that the CRS
regulations had anything to do with which prices airlines
charge. The CRS regulations were a response to practices that
the airlines jointly owned computer systems, an analogy
somewhat to the current situation of an on-line market place
where they jointly own Orbitz.
Their jointly owned information distribution systems, which
were placed in the hands of travel agents, had displays which
were designed through bias and programming tricks to favor the
owners of those systems and other companies which entered into
partnerships with them.
And the judgment of the government, which was in the throws
of deregulation, of finishing the process of deregulation, and
shifting the residual authority of CAB to DOT, and putting the
CAB completely out of business at that moment in history, the
problem was judged so severe for airline competition that the
government was compelled to regulate those practices to
eliminate the propensity of these airlines working together to
bias the displays in favor of themselves and against their
competition.
And that is the fundamental principle to which those rules
were directed, a lesson we are suggesting that we should keep
in mind now that Orbitz has acknowledged publicly and in its
filing with the Securities Exchange Commission, that it wants
to be ultimately the fifth CRS, but without being subjected to
those same regulations.
There is nothing in the regulations that I am aware of that
would inherently prevent their application to airline jointly
owned on-line operations.
Mr. Towns. Thank you very much. I guess a question to Mr.
Zuck and Mr. Gilliland, this morning I decided to do a little
on-line homework, and went to Orbitz and looked up what a
flight would be from National Airport to LaGuardia, because I
go home a couple of times a week, and sometimes three times.
And I then went to Travelocity, and typed in the same
details. Do you have any guesses to what I found? And being you
can't guess, let me tell you. I found a flight on either U.S.
Airways or Delta Shuttle, on Orbitz where it was $290. The same
flight on Travelocity was $412.50. Could I get a response, Mr.
Zuck, and Mr. Gilliland?
Mr. Zuck. Sure, I will take first shot at that. I mean,
obviously, speaking on behalf of the airlines is way above my
pay grade, but it is amazing that some of the things that
people are allowed to get away with saying up here.
For example, one of the things that is going unsaid is that
the airlines are in fact customers, too, to the CRS system that
sell their tickets. They are in fact paying those----
Mr. Stearns. Mr. Zuck, do you have your microphone on?
Mr. Zuck. No. Now it is. Okay. Thanks. The airlines in fact
pay companies like Travelocity's owner, Sabre, in order to sell
tickets, and those rates, as Congressman Deal mentioned, have
gone up, and up, and up. In fact, airlines are losing business,
and losing money, and the CRS is making money, which might be
some indication of why the CRSs have time to be here today.
I don't know if that is an answer to that question which
has been raised, but the bottom line is this. Orbitz put
something in their contracts that said we are willing to
discount the money you spend on us to book this travel in
return for giving us these cheaper fares that obviously you
make less money on.
The ones that were previously offered on their on-line
sites are ones that they have a lower profit margin on, and
therefore don't want to spend the exorbitant booking fees that
are being paid to CRS systems. These nonexclusive parts of the
so-call MFN agreement is just an inventory availability
agreement that is the result of discounts that Orbitz offers to
suppliers on those booking fees.
So they make it cheaper for airlines to sell their cheaper
flights, and it is really that simple. What companies like
Travelocity and Sabre, and other CRS systems would like you to
propose is that they be granted access to those cheaper fares,
while still charging the exorbitant booking fees that they
charge for the more expensive fares.
What is happening today in the market place is that we are
seeing web fares beginning to appear on Expedia and on other
on-line sites, and the reason or the way that is happening is
probably through price negotiation, although while the Orbitz
system is totally transparent, negotiations between airlines
and Travelocity and Expedia remain confidential.
So in fact some kind of competition is taking place, where
before there was none, and I think you will start to see the
same fares appear on both sites very shortly as the RS systems
begin to give way on their monopolistic ways.
Mr. Towns. Mr. Chairman, I know that my time has expired,
but I sure would like to hear Mr. Gilliland's answer as well.
Mr. Stearns. Mr. Gilliland.
Mr. Gilliland. I appreciate that, Chairman Stearns. First
of all, let me answer your question directly and then I will
come to the points that were raised in the answer before me. On
the question of these fares that you looked at, it is very
likely that we simply at Travelocity didn't have access to the
same fares that were being made available to Orbitz, and again
this is my point earlier.
If an airline puts a web fare on its own site, it is
obligated to provide it to Orbitz. If it provides a special
fare to Travelocity, it is obligated to provide it to Orbitz.
And that is irrespective of any price competition that the
other panelists talked about.
We have gone into the airlines time and time again, and
asked to get the same fares at reduced costs. We provide the
booking fees at lower costs to those airlines. American Express
mentioned last month that they have gone in and done the same
thing, and in fact they said that we will offer up free
distribution.
We will pay all of those fees that you typically pay to the
CRSs. And did they get access to the fares? No. So the question
is whether is it a competitive marketplace or an anti-
competitive marketplace, and I think that this really gets back
to the crux of the issue for us.
We have competed at Travelocity in the past by getting the
best fares that we could for consumers. We would get exclusive
fare sales from those airlines, a very competitive market to
get at those fares.
If we enter into an agreement like that today,
automatically those fares are given to Orbitz. So we have no
leg up, and we have no competitive benefit, and there is no
motivation for the airlines to do a deal with us. So we are
left in a position where our sales force is busting its hump
engaging with airlines trying to do those deals at lower
distribution costs to those airlines.
And when we get them done, the Maytag repair man in Chicago
at the Orbitz headquarters gets those same fares. It doesn't
seem like competition to me.
Mr. Stearns. The gentleman's time has expired. The
gentleman from Georgia, Mr. Deal.
Mr. Deal. Thank you, Mr. Chairman. It seems rather
inconsistent to me on the one hand that people are arguing that
things are anti-competitive and the reason that they are anti-
competitive is because the cost to consumers is going down.
That seems to be what competition is supposed to do, is to
bring the costs down. The heart of this whole issue is as Mr.
Zuck indicates, is the booking fees that are charged by the
CRSs. Now, Travelocity is wholly owned by the largest CRS,
Sabre.
Seventy-five percent of Sabre's revenues come from booking
fees. Booking fees are the third largest expense, that is,
distribution costs, and booking fees is the largest part of
booking costs or distribution costs.
They are the third largest cost to airlines behind labor
and fuel, and so we are talking about something here of
protecting--if you want to talk about protecting the old
mechanism, Dr. Cooper, it is designed to protect the old
mechanism of preserving booking fees.
What Orbitz has done is to say to these airlines that if
you will enter into agreements with us, we will rebate up to a
third of the booking costs as an incentive to do that, and they
promised over a series of years to continue to lower the
booking fees.
Now, I can understand, Mr. Gilliland, why Travelocity,
being owned by a CRS, doesn't like that. But you, your own
company, has entered into agreements with Delta and other
companies to do exactly that have you not?
Mr. Gilliland. We have provided them with lower
distribution costs in exchange for web fares, and in fact, we
get dribs and drabs of web fares from those deals, and we do
not get the contractual guarantees that are provided to Orbitz
through this most favored nations clause.
Mr. Deal. But you and Expedia have both entered into
agreements for web fares from Delta if you would agree to cut
some of your booking fee costs aren't you?
Mr. Gilliland. And in fact we would like to see that same
type of competition occur in the future. We enter into
agreements with a single airline to distribute their fares at a
low distribution cost.
We don't enter into an agreement with five airlines all at
once on the same exact economic deal, a price that has been set
by the airline owners of Orbitz and Orbitz itself.
Mr. Deal. And part of that is that your system has a built-
in bias if people will pay you for that bias, something that
was alluded to by some of the others, and I believe you call it
a preferred carrier.
In other words, if you have a preferred carrier who pays
you a fee to be a preferred carrier, when someone uses your
website, you give them preference, in terms of the pull-up of
that site, do you not?
Mr. Gilliland. In fact, a consumer can make a choice to
show a preferred airline, and a preferred airline display, or
they can choose not to.
Mr. Deal. And you get paid a fee if the airline will pay
you to put a preferred status on your website?
Mr. Gilliland. We have promotional deals with the airlines.
That's competition in this marketplace.
Mr. Deal. And that is what Orbitz doesn't have isn't it?
Mr. Gilliland. Our site is not biased. Let me explain.
Mr. Deal. Okay. Go ahead.
Mr. Gilliland. Our site is not biased. If you look at our
slight displays today, you will see that Travelocity has
adopted the same display ordering as the Sabre CRSs, and the
Sabre CRSs whose displays are governed by the CRS rules. Do we
offer special promotional fares on some airlines? You bet we
do.
When we can get deals with those airlines, we offer special
promotions, and we will sometimes send promotional e-mails to
promote those deals. You will not, however, see inferior
service presented before better service.
Mr. Deal. Mr. Chairman, I am reclaiming my time. I think
you have answered the question. Let me ask you this though.
Isn't it true that you refused to enter into some of these
agreements for cheaper fares because of your exclusive
agreements?
In fact, it was reported in May of this year in Aviation
Daily that Travelocity and Expedia both turned down a special
offer of an on-line fare from Northwest Airlines from the U.S.
to Frankfurt, which they offered lower rates, and the reason
that you turned it down was because it would interfere with an
already exclusive agreement that you had with another airline;
isn't that correct?
Mr. Gilliland. We promote Northwest fares when we do
promotional deals with Northwest.
Mr. Deal. And that is assuming that they don't interfere
with these preferred contracts that you already have with
somebody else that you are already getting paid for?
Mr. Gilliland. Sir, competition in this business--and in
competition in many marketplaces, and supermarkets as an
example--is to go out and get the best supplier deal that you
can get one at a time, and that is what I am talking about
here.
We are going out one at a time and getting promotional
deals and we are offering those deals in our supermarket. It
sounds like commerce to me, and it sounds like e-commerce to
me.
Mr. Deal. And you pay those booking fees back to your
parent company, Sabre; is that correct?
Mr. Gilliland. No, we don't pay booking fees back to the
parent company.
Mr. Deal. You don't pay booking fees?
Mr. Gilliland. That is incorrect. We don't have a booking
fee relationship with our parent company.
Mr. Deal. You do not have any booking fee arrangements? Are
you saying that you are not charging any booking fees at all in
your----
Mr. Gilliland. We don't charge booking fees. We charge
distribution fees to the airlines that we have relationships
with. They are not booking fees.
Mr. Deal. Well, it is the same thing, but just called by a
different name isn't it?
Mr. Gilliland. No.
Mr. Deal. All right. Let me ask you this. If this
arrangement that you accuse Orbitz of being involved in is so
bad, can you explain to me why you are entering into an
arrangement in Asia, and I believe it is called Zugi, along
with 18 major airlines there in which you are the exclusive
booking agency for them?
Mr. Gilliland. Yes, I can explain that. We are a technology
service provider to them, and we have licensed our technology,
and those airlines are running that business, and we simply
provide the technology, similar to the technology that Orbitz
has contracted with a company named ITH to provide to them.
Mr. Deal. So what you have done then in Asia is to
duplicate what you are complaining about somebody else doing in
the United States?
Mr. Gilliland. No, and in fact it is very different. It is
a technology services relationship.
Mr. Deal. I see.
Mr. Gilliland. And we perform technology services with many
different companies on the Internet today, and as an example,
Yahoo and AOL.
Mr. Deal. And when you talk about wanting regulatory
parity, are you asking this committee to recommend that we
regulate the Internet in terms of online travel services?
Mr. Gilliland. What I am simply suggesting is that we apply
a very common sense approach to the Internet. If I go down to
the corner drug store and get a prescription, and get drugs, I
need a prescription. If I go to Drug Store.com, I need a
prescription.
