DEPARTMENT OF TRANSPORTATION

OFFICE OF THE SECRETARY

14 CFR Part 255

(Dockets Nos. OST-97-2881, OST-97-3014, OST-98-4775, and OST-99-5888)

RIN 2105-AC65

Computer Reservations System (CRS) Regulations

AGENCY: Office of the Secretary, Department of Transportation

ACTION: Final rule.

SUMMARY: The Department is amending its rules governing airline computer
reservations systems (“CRSs” or “systems”) to eliminate most of
the rules now and to terminate additional rules as of July 31, 2004.
The Department is readopting the rules prohibiting display bias and
adopting rules that prohibit systems from imposing certain types of
contract clauses on participating airlines that would unreasonably
restrict their ability to choose how to distribute their services.
These rules will be effective during a six-month transition period.

DATES:  This rule is effective on January 31, 2004.

FOR FURTHER INFORMATION CONTACT: Thomas Ray, Office of the General
Counsel, 400 Seventh St. S.W., Washington, D.C. 20590,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

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Table of Contents

A.   Summary of Final Rule

B.   Background

1.	The CRS Business

	2.	The Travel Agency Distribution System and the Business Relationships
between

		Travel Agencies and the Systems

	3.	Regulatory Background

C.   Development of the Record in this Rulemaking

D.   Procedural Issues

E.   The Need for Limited CRS Regulation

	1.	Introduction

2.	Final Rule

3.	Market Definition

4.	The Systems’ Market Power over Airlines

5.	The Potential for System Conduct Undermining Airline Competition

6.	System Practices that Preserve Market Power

7.	The Systems’ Ability to Engage in Display Bias

F.   The Department’s Statutory Authority To Regulate CRS Practices

1.	Whether Non-Airline Systems Are Ticket Agents Subject

to Section 411

2.	Antitrust Principles Relevant to System Practices

	3.	First Amendment and International Law Issues

G.   The Specific Rule Proposals

1.	The Scope of the Rules

2.	Exclusion of Internet-Based Systems

3.	Definitions

4.	Rules Barring Display Bias

5.	Contract Clauses Restricting Airline Choices on System Usage

6.	Equal Functionality

7.	The Mandatory Participation Rule

8.	Booking Fees

	9.	Booking Fee Bills

10.	Other Participating Carrier Contract Rules

11.	Marketing and Booking Data

12.	Third-Party Hardware and Software

13.	Travel Agency Contracts

	14.	The Tying of Commissions and Marketing Benefits with a

		Subscriber’s Choice of a System

15.	Regulation of the Internet’s Use in Airline Distribution

16.	Tying of Internet Participation

17.	International Issues

18.	Retaliation against Discrimination by Foreign Airlines and Systems

19.	Sunset Date for the Rules

20.	Effective Date of the Rules

	21.	Divestiture

REGULATORY PROCESS MATTERS

Regulatory Assessment and Unfunded Mandates Reform Act Assessment

Regulatory Flexibility Analysis

Paperwork Reduction Act

Federalism Implications

Taking of Private Property

Civil Justice Reform

Protection of Children

Consultation and Coordination with Tribal Governments

Energy Effects

Environment

Glossary

ASTA		American Society of Travel Agents

Board						The Civil Aeronautics Board

Booking fees	Fees paid by airlines and other travel suppliers when a
travel agent makes or changes a booking in a system

CRS		Computer reservations system

Mandatory participation rule		The rule requiring each airline that has a

				significant ownership interest in a system to

				participate in competing systems at as high

				a level of functionality as it does in its

				own system, if the terms are

				commercially reasonable

Network airlines			The airlines that operate hub-and-

			spoke route systems,

			especially the five largest airlines

			(American, Continental, Delta, Northwest,

			and United)

Non-airline system		A system that is neither owned nor controlled

			by any airline or airline affiliate

OMB			Office of Management and Budget

Participate		To make the services of an airline or

			other travel supplier

available for sale through a system

under a contract with that system

Parity clauses		Clauses in participating airline contracts that

require a participating airline to buy at least as high a level of
service from the system as it does from any other system

Productivity pricing			Pricing formula used in subscriber contracts that
enables

		the travel agency to obtain lower CRS fees

		from a system if the travel

		agency meets 	minimum booking quotas established

		by the contract

Section 411		49 U.S.C. 41712, recodifying section 411 of

		 the Federal Aviation Act

Subscriber	A travel agency that obtains CRS services

	under a contract with the system

System			Computer reservations system

Webfares		Discount fares offered by an airline

			through its own website

			and often through selected distribution channels

A.	Summary of Final Rule

In this proceeding we have reexamined whether our existing rules on
computer reservations systems (“CRSs” or “systems”), 14 CFR Part
255, remain necessary and, if so, whether we should readopt them, with
or without modifications.  If we do not readopt the rules, they will
expire on their sunset date, currently January 31, 2004.  Our notice of
proposed rulemaking asked for comment on these issues and proposed that
most of the rules should be readopted.  67 FR 69366 (November 15, 2002).
 After reviewing the comments and the on-going changes in the airline
distribution and CRS businesses reflected in those comments, we have
concluded that most of the rules should be allowed to sunset on January
31, 2004.  We believe, however, that we should adopt the rules
prohibiting display bias and certain rules barring unreasonably
restrictive requirements in the contracts between systems and their
airline customers for a six-month transition period to provide an
opportunity for the affected parties to prepare for complete
deregulation of computer reservation systems.  We intend to monitor
developments in the industry during this period and beyond.  We, of
course, retain our authority to pursue future regulatory or enforcement
actions against airlines or systems that engage in anti-competitive
practices.

The systems’ operations have been subject to rules for twenty years.
Although the systems now are commonly called global distribution
systems, or GDSs, we will continue to refer to them here as CRSs.  The
Civil Aeronautics Board (“the Board”), the agency that had been
responsible for the economic regulation of the airline industry,
originally adopted those rules in 1984.  49 FR 32540 (August 15, 1984),
aff’d, United Air Lines v. CAB, 766 F.2d 1107 (7th Cir. 1985).  After
reexamining whether those rules were necessary and effective, we
readopted them with some changes in 1992.  14 CFR Part 255, adopted at
57 FR 43780 (September 22, 1992).

When these rulemakings were held, one or more airlines or airline
affiliates owned or controlled each system, airlines depended heavily on
travel agencies for distribution, travel agents used a system to
research airline service options and to make bookings, and each travel
agency predominantly relied on one system to perform these tasks.
Systems therefore did not need to compete for airline participants (a
“participant” is an airline that agrees to make its services
saleable through a system).  The airlines that controlled the systems
had the incentive and ability to use them to prejudice the competitive
position of non-owner airlines and to provide information on airline
services through the systems to travel agents that gave an undue
preference to the services operated by the owner airlines.  Competitive
market forces did not discipline the prices and terms for services
offered by systems to participating airlines.

Our goal in CRS rulemakings has been to prevent practices that were
likely to harm consumers by substantially reducing airline competition
or by giving travel agents and their customers inaccurate or misleading
information on airline services.  The rules block system practices that
would cause consumers and their travel agents to receive misleading
information and would distort airline competition.  We adopted most of
the rules under our authority to prevent unfair methods of competition
in the sale of airline transportation, an authority that empowers us to
prohibit practices that violate the antitrust laws or antitrust
principles, but, in adopting the rules prohibiting display bias, we
additionally relied on our authority to prevent unfair and deceptive
practices in the marketing of air transportation.

We should adopt rules regulating industry practices only if they are
reasonably necessary to prevent anti-competitive or deceptive practices
that are likely to occur, and would cause significant consumer harm if
they did occur, and that market forces are unlikely to remedy.  Any rule
must be effective and enforceable.  Rules intended to address a serious
competitive concern may have unintended consequences that may reduce
efficiency and consumer choice.  As we explained in our notice of
proposed rulemaking, we will not adopt rules that address all potential
problems, for such detailed regulations would necessarily impose
significant burdens on the systems and interfere with legitimate
business practices.  67 FR 69389.  Our approach for determining whether
rules are necessary is essentially the same as that recommended by the
Justice Department.  The Department of Justice states that regulation is
appropriate “only when (1) market participants have substantial and
durable market power that will likely harm consumers directly, or will
be exercised in ways that exclude or limit competition in contiguous
markets, and (2) the regulation will likely be effective and enforceable
without imposing significant costs of its own.”  Justice Department
Reply Comments at 18.

Our rules included a sunset date, currently January 31, 2004, to ensure
that we would review whether the rules remained necessary in light of
on-going developments in the CRS and airline distribution businesses.
57 FR 43829-43830; 68 FR 15350 (March 31, 2003).  This proceeding
carries out that reassessment.  The major changes that have occurred
since our last major rulemaking underscore the need for such a
reassessment.  All of the U.S. airlines that had controlled a system
have divested their CRS ownership interests.  As a result, none of the
four systems now operating in the United States is owned or controlled
by any U.S. airline or airline affiliate.  Furthermore, airlines are
selling an increasingly large share of their tickets through their
Internet websites and a diminishing share through travel agencies using
a system.  The airlines’ control over access to their webfares, the
discounted fares originally offered only through individual airline
websites, has enabled them to obtain lower fees from two of the systems.
 And travel agencies are increasingly demanding -- and winning --
contracts from the systems that give them more freedom to use
alternative booking channels and to switch systems periodically.

Our examination of these developments has persuaded us that we should
allow most of the existing rules to sunset upon their expiration.  The
major predicate for the rules has always been the systems’ control by
airlines.  The U.S. airlines’ divestiture of their ownership interests
has eliminated that basis for the rules.  While each system still has
market power over most airlines, that power is diminishing.  Moreover,
the record does not show a likelihood that the systems would use that
power to distort airline competition except potentially through the sale
of bias.

On the other hand, we have determined that we should readopt, for a
six-month transition period, the rules prohibiting display bias and
rules prohibiting certain types of contract clauses in the systems’
contracts with airlines.  We are readopting the rules against display
bias because we believe that, were the rules terminated immediately,
systems might well be expected to bias their displays in ways that could
mislead travel agents and their customers and prejudice airline
competition.  For that reason, we believe it is important to provide a
measure of notice to the industry prior to the rules’ termination and
a concomitant opportunity to prepare for the absence of regulation.

Similarly, we are adopting for the same short transition period two
rules governing the contracts between the systems and airlines:  rules
prohibiting parity clauses (a parity clause would require an airline to
participate in that system at at least as high a level as it
participates in any other system) and clauses requiring airlines to
provide access to all webfares as a condition to any participation in a
system.  However, an airline is free to agree to such clauses.  We
believe that, were these prohibitions terminated immediately, the
systems would have sufficient market power to impose contract terms on
airlines that would unreasonably restrict the airlines’ ability to
bargain for better terms for participation.  The transition period
during which these prohibitions will be maintained will furnish the
industry with reasonable notice of the forthcoming change with an
opportunity to prepare for it.  Our final decision is consistent with
the recommendations made by the Justice Department.

The two rules on contract clauses and the rule prohibiting display bias
therefore will sunset on July 31, 2004.  We will actively monitor
developments during the transition period and beyond and take
appropriate investigative, enforcement, or regulatory action if we see
evidence that systems or airlines are engaging in anti-competitive
conduct in connection with airline distribution through the systems and
other channels.

We will not readopt the other rules now in force, and we reaffirm our
tentative decision not to adopt rules governing the use of the Internet
in airline distribution.  The rules that we are not readopting will
automatically expire on January 31, 2004, their sunset date.

The elimination of most of the rules will ensure that government
regulation does not interfere with market forces and innovation in the
CRS and airline distribution businesses.  The record indicates that
market forces are beginning to discipline business practices in the CRS
industry.  Ending the broad regulation of CRS practices will enable each
system and each airline to bargain over the terms on which CRS services
should be provided, just as airlines obtain products and services from
other suppliers under agreements negotiated by the parties.  The systems
will have the same ability to bargain with their other customers, the
travel agencies.  The resulting terms under which airlines and travel
agencies obtain system services will likely reflect the interests of
both sides better than if we maintained broad regulations restricting
the parties’ behavior.  While we cannot predict exactly what will
happen, we believe that ending most of the rules will produce the best
results for consumers over time.  We base this judgment on our
experience with airline deregulation.  Airline deregulation has provided
lower fares and better service for consumers, in part by enabling new
firms to enter the airline business.  Several of the new airlines have
followed new business plans that have provided great benefits for
airline travelers.  Airline deregulation has produced these benefits
even though the deregulated airline industry has not operated in the
manner expected by industry experts on the eve of deregulation.  The
deregulation of the CRS business should also benefit consumers, even
though we cannot forecast how it will play out.

Our final rule also conforms to the limits imposed by Congress on our
authority to regulate the airline and airline distribution businesses.
Congress has given us the authority to prevent practices that violate
the antitrust laws or antitrust principles and practices that are
deceptive, but no comprehensive oversight authority over airline
distribution.  We are adopting only those rules that are necessary to
prevent practices in the CRS business that would constitute unfair or
deceptive practices, or unfair methods of competition.

We are aware that some participants in the airline distribution and CRS
businesses may seek to engage in anti-competitive conduct that would
reduce competition in the airline and airline distribution businesses
and thereby harm consumers.  A system, for example, might develop
vertical ties with an airline that would cause the system to operate in
a way that could prejudice airline competition.  Some systems may seek
to pursue practices that would reduce competition in the CRS business
and preserve their market power over airlines.  Even without specific
regulations, any such practices could be unfair methods of competition
and thus unlawful.  We retain the authority to bring enforcement cases
against firms that violate the statutory prohibition against unfair
methods of competition, and we will take appropriate action if we have
evidence of unlawful conduct.  As Congress stated when it deregulated
the airline industry, S. Rep. No. 95-631, 95th Cong., 2d Sess. (1978) at
52:

Vigorous enforcement of antitrust policy is the discipline by which
competition can remain free and markets can operate in a healthy
fashion.  Predatory behavior, market concentration, and other economic
evils should be avoided and remedied by the Board when they exist.

See also H. R. Rep. No. 98-793, 98th Cong., 2d Sess. (1984) at 5:
“Although the airline industry has been deregulated, this does not
mean that there are no limits to competitive practices.  As is the case
with all industry, carriers must not engage in practices which would
destroy the framework under which fair competition operates.”

We will also actively monitor the systems’ reactions to the
substantial deregulation of their business, and we, of course, retain
the power to reexamine our decision that all rules should terminate by
July 31, 2004, if the systems’ conduct or other developments makes
such a reexamination necessary.

Our final rule departs from the proposals made by our notice of proposed
rulemaking.  Our notice proposed to eliminate two of the major rules,
the rule barring discriminatory booking fees and the rule requiring
airlines with a significant ownership interest in one system to
participate in competing systems at an equivalent level if the terms for
doing so were commercially reasonable, but to readopt most of the
remaining rules.  Our review of the rulemaking record up to that point
suggested that rules were still necessary, notwithstanding the changes
in the systems’ ownership and the growing role of the Internet.  67 FR
69375-69384.  The notice, however, did request comment on whether we
should sunset more of the rules now, and we predicted that the rules
would become unnecessary in a few years.  67 FR 69368, 69376,
69388-69389.

The comments and the continuing developments in airline distribution and
the CRS business have convinced us that most of the rules are no longer
appropriate.  In particular, one of the systems, Worldspan, was owned by
three U.S. airlines when we issued our notice of proposed rulemaking but
was sold several months ago to two private venture capital firms.  The
airline distribution business has continued to evolve since we issued
the notice.  Airlines are selling more tickets through the Internet.
Moreover, as we predicted, the airlines’ control over access to their
webfares has led some of the systems to offer airlines discounted
booking fees in return for the ability to sell those fares.  67 FR
69381; Galileo Supp. Comments at 5-8.  And the comments have shown that
the systems’ contracts with travel agencies are significantly less
restrictive than they were even a few years ago.  See, e.g., ASTA
Comments at 14-16.

That our final rule does not duplicate our proposal is consistent with
the purpose of rulemaking procedures.  The notice of proposed rulemaking
was designed to obtain comments from interested persons on our tentative
findings and our economic and policy analysis and to enable them to
submit current information.  We held a public hearing to give interested
persons an additional opportunity to present their views and respond to
our questions.  The comments submitted in this proceeding, together with
the on-going developments in the airline distribution and CRS
businesses, have persuaded us that our proposals should not be made
final.  Those proposals, while reasonable in light of industry
conditions two or three years ago, to a large extent no longer reflect
current conditions.

We will begin our explanation of our final rule by updating our
description of the CRS and travel agency businesses, and we address
several procedural issues.  We then discuss our conclusions on the need
for adopting some CRS rules, including our findings that the systems
continue to have market power over airlines, and discuss the question of
our legal authority to readopt the rules and to apply them to systems
that are not owned by airlines.  We thereafter present the rationale for
our decisions on each of the rule proposals.

Our notice of proposed rulemaking included a request for comments on
whether we should clarify our policy on fare disclosures as regards the
disclosure of travel agency service fees.  We have decided to address
that question in a separate rule.