And I am simply asking that we apply similar types of rules
to the Internet, and it is not about new rules. It is simply
about ensuring that there is effective competition, just as
that same competition was affected by in the mid-1980's, and in
1992 with the CRS rule.
Mr. Deal. Mr. Chairman, I would ask--I realize my time is
up, but I would ask for unanimous consent to include in the
record a statement by Mr. Scott Yohe, the Senior Vice President
of Government Affairs for Delta Airlines, which was his
testimony on June 26 of this year before the National
Commission to Ensure Consumer Information Choice of Airline
Industry.
Mr. Stearns. By unanimous consent, it is so ordered.
[The statement follows:]
Prepared Statement of D. Scott Yohe, Senior Vice President--Government
Affairs, Delta Air Lines, Inc.
Members of the Commission: On behalf of Delta Air Lines, I would
like to thank you all for the opportunity to provide testimony on the
important issues being addressed by this Commission.
I am Senior Vice President--Government Affairs for Delta Air Lines.
I have worked for Delta for 24 years. During this period, I have seen a
number of changes in the airline-travel agent relationship,
particularly in recent years as the e-commerce revolution has
transformed our industry.
This Commission has been charged with considering two important
questions: first, whether the financial condition of travel agents is
declining, and if so, what effect that decline will have on consumers;
and second, whether there are impediments to information regarding the
services and products offered by the airline industry.
Delta appreciates the opportunity to submit our views to the
Commission. Ensuring that consumers have full and complete access to
information about our services is a goal that benefits Delta and our
customers, and travel agents remain an important part of Delta's
distribution network.
In answer to the first question the Commission has been charged
with considering, Delta has always distributed its tickets in many
different ways and it is critical to our success that we provide our
tickets through each distribution channel that our customers want to
use. Many customers prefer to use the services of traditional travel
agencies, and therefore traditional travel agencies remain an important
part of Delta's ticket distribution network. On the other band, the e-
commerce revolution has created new alternatives to traditional travel
agencies that, in many cases, offer less expensive means to deliver
airline services to the public--and many customers prefer the
convenience and flexibility of these new low cost channels.
These new online alternatives to the traditional travel agency have
created both challenges and opportunities for traditional agents. Many
travel agencies have successfully adapted to these changes, finding new
ways to deliver added value either to their customers or to airlines,
or both. These agencies will continue to thrive and to play a critical
role in Delta's ticket distribution system. On the other band, some
agencies have resisted change, and have failed to develop business
models that deliver added value that consumers or airlines are willing
to pay a premium for. Like any business that fails to adapt to change,
such travel agencies are not likely to succeed.
It is absolutely clear, however, that the e-commerce revolution
that is driving these changes will benefit consumers. E-commerce is
making it much easier than ever before for consumers to get information
about Delta's services, and it is driving the price of airline ticket
distribution down. These changes are forcing airlines and travel
agencies alike to find new ways to deliver value to consumers at a
lower and lower cost. Competition can be hard for competitors who fail
to meet the competitive challenge, but competition is good for
consumers. Any regulatory intervention that blocks these changes or
restricts this competition will inevitably result in less choice and
higher prices for consumers.
The answer to the second question the Commission has been charged
with considering is simple. The answer is ``No.'' There are no
significant impediments to the dissemination of information about air
travel products--to the contrary, the e-commerce revolution has made
air travel information more available to consumers than ever before.
i. the domestic aviation industry is facing a financial crisis that is
forcing delta to find ways to cut costs and improve the efficiency of
our operations
Before I address in detail the specific questions the panel has
been charged with considering, it is important to review the current
financial conditions facing the airline industry. Even in the best of
times, the economics of the airline industry are fragile--over the last
fifty years, the industry's net profit margin has been one-half of one
percent, compared to the average for all industries of approximately
six percent. But today, our industry is facing one of the most serious
economic crises in its history--largely as a result of the terrorist
attacks of September 11 and their aftermath.
Last year, U.S. airlines collectively lost $7.7 billion--despite
the federal emergency package enacted by Congress to prevent an
industry collapse in the immediate aftermath of the attacks. Delta
alone reported a financial loss of $1 billion in 2001. The total aid
package covered only a few short weeks of the tremendous losses that
the airlines continue to sustain.
In the first quarter of this year, industry losses have continued
to climb by an additional $2.4 billion. The industry is carrying an on-
balance-sheet debt burden of nearly $110 billion, with debt-to-capital
ratios more than double those of other industries. Early predictions of
a return to profitability in 2003 now appear increasingly unlikely,
with 2004 offering the first ray of hope. Industry revenues are down 20
percent from where they were a year earlier--and that revenue shows
little sign of returning any time soon.
A major cause of this financial crisis is the huge cost of
complying with the waves of new taxes, government mandates, and other
new costs that have been imposed on air travel since September 11. For
Delta alone, the annualized impact of these new costs includes:
Post 9/11 passenger security taxes: $266 million.
Increased terrorism insurance premiums, assuming FAA support
ends, and the airlines have to rely on the commercial market:
$250 million.
Security-related revenue losses from postal service and cargo
restrictions, as well as unreimbursed security costs for
cockpit door fortifications, ramp security, checkpoint document
verification, screening of catering supplies and material,
airport space occupied by TSA, security equipment, personnel
training, and airline seating for Federal Air Marshals: $175
million.
And revenue losses due to customers deterred from air travel
by the hassle factor: an estimated $600 million.
Added together, these numbers would total approximately $1.3
billion in pretax profit impact to Delta.
With all of the ticket taxes and fees that apply to airline ticket
purchases, airline tax rates are now among the highest federal
consumption taxes on any industry. To put this in perspective, the
consumption taxes on a $100 round-trip airline now exceed 44 percent.
On a $200 ticket they are over 25 percent; and on a $300 ticket, over
19 percent. Those figures exceed even the intentionally high federal
tax rate of 18.2 percent on cigarettes--imposed, in part, to discourage
consumption. Taxes on airline ticket purchases are nearly triple what
they were in 1991.
In addition to these increased costs, the current economic
conditions have forced down average ticket prices. Today, Delta's
average domestic round trip fare is $45 lower than it was during the
same period last year. Delta effectively has no ability to pass these
new costs on to consumers, which means these new costs have directly
impacted Delta's bottom line.
For all of these reasons, the current financial crisis has forced
Delta to seek ways to cut costs in almost every aspect of our
operations. We have undergone the agonizing process of reducing our
workforce by approximately 13,000 positions. Industry wide, some
100,000 airline employees have lost their jobs. Delta has cut its
flight schedule back by approximately 15% from pre-September 11 levels,
and many other U.S. carriers have similarly reduced their own networks.
U.S. airlines parked or retired some 350 aircraft. Hundreds of aircraft
orders have been canceled or reduced.
The financial crisis is placing even greater pressure than ever on
Delta to find ways to reduce cost and improve the efficiency of
operations--including the costs of distributing tickets to our
customers. Like any business, we must constantly find new and more
efficient ways to deliver our products to our customers. But in the
current context, this has become a matter of economic survival.
ii. the information age has dramatically improved consumer access to
air travel information and consumer choice
With that context as background, let me address the specific
questions the Commission is considering, beginning with the question of
consumer access to information.
The e-commerce revolution has dramatically improved the access of
every consumer to air travel information. Just a few years ago,
consumers seeking airline fare and schedule information had little
choice but to call individual airline reservations departments or to
consult a travel agency that subscribed to one of the complex Global
Distribution System (GDS) databases to obtain this information. Those
two traditional options are still available to any consumer who chooses
to use them, but they are no longer the only options available.
Today, anyone with a connection to the Internet has direct access
to every airline's schedule and published fares--information that is as
sophisticated and complete as that delivered through the old GDS
computer systems. Since almost any public library offers its patrons
free Internet access, this wealth of travel information is available at
little or no cost to any consumer who chooses to take advantage of it.
Of course, many consumers have Internet access from their home or
office, and many prefer the convenience and control that these new
Internet tools make possible.
Online travel information takes several different forms. For
example, virtually every major airline has developed an Internet
website through which it provides detailed information about its own
services directly to consumers. On delta.com, for instance, with the
click of a mouse, customers can search for Delta fare and schedule
information, purchase tickets, make or change seat selections, check on
the status of flights or airport wait times, check in for a flight and
print a boarding pass, request notification of flight delays, request
and receive e-mail notices of special promotions, manage their SkyMiles
accounts, redeem miles for free tickets, and so on.
In addition to airline websites like delta.com, several major
online travel agencies operate websites that provide comprehensive
travel information from a single online source. The largest of these
are Travelocity, Expedia and Orbitz, each of which provides quick and
easy access to schedule and fare information from as many as 450
different airlines--enabling consumer searches for airline fare and
schedule information, plus the ability to easily purchase airline
tickets and a variety of other travel-related goods and services with
the click of a mouse.
But airline websites and the largest online travel agencies are
only the beginning of the wealth of consumer information the Internet
provides at virtually no cost to the public. The entire Official
Airline Guide, for example, is available in searchable format for free
on the Internet. Many traditional ``off-line'' travel agencies have
also launched their own Internet web sites. A recent search for
``airline ticket information'' on the Google Internet search engine
returned some 290,000 websites offering air travel information to the
public.
Of course, not all consumers take advantage of the travel resources
the Internet makes available. Some consumers prefer to deal directly
with an airline reservations representative, because they are more
comfortable talking to a live sales representative than interacting
with the airline via online channels. Many other consumers prefer to
use the services of a traditional travel agent for a variety of
different reasons--for example, because they want to take advantage of
their travel agent's special expertise and experience, or simply
because they do not want to spend the time or effort doing their own
travel research. Consumers who value the services of a travel agent
remain free to hire a travel agent to provide these services, and there
are tens of thousands of independent travel agents willing to compete
to provide consumers with these services.
In other words, there is no impediment to the dissemination of air
travel information to consumers in the information age. To the
contrary, the e-commerce revolution has made air travel information
more available to consumers than ever before.
iii. the e-commerce revolution has created new competitive pressures
that benefit consumers
As to the financial condition of traditional travel agents, it is
clear that the e-commerce revolution is profoundly changing the airline
ticket distribution system. It is creating new competitive alternatives
to the expensive, legacy GDS ticket distribution systems and
traditional travel agencies that rely upon these systems. Like any
business in any competitive marketplace, traditional travel agencies
must adapt to change and competition. But while competition can be
difficult for competitors who fail to meet the challenge, competition
is always good for consumers.
A. Traditional Offline Travel Agencies Are A Critical Part of Delta's
Distribution Network
Professional travel agents remain important to Delta's success as
an airline. Traditional offline travel agents currently sell
approximately 47% of all tickets for travel on Delta, and they generate
approximately 64% of the revenue from Delta ticket sales. In other
words, travel agents sell a disproportionate percentage of Delta's
higher value tickets. These sales are critical to Delta's success, and
Delta has thousands of valued business relationships with travel
agencies across the United States.
For this reason, Delta continues to invest heavily in the sales
efforts of traditional travel agencies. Claims by some that airlines
like Delta now pay ``nothing'' for the distribution services of
traditional travel agents are simply misrepresenting the facts. While
it is true that Delta no longer pays a flat fixed ``base'' commission
to every travel agent on every ticket sale, Delta still pays millions
of dollars every year to subsidize airline ticket sales by traditional
travel agencies.
Most notably, nearly all traditional travel agencies rely upon the
expensive legacy GDS booking systems to book tickets for their clients.