We will refer to commenters by their common names (for example,
“Alaska,” not “Alaska Airlines”).  References to comments and
reply comments are to the pleadings filed in response to the notice of
proposed rulemaking, not the pleadings filed in response to the advance
notices of proposed rulemaking, which were discussed in the notice of
proposed rulemaking.  We will refer to the statutory provision that is
the principal basis for our adoption of CRS rules, 49 U.S.C. 41712, by
its traditional name, section 411, as we did in the notice of proposed
rulemaking.  The glossary at the beginning of this document gives the
meaning of the abbreviations and technical terms used in this rule.

B.	Background

Our notice of proposed rulemaking described in some detail the nature of
the airline distribution and CRS businesses, including the travel agency
business.  67 FR 69369-69375.  Here we will update our factual
description on the basis of the information provided by the comments and
set forth the factual findings underlying our final decision.

1.	The CRS Business

Airlines use several distribution methods: direct sales through their
reservations agents, sales through “brick-and-mortar” travel
agencies, sales through individual airline websites, and sales through
on-line travel agencies.  In the past, the “brick-and-mortar” travel
agency channel produced the great majority of airline revenues for
almost all airlines.  In 1999 travel agencies sold almost three-quarters
of airline tickets, almost all through off-line travel agencies.  67 FR
69369, citing Bear, Stearns & Co.,  “Point, Click, Trip: An
Introduction to the On-Line Travel Agency” (April 2000) at 17.  Since
then the Internet has become an increasingly important distribution
channel.  Galileo states that the different channels’ shares of total
airline tickets in 2002 were as follows, Galileo Comments,
Guerin-Calvert, Jernigan, & Hurdle Declaration at 24:

off-line sales by airlines	17 percent

on-line sales by airlines					10 percent

off-line sales by travel agencies				58 percent

on-line sales by travel agencies				15 percent.

Until recently the great majority of all travel agency airline ticket
sales, whether off-line or on-line, have been made through one of the
systems.

Four systems operate in the United States: Sabre, Galileo, Worldspan,
and Amadeus.  Each of them was originally developed by one or more U.S.
airlines (Amadeus entered the U.S. market by acquiring a U.S. system).
Two of the systems -- Sabre and Galileo -- were no longer owned or
controlled by any U.S. airlines when we issued the notice of proposed
rulemaking.  At that time, three U.S. airlines -- American, Delta, and
Northwest -- owned Worldspan.  Amadeus was then owned by three European
airlines -- Air France, Iberia, and Lufthansa -- as well as by public
shareholders (and has the same ownership today).  Worldspan’s airline
owners sold that system to two private venture capital firms on June 30,
2003, after the issuance of our notice of proposed rulemaking.  As part
of that sale, the airline owners agreed to certain parity clauses and
marketing commitments.  Galileo Comments, Guerin-Calvert, Jernigan, &
Hurdle Declaration at 20; Amadeus Comments at 32-33; August 1, 2003,
Letter from Charles Simpson, Jr.; Sabre Supp. Reply at 4.  Amadeus is
now the only system with any airline ownership.

The systems that have no airline owners have marketing ties with their
former owners.  United markets Galileo, American markets Sabre, and
Delta and Northwest have agreed to market Worldspan for several years
following the closing of the system’s sale.  Amadeus Comments at 25,
n. 24; Galileo Supp. Comments at 1-4.  Southwest also markets Sabre,
although Southwest never had an ownership interest in the system.

Each system’s share of CRS airline bookings in the United States in
2002 was as follows, Galileo Comments, Guerin-Calvert, Jernigan, &
Hurdle Declaration at 18:

Sabre								44.7 percent

Worldspan							26.5 percent

Galileo								19.7 percent

Amadeus							9.2 percent

Since 1999 the shares of Galileo and Amadeus have been declining, while
Worldspan’s share has risen sharply, from 19.3 percent to 26.5
percent.  The growth in Worldspan’s share in large part reflects its
status as the booking engine for two of the three largest on-line travel
agencies, Expedia and Orbitz.

Each system provides information and booking capabilities on the
airlines that “participate” in it, that is, agree to make their
services saleable through the system.  The system obtains its
availability information from the airlines’ internal reservations
systems, and it makes bookings in those systems, which are used by the
airlines’ own reservations agents and other staff members.  The
systems also provide information and booking capabilities for rental
cars, hotels, and other travel services.  Airline transportation is the
most important travel service sold through the systems, and airlines
obtain a larger share of their revenues from CRS bookings (sales made
through the systems) than do other travel suppliers.  67 FR 69370.

An airline (or other travel supplier) participating in a system must pay
fees for each booking transaction (the fees paid by participating
airlines are usually called “booking fees”).  Airlines can
participate at different levels.  At higher levels the information
provided travel agencies will be more timely and so more reliable, and
travel agents can carry out tasks like reserving specific seats for
their customers.  An airline that chooses a higher level of
participation must pay a higher booking fee.  67 FR 69370.  Booking fees
paid by airlines provide well over half of the systems’ total
revenues.  67 FR 69380.

The average airline booking fee per segment is $4.25.  Because the
average ticket includes more than one segment, the average booking fee
per ticket is $11.  United Reply Comments at 28; “Upheaval in Travel
Distribution: Impact on Consumers and Travel Agents,” National
Commission to Ensure Consumer Information and Choice in the Airline
Industry” (November 13, 2002), at 16.  United alleges that its average
booking fee per segment equals 3.3 percent of its average revenue per
segment.  United Reply Comments at 29.  Sabre has stated that the
effective booking fee per segment for its highest level of participation
was $4.38 in 2002, about 2.4 percent of the average airline ticket price
for tickets sold through Sabre.  Sabre charges $2.12 per segment for
airlines participating at its low level, Basic Booking Service.  Sabre
Comments at 14; Sabre Comments, Wilson Declaration at 6.

Sabre and Galileo have created programs that give participating airlines
lower booking fees in return for a commitment to provide the system with
all of their webfares.  Under Sabre’s Direct Connect Availability
program (“DCA program”), an airline can obtain a 10 percent
reduction in its booking fees, guaranteed for three years, in exchange
for a commitment to provide the system with all of the airline’s
published fares, including its webfares.  American, Continental, Delta,
Northwest, United, US Airways, and a number of smaller airlines now
participate in this program.  Sabre Supplemental Reply at 1.

Galileo first established its Momentum program, which gave airlines a 20
percent reduction in booking fees for tickets sold through participating
travel agencies, if the airlines agreed to give Galileo access to all of
their publicly-available fares.  Travel agencies could participate in
the program if they agreed to a reduction in their incentive payments
from Galileo.  United and US Airways were the first airlines that joined
this program.  One of the travel agencies that joined the program was
Rosenbluth International, the fourth largest U.S. corporate travel
agency.  Due to complaints from America West and other airlines, Galileo
dropped the initial requirement that any airline participating in the
Momentum program must upgrade its participation level to the highest
level.  More recently Galileo introduced Preferred Fares Select, which
will enable airlines to obtain lower booking fees on all of their
bookings if they agree to make all of their publicly-available fares
saleable through Galileo.  Galileo Comments, Guerin-Calvert, Jernigan, &
Hurdle Declaration at 52-56; Galileo Reply Comments at 33-34; Galileo
Supplemental Comments at 5-8; Sabre Comments, Fahy Declaration at 10-11.

The record does not indicate that Amadeus or Worldspan has introduced
comparable programs.

  Travel agencies often obtain CRS services at no cost or receive bonus
payments in exchange for agreeing to use a system.  ASTA states that in
2002 fewer than half of all travel agencies paid monthly fees for system
services and that 60 percent of them received a signing bonus of some
kind from the system that they were using.  ASTA Comments at 17.  The
systems pay on average $1 to $1.50 per booking to travel agencies for
using a system.  Sabre Comments at 7.

As we stated in the notice of proposed rulemaking, travel agents have
depended heavily on the systems to determine what airline services are
available and to make bookings.  There we cited statistics showing that
travel agencies in 1999 sold almost three-quarters of all airline
tickets and made 93 percent of their domestic airline bookings and 81
percent of their international airline bookings through a system.  67 FR
69369-69370.  The record shows that since then the share of airline
revenues produced by travel agents using a system has been declining.
The Justice Department states that the share of revenues produced by
“brick-and-mortar” travel agencies for the five airlines that own
Orbitz has fallen from 76 percent in May 2000 to 67 percent in March
2002, primarily due to the growth in Internet sales.  Justice Department
Reply Comments at 14-15.

In the past, almost all U.S. airlines participated in every system.
Southwest, which has participated only in Sabre and at a low level, was
the major exception.  JetBlue, which began operations in 2000, also
participates only in Sabre and at the same level as Southwest.  Sabre
Comments at 38.  Airlines that can avoid participation in every system
focus their marketing efforts instead on direct sales to consumers, made
through either the airline’s website or its reservations agents.
Airlines that have been participating in all of the systems, such as
Alaska, have been shifting many of their bookings away from the travel
agency channel, which required them to pay the systems’ booking fees.
See, e.g., Alaska Comments at 5.  The large network airlines nonetheless
still obtain at least 60 percent of their revenues from bookings made by
travel agents using a system, as discussed below.  American, for
example, states that over 70 percent of its bookings are made through
the systems.  American Reply Comments at 19.  The share of total
industry bookings made through the systems has been declining in part
due to the growth of airlines like Southwest that do not depend on
travel agencies for the major share of their revenues.  American Reply
Comments at 19.

The systems have played a major role in airline distribution because
travel agents -- the airlines’ primary distribution channel -- have
relied so much on the systems for investigating airline service options
and booking tickets, because the systems are so efficient.  They
electronically provide comprehensive information and booking
capabilities on airlines and other travel suppliers.  Each system
presents displays that integrate almost all services offered in a
market.  Each system shows the schedules and fares offered by airlines
in each market that are available for sale through travel agents using
that system and whether seats are available on specific flights at
specific fares (some fares are often not available through the systems,
notably corporate discount fares and webfares).  The system thus allows
the travel agent to compare the schedules and fares offered by different
airlines and determine which would best meet a customer’s needs.  The
agent using a system can reserve a seat and issue a paper ticket or
print an E-ticket.

On-line agencies also use systems -- Travelocity uses Sabre, while
Expedia and Orbitz use Worldspan, for example.  67 FR 69370.  Orbitz and
Expedia have been developing direct connection technologies which enable
bookings to be made directly with an airline’s internal reservations
system, bypassing Worldspan.  Sabre Comments, Fahy Declaration at 8-9.

Since the Board first adopted CRS rules, no firm has entered the CRS
business.  Until recently, entry into the CRS business would have been
prohibitively costly and time-consuming.  67 FR 69381.  This may no
longer be true.  Sabre Comments, Fahy Declaration at 8.  New
direct-connection technologies can enable firms to provide airline
information and booking services that replicate at least some of the
services provided by the systems.  Galileo Comments at 42, n. 38.
Orbitz, which now operates as an on-line travel agency, plans to make
its services available to travel agencies through software being
developed by Aqua.  Orbitz continues to rely on Worldspan for some
functions involved in the search and booking process.  67 FR 69373,
69374.  Another commenter in this proceeding, AgentWare, is also
offering travel agencies fare and schedule information and links to
booking sites.  Galileo Comments at 66-67.

The development of sources of airline information and booking
capabilities on the Internet has created additional resources that
travel agents can use.  Travel agents are increasingly checking the
fares and services offered on websites because some airline discount
fares have not been sold through the systems.  Travel agents, however,
continue to make most of their airline bookings through a system.  Using
alternative booking channels is less efficient for travel agents, as
discussed below.  Nevertheless, the development of alternative sources
of information and booking capabilities on the Internet, and the
airlines’ control over access to their webfares, have begun to make
the systems responsive to market force discipline.

Corporate travel departments as well as travel agencies use the systems.
 A corporate travel department can book travel for its company’s
employees by accessing a system through the Internet or by Intranet (an
internal corporate communications network based on Internet technology).
 67 FR 69370.

Systems operate throughout the world.  U.S. systems like Sabre and
Worldspan market their services to travel agencies in foreign countries,
and Amadeus is a major system in the Eastern Hemisphere.  The systems
had the following shares of worldwide CRS airline bookings in 2002,
Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 18:

Sabre								30.8 percent

Worldspan							15.1 percent

Galileo								26.4 percent

Amadeus							27.7 percent

The European Union, Canada, and other governments have regulations
governing CRS operations.  The United States has entered into a number
of international air services agreements that require each party to
ensure that the systems operating in its country and their owners do not
subject airlines and systems from the other country to discriminatory
treatment.  67 FR 69371-69372.

	2.	The Travel Agency Distribution System and the Business Relationships
between

Travel Agencies and the Systems

The systems’ practices have affected airline competition because of
the importance of travel agents in airline distribution.  The travel
agency system has provided airlines with an efficient means of
distribution.  Travel agencies have acted as agents for virtually all
airlines and generally hold themselves out to the public as sources of
impartial advice on airline services and other travel services.  67 FR
69371.

In 2001, there were 18,425 travel agencies.  The travel agency business
is dominated by the largest travel agencies.  In 2001, the 117 travel
agencies with revenues of more than $50 million (as measured by sales of
air transportation) accounted for 57.2 percent of all travel agency
sales.  The 1,015 travel agencies with revenues of $5 million to $50
million accounted for another 20.1 percent of all travel agency sales.
“Upheaval in Travel Distribution: Impact on Consumers and Travel
Agents,” National Commission to Ensure Consumer Information and Choice
in the Airline Industry” (November 13, 2002), at 113.  See also Sabre
Comments, Salop & Woodbury Declaration at Table 3 (Sabre’s top five
subscribers produced 25.7 percent of its total bookings, excluding
Travelocity, and the top 100 produced 49.6 percent of its total
bookings, excluding Travelocity).

As noted above, in 2002 the airlines obtained 58 percent of their
bookings from “brick-and-mortar” travel agencies and 15 percent from
on-line travel agencies.  Galileo Comments, Guerin-Calvert, Jernigan, &
Hurdle Declaration at 24.  The three largest on-line travel agencies had
the following shares of all on-line travel agency bookings in 2002:
Travelocity, 28.5 percent; Expedia, 28.7 percent; and Orbitz, 21.3
percent.  Sabre Comments, Salop & Woodbury Declaration at Table 2.
Travelocity is a Sabre subsidiary, while Orbitz is owned by the five
largest U.S. airlines -- American, Continental, Delta, Northwest, and
United.  Travelocity has been using Sabre as its source of airline
information and booking capabilities, while Expedia and Orbitz have been
using Worldspan for these functions.  Orbitz and Expedia have been
developing direct connections with airlines that bypass Worldspan.
Airlines that agree to be “charter associates” in Orbitz, which
includes a commitment to make all publicly-available fares available for
sale through Orbitz, receive a rebate on their booking fees.  67 FR
69374.

The larger airlines still obtain most of their revenues from bookings
made by travel agents.  However, despite the continuing importance of
travel agencies in airline distribution, the travel agency business has
faced severe business problems in recent years, due to developments such
as the airlines’ elimination of base commissions (but not incentive
commissions), the growing use of the Internet by many travelers,
particularly leisure travelers, and the overall decline in airline
traffic.  See “Upheaval in Travel Distribution: Impact on Consumers
and Travel Agents,” National Commission to Ensure Consumer Information
and Choice in the Airline Industry” (November 13, 2002).  From 1994 to
2002, the number of travel agencies fell by 31 percent and the number of
travel agency locations by 21 percent.  “Upheaval in Travel
Distribution” at 21.  The number of travel agencies declined by 12
percent in the year ended September 2002 and by another 7 percent
through April 2003.  ASTA Reply Comments at 15-16.

The nature of the travel agencies’ operations is important to this
proceeding, because we must consider the impact of our decisions on the
travel agencies’ business and because the rules have covered some
features of the relationships between the systems and travel agencies.
However, providing support for travel agencies that would offset other
economic developments is not within our statutory authority and
therefore not a proper goal of this proceeding.  This proceeding must
be, and is, limited to preventing system practices and related airline
practices that would harm consumers by significantly reducing airline
competition.

A critical factor in our decision-making is that travel agencies, unlike
most airlines, can choose which system to use.  Most travel agencies
need to use only one system, and for most travel agencies no system has
features and information that are indispensable, as discussed below.
Because most travel agencies are free to decide to use one system rather
than its competitors, the systems compete vigorously for travel agency
customers.  As noted above, systems usually pay travel agencies for
choosing one system rather than another.  See, e.g., 67 FR 69371; Sabre
Comments at 7.

In past rulemaking proceedings, and in our notice of proposed rulemaking
in this proceeding, we cited evidence that the systems’ contracts with
travel agencies often contained provisions that unreasonably restricted
the travel agencies’ ability to use more than one system or to use
alternative electronic sources of airline information and booking
channels.  67 FR 69405; 57 FR 43822.  For example, each system formerly
kept travel agencies from buying their own equipment and made them use
equipment provided by the system for accessing its services.  57 FR
43796.  The record further suggested that the systems’ contracts with
travel agencies typically included “productivity pricing” programs
that imposed financial penalties on an agency that began using another
system or other booking channel for making a substantial number of
bookings, or that gave the agency incentive payments if it made most of
its bookings through that system.  67 FR 69408.  These types of
restrictive contract provisions concerned us because they tended to
preserve the systems’ market power and denied airlines an opportunity
to encourage travel agencies to use alternative electronic means for
obtaining information on airline services and making bookings, such as
direct links between a travel agency and an airline’s own internal
reservations system.  Our notice observed, however, that the systems
were giving at least some travel agencies more flexible terms.  67 FR
69405.