These GDS systems charge Delta high booking fees for each travel agency
booking--but they are typically cost-free to the travel agency that
benefits from the use of the system. Delta's expenditures for GDS
booking fees totaled over $350 million in 2001, and these booking fees
have increased from 4-7% every year since 1999, despite the falling
cost of information processing and computer systems.
In addition, unlike most store front retailers in other industries,
travel agents are not required to enter into merchant agreements with
the major credit card vendors to sell airline tickets. Instead, they
are authorized to accept credit card payments as an agent on behalf of
the airline whose ticket they are selling. In this way, Delta
subsidizes the operations of each agency in every credit card
transaction, because credit card companies charge the merchant
accepting these cards up to 3% of the charged amount as fees for the
transaction. Delta spent approximately $190 million paying these credit
card merchant fees on behalf of travel agents in 2001.
Delta also enters into contracts with individual travel agencies to
pay a sales commission--known as an ``Incentive commission''--designed
to reward agents who meet sales goals for promoting Delta services.
Incentive commissions reward those travel agencies who are most
valuable to Delta's sales efforts. These contracts implement a ``pay
for performance'' system in Delta's travel agency sales network. They
set specific sales goals for key travel agencies that are most
important to Delta's distribution efforts, and reward those agencies
based upon the sales performance they actually deliver to Delta.
The bottom line is that Delta wants to be able to sell tickets
through any distribution channel that its customers want to use to buy
Delta tickets. Because many Delta customers prefer to use the services
of a travel agent, Delta fully expects traditional travel agents to
remain an important part of Delta's ticket distribution network for the
foreseeable future.
B. E-Commerce Is Creating New Competitive Alternatives to Traditional
Travel Agencies
While traditional travel agencies remain an essential part of
Delta's distribution network, the e-commerce revolution has created new
choices for consumers. It has made it possible for customers to choose
to take control of their own travel needs in ways that were never
possible before--by interacting directly with Delta via delta.com; by
using the comprehensive online travel agency websites such as
Travelocity, Expedia and Orbitz; by bidding for special deals at
``name-your-own price'' websites such as Priceline.com; or by taking
advantage of the thousands of other online ticket distribution outlets
that offer many other unique consumer benefits. As with any other
technological and competitive developments that create lower cost
alternatives to existing competitors, the e-commerce revolution has
created challenges that traditional agencies must meet if they are to
succeed in the new competitive environment.
Many consumers have made clear--by voting with their wallets when
they buy airline tickets--that they prefer the convenience, control,
and flexibility that these new online channels provide. Delta ticket
sales through delta.com generated $1.1 billion in revenue for Delta in
2001, a 45% ]increase from 2000. Major online agency transactions also
continue rapid growth. Sales via Expedia grew 54% from 2000 to 2001.
Sales via Travelocity grew 18% during the same period. Delta currently
sells approximately 24% of its tickets either through delta.com or
online travel agencies.
These e-commerce alternatives provide a means of distributing
airline tickets to the public that costs less than the traditional
travel agency distribution channel. The Internet is a highly efficient
means of selling airline tickets, just like it provides a highly
efficient way to sell many other services. Perhaps the most direct
analogy is online financial and investment services websites--where
major financial services providers have given consumers the power to
use the Internet to take control of their own finances. Consumers who
prefer this convenience and control can now make their own stock trades
on the Internet for less than $10 rather than paying the hundreds of
dollars in commissions that traditional stock brokers charge.
The Internet is bringing similar benefits to consumers who want to
purchase travel services. Like the sale of financial services, airline
tickets and other travel services are uniquely suited to Internet
distribution, because electronic ticketing eliminates the need for any
delivery costs. Travel suppliers who sell their services on the
Internet--either directly or through online travel agencies--can easily
deliver their product to any consumer anywhere because there is no
longer any physical ticket that must be delivered in most cases.
Electronic ticketing eliminates the need for even the minimal cost of
mailing a paper ticket. All a consumer needs is the confirmation that
their electronic ticket has been issued.
In addition to this efficiency, online distribution channel
alternatives reduce airline distribution costs because these online
alternatives have created competition for the dominant GDS systems that
traditionally controlled the distribution of information on airline
schedules and published fares. Direct sales through delta.com, for
example, avoid these high GDS booking costs altogether. These direct
sales via delta.com are Delta's lowest cost distribution outlet--it
costs Delta roughly 75% less to sell a ticket via delta.com than
through a traditional travel agency using the expensive GDS booking
engines. The savings through other online channels are also
significant. Because Delta has negotiated significant rebates of the
GDS booking fees from the major online travel agencies, it costs Delta
roughly 50% less to sell a ticket through these online agencies as
through traditional travel agencies.
C. Delta Web Fares Have Benefited Consumers
Like any other cost savings, these developments are good for
consumers. They make it possible for airlines to offer lower fares and
increased services. The lower costs associated with direct distribution
via the Internet have led Delta and other airlines to offer lower
prices to consumers in the form of ``web fares''--special discounted
fares that an airline offers on the Internet but does not publish
through the traditional GDS system.
Some traditional travel agents have complained that an airline's
decision to offer these special fares only on the Internet is
``unfair'' to traditional travel agents and to consumers who choose not
to take advantage of the new online channels. These complaints distort
the facts:
First, any traditional travel agent can sell Delta web fares to its
customers. Delta has created a special travel agency-only website--
Delta's ``Online Agency Service Center''--that allows any Delta-
accredited travel agency to book any published Delta fare (including
any discounted web fare) without using the GDS system that results in
high booking costs to Delta. Some travel agents may choose not to take
advantage of this opportunity because they prefer to rely on the high
cost GDS computer system for booking tickets. The fact that travel
agencies choose not to take advantage of the tools that Delta has
created for them to better serve their customers, however, is purely a
matter of business judgment on the part of each agency.
Second, there is nothing unique about web fares. Delta (and many
other airlines) have for many years sold their tickets in many
different ways. In addition to the published fares in GDS systems that
any travel agent can sell, Delta has traditionally offered many
different special prices through privately negotiated arrangements--for
example, to government agencies, corporate clients, tour and cruise
operators, ticket consolidators, and so on. Web fares simply represent
one more way for airlines to market their products.
Finally, the bottom line is that low fares benefit the consumers
who choose to take advantage of them. Any regulatory attempt to
interfere with the free market by prohibiting airlines from offering
special discounts on the Internet would harm these consumers. The fact
that some consumers may choose not to shop online does not make it
``unfair'' to offer discounts to those who do. Many businesses offer
discounts to consumers who shop through less expensive distribution
channels, whether that is an Internet web site, a warehouse superstore,
or a rural factory outlet. Airlines are no different. It is no more
``unfair'' to offer discount airline tickets on the Internet than it is
to offer discount commissions for online stock trades or discount
prices for consumer products in a warehouse superstore.
D. Orbitz Has Benefited Consumers
Many travel agencies--both traditional and online agencies--have
also complained about Orbitz, the new online travel agency launched by
five major airlines. Like the complaints about web fares, these attacks
on Orbitz by its competitors have seriously distorted the facts:
Orbitz is a success with customers because it offers a superior web
site that consumers want to use. The site uses state of the art
technology to provide consumers with an online tool that instantly
searches the fares and schedules of some 450 different airlines and
displays those fares for consumers in a balanced, unbiased and easy-to-
read format. Orbitz is unique among the major online travel agencies in
that it is a truly unbiased source of travel information.
Orbitz has also benefited consumers by creating new competition for
online travel agencies. Most of the distorted criticism of Orbitz is
really an attempt by its competitors to shield themselves from this
competition. Prior to the launch of Orbitz, the online agency business
was dominated by two companies--Travelocity and Expedia--that
controlled as much as 75% of the agency online market. These two travel
agencies both continue to enjoy almost twice as much Internet traffic
as Orbitz:
Top Three Travel Web Sites
(based on the number of visits made in March 2002)
------------------------------------------------------------------------
------------------------------------------------------------------------
Expedia.................................................... 11.6
million
Travelocity................................................ 10.2
million
Orbitz..................................................... 6.6 million
------------------------------------------------------------------------
Source: Nielson/Net Ratings
Most of the criticism of Orbitz has centered around the myth that
carriers like Delta have given Orbitz an unfair advantage by offering
Orbitz ``exclusive'' access to their web fares. Delta's contract with
Orbitz is not exclusive and Orbitz has no unique access to Delta web
fares. To the contrary, any travel agent can book any Delta web fare
via the Delta Online Agency Service Center, as I just described. Orbitz
earned the right to sell Delta's web fares on the Orbitz website by
offering Delta (and any other airline who chose to participate, whether
or not the airline was an Orbitz owner) significant rebates of the
expensive GDS booking fees. Delta has recently signed deals with
Travelocity and Expedia that allow these agency--like Orbitz--to sell
Delta web fares on their websites in exchange for rebates on GDS
booking fees. The beneficiary in all of these arrangements is the
consumer who is willing to shop in these low cost channels.
E. New Competitive Alternatives & Economic Crisis Led Delta to
Eliminate ``Base'' Commissions For Traveling Agents, Allowing
Consumers To Choose Whether They Want to Pay for A Travel
Agent's Services
Finally, many travel agents have criticized Delta for one of the
many cost-cutting moves that Delta took in its efforts to deal with the
current economic crisis facing the airline industry -the decision that
effective March 14, 2002, Delta would no longer pay a ``base''
commission on travel agency ticket sales in the United States. This
``base'' commission--a fixed amount paid to any agency who sells a
Delta ticket, regardless of the value actually delivered by the agency
to Delta in the ticket sale--was a vestige of the days of airline
regulation by the Civil Aeronautics Board, which bad mandated a fixed
industry-wide commission payment. After deregulation, airlines were
free to offer whatever commission payment they chose to travel
agencies. One result of this was the creation of the ``Incentive
commission'' that Delta continues to pay to key agencies--individually
negotiated commissions that tie payment directly to the agency's sales
performance, rather than a flat commission paid regardless of the
agency's actual value as a part of the Delta sales network. A second
result was that, market forces began to drive down the amount of fixed
``base'' commissions paid to travel agencies.
Delta's elimination of ``base commission'' in March 2002 recognized
the fact that travel agents function as middlemen in the airline ticket
sale transaction. The provide services both to the airline and to the
agency's customer. Because travel agency ticket sales benefit Delta,
Delta continues to invest heavily in supporting the travel agency
distribution system, both by paying the expensive GDS booking fees that
subsidize the GDS booking engines travel agents use to sell their
services, and by paying the merchant fees that allow travel agencies to
accept credit cards for airline ticket sales at no cost to themselves.
Delta also continues to reward key travel agencies with targeted
incentive commission contracts that reward agencies for excellent sales
performance on Delta's behalf.
Much of the value that travel agents provide, however, are provided
not to the airline, but to the travel agency's clients. Researching air
fare alternatives, planning travel itineraries, providing travel
management services, and offering the benefit of special travel
expertise and experience, for example, are all services rendered by the
travel agent to their customer--not to the airline. Consumers who value
these services are willing to pay the travel agency for them. Like any
business, travel agents can and should charge their customers for the
services they provide. Most U.S. travel agencies have begun doing so,
and agencies who deliver value to their customers have found that their
customers are more than willing to pay for it.
Many consumers, however, do not need or want the services provided
by a traditional full service travel agent. They prefer to take control
of their own travel planning, and the e-commerce revolution has
empowered them to do so. These consumers should not have to pay for the
services of a full services travel agent--any more than an investor who
does not need the services of a full service stockbroker should be
required to pay hundreds of dollars in commission for a stock trade.