The proposals made by our notice fairly reflected industry conditions
when the comments on our advance notices of proposed rulemaking were
filed.  Large Agency Coalition Comments at 7.  However, the comments
submitted in response to our notice of proposed rulemaking show that
travel agencies since then have been successfully demanding more
flexible contracts and winning the ability to use alternative booking
channels.  ASTA’s October 2002 travel agency survey made the following
finding (quoted in Sabre Comments at 151):

[CRS] vendors are introducing a new crop of more flexible contracts with
less rigid productivity requirements and more pricing options.
[C]ontract  terms have gotten more favorable towards agencies with
shorter overall length, lower required segments and a higher percentage
of  agencies receiving booking incentives.

See also Large Agency Coalition Comments at 7-14.

For example, subscriber contracts typically have a term that is
substantially shorter than the maximum permitted by our rules.  Our
rules prohibit contracts with a term of more than five years and require
a system to offer a three-year contract to any travel agency offered a
five-year contract.  57 FR 43825.  For some time after we adopted that
rule, few travel agencies had contracts with a term of less than five
years.  67 FR 69405.  Now, however, many travel agencies have contracts
that are no more than three years in length.  The percentage of travel
agencies with five-year contracts has declined from 85 percent in 1998
to 47 percent in 2002, while the percentage with three-year contracts
has risen from 9 percent in 1998 to 39 percent in 2002.  Almost 60
percent of Worldspan subscribers had five-year contracts in 2002, while
only 35 percent of Sabre’s subscribers had such contracts.  Sabre
Comments at 17-18; Sabre Comments, Fahy Declaration at 14-15.

Travel agencies, moreover, have a substantial ability to switch systems
when their existing contract expires.  Half of the responding agencies
in the ASTA survey stated they intended to obtain competitive bids at
the end of their current contract, while another third stated that they
might seek competitive bids and only one sixth stated they definitely
intended to continue using the same system.  Sabre Comments at 153.
Nonetheless, switching systems can impose significant costs on travel
agencies, at least for smaller travel agencies.  Galileo Comments,
Guerin-Calvert, Jernigan, & Hurdle Declaration at 81.

When we last readopted the rules, we added a provision giving travel
agencies the right to use their own equipment to access a system and to
use third-party software.  Before then, each system typically demanded
that its subscribers use equipment provided by the system and barred
subscribers from accessing other systems and databases from that
equipment.  57 FR 43796-43797.  Travel agencies are increasingly using
their own equipment.  Only 70 percent of travel agencies leased
equipment from a system in 2002, while 85 percent did so in 2000.  ASTA
Comments at 14.  Sabre alleges that it seeks to exit the
equipment-leasing business, that 73 percent of the equipment used by
Sabre subscribers will be provided by third parties by the end of 2003,
and that 62.5 percent of their equipment was being provided by third
parties as of November 2002.  Sabre Comments at 131.  Amadeus states
that only one fourth of its subscribers rely entirely on equipment
provided by Amadeus.  Amadeus Comments at 45.  Subscribers to other
systems are more likely to use equipment provided by the system.  ASTA
represents that systems do not resist subscriber efforts to use their
own equipment instead of equipment provided by the system.  ASTA
Comments at 15.  Sabre represents that it does not enforce the
provisions in its older subscriber contracts that barred the travel
agencies from using Sabre equipment to access other systems.  Its
subscribers are free to use multiple systems.  Sabre Comments at 17, n.
17, and 71.  Amadeus has made a similar representation.  Amadeus
Comments at 45.

Sabre further represents that the larger travel agencies often have
complete flexibility in using the systems.  Sixteen of Sabre’s 20
largest “brick-and-mortar” travel agency customers use multiple
systems, and many use their own software to direct bookings to a
specific system, often in order to maximize their incentive payments.
Those 16 agencies produce 35 percent of Sabre’s total volume from
“brick-and-mortar” travel agencies.  Sabre Comments at 71.  However,
as discussed below in our market definition analysis, each location of a
travel agency that subscribes to more than one system tends to
predominantly rely on one system rather than make substantial use of
every system whose services are being purchased by the parent firm.

Using alternate booking channels and sources of information has become
easier for travel agents in recent years.  New software, for example,
allows travel agents to conduct fare searches simultaneously through a
system and airline websites.  Galileo Comments, Guerin-Calvert,
Jernigan, & Hurdle Declaration at 29.    The systems allegedly do not
seek to block their subscribers from using alternative booking channels
and sources of information, and they help develop tools enabling travel
agents to use alternative sources of information.  Galileo Comments at
64, 66-67.  In 2002, 98 percent of all travel agencies had Internet
access, according to an ASTA survey.  Galileo Comments, Guerin-Calvert,
Jernigan, & Hurdle Declaration at 81.

However, despite the widespread use of the Internet by travel agents,
they make relatively few bookings through the Internet.  According to
the ASTA survey, travel agents made only 10 percent of their bookings
through websites, and most of those bookings were for tours booked
through tour operator sites.  ASTA Comments at 12.  The inefficiency of
using the Internet for airline bookings is probably the most important
deterrent to a greater use of the Internet.  See “Upheaval in Travel
Distribution: Impact on Consumers and Travel Agents,” National
Commission to Ensure Consumer Information and Choice in the Airline
Industry” (November 13, 2002), at 47-50.

Our notice further identified the systems’ pricing practices as a
factor that seemingly kept travel agencies from using alternative
systems and booking channels.  Each system’s productivity pricing
program generally gave travel agencies incentive payments if a
subscriber used the system for a large majority of its bookings (or
imposed financial penalties if it did not).  We believed that such
productivity pricing programs effectively deterred travel agencies from
making significant use of alternative booking channels, such as airline
websites.  While we noted that the percentage of subscriber contracts
with productivity pricing had been declining, most subscriber contracts
still included productivity pricing.  67 FR 69408-69409.

The comments show that the systems’ productivity pricing provisions
have become significantly less widespread and less restrictive in the
last few years.  In 1998 91 percent of subscriber contracts had
productivity pricing, but only 56 percent did in 2002.  The average
number of bookings required before a travel agency can obtain incentive
payments has fallen from 252 in 1998 to 194 in 2002.  ASTA Comments at
15; Sabre Comments at 69, 162.  The Large Agency Coalition represents
that the systems’ incentive payment programs typically allow the
travel agency to make up to thirty percent of its bookings outside the
system before it suffers a financial penalty.  Transcript at 231.
Despite these changes, however, Sabre states that it has contracts with
some small travel agencies that require the subscriber to use no system
other than Sabre.  Sabre argues that this requirement is reasonable
under the circumstances because Sabre is providing support for the
agency’s operations that would otherwise not be economical.  Sabre
Comments, Salop & Woodbury Declaration at 20.  Nonetheless, despite the
greater flexibility allowed travel agencies by recent productivity
pricing arrangements, the record suggests that the systems’ current
contractual arrangements may still deter travel agencies from making
many bookings through the Internet.  Orbitz Comments at 23, n. 10; ASTA
Comments at 26, n. 44, and 34-35; Travel Management Alliance Comments.

The increasing flexibility of the contracts obtained by travel agencies
is the result of changes in the travel agency business.  ASTA states
that travel agencies must have a greater ability to respond to changing
technology, especially the growth of the Internet.  The increasing
uncertainties of the travel agency business itself, moreover, are likely
to encourage many travel agencies to avoid long-term commitments if
possible.  ASTA Comments at 14.  The large travel agencies created in
recent years have more bargaining leverage with the systems.

In the past, we have endeavored to prevent system practices that would
deter travel agencies from using multiple systems.  We reasoned that the
systems’ market power over airlines would be reduced if travel
agencies had the ability to use alternative sources of airline
information and booking capabilities.  57 FR 43797.  Travel agency
parties had encouraged those efforts.  67 FR 69391; 57 FR 43796.

The travel agency commenters in this proceeding assert, however, that
rules designed to encourage travel agencies to use multiple systems will
be futile.  They contend that almost all travel agencies predominantly
or entirely use one system.  ASTA thus alleges, ASTA Comments at 3-4:

Use of a single CRS is a function of the market reality that multiple
CRS’s are highly inefficient for travel agencies, who therefore do not
employ them.  No amount of realistically foreseeable inducement from
competing CRS’s or regulatory pressure from DOT is going to overcome
the inefficiencies for most agencies of operating multiple CRS’s in
today’s environment.

See also Transcript at 213.

Using more than one system is generally inefficient for travel agencies,
because, among other things, it requires training staff members to work
with different systems and will cause the booking records of different
customers to be in different places.  Cardinal Travel Service Comments;
Galileo Comments at 64-65; Galileo Comments, Guerin-Calvert, Jernigan, &
Hurdle Declaration at 79; ASTA Comments at 23-24; Large Agency Coalition
Comments at 20.  At travel agencies that have multiple offices, each
office tends to use one system even though the firm subscribes to
several systems.  Carlson Wagonlit Comments at 11.

Travel agencies, moreover, assertedly have no need to use multiple
systems.  Large Agency Coalition Comments at 20; Transcript at 236-237.
While some travel agencies use multiple systems, they appear to make
relatively little use of the secondary system.  Galileo Comments,
Guerin-Calvert, Jernigan, & Hurdle Declaration at 79-80. The Large
Agency Coalition is a group of 22 large, corporate-oriented travel
agencies, all but one of which was included in a recent listing of 84
top corporate travel agencies.  Although many of the 22 use two or three
systems, they typically do so because (i) the dominant airline in a city
other than the agency’s headquarters city insisted that the agency use
the system affiliated with the airline, (ii) a newly-won corporate
client wished to keep its existing system at an on-site location rather
than switch to the agency’s primary system, or (iii) the agency
acquired another agency which had a contract obligating it to continue
using another system.  Large Agency Coalition Comments at 1-3.  See also
Transcript at 212.

	3.	Regulatory Background

The Board’s rules, adopted in 1984, included an expiration date to
ensure that we would reexamine the rules after they had been in force
for several years.  We therefore reexamined those rules through our
rulemaking completed in 1992.  57 FR 43780 (September 22, 1992).  We
readopted the rules, because we found that CRS rules remained necessary
then to protect airline competition and to help ensure that consumers
did not receive inaccurate or misleading information on airline
services.  We based our decision on the systems’ control by airlines
and airline affiliates, which could still use their control of the
systems to prejudice airline competition if there were no rules.
Airlines then relied on travel agencies for distribution and had no
practical ability to induce travel agencies to use systems charging
lower fees, and travel agencies did not choose systems on the basis of
their treatment of airlines.  See 67 FR 69367, 69372.

The rules adopted by us regulate the operations of systems owned or
marketed by an airline or airline affiliate insofar as the system was
providing services to travel agencies.

The current rules (i) bar each system from using carrier identity as a
factor for editing and ranking services, (ii) prohibit systems from
charging airlines discriminatory booking fees, (iii) require each system
to make available to any participating airline the booking and marketing
data generated by the system from bookings for domestic travel made
through the system, and (iv) prohibit certain types of restrictive
contract provisions that unreasonably limit the travel agencies’
ability to switch systems or use more than one system.  The rules also
require each system to provide non-owner airlines with information and
booking capabilities as accurate and reliable as those provided the
owner airline, and they give each travel agency the right to use its own
equipment in conjunction with a system and to access other systems and
databases from the same terminals used to access its primary system,
unless the agency uses equipment provided by that system.  The rules
additionally require each airline with a significant CRS ownership
interest to participate in other systems at as high a level of
functionality as it does in its own system, if the terms for
participation are commercially reasonable (this is the mandatory
participation rule).

.

Five years after our last overall reexamination of the rules, we revised
the rules in two respects.  First, we prohibited systems from enforcing
“parity clauses” against airlines that did not own or market a
competing system.  62 FR 59784 (November 5, 1997).  The parity clauses
required each airline to buy at least as high a level of service from
the system as it did from any other system.  The parity clauses made it
unnecessary for systems to compete for airline participation at higher
levels of service.  Secondly, we strengthened the prohibition against
display bias by requiring each system (i) to offer at least one display
that does not give on-line connections a preference over interline
connections and (ii) to either list one-stop and other direct flights
before connecting services or use elapsed time as a significant factor
in selecting flight options from the database.  62 FR 63837 (December 3,
1997).  We strengthened the rule in large part because of evidence that
United had caused Galileo to create displays that prejudiced United’s
competitors.  62 FR 63840-63841.

C.	Development of the Record in This Rulemaking

To ensure that the record in this proceeding would be as complete as
possible and that all interested persons would have the opportunity to
present their views and to respond to points made by other commenters,
we have used procedures in addition to those required by the
Administrative Procedure Act for informal rulemakings.  We began this
proceeding by issuing an advance notice of proposed rulemaking, 62 FR
47606 (September 10, 1997).  We issued a supplemental advance notice of
proposed rulemaking that asked interested persons to update the record
and to comment on the implications of two developments, the Internet’s
growing role in airline distribution and the systems’ shrinking
airline ownership.  65 FR 45551 (July 24, 2000).

After reviewing the comments submitted in response to those notices, we
issued our notice of proposed rulemaking on November 15, 2002.  That
notice, as stated above, proposed to readopt most of the existing rules
but also asked for comments on whether the rules had become unnecessary.
 We additionally proposed to eliminate the mandatory participation rule
and the prohibition against discriminatory booking fees.  We tentatively
concluded that we should not extend the rules to cover the distribution
of airline tickets through the Internet.  We asked for comment on
whether we should change our policy statement requiring travel agents to
disclose the full amount of airline fares to consumers so that travel
agents would be obligated to state separately the amount of any travel
agency service fee, as long as the fee did not exceed certain levels.
We took into account the changes in the systems’ airline ownership,
although only Galileo and Sabre then had no airline owners.  We
tentatively believed that the systems might engage in practices that
would undermine airline competition due to the marketing relationships
and other ties that continued to exist between the systems and their
former airline owners.

To make certain that interested persons had ample opportunity to present
their evidence and positions on the issues, we established a lengthy
comment period and asked for reply comments.  67 FR 69366.  We later
extended the comment period and reply comment period by two months and
one month, respectively.  67 FR 72869 (December 9, 2002).  To provide an
additional opportunity for public participation, we also held a public
hearing on May 22, where interested persons could present their views to
a Department official, Michael W. Reynolds, the Deputy Assistant
Secretary for Aviation and International Affairs, and answer his
questions.  68 FR 25844 (May 14, 2003); 68 FR 27948 (May 22, 2003).

We received about 95 comments and 35 reply comments.  The commenters
included members of Congress, other Federal agencies, the systems, many
U.S. and foreign airlines, many travel agencies and travel agents, firms
that process the marketing and booking data sold by the systems, and
several public interest groups.  Because of the complexity of the issues
and the varying effects of the rule proposals, the commenters do not
share common views.

The Justice Department argues that we should readopt the rules
prohibiting display bias and should not adopt any other rules except
possibly transitional rules barring the systems from demanding
most-favored-nation clauses in their contracts with participating
airlines.  Sabre, Worldspan, United, Expedia, and Travelocity contend
that we should terminate all of the CRS rules.  Amadeus, Galileo,
Alaska, America West, Midwest, and US Airways generally assert that most
of the rules should be readopted.  Orbitz, American, Continental, Delta,
and Northwest argue that we should maintain some rules only for a
transition period to ensure that the CRS industry’s deregulation will
succeed.  The travel agency commenters largely support the continuation
of rules governing the systems’ contracts with their travel agency
customers but object to any significant restrictions on the systems’
incentive pricing programs.  The public interest groups generally oppose
continued regulation, but some argue that we should take action to
prevent Orbitz’ operations from reducing competition.

As stated above, we have determined not to make final our tentative
proposals to readopt most of the rules.  The comments on our notice of
proposed rulemaking have shown that market forces in the CRS business
are more effective than was shown by the comments submitted before we
issued that notice: the airlines’ control over access to their
webfares has enabled them to obtain better terms for participation in
some systems, the systems’ subscriber contracts are giving travel
agencies increasing flexibility to use alternative booking channels, and
the airlines’ share of revenues from travel agents has continued to
decline.  Furthermore, as a result of the Worldspan sale, no system is
now controlled by U.S. airlines.

Before turning to the detailed discussion of the substantive issues, we
will address the procedural questions raised by commenters.

D.	Procedural Issues

For this proceeding we have followed the notice-and-comment procedures
established by the Administrative Procedure Act for informal
rulemakings, as we have done in all past CRS rulemakings.  67 FR 69369.
We also held a public hearing and invited interested persons to submit
reply comments as well as comments.  These informal rulemaking
procedures have given commenters a fair opportunity to present their
evidence and policy and legal arguments and have enabled us to resolve
the issues rationally and efficiently.

Some parties filed comments or reply comments after the due date for
those documents.  We have accepted all such documents, and we have
considered them to the extent practicable.