When an airline chooses to pay a flat ``base'' commission to every
travel agent on every ticket sale, this ``base'' commission is
necessarily built in to the price of every ticket. In other words,
every customer ends up paying this commission--regardless of whether
the customer needs or wants a travel agency's assistance. The
elimination of base commissions from the ticket price allows each
customer to make his or her own choice. Those customers who value and
want the assistance of a travel agent, can choose to pay for it (in the
form of travel agency service fees). Those who do not want or need that
assistance.can take control over their own travel needs, and save.
Either way, the consumer is the ultimate winner.
conclusion
Delta recognizes the valuable contribution travel agents make to
the travel industry. We have thousands of valued business relationships
with travel agencies across the United States. We understand that
travel agents--like airlines--are suffering from reduced revenues in
the present business environment. But like all businesses, travel
agencies must compete and deliver value to succeed in a competitive
marketplace.
Delta is committed to extending our reach to all consumers,
including both those chose to use the Internet and those who prefer to
use the services of traditional agencies. The success of all of our
distribution partners, whether traditional or online, are key
components of Delta's overall distribution strategy. The e-commerce
revolution has increased the amount of information about airline fares
and services to the public. It has increased consumer choice in airline
ticket purchases. These developments are good for consumers. Many
customers still prefer the services provided by traditional travel
agents, however, and Delta believes that traditional agents who provide
a level of service that consumers want and are willing to pay for will
continue to serve an essential role in the sale and distribution of
Delta tickets for the foreseeable future.
Mr. Stearns. And I would say to all of the members that we
will have a second round. I don't think we are going to have
votes until one o'clock. So we have the unique privilege of
listening to our panelists without interruptions. The
gentlelady from California, Ms. Eshoo, is recognized.
Ms. Eshoo. Thank you, Mr. Chairman. I really appreciate you
holding this hearing, because I think that there are really a
plethora of issues for us to examine. As each person at the
table states their case to each one of us up here, you are
looking at the ultimate commuters in the country, I think.
Each one of us is tied to the airlines and reservations in
some way, shape, or form, regardless of where our district is.
I mean, in my case, I commute to California every single week,
and I have almost without exception for 9\1/2\ years.
So in my case, it is United Airlines. They are terrific to
me. They are wonderful for my staff to work with, and the crews
are terrific, and the reservation people take very good care of
us.
We travel on what I think is called a Y-rate. It is a
government rate, and for those of you that are listening in,
yes, we get mileage, but I have to tell you that the last thing
I feel like doing is getting on an airplane when I don't have
to commute, in terms of earning any kind of mileage.
We don't get anything that anyone else doesn't get, but I
guess it is good to have it because it helps us get some
tickets that we don't have to pay for out of our budget. I
don't--I say this not so much to state the obvious, whether it
is United Airlines or Delta Airlines, whomever the airlines are
that are involved in this, make no mistake about it.
The Congress in the wake of September 11, one of the first
steps it took was to put up $20 billion for the airlines. We
recognized that we had grounded them, and we recognized that we
needed to step up to home plate.
We understand what they mean in terms of our Nation's
economy, commerce, all of it. So it is not whether I fly
United, or the next person has Delta in their district, or the
next person has whatever airline.
It is how business is conducted. I am not a lawyer, but I
have to tell you that I think that some of this really bumps up
against some anti-trust. It is just my initial take on it.
Why? Because when you put major airlines together, in terms
of a service that others cannot get, and that you are not only
stepping on the consumer, but that you are essentially cutting
them out, in terms of getting the best price.
So I recognize that computerization and computerization of
reservation services are very important, but you know, if you
can't get the list in order to put it out there for people to
take advantage, you are putting a world of hurt on them. I am
very curious about why Orbitz is not here today. They were
invited, Mr. Chairman?
Mr. Stearns. Absolutely. They were invited and the airlines
were invited, too. And there has been other hearings on this in
the Senate Commerce Committee.
Mr. Deal. Would the gentlelady yield on that issue?
Ms. Eshoo. Well, I am not finished yet, and if I have time,
I would be more than glad to, to my colleagues. I am troubled
about what the current state of affairs is, and it is rooted in
some other things that have troubled me, in terms of what has
happened with travel agents.
You have the airlines saying--you know, I have never really
understood why the airlines are always hanging on by a thread.
I mean, management and whatever, and it may be very well a
business that doesn't produce a lot of profit.
But having said that, I think that they have the right to
have a service where they get a crack at reservations and the
profits that come from that. But do I think they should be the
elephant with the big hoof and consider everyone else an ant
under that hoof?
Well, you don't have too much of a chance if you are in
that position. So let me ask a question and whomever would like
to take a stab at it. What is the niche that Orbitz in your
view is trying to fill? When they decided to enter the market
there were already a few big players, and many little ones
providing on-line travel services. All of the airlines had and
still have websites where a customer can buy tickets on-line.
It doesn't appear, at least to me, that there are cost
savings, because it is my understanding that Orbitz is losing
money overall. I mean, I am playing a little devil's advocate,
but I think that given who is here today, and they are not,
that maybe you take a stab at that, and whomever wishes to.
Mr. Gilliland. If I might, I won't speak on behalf of
Orbitz and would prefer that they, too----
Ms. Eshoo. Well, you can't.
Mr. Gilliland. [continuing] could be here as well to speak
their mind.
Ms. Eshoo. Yes. I think they are missing a real
opportunity.
Mr. Gilliland. Yes. However, I can say that I can talk a
little bit to the broader market, and the broader market that
we compete in. And that is to provide very low priced trips,
whether that includes air, car, hotel, vacation cruise, to
consumers.
And this part of the market is very, very price sensitive,
and in fact a $5 or $10 change in price can often mean the
difference between making a sale and losing the sale to someone
else.
Ms. Eshoo. Sure.
Mr. Gilliland. Simply because they are a mouse click away.
Competitors are but a mouse click away. So the importance of
what we are describing here is that we need to, because of that
price sensitivity, have the opportunity to get at promotional
fares.
And when we do, when we strike deals with airlines, and we
have done that historically, that is what Expedia, and
Travelocity, and a number of other independent sites were based
upon, was competing to provide the consumer with that best
deal.
When we get those deals, we would rather they not
automatically then go to Orbitz.
Ms. Eshoo. I see.
Mr. Gilliland. And we think, and we also think that it is
not good for consumers, because Orbitz charges a $5 service
fee, which the other independent sites do not charge.
Ms. Eshoo. That's interesting.
Mr. Gilliland. And in addition to that, we think it is not
good for the airlines, and when it ends up not being good for
the airlines, it is not good for the industry. They are in
fact----
Ms. Eshoo. Well, I don't know if they are going to pay
attention to what you think is good for them or not, but I
appreciate you answering the question. What is the purpose of--
let me just ask this, because I don't think I have too much
time left. What is the purpose of the most favored nations
clause?
Mr. Stearns. Your time has expired.
Ms. Eshoo. Can they answer that, Mr. Chairman?
Mr. Stearns. Okay. Go ahead. Sure.
Ms. Eshoo. Because it might be constructive.
Mr. Stearns. We are going to have a second round here, and
so you are welcome to go ahead.
Ms. Eshoo. The most favored nations clause; can they just
tell us what that is?
Mr. Stearns. Yes.
Ms. Eshoo. What is the purpose of that?
Mr. Zuck. Well, I think one way to address that question is
to segue from your first question. I mean, as Congressman Deal
mentioned, the third highest cost to airlines is distribution,
and a lot of this is these booking fees, which were over $2
billion generally annually.
So when asked what their purpose was for trying to
construct Orbitz, it was to cut down their distribution costs.
So it has a built-in model that rebates back booking fees, and
makes that distribution cost less so that they save money.
I mean, it is not--there was not an alteristic motive or
anything like that. but that they were simply trying to cut
distribution costs to getting tickets out to consumers. That
most favored nation status was something that again is a bit of
a misnomer--it is just sort of an inventory availability
clause--was simply a guarantee that came as a result of those
reduced booking fees.
I mean, in other words, Orbitz was taking a risk by taking
less money for booking travel and in return asked to get the
best fares. Those options are available, and we are seeing
plenty of other sites making use of web fares, et cetera, and
Orbitz is contractually obligated to show all fares, and not
just some subset that a mainframe returned.
And it is contractually obligated to show them in an
unbiased way. We get mislead a lot by talking about different
kinds of fees. Well, there is a booking fee that they charge,
and that another company doesn't, but at the same time,
companies like Travelocity get paid volume booking rewards and
things like that.
Everyone finds a way to get paid, and I think it is
important that we keep that in mind as well. But the problem is
that if the way that you are finding to get paid involves
essentially biasing your display, or promoting one fare over
another, that is less pro-consumer than actually just getting
paid a flat fee.
Let's make sure that we talk about things in the same
terms. Everybody is getting paid in this, and the airlines are
simply trying to pay less to sell airline tickets, and in an
environment in which they are losing money.
Mr. Cooper. Let me try the reverse of that. Jonathan and I
have been on opposite sides on a lot of issues. The essential
threat to cartel behavior is cheating, and now you have a
guaranteed flaw that it disenchants cheating.
And you can tell me why you were doing this to induce
people to put your tickets there, but the effect is to
disenchant people from cheating, from cutting that individual
one-on-one deal that gets somebody a better price.
And that leads me to your first question, which is why do
they come to this? They came to this for a simple reason. All
hell was breaking loose out there. I mean, people thought they
could name their own price.
They were getting resistance, alternative means of
distribution, and this is an industry that clearly engages in
cartel behavior. And cartels need to discipline, and so the
answer is that you discipline by establishing a joint venture,
and that dampens down the ability of all these people popping
up in cyberspace to cut a side deal and offer a lower price.
And I will tell you that the 12 bucks difference between
the CRS and what Orbitz is charging is peanuts compared to the
$200 and $300 differences that you heard here. So you are
disciplining the hundreds of dollars by diminishing the
likelihood for deals to pop up in cyberspace.
Mr. Stearns. Mr. Wolff, you might want to reply to that and
then we will close up the debate and go on to Mr. Terry. Mr.
Wolff, you will get the last word here.
Mr. Wolff. Okay. Since this subject is supplier owned on-
line sites, and the hotel site is an important entity, when
words like cartel are distributed out, I want to make sure that
there is no misunderstanding about how we operate.
First of all, we have a very narrow MFN, and it only says
that if you are going to deal on TravelWeb and give us a rate,
we would like to make sure that our big competitors don't get a
better rate. It does not restrict them in any way from giving
better rates on their own site, or through other channels. It
is a very narrow MFN.
And so that this does not discourage competition through
any other channel, and we want to make sure that our process
here is very clear to everyone, and that we don't see ourselves
operating as a cartel in any way, shape, or form. This is just
handling one small segment of distribution, less than 1 percent
of our business.
Mr. Stearns. Thank you, Mr. Wolff. The gentleman from
Nebraska, Mr. Terry, is recognized.
Mr. Terry. Thank you, Mr. Chairman. I will follow up on
these comments though. Let me just quickly outline why I think
this smacks or smells of anti-competitive behavior here. First
of all, you have an entity that is started up by the airlines.
Right away, that will catch my attention.
Then they agree amongst themselves that on this website,
through this most favored nation clause, that they will make
sure that on this site is the lowest fare. This ensures though
as they market Orbitz that we as consumers are then trained to
automatically go to Orbitz because that will automatically have
the lowest fare.
Now, we can say in the immediate sense that that is good
for consumers, because that means that they will have the $290
fare, and you are guarantee this cheap seat on the airlines,
but then what happens when they become the 800 pound gorilla
and there is no more Travelocity or others?