Sabre’s comments included several exhibits for which Sabre requested
confidential treatment.  Sabre thereafter concluded that some of these
exhibits did not require confidential treatment, because their
information was equivalent to that provided by other commenters without
any request for confidential treatment.  We were unable to work out an
arrangement with Sabre on the remaining documents that would meet
Sabre’s interests in protecting the confidentiality of the information
while satisfying our need to give all interested persons an adequate
opportunity to review the information while preparing their comments.
We are therefore returning those documents to Sabre, and we have not
considered them at all in this rulemaking.

Some commenters requested a more formal hearing where they could
cross-examine members of our staff and representatives for other
commenters.  We found such additional procedures would be unnecessary
for the development of an adequate record in this proceeding.  68 FR
12883 (March 18, 2003).

Several commenters assert that the record is stale or incomplete.  See,
e.g., Galileo Reply Comments at 9-13; ASTA Reply Comments at 4-8.  We
disagree.  While our notice of proposed rulemaking cited some factual
material that may not have reflected current conditions, the notice set
forth our tentative factual findings, our reasoning on the economic and
policy issues, and, most importantly, gave all interested persons ample
opportunity to submit their own factual information.  Any commenter who
considered the factual record outdated or incomplete could have
corrected any inadequacies by submitting current information.  We
believe that the record is more than adequate for our decision.

We also disagree with those commenters who contend that we cannot reach
a rational decision on the issues without learning the details of the
marketing and other on-going relationships between Worldspan and its
former airline owners.  See, e.g., Galileo Reply at 10.  In this
proceeding we are considering what general rules, if any, should be
adopted that will regulate each system’s operations, not whether
specific features of the arrangements between Worldspan and its former
owners may be unlawful as unfair methods of competition.  The record is
entirely adequate for us to determine what general rules should be
adopted.  If it becomes apparent that specific features of the
relationships between Worldspan and its former owners present questions
about possible violations of section 411, we can address those issues
through our investigatory and enforcement powers.  In addition, the
record does not include information on the details of the relationships
between Galileo and United, or between Sabre and American or Southwest.
Some commenters, however, have submitted evidence on their experience
with those relationships, and other commenters could have done so as
well.  That evidence indicates neither that we must obtain additional
information nor that the existing relationships create a likelihood of
anti-competitive behavior that would injure airline competition and that
requires regulations.

Our notice of proposed rulemaking included an initial regulatory
flexibility analysis as required by the Regulatory Flexibility Act of
1980, 5 U.S.C. 601 et seq.  That analysis discussed the potential impact
of our rule proposals on small entities and invited comments on that
analysis.  67 FR 69423-69424.  Travel agencies, several members of
Congress, the Small Business Administration’s Office of Advocacy, and
some other commenters contend that we failed to comply with the
Regulatory Flexibility Act, because our initial regulatory flexibility
analysis allegedly failed to provide adequate analysis and an
opportunity for comment on several rule proposals affecting travel
agencies, particularly our proposal to restrict the systems’ incentive
payment programs.  See, e.g., June 9, 2003, Letter from Senators Snowe
and Kerry; March 19, 2003, Letter from the Democratic Members of the
House Committee on Small Business; Comments of the Small Business
Administration Office of Advocacy; ASTA Comments at 51-54.  We recognize
the importance of the goal of ensuring that our rules do not
unreasonably or unnecessarily affect small businesses and the importance
of compliance with the Regulatory Flexibility Act.  We believe that we
have fulfilled our obligations under that statute.  However, the issue
is moot for the most part because we are not adopting the rule proposals
that generated most of the complaints.  In addition, certain other
proposals sought by travel agency groups, such as a requirement that
every airline make all publicly-available fares saleable through every
distribution channel, are not alternatives that we have the statutory
authority to adopt on the basis of the record in this proceeding.  Our
final regulatory flexibility analysis is set forth later in this rule.

We also conducted a review under 5 U.S.C. 610 of the CRS rules, Part
255, in this proceeding.  As discussed below, we concluded that changes
were necessary to relieve regulatory burdens and respond to changed
circumstances.

E.	The Need for Limited CRS Regulation

	1.	Introduction

We adopted the current rules because we found that regulations were
necessary to prevent the systems from engaging in anti-competitive
conduct that was likely to prejudice competition in the airline industry
(for example, display bias and unjustly discriminatory booking fees).
We additionally concluded that some practices followed by the systems
represented efforts to preserve their market power over airlines (for
example, subscriber contract provisions that kept travel agents from
using alternative booking channels).  We further determined that, if
there were no rules, the systems would probably bias their displays,
thereby denying travel agents and their customers impartial and
information on airline services.  57 FR 43781-43787.  In addition, as
the Justice Department observes, the system owned by an airline that
dominated a region had a substantially greater ability to obtain
subscribers than did other systems.  If that system operated in ways
designed to prejudice the competitive position of rival airlines, it
would reinforce its owner’s dominant position in the airline market.
Justice Department Reply Comments at 9.

We based these conclusions on our findings that airlines relied heavily
on travel agencies for distribution, that travel agents generally used a
system to determine what airline services were available and to make
bookings, that each travel agency predominantly or entirely used one
system for these tasks, and that the resulting need of almost all
airlines to participate in each system meant that market forces did not
discipline the prices and terms offered by the systems for airline
participation.  We further relied on the fact that each system was then
owned and controlled by one or more airlines or airline affiliates.  57
FR 43781, 43790, 43794.

Recent developments, such as the systems’ ownership changes and the
growth of on-line bookings, have seriously eroded the basis for the
findings on which the current rules were based.  We must thus examine
whether the regulation of system operations remains necessary.  When we
issued our notice, one system was still controlled by three U.S.
airlines, and we tentatively found that the rules remained necessary
because the systems still had market power over airlines and because the
continuing ties between the systems and their former owners created a
likelihood that systems would engage in conduct that would prejudice
airline competition.  67 FR 69377-69384.  We nonetheless invited
comments on whether we should allow all of the rules to sunset, 67 FR
69368, and we stated that we anticipated that the on-going changes in
the marketing of airline tickets could in time make the rules
unnecessary.  67 FR 69376.

The commenters disagree on whether rules are still necessary.  The
Justice Department recommends that we maintain only the rules
prohibiting display bias and possibly short-term rules barring certain
types of most-favored-nation clauses in the systems’ contracts with
participating airlines.  Some commenters, such as Expedia and United,
contend that the rules should be terminated now.  Sabre argues that no
rules are necessary unless a system is still controlled by U.S.
airlines.  Other commenters, like Orbitz, American, Continental, and
Northwest, contend that we should adopt regulations for a transition
period to ensure that the ultimate deregulation of the CRS business will
be effective.  And still others, like Midwest, argue that the
regulations are likely to remain essential for a number of years.  Some
commenters, like United, argue that we may not regulate non-airline
systems at all and that we should not regulate systems owned or
controlled by airlines.

	2.	Final Rule

We have concluded that market forces are beginning to discipline the
systems’ prices and terms for airline participation, and the
systems’ competition for subscribers is in large part eliminating
contract provisions that substantially restrict travel agents from using
alternative electronic sources of airline information and booking
capabilities.  Furthermore, the record does not contain evidence showing
a likelihood that a system will engage in conduct designed to distort
competition in the airline industry, except for display bias.
Readopting most of the existing regulations would not be justified
without such evidence.  For these reasons, we have determined to permit
most of the rules to sunset upon their expiration on January 31, 2004.

The only exceptions are the rules that prohibit display bias and
foreclose certain contract clauses with airlines that would maintain the
systems’ market power.  We find that the systems continue to have
market power over airlines, as argued by the Justice Department; that
there is some potential for conduct by the systems that could  prejudice
airline competition (most notably the sale of display bias); and that
systems could engage in practices that could  unreasonably preserve
their market power.  For these reasons, we will adopt these rules for a
six-month period in order to facilitate an orderly transition to a
completely deregulated distribution marketplace.  We retain the power to
reexamine this decision if unexpected developments show that continuing
regulation may be necessary.  We are also prepared to take enforcement
action if a system engages in conduct that appears to violate section
411.

We explain in this section why we have concluded that most of the
current rules are no longer needed, and that the remaining rules will be
maintained only for a short transition period.  The several types of
system conduct that create concern require separate discussion, because
they involve different groups of system users -- airlines, travel
agencies, and travel agents and their customers -- and the degree and
effectiveness of market forces for each group is different.  For
airlines, the question is whether competition disciplines the prices and
terms for CRS services offered airlines.  For travel agencies, the
question is whether the systems can engage in conduct that tends to
preserve any market power they may have over airlines by unreasonably
restricting a travel agency’s use of alternative information sources
and booking channels.  For travel agents and their customers, the
question is whether the systems could engage in display bias and similar
practices that would lead to consumer deception and undermine airline
competition.  As a separate matter, we must determine whether, assuming
that the systems do have market power over airlines, they are likely to
pursue practices that would distort airline competition, even though no
U.S. airlines now control any system.