Then the only thing on Orbitz is the $490 seat or the $415
seat. That's why you have to be on top of this type of anti-
competitive behavior at the beginning. At the beginning, it
looks pro-consumer, but you have to look down the line.
So first of all, I want to ask Mr. Zuck. I am very curious
about what the Association for Competitive Technology is, but I
will ask it another time, because your passion for Orbitz makes
you look less independent than the name of the organization.
Mr. Zuck. Well, now I feel compelled to answer.
Mr. Terry. Well, don't talk, because I am speaking, please,
and I have only a few minutes here. In your industry speech
that I was trying to interpret, and in Mr. Towns' great
question and research between Travelocity's price and Orbitz's
price, there is a difference of $122.50 that you--that I
interpreted from your answer as blaming on the CRS, the
computer reservation system, and their pricing.
Are you saying that there is $122.50 difference simply
because of the type of reservation technology that they use,
and their $5 or whatever, their $17 fee that they put on? I am
at a loss of what you are really trying to tell us. So if you
could further explain the $122.50 in layman's words?
Mr. Zuck. Sure. Thank you, Congressman, and I look forward
to the opportunity to talk to you about the Association for
Competitive Technology, that is mostly made up of small
businesses, who would like nothing worse than to see imposed
distribution channels put in place where they are not
necessary.
So I would love to have that conversation, but to try and
clarify this issue. First of all, we hear all the time that you
don't always find the cheapest fares on Orbitz. So to some
extent, what Congressman Towns found could be an anomaly, and I
can't seek to explain a single fare, or where that anomaly
comes from.
And there is a number of different possible reasons that
that occurred, but taking the worst case scenario, which is in
fact that there was a fare that was offered to Orbitz that
wasn't offered to Travelocity, if that is where the site was.
Let's say that it is that worst case scenario and how would
I explain that. What I was trying to say is that the reason
that the airlines started offering these so-called web fares,
fares that they only offer on their sites, is that they had
distress inventory that they were offering at reduced prices.
In other words, cutting their profit out of that seat in
order to simply fill seats on an airplane. They wanted to try
and eliminate the distribution costs or minimize the
distribution costs of those cheaper seats.
Orbitz's business model is about lowering those
distribution costs. It is not comparing $12 to $120. It is
comparing what the profit on that seat would have been, and if
that profit has gone away, and that $12, which adds up to $2
billion, makes an awful lot of difference.
So Orbitz's business model is about selling airline seats
more cheaply, and that is why they are getting some of these
lower fares. To address your other comment about our sort of
psychic predictions about anti-competitive conduct, I would
remind you that the Department of Justice has guidelines for
companies to get together to create distribution competition
that Orbitz has followed and is under perpetual scrutiny from
both the Department of Justice and the Department of
Transportation.
And I can't for a moment imagine that Dr. Cooper would
stand silent the minute that suddenly they were raising fares
because they were the only on-line travel site, which seems
very unlikely to begin with.
Mr. Stearns. The gentleman's time has expired. Mr. Rush is
recognized for questions.
Mr. Rush. Thank you so much, Mr. Chairman. Mr. Gilliland,
from the standborne of size and market penetration, Sabre and
the other computer reservation system companies are much larger
and far more profitable than Orbitz. Do you share that
conclusion?
Mr. Gilliland. That is correct. Orbitz is unprofitable.
Mr. Rush. In fact, Mr. Deal said in his opening statement
that Orbitz sold only 2 percent of all tickets last year, why
Sabre and the other computer reservation systems sold 70
percent of all tickets. Do you agree with Mr. Deal's figures?
Mr. Gilliland. I don't know if that is the exact math. I
would say that largely speaking most tickets are sold through
computer reservation systems, and even Orbitz uses the computer
reservation system for much of the work that it has to do in
the booking process on behalf of the consumer.
Orbitz is, although it wants to be in the CRS business, and
therefore we think, great, let them come into the CRS business,
and let them be governed by the same rules that the CRSs are.
They are relatively small compared to the CRSs. They have only
been in operation for 6 months, and CRSs have been in business
for 20 years.
So it is kind of a striking comparison, both in terms of
time, and time in market, and capabilities.
Mr. Rush. Well, now I am trying to understand what the--
well, who is the elephant and who is the ant here? Is the
Elephant Orbitz or is the elephant Sabre? Who is the elephant
and who is the ant here?
Mr. Gilliland. Well, I think the issue, and what we are
laying out here for you, is that we are concerned about maybe
not step No. 1 of what has occurred here, but step two. What
does this mean in terms of the consumer, and what will happen
to consumer pricing if all of these fares are available in one
place.
It seems to me that in fact if all of these fares are
available in one place, it will discourage airlines from
actually discounting as they have in the past. They are in the
business of doing selective discounting, promotional fares, and
that is how they compete. That is how they attract and
stimulate demand.
They can't do that across the broader market and if in fact
Orbitz continues with the success that it has seen and in fact
it is depending on what stats you see, the No. 2 or the No. 3
on-line travel agency in just 6 months, our concern is that
over time the same discounts that you see today may simply not
be available, and again, not good for the consumer.
Mr. Rush. Should we use another kind of standard, or
another type of measurement stick other than--well, let's look
at the employees. I mean, Orbitz has less than 200 employees,
and Sabre has about 11,000 employees.
Mr. Gilliland. Yes.
Mr. Rush. Is that wrong for us to draw some conclusions
based on those kind of measurement sticks?
Mr. Gilliland. Well, Orbitz operates in one country and
Sabre operates in 112 countries, and so again I don't really
see the comparison there. If you are going to make comparisons
between Orbitz, you might talk about its direct competitors
today, which are Travelocity and Expedia, which have very
similar numbers of employees working there today.
Again, you know, if Orbitz--and certainly it is indicated
that it wants to be in the CRS business, would like to compete
in that business, we welcome them. We welcome them under the
jurisdiction of the CRS rules, which we have to comply with and
have for many years, simply because we found, and the
government found back in the mid-1980's, and early 1990's, that
it made sense to ensure that there was effective competition
between the large carriers and the small carriers; small
carriers being disadvantaged back in that time by the airline-
owned CRSs.
Mr. Rush. Let me ask you another question. What about the--
well, we have gotten a report that Orbitz had a large operating
loss last year, and expects to lose money for several years to
come.
And on the other hand, Sabre had a large profit increase in
their first quarter of this year, compared to the first quarter
of last year. And Sabre's first operating profit increase this
year, compared to last year's, was about 25 percent of an
increase.
Mr. Gilliland. Yes.
Mr. Rush. So where is the problem at?
Mr. Gilliland. Well, let me first talk to Travelocity, who
we posted our earnings today at Sabre and Travelocity, and
Travelocity posted a loss this quarter. So things aren't going
really as they should be for Travelocity.
Sabre, I am not going to apologize for as well-managed
business. We have seen our revenues decline. If you look at the
first quarter, our revenues declined by almost 6 percent. Our
expenses, we took expenses out, and it is a very painful
process that involves our employees, and we took over 20
percent of our expenses out.
It is about managing the business and managing the business
in the technology sector. Technology companies--and we have
done the studies--typically get better margins than airlines.
And again that is not something that we are going to apologize
about.
I want the airlines to do well. They have to do well for
our business to do well.
Mr. Rush. Thank you, and I yield back the balance of my
time.
Mr. Stearns. The gentleman's time has expired, and the
gentleman from New Hampshire, Mr. Bass, is recognized.
Mr. Bass. Thank you, Mr. Chairman, and I don't have a dog
in this fight. I have been listening with interest to this
testimony, and there are clearly some inconsistencies of logic.
I think it would be helpful if Mr. Towns sent the printouts
of his inquiry to the Internet to Orbitz and asked them for an
explanation so we could make it a part of the record.
Mr. Towns. Would the gentleman yield?
Mr. Bass. Yes, sir.
Mr. Towns. I think it would be more important if Orbitz
would come here and become a witness, and I think they should
come here. That would be the real way to do this.
Mr. Bass. Well, reclaiming my time, it is my understanding
from the opening statement of Mr. Deal----
Mr. Terry. Would the gentleman yield for a minute?
Mr. Bass. Certainly.
Mr. Terry. I will submit what Mr. Towns provided me for the
record, which is just a printout from Travelocity and Orbitz.
Mr. Stearns. With unanimous consent, it is so ordered.
[The information referred to follows:]
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Mr. Bass. It is my understanding that there may be an
opportunity for Orbitz to appear here today. I understand from
Mr. Deal's opening statement that perhaps they did not have
adequate time from the point when they were invited to prepare.
Second, if I can continue here, I understand that the
Travelocity website boasts of them having the lowest fares on
the one hand, and then apparently that is not the case
according to the testimony today.
Third, Mr. Deal asked Mr. Gilliland about the Zugi
question, and instead of answering it, he said, well, we aren't
really partners, even though their own website says that they
are a proud and full participant in this joint venture.
And it is clear that Zugi is doing exactly what apparently
you, Mr. Gilliland, are objecting to Orbitz doing. Third, it is
my understanding that Orbitz is going to have an initial public
offering, and although it is alleged that the management of
Orbitz will continue to act in the alleged anti-competitive
fashion, an IPO is an IPO.
And other people get involved in the management of the
business, and you can't say for sure what will happen. I could
ask these three questions, these questions of the witnesses
here, but I think instead that I will yield the balance of my
time to Mr. Deal.
Mr. Deal. I thank the gentleman for yielding. If I could
just follow up briefly with the comments of Ms. Eshoo with
regard to why is all of this happening. There seems to be a
presumption on the part of some people that airlines don't want
to sell tickets on their aircraft.
I think quite the opposite is true for an industry that has
lost almost $7.7 billion last year, and they want to sell every
seat they can. I realize that this use of most favored nation
terminology is difficult to understand, but as I understand it,
what it simply says is that if you enter into an agreement with
us, you agree that you will offer to us the same low fares that
you offer in any other venue.
Now what that simply does is it makes the lowest fares
available in more venue sites, and that is the whole concept
behind trade when we use the most favored nations status in the
international trade atmosphere. It is a technique to bring down
the cost to the consumer.
It is also the technique that is designed to bring down in
this instance the cost to the airline consumer. But I still
think that there is a huge problem here, and that is with
regard to these booking fees of the CRS.
And, Mr. Ruden, I would ask you, and my information is,
that you and your industry have advocated that there needs to
be some rules to strengthen the role of travel agents, and to
get them out from under some of these binding agreements and
contracts they have with these CRSs. Is that correct?
Mr. Ruden. Yes, sir. We have been advocating to the
Department of Transportation for more than 5 years that they do
the job that they originally were assigned to do by themselves,
to review those regulations, which were set to expire in 1997,
and which are still in place, to give travel agents the freedom
from those restrictions so that they could be more adaptive
rather than less adaptive to changes in the marketplace, among
the major ones of which is the Internet.
Mr. Deal. And the cost of these booking fees is part of
what makes the travel agent less competitive is it not?
Mr. Ruden. Well, we hear Orbitz talking about that, and I
think that the entire debate on this subject of booking fees is
guilty of a gross oversimplification. One of the things that is
not brought out about booking fees is that the booking fee is
charged only on the final transaction, and the process leading
up to that, of loading fares and doing all the things that have
to be done in order to make a transaction possible, are not
charged for separately.
I don't know that the airlines want to face the day when
the CRSs are unbundling their prices the way that the airlines
are trying to unbundle their prices to consumers. So it is a
very complicated subject, and it is not at all clear I think
that the pricing problems that Orbitz presents have anything to
do with costs.
Mr. Deal. Well, isn't it true that 46 percent of the travel
agents in this country are under contract with Sabre as their
CRS, the parent company of Travelocity?
Mr. Ruden. That may be. I wouldn't argue with that
percentage. It is a significant number.
Mr. Deal. And isn't it true that booking fees through the
CRSs have gone up at an average of 4 to 7 percent over the last
10 years?
Mr. Ruden. Within that range, that is probably right.
Mr. Deal. Yes, sir, and that has got to play a part in
making somebody competitive and somebody non-competitive does
it not?
Mr. Ruden. Well, it is a relevant consideration, but there
are many, many other considerations, and you cannot explain, I
suggest, this issue about this fair comparison, for example.
There are documented cases in the Department of
Transportation records, countless cases, in which the fair
disparity is hundreds and hundreds of dollars, and those cannot
be explained on any cost factor, especially not CRS booking
fees. There is another explanation for what the airlines are
doing, and it has nothing to do with costs of distribution.
Mr. Stearns. The gentleman's time has expired. The
gentleman from Massachusetts is recognized, Mr. Markey.
Mr. Markey. Thank you, Mr. Chairman, very much. I wish that
Orbitz was here today, the five airline consortium, but they
said they had travel problems and they couldn't figure out how
to get here. They only had 2 weeks notice, and it was hard for
them to figure out how to get anybody from Orbitz, anybody,
anybody from Orbitz, to come here and to testify today.
And that is not good, Mr. Zuck, you know. They should be
able to figure out how to do that, and I know that you are
sitting here saying that you can't really represent them. So
there is no point in asking you any questions since you are not
qualified to answer questions about them, not that that was
your job anyway.
So we are left here without anybody from the organization
that is causing this problem; that is, the concentration of
power in one place.
Mr. Stearns. Would the gentleman yield for just a
statement?
Mr. Markey. I would be glad to.
Mr. Stearns. Mr. Wolff is here from TravelWeb, which is--he
represents--there is five hotels, Marriott, Hilton, Hyatt,
Sheraton, and Holiday Inn, have formed this website. and as we
pointed out earlier in the committee, we are thinking not just
in terms of Orbitz, or even TravelWeb for the hotels.
But in general what is the implications when large
companies get together to have a website? Does it benefit the
consumers because there is better pricing, or is it in the long
term to the disadvantage of the consumers. So why Orbitz is not
here, Mr. Wolff has been kind enough to step up to the plate
and argue for the concept and the nuances here.
So in the broader question, Mr. Wolff is here to help solve
some of these questions.
Mr. Markey. Well, the beauty, and we appreciate that, Mr.
Wolff, and I am sure that you would have helped Orbitz, the
airlines find, a low cost room here in DC if they had been
willing to fly in.
So it probably wasn't the fact that they couldn't find a
low price airline fare, or a low price room in Washington, that
kept them from being here. It was that no one who works for
Orbitz could make it on 2 weeks notice, because we told them
that they could come this week, or we would even put the
hearing----
Mr. Stearns. Would the gentleman yield once again?
Mr. Markey. Yes.
Mr. Stearns. They really had just a 1-week notice. and
that----
Mr. Markey. But we could have had the hearing next week for
them.
Mr. Stearns. We were willing for the airlines to delay it a
week, but in all fairness, your statement that Orbitz had 2
weeks notice is not true. They had perhaps--it was just under a
week.
So in fairness I have to correct that, and I wish I could
have given them more notice. I think if they had contacted us,
we would have delayed it 1 week.
Mr. Markey. You would have had it 1 week later.
Mr. Stearns. One week, next week, and obviously our
communication with Orbitz was not fluid.
Mr. Markey. You know what is interesting though, Mr.
Chairman, is that when the airlines wanted $20 billion out of
us last September, the chairman of every airline was willing to
show up any day of the week at any time for as long as it took
to get the $20 billion.
And now just the chairman of each airline, but every other
employee of the airline was willing to walk up and down the
corridors of the Rayburn Building for as long as it took to get
the $20 billion for those corporations.
Now what we are talking about is explaining what the
benefits are for the passengers of those airlines, and none of
their employees are available on 1 weeks notice, or 2 weeks
notice, to testify before this committee. And I find that to be
troubling.
Mr. Wolff. Does that mean that I get the $20 billion?
Mr. Markey. Well, in fact, one of the things that we never
did address was what happens to the tourism industry after
September 11. That was a question that many people said we
should be discussing simultaneously.
Mr. Wolff. Well, I am also on the board of Travel Industry
of America, whose primary concern is the impact of tourism on
America.
Mr. Markey. But there was no money for you.
Mr. Wolff. I know that.
Mr. Markey. It went to the airlines. So, I guess part of
what the promise of the Internet was, was a word--it is a
complicated word. It is a difficult word to say. It is called
disintermediation.
Put simply and in terms that I heard in my house from age
9, 10, or 11 on, was getting rid of the middleman. That is what
it is all about, getting rid of the middleman. And what happens
here it seems to me is that as the Internet makes it possible
to get rid of the middleman so that you can start to cut your
own deals, all of the big companies say wait a minute. We don't
want to get rid of the middleman. Let's all band together and
make them all come to us.
So that 80 percent of any one industry is now consolidating
the website so that you have got to go to them, and make it
tough for anyone to get around the fact that the Internet makes
it possible to get around the middleman. Now, I understand that
from a big company's perspective. Now they say on the one hand
that----
Mr. Stearns. The gentleman's time has expired. We are going
to do a second round of questions here.
Mr. Markey. Well, half of my time was having a conversation
with you, Mr. Chairman. So if you don't--I mean, I am not
trying to be a wise guy there, but you did help to explain why
it is that we don't have anyone here that I can ask a question
from.
Mr. Stearns. Well, would the gentleman like for unanimous
consent for an additional 1 minute?
Mr. Markey. Well, actually, I think we had about a 2\1/2\
minute conversation, and I am only beginning now to ask my
question.
Mr. Stearns. Well, historically I have been in many
hearings with you.
Mr. Markey. Well, how about we negotiate, because we don't
need any middleman in this, but how about we negotiate like 2
minutes?
Mr. Stearns. Two minutes. What is your booking fee? By
unanimous consent, 2 minutes.
Mr. Markey. I thank you. So, Mr. Cooper, if you could,
because you represent the consumer here, what is the long term
implication of having these huge corporations now use the
Internet not as a way for consumers to bargain for themselves,
but to only go to an oligopoly approved website.
And somehow or another that is going to lead to lower
prices for consumers and the consumers are beginning to cap
arched eyebrows toward the very companies who they thought they
were going to be able to use the Internet to play one off
against the other.
Mr. Cooper. Well, the fundamental proposition here is that
as I said, we loved the many to many of the Internet.
Mr. Markey. The many to many, what does that mean?
Mr. Cooper. Well, it means that in a sense that if you
think about there is many people on this side of the
transaction, and many people on that side of the transaction.
Mr. Markey. You are saying that we liked the idea that
every consumer has a chance of going to every airline and
figuring out amongst----
Mr. Cooper. Or every producer has a chance to go to every
consumer. Every producer.
Mr. Markey. And who is the producer?
Mr. Cooper. The airlines apparently.
Mr. Markey. So you mean every airline.
Mr. Cooper. And I like the thought of, and Mr. Zuck said,
well, the airlines have got distress seats, and he wants to see
sell them, and the answer was it is really neat when each
individual airline tries as hard as heck to sell those seats to
each individual consumer, instead of making a deal that says
when I cut a price, I have got to put it on this joint venture
website.
That chills the willingness to cheat, to try and find with
emotion----
Mr. Markey. But I thought, Mr. Cooper, that putting up
websites were a very inexpensive thing to do. Why would the
airlines have to band together on the least expensive thing?
Mr. Cooper. The interesting thing is that if there had not
been websites developing independently beforehand, then it
would be an interesting proposition. That here is a new
efficiency we are introducing, but they were the last guys in
the market.
The other folks had already come up with their websites,
and so people knew how to exploit the efficiencies of the
Internet, and then along comes the airlines that say, wait a
minute, we are going to have ours, too, and lo and behold,
supply is going to start to dry up on the other guy's website.
So there was not a market failure here.
Mr. Markey. Every kid in America, Mr. Cooper, can set up
their own website. So it is not that expensive for each airline
to have their own website. Why do they have to band together on
the least expensive thing that actually occurs in America?
Mr. Stearns. The gentleman's time has expired.
Mr. Cooper. And the answer was that I believe that they
were trying to discipline the chaos of cyberspace by
restricting supply.
Mr. Markey. You are saying don't let the consumer get lower
prices; is that what you mean, in disciplining the chaos of
cyberspace?
Mr. Cooper. No, look, let me be clear. The prices might be
lower, but they are not nearly as low as they could have been--
--
Mr. Stearns. The gentleman's time has expired.
Mr. Markey. Okay. Thank you.
Mr. Stearns. And I urge him to stay around for a second
round. Mr. Zuck, let me see if I can get some more nitty-gritty
here, and you can help on this matter. I beg your pardon. Mr.
Boucher is recognized.
Mr. Boucher. Thank you very much, Mr. Chairman. I want to
commend each of these witnesses for the careful preparation of
their testimony and for taking time here to discuss these
important matters with us. Mr. Gilliland, I would like to get
from you a description, please, of how the most favored nation
clause that is in the contract between Orbitz and the carriers
that originated Orbitz disadvantages Travelocity.com.
And by disadvantaging you, also disadvantages the public
that is consuming Internet-based air fares?
Mr. Gilliland. Well, thank you for the opportunity. Let me
just describe again the Orbitz MFN. There are really two
important components of that MFN, one in which is called, and
which we term the third-party MFN component, where every fare
given to a third-party site like Travelocity, or Expedia, must
also be given to Orbitz.
The second element or component of that MFN is what we call
the airline website MFN, where every fare on the airlines'
website must be given to Orbitz. And this becomes a serious
deterrent in my view to airlines offering price discounts to
other distributors, and let me tell you the marketplace
dynamic.
Before Orbitz had launched, airlines could and did very--
and similar to what you see in other types of supermarkets on-
line or off-line--they would post exclusive fares on their own
websites and occasionally gave short term exclusive fares or
promotional fares to third-party sites, really as a way of
competing.
It drove the market dynamic for discounting. They would try
to acquire new customers, and try to take share away from their
competitors, and a very competitive dynamic. Those tactics
might tend to lead to larger fare initiatives, or fare wars,
across the airlines, thereby reducing prices to consumers.
But discounts I think as we all have seen in the events
after September 11 can be costly to air carriers if they can't
limit their reach. It becomes very dilative, and they can't
make a profit.
When airlines decide to do fare sales, they weigh the
stimulative effects of those fare sales against the revenue
dilution, and it doesn't want promotional discounts to be
readily available everywhere, because it dilutes selling
opportunities for higher priced tickets.
Orbitz precludes this type of selective price discounting.
So they are not motivated as they were before to promote price
competition that I described, because all fares and all
inventory, regardless of the deals that we strike, and what we
think is a clandestine fashion with the airlines, are then made
available to Orbitz.
So the airlines become less motivated to do these types of
deals with the independent travel sites, and less motivated to
make those discounts available because they are proliferated in
many respects much further than they had ever intended them to
go.
Mr. Boucher. When you and your sales staff talk to the
airline carriers that participate in Orbitz, and you ask them
about the possibility of entering into special promotions with
you that would benefit the traveling public, what kind of
response do you get? To what extent are you even able to have
these negotiations with those carriers today?
Mr. Gilliland. Well, we negotiate, and we negotiate
vigorously, and in fact a part of that is how do we drive down
their distribution costs as a part of that, and also how do we
get access to fares that might not be distributed across
multiple distributors, and therefore go to Orbitz.
With some airlines, we have very productive discussions and
even relationships. I think the concern again that we have is
that we typically don't get guarantees as to the quantity of
fares that they make available to us; whereas, contractual
obligations are within this Orbitz's MFN that they get these
quantities, these large quantities of fares that we simply
don't have access to.
So we get dribs and drabs. We get crumbs, and not a slice
of the cake, and not the cake. And it makes it very difficult
for us to compete in that environment when it is a very price
sensitive shopper on the Internet.
Mr. Boucher. The Department of Transportation as a rule
that says that in the off-line world with regard to companies
that have an ownership interest in computer reservation
systems, when they give a fare to the computer reservation
system in which they have an ownership interest, they also
under this Department of Transportation rule have to give that
same fare to the other computer reservation systems.
Now, this strikes me as a sensible rule that promotes
competition and makes sure that all of the computer reservation
systems have an opportunity to have a roughly equal place in
the market, and to attract business. Why wouldn't that kind of
rulemake sense in the Internet world also, and if we have that
kind of rule in place, would that resolve most of the concerns
that you are addressing here today?
Mr. Gilliland. I think it would solve a lot of the
concerns. I do think that we would solve a lot simply by
removing the same as them language. However, I think that
applying some of these same regulatory actions to this case on
the Internet makes a lot of sense.
And really I think the intent there again would be that if
they make fares available in one system, one distribution
system, whether it is on-line or whether it is through the
traditional CRSs, that it be made available in other places.
I think though that we have to--and if you think back to
the history behind those rules, you had an airline industry
that was very quickly expanding, and building hubs, and
building distribution hubs as well. Distribution through these
CRSs.
And I think that what we found and why the government chose
to implement the CRS rules is that they became an anti-
competitive type of--they had an anti-competitive effect,
particularly with the smaller airlines.
Mr. Boucher. Mr. Gilliland, thank you. Mr. Cooper, let me
just ask you to comment if you would on that same question. I
know that you----
Mr. Cooper. The gentleman's time has expired, and I welcome
him for another round if he wants.
Mr. Boucher. Could I get a short comment from Dr. Cooper?
Mr. Stearns. Sure, go ahead.
Mr. Boucher. Very briefly, Dr. Cooper.
Mr. Cooper. What was the question again?
Mr. Boucher. On the Department of Transportation rule that
requires that the air carriers that have an ownership in
computer reservation systems and make a fare available to that
system, make the same fare available to the other computer
reservation systems, would this be a good rule to apply in
principal to Internet transactions as well?
Mr. Cooper. Well, you want to take out the vertical
leverage that the airline is seeking to obtain. So if that
removes--and it has been described to me, but if that removes
the disincentive to discount, and levels the playing field,
that is more of a long term question, and that if we lose the
independent sites, then we will watch the floor rise very
quickly.
So we think that it is important to worry about that
leverage, and obviously the interesting thing is that the
elephant and the ant analogy is not quite right. I think the
way that we need to think about it is that because Orbitz is
connected to the rest of the elephant, we ought to see it as
the tusk of the elephant.
And it is small, and it is growing, but when it gets big,
it can in fact destroy everything around it. So it would be
different if it were a separate beast, but it is not. It is
part of the elephant, and that is what is important.
Mr. Boucher. Thank you very much, Mr. Chairman.
Mr. Stearns. I thank my colleague, and I will start this
second round of questioning. Mr. Wolff, you seem to want to
anticipate Mr. Boucher's question. Perhaps you want to speak
after Dr. Cooper, and so I will give you fair game here.
Is there anything that you want to add after hearing Dr.
Cooper? Because he is pretty much saying what is true for
Orbitz is true for yours, too.
Mr. Wolff. I'm sorry, but I don't believe we should be
painted with the same brush because we are different
industries, and I think that this is a very important issue.
People think of travel because it affects you. You travel, you
fly, you stay in a hotel, and you rent a car.
So they think of it as one industry, but we are vastly
different industries, and that the hotel industry is a highly
unconcentrated industry, with thousands of independent players,
making independent business and pricing decisions, with not a
very inhomogeneous product.
This morning, like all of us, it appears that we did our
little homework on the web, and on my way here I stopped with
someone who was completely unfamiliar with the web or making
reservations, and in a matter of 2 minutes, she went on-line.
And she went to one of the sites that we have been
discussing, and she found 198 hotels within 10 miles of Reagan
Airport that are available today to check in, 198 hotels.
So this is not a concentrated industry. This is a very
diffuse industry, and it is different in its nature. So a few
hotel companies getting together does not provide any issues
that we see with respect to the very important issue here of
antitrust.
I understand how important antitrust is, and now in light
of the concerns over accounting issues, et cetera, it should be
of concern to all of us. And Mr. Chairman, and Congressman
Terry, and Congressman Boucher, and other people have mentioned
that when suppliers get together, it raises bells.
And it should raise bells, and we understand that. So if
you just grant me 1 minute, let me share why I think in
addition to an industry that is not ripe for collusion, the
steps that TravelWeb has taken to ensure that collusion isn't
and won't take place.
First of all, before we met, each of us met with our
individual counsels, and got instructions to make sure that we
were careful with respect to antitrust concerns, legitimate
antitrust concerns. Second, the very first action of the entity
was to hire outside counsel to attend every meeting and every
conference call to make sure that nothing was ever said or
contemplated.
They gave us instructions and they made sure that nothing
was said or contemplated that would be of an antitrust nature.
Now you can imagine the early meetings where every member of
the parties had their own personal lawyer and the entity had a
lawyer, to make sure that nothing was said out of bounds and no
actions were taken.
We established rules of engagements and rules of the
operation so that, for example, even as chairman of the
organization, I am not privy to certain information about what
other's rates are, or what those deals are. So we have very
strict rules and guidelines.
We have made our offering available to all competitors. So
that while we offer--and Congressman Boucher legitimately said
that he is concerned about creating something and then not
making it available, rates available to others.
We have addressed that, and we have eliminated exclusivity,
and we have made sure that competitors can come in and
participate in this. So we have given our entire brief to the
Federal Trade Commission and to the Department of Justice
before our launch.
And that's why I am here today, and frankly at a lot of
personal distress, but we have gone every step to make sure
that legitimate concerns about antitrust are addressed.
Mr. Stearns. Well, that's fine, Mr. Wolff, and I wanted to
give you a lot of my time after Dr. Cooper.
Mr. Wolff. Than you.
Mr. Stearns. And let me continue, Dr. Cooper. I wanted to
make sure that you had every ample opportunity, because what
was implied here, I think you have made clear and correct from
your standpoint.
Mr. Cooper. Right.
Mr. Stearns. But, Mr. Zuck, let's say, for example, that
Orbitz has some unique technology that gives it a special
advantage, and is it true, or isn't it true, that Orbitz has a
technology different from its competitors, and that this
comparative advantage would give advantages to the consumer?
I mean, is that possible, and maybe you want to explore
that.
Mr. Zuck. Well, I mean, it sure is. I wish I could shop for
turbans the same place that Mr. Cooper and Mr. Markey do. It is
probably where Johnnie Carson shops, but I can't predict
whether or not there will be lower prices as a result of new
technology.
I can only hope that that new technology is allowed to
exist, and is allowed to flourish in the marketplace to see if
it ends up delivering benefits to consumers. What we are seeing
in the short term is lower prices for consumers, and so our
only indicators that we have thus far are pro-competitive and
pro-consumer.
There is a new search technology that Orbitz is using and
in a more efficient sort of server base technology, that allows
them to bring up more fares at once. The CRS system is based on
their own mainframe software, and brings up a subset of fares
at once, and can't actually search the entire universe of fares
with each search. It is cost insufficient for them to do so.
So certainly in theory this new technology contains the
potential to deliver additional value to consumers, and so all
we ask in the IT industry is that new technologies be allowed
to attempt to deliver value to consumers, and see what happens.
Mr. Stearns. My time has expired. The ranking member, Mr.
Towns, is recognized.
Mr. Towns. Thank you very much, Mr. Chairman. Mr. Ruden,
let me sort of reverse the situations here. This is really an
unfair mess that we have here. What can we do to correct it?
What advice do you have to us as to what we might do to
correct this?
Mr. Ruden. Well, if the Department of Justice does not act
soon, it would be our view, and it has been our view for some
time that Congress needs to step in, and to address this
aggregation of market power, which I think is probably
unprecedented in American history, certainly in modern times.
And we have advocated legislation, for example, that would
buy on its face and assure consumers the ability to choose the
channel they want to buy through, and having chosen that
channel, to find there all of the fares that are available from
the airline.
That is a drastic remedy without question, but if we don't
do something, then what Dr. Cooper correctly described as the
tusk will become an instrument for the destruction of most of
the third-party distribution system that is out there.
And I have to say, Congressman, that there is a lot of talk
about low fares and discount fares, as if that were
independently a value that should be sought here as a matter of
government policy.
And I would suggest that the value is a competitive system.
Prices are supposed to be set by competition, and those prices
end up bearing a relationship to costs, and provide a
reasonable return on profit when they are the product of
competition.
And you may look at a set of prices that come from that
process and say, gee, those are kind of high prices. But if
they are properly related to costs, and provide a reasonable
return on investment, they are the correct prices.
And you want a system that allows firms in that marketplace
to strive for opportunities with what Dr. Cooper would call
cheating, and I would simply say taking the initiative to try
to capture some more business by finding price initiatives,
ways to reduce costs further, ways to repackage and rebundle.
Those are the things that you are looking for, and the
problem that Orbitz is addressing has nothing to do with costs
as I said before. If you look at their S-1 registration
statement, the return to the airlines, the five founders, in
return booking feels for the first year was $6 million on 6
million transactions.
Those are their numbers and not mine. That is a dollar a
transaction. That is what the airlines got back, and surely
this $200 million investment, of which $153 million has been
lost, is not about getting $6 million back, or even $12 million
back.
It is about displacing the independent distributors. That's
why these multi-brand sites that Mr. Wolff correctly stated,
and I don't know enough frankly about the hotel site to comment
directly about it.
But to the question of why these multi-brand sites are so
important to the producers all of a sudden, it is precisely
because they saw the independent people moving into the
Internet space, and making creative, pro-consumer use of it,
and they decided that we don't want that to happen. We are
losing control.
And so we are going to take control back, and they formed
Orbitz to get that done.
Mr. Towns. Thank you very much. Mr. Wolff, I would like for
you to just sort of clear up something. You know, you used or
you started out by saying that you felt that privacy was
extremely important.
And then in your last statement the last time around, you
said that you make everything available to your competition.
Now, how do you do both?
Mr. Wolff. Oh, I'm sorry. For clarity, privacy is
important, and we protect the data that we create very
carefully, and we make sure that we only accept data that is
necessary, and only transmit it to people who are important.
What I said about the competition is we are going to make
available to the competition the opportunity to participate on
this website. So choice hotels and other hotels can be on the
website, and can be sold through our website. But we are not
going to be giving them information that isn't appropriate to
them.
Mr. Towns. Thank you for clearing that up. I must admit
that I was troubled by that. Thank you very much, Mr. Chairman,
and I yield back.
Mr. Stearns. The gentleman yields back. The gentleman from
Georgia, Mr. Deal, is recognized.
Mr. Deal. Thank you, Mr. Chairman. Mr. Ruden, did I
understand you to say that you were not familiar with the
website that Mr. Wolff is here representing in the hotel area?
Mr. Ruden. I am aware of it, but I am not familiar with the
internal contractual relations that they have developed in the
same way that I am familiar with the Orbitz website.
Mr. Deal. So you prepared yourself to focus on Orbitz for
this testimony today; is that right?
Mr. Ruden. Well, yes, my testimony does address their
website, the written testimony.
Ms. Eshoo. Mr. Chairman, excuse me, but can you turn your
mike on? It is hard for me to hear your answer. I can hear the
question, but not the answer.
Mr. Stearns. Do you have your mike on?
Mr. Ruden. It is on now, and what I said essentially was
that my written testimony did address briefly the hotel website
issue, but we do not have and have not had the access to the
contractual information about how that thing works, and I will
tell you that I am concerned every time I hear about most
favored nation clauses. And we will be taking another look at
that issue.
Mr. Deal. I just thought it strange that someone
representing the travel agents weren't familiar with the issue
relating to hotel websites.
Mr. Ruden. Well, perhaps I spoke too broadly in saying not
familiar. I am not familiar as I said with the contractual
details of it.
Mr. Deal. Mr. Gilliland, let me ask you just a few
straightforward questions to see if you can clarify in my mind
where we stand here. Do I understand that you are contending
that you as Travelocity could not set up a website that
operates exactly like Orbitz, with most favored-nation clauses
in it?
Mr. Gilliland. What I am saying is that--and this is kind
of a peculiarity of the agreements that have been set up, is
that----
Mr. Deal. Which agreements?
Mr. Gilliland. The Orbitz agreements, and so the question
you are asking me is could we set up agreements that are
similar to what Orbitz has done. The peculiarity that I find in
it is simply that those agreements were put in place with a
company that had no bookings, and had no share of the market,
and had no presence.
Mr. Deal. And that is the CRS that they used that you are
speaking of?
Mr. Gilliland. No, no, I am talking about Orbitz. When they
were setting up the agreements, you had a company that was
getting these very favorable types of agreements set up with
particularly these five airlines, and that was happening in an
environment where thy had no bookings. They had no share.
Typically when you are competing in this market, and you
are attempting to get those types of agreements, and put those
types of agreements in place, they are generally given to
those--those aggressive types of agreements are given to those
distributors that are providing lots of volume to those
suppliers, and very similar to what you would see really in any
industry.
So that is what I am calling out, is that first of all, is
that peculiarity. And I think again this point that says that
we have no problem with Orbitz operating, and we have no
problem with the Orbitz ownership. We do have a problem with
the fact that we have these agreements in place.
Mr. Deal. Well, to specifically try to answer my question,
is there anything that prohibits you from going to the five
major airlines, or the 37 smaller airlines that are associates
with them, and say if you will enter into an agreement with
Travelocity, we will employ the same most favor nation
language. Is there anything that prohibits you from doing that?
Mr. Gilliland. Nothing that prohibits me. Unfortunately, no
progress, as we have attempted to provide lower distribution
costs to them through our site.
Mr. Deal. Have you ever made that offer to any of these
airlines?
Mr. Gilliland. We have made those types of offers, and I
think it is in the record, that American Express has made the
offers to provide for free distribution of those same types of
fares for which they got a no answer at least so far.
Mr. Deal. But you are not willing at the same time to give
up your payment system for someone who would pay you to give
them a biased or preferred customer status; isn't that correct?
Mr. Gilliland. We have been extremely aggressive to try and
go out and get the same types of deals that Orbitz has. The
very issue here I think is that we do that one by one, we
compete in the marketplace, and we have this singular
agreement, this MFN agreement, which provides all of that to
Orbitz at one time.
And as a part of that, you have the owner airlines and
Orbitz setting the price for distribution, and setting the
price for distribution collectively.
Mr. Deal. And what do you mean by that?
Mr. Gilliland. They had agreed to what the price of
distribution would be through Orbitz for the next--for what I
understand are 10 year agreements.
Mr. Deal. That is the declining fee schedule?
Mr. Gilliland. It is a declining fee schedule.
Mr. Deal. Well, Sabre is the largest CRS and it also fixes
the costs, and there is no incentive to decrease your costs
over the next 10 years. In fact, to follow your 10 year
history, it would go up 5 percent a year; isn't that right?
Mr. Gilliland. In fact, it has gone up 4.8 percent over the
last 10 years, while air fares have gone up 5 percent, 5.1
percent over that same period on an annual basis. Now, let me
just talk to the costs for just a minute.
The airlines have taken commissions to zero as you know for
all travel agencies, and therefore, through that process the
cost of distribution through a mom and pop travel agency
connected to a CRS, Sabre or otherwise, on average costs $11.
That is every element of cost that an airline pays for
distribution for that mom and pop agency connected to a CRS, is
about $11 on average.
That same comparison made through Orbitz today on that fee
schedule is $14. It just does not make any sense, and I think
that we are competing on distribution costs, and we are in with
those airlines every day, and we want to continue to engage in
those types of competitive activities with the airlines.
Mr. Deal. I just have trouble understanding how somebody
can complain about a provision of a plan that continues to
reduce the costs of booking fees, and at the same time holding
their own and increasing theirs every year, and complain and
point the finger at the one who is reducing the costs. That
doesn't make any sense to me in a competitive environment.
Mr. Gilliland. Yes, and let me just describe what doesn't
make any sense to me, and that is that you have a set of
competitors coming together to set distribution price. That
just doesn't sound right to me.
Mr. Deal. And that distribution price has to be the lowest
price that is offered anywhere in the marketplace, which can't
be harmful to the consumer.
Mr. Gilliland. The lowest price for an unprofitable
company, and in the end the consumer issue comes back to the
availability of the fares. It has nothing to do as Mr. Ruden
said with the distribution costs. It has to do with the
competition that needs to----
Mr. Deal. Are you saying that in your capacity for
Travelocity or in your capacity for your parent company, Sabre?
Mr. Gilliland. Well, I am representing both Travelocity and
Sabre.
Mr. Deal. Oh, so they are both represented in your
testimony today?
Mr. Gilliland. They are.
Mr. Deal. Thank you, sir. Thank you, Mr. Chairman.
Mr. Stearns. I thank the gentleman. The gentlelady from
California, Ms. Eshoo, is recognized.
Ms. Eshoo. Thank you, Mr. Chairman. One of the advantages
of going around from member to member is that you get to listen
to not only the questions that are asked, but the answers that
are given, or the responses that are given, and in my view,
there is a big difference between an answer and a response.
I have heard both, and I would like to compliment you on
the professionalism of your testimony. You helped to answer
questions when you speak.
Mr. Gilliland. Thank you, Congresswoman.
Ms. Eshoo. Each one of us here on the subcommittee
represents about 650,000 people, and so we have a lot of
customers, too. We call them constituents, but they are our
customers.
There has been a lot of talk about booking fees, and what
these various organizations--small, medium, large, consortium,
bumping up against the antitrust organization in my view. I
mean, the more I listen, the more I am convinced of it. So you
have not unraveled this thing. You have convinced me that this
is an elephant's hoof in terms of Orbitz.
My constituents look at--and so do I, and so do my kids, my
young adult children, they look at the basic price. I know that
there is a booking fee that is attached to the ticket, but that
is not what they go to first.
They look at the lowest and the best price, and then the
schedule, the time, in terms of travel. And let me say
something else about travel. Since our country was attacked,
whether they are people of means, and I have plenty of them in
my district in the heart of Silicon Valley, and throughout our
region in the Bay Area, as well as the most extraordinary
ordinary family, they are not looking to go abroad.
They are nervous about it. They want to stay either within
our State, which is the Nation's State of California, or see
and take advantage of those things that our country has to
give.
And so what you are doing speaks to our time, and I think
the cost of those tickets and the best bang for the buck, and
who can bring it to them, is central to what we are doing here
today.
Now, I am not asking a question. I am giving my
observations based on what each one of you have said, and in
cases what the responses are. I know that there are many
intricacies to this, but really as I pull the lens back, it is
what this thing is about.
I really believe, Mr. Chairman, that we should be taking a
look at writing legislation to correct this. I don't think the
consumer is getting the benefit of the doubt when the five
largest outfits, and in this case they are airlines, come
together. There is a squeeze going on here.
And I wasn't a travel agent in my past life, and I probably
won't be one in my future life, but I will be a consumer all of
my life. Take a look at my credit cards and yo can see that.
But when I go to consume, I want the best price and so do
my constituents. I think there is an effort here in terms of
the squeeze of the market, and I think there really is an
adherent danger in having the entity or the entities that
control the inventory also in charge of distribution.
And I think that is what this thing is about. I really
think that is what this thing is all about. So, hats off to the
big five. You thought of something, but I don't think it is
fair. I don't think it is fair, and I don't think the consumer
is getting the best of what they should get.
Many years ago, and it was before I came to the Congress,
and it was in this committee, there was an issue about
controlling inventory and being in charge of the distribution.
It was Medicare, but there was also Medicare Gap policies.
Well, you know what? They used the coin of the realm, which
is the word Medicare. But you know what? They all didn't offer
the same thing, but people went to them because they thought
they were.
Congress stepped in, and I remember my father saying, or I
chided my father, and I said why are you buying that Medicare
or Medi-gap policy, and he said, well, god rest his soul, both
of them, both my father and Danny Thomas, he said, do you think
that Danny Thomas is going to lie to me?
So the Congress stepped in and it was this committee that
did it first, and said, look, you have got to be fair to
people. You offer these prices, and in your case, it is the
cost of an airline ticket for travel, then everybody has to
have access to this, and you compete.
So while some may not like the analogy, I don't think it is
such a bad one. I remember it from many years ago. So I am not
going to ask any questions. You have just heard my
observations, and I think that our ranking member has stated it
well in a very brief sentence.
This is a mess, and I think that we have the responsibility
on behalf of our constituents who do travel. You know, my
constituents come to Washington, DC, and it is a pretty costly
ticket. They are looking for the best deal.
The teachers and the schools that are trying to bring the
students here so they can see how democracy works, even though
it is kind of messy, they need the best price for those
tickets. Otherwise, they can't come here.
They are average families, and these are not easy things
for them to do. So if I pull back from all of the complications
and the sophisticated language that has been used here, I
really think that is what the issue is, Mr. Chairman.
I think you have brought us a long distance today in a
short period of time by having this hearing, because I have
learned a lot, and the witnesses, whether they intended it to
be the case or not, have really been highly instructive in
terms of my forming my opinion here.
So I think we need to take a look a legislation to fix this
and clean it up, and make it better for the consumer and for
our constituents. Thank you.
Mr. Stearns. I thank the gentlelady, and we have completed
our hearing. And let me thank the witnesses for their
attendance. Most of you got a notice--it was less than a week,
and so you were kind enough to come and we want to thank you.
I think the hearing has brought out that it is a lot more
complicated issue. I think we start to understand most favored
nation status, and some of these clauses, that we didn't have
any inkling or understanding before. So you have done a lot to
educate us as the gentlelady from California has mentioned.
And, of course, we will continue to follow this. I think it
is complicated. Mr. Wolff, we appreciate you coming here and
some of your comments, and we have to look at this at the macro
level. I mean, it is not just the airline industry and it is
not just the hotel industry.
There is a possibility of the music industry doing this,
and the movie industry, and the currency exchange industry is
doing this. So when you look from a macro standpoint, there is
much larger issues than just Orbitz, or just one particular
site, or one particular industry.
It is a larger issue that we as members should be cognizant
of, and so I think this hearing went a long ways to doing that,
and again we thank you for your support, and your attention,
and your participation, and the subcommittee is adjourned.
[Whereupon, at 12:10 p.m., the subcommittee was adjourned.]