Most commenters supporting continuing regulation assume that any rules
should apply equally to all systems, whether or not owned and controlled
by airlines.  None of the commenters argues that Amadeus’ ownership by
three European airlines provides a basis for regulating that system if
the others are unregulated.  We agree.  We doubt that the alliance
relationships between each Amadeus owner and one or more U.S. airlines
will substantially increase the potential for anti-competitive behavior
affecting the U.S. airline market, especially since the Amadeus owners
belong to different alliances.  In addition, Amadeus has substantial
public ownership, and its obligations to its public shareholders should
lessen any potential for action by Amadeus designed only to distort
airline competition in the United States.  Amadeus also has the smallest
market share in the United States.  Amadeus Comments at 32-33; Sabre
Comments at 4, n.6.

The primary basis for our rule proposals was our belief that the
proposals appeared necessary to prevent system practices that would
constitute unfair methods of competition and that market forces would
not prevent those practices.  We will begin our explanation of the need
for maintaining some short-term, residual regulation with our analysis
of the systems’ market power over most airlines, an analysis that
begins with our conclusions on market definition.  We then discuss
whether systems are likely to engage in conduct that would prejudice
airline competition, preserve their existing market power, or give
consumers and their travel agents misleading information on airline
services.  Despite our conclusion that the systems have market power
over airlines, we are allowing most of the existing rules to expire
because we find that the systems are not likely to engage in practices
that would prejudice airline competition or tend to maintain their
existing market power, except for display bias and the potential
imposition of some contract clauses on participating airlines that would
reduce the airlines’ bargaining power.  Because we conclude that the
systems would probably sell display bias if our prohibition against
doing so were immediately terminated, thereby misleading travelers, we
have decided to retain that prohibition for a six-month transitional
period to furnish the industry notice of the change.

Where we find short-term, transitional regulation necessary, our
analysis is substantially the same for both airline and non-airline
systems.  Elsewhere, as discussed below, our conclusions that rules are
not necessary stems in large part from the lack of any U.S. airline
control of the systems now operating in the United States.  If Orbitz
enters the CRS business,  there would again be a system controlled by
U.S. airlines.  However, we are unwilling at this time to adopt general
regulations based upon Orbitz’ potential entry.

	3.	Market Definition

In judging whether any regulation is necessary, the fundamental question
is whether market forces would discipline system practices.  If
competition would do so, no rules should be necessary.  Cf. Justice
Department Reply Comments at 18.

When we adopted the current rules, we found that they were necessary
because each system had market power over almost all airlines and market
forces would not discipline the systems’ anti-competitive practices.
We also adopted rules governing subscriber contracts, even though we did
not find that systems generally had market power over travel agencies,
because the systems’ contracts with travel agencies contained clauses
that would maintain the systems’ market power over airlines.  67 FR
69405.  In the current rulemaking, we again made a tentative
determination that the systems had market power over airlines.

Determining whether the systems have market power over airlines requires
us to define the relevant market.  The relevant market must contain all
products or services that consumers -- here the airlines -- are likely
to consider using for the same purpose.  The relevant market includes
all reasonably interchangeable products and services, because “the
ability of consumers to turn to other suppliers restrains a firm from
raising prices above the competitive level.”  United States v.
Microsoft Corp., 253 F.3d 34, 51-52 (D.C. Cir. 2001), quoting Rothery
Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir.
1986).

In our notice of proposed rulemaking, we tentatively found that, for
airlines, each system is a relevant market.  Most airlines still obtain
the great majority of their revenues from travel agents, each travel
agency office normally uses only one system, and travel agents rarely
make airline bookings outside a system.  If travel agents routinely used
several electronic sources of airline information and booking
capabilities when making reservations for their customers, an airline
could then afford to withdraw from one or more systems, because the
travel agents’ use of alternative systems would still enable the
airline to obtain bookings.  Travel agencies, however, typically rely
entirely or predominantly on one system for investigating airline
service options and making bookings.  67 FR 69375-69376, 69377-69381.

As a result, an airline that wants its services to be readily saleable
by travel agencies must participate in each system, because otherwise it
will lose a significant amount of revenue.  As the Justice Department
had stated in an earlier rulemaking, quoted at 67 FR 69376:

Each CRS provides access to a large, discrete group of travel agents,
and unless a carrier is willing to forego access to those travel agents,
it must participate in every CRS.  Thus, from an airline's perspective,
each CRS constitutes a separate market and each system possesses market
power over any carrier that wants travel agents subscribing to that CRS
to sell its airline tickets.

We further noted that, due to the economics of the airline industry, the
addition or loss of a few passengers on an airline flight will determine
whether the flight is profitable.  The importance of marginal revenues
in the airline business meant that airlines cannot afford to lose access
to any significant distribution channel.  In that regard, we quoted the
statement of one industry economist, Daniel Kasper, 67 FR 69375:

Airlines utilize many different distribution channels for the simple
reason that they must do so in order to ensure that their products are
easily accessible to the broadest possible array of prospective

travelers. . . .  Because attracting incremental passengers is
critically important to an airline’s profitability, each airline
strives to match or surpass the visibility to purchasers enjoyed by its
rivals.  That is, airlines must compete for “shelf space” in any
channel where consumers prefer to shop.

The comments support our tentative factual findings on market
definition.  First, most airlines still obtain the majority of their
revenues from bookings made by travel agencies through a system.  The
Justice Department states that the five airlines that own Orbitz derived
65 percent of their total revenues in March 2002 from
“brick-and-mortar” travel agency bookings.  Justice Department Reply
Comments at 14.  America West states that 67 percent of its revenues in
2002 came from bookings made through the systems.  America West Comments
at 7.  Alaska similarly states that it obtains 56 percent of its
revenues from travel agencies.  Alaska Comments at 5.  Delta states that
55 percent of its revenues are produced by “brick-and-mortar” travel
agencies and that another 10 percent are produced by on-line travel
agencies through a system.  Delta Reply Comments at 39.  Sabre by itself
produces about one-third of a typical airline’s revenues.  Orbitz
Comments at 10.  While the Justice Department suggests that the
systems’ use by on-line travel agencies (as opposed to
“brick-and-mortar” travel agencies) adds little to their market
power over airlines, because most consumers check two or more websites
before making a booking on-line, the Justice Department agrees that the
systems have market power due to their usage by “brick-and-mortar”
travel agencies.  Justice Department Reply Comments at 15.  About 80
percent of CRS bookings made by travel agencies are made by
“brick-and-mortar” agencies.  Galileo Comments, Guerin-Calvert,
Jernigan, & Hurdle Declaration at 24.

In arguing that the systems do not have market power, Sabre cites
figures showing that less than half of all tickets will be sold this
year by travel agencies using a system.  See, e.g., Sabre Comments,
McAfee and Hendricks Declaration at 2; Transcript at 8.  We believe that
market shares based on revenues, not individual tickets, should be
determinative.  A firm’s profitability directly depends on its total
revenues, not on the number of units sold.  The travelers who make
bookings on-line  tend to buy tickets that are sold at greater
discounts.  The travelers using “brick-and-mortar” travel agencies
are more important to the airlines because they tend to buy the more
expensive tickets.  Justice Department Reply Comments at 16.

We agree with Sabre that the travel agencies’ share of total bookings
has been declining and will likely continue to decline.  See, e.g.,
Justice Department Reply Comments at 14.  However, as noted, the large
network airlines still obtain the large majority of their revenues from
travel agencies using a system, a situation likely to persist for some
time to come.

Business travelers -- the travelers that produce a disproportionate
share of the network airlines’ revenues -- have been reluctant to make
bookings on-line or otherwise outside the travel agency channel.
Justice Department Reply Comments at 16; NBTA Comments at 11-14.
Consumers make about five times as many on-line bookings as do corporate
travelers.  Galileo Comments, Guerin-Calvert, Jernigan, & Hurdle
Declaration at 26, n. 40.  We recognize that a growing number of
business travelers are booking on-line, but they appear to be doing so
through websites offered by travel agencies using a system, or through
one of the corporate booking firms acquired by systems like Sabre.
Sabre Reply Comments at 34-35; American Reply Comments at 25.

It may well be that within several years even a large proportion of
business travelers will book their air travel outside of travel agencies
using a system, but they do not do so now.  Most airlines, including the
major network airlines, derive the large majority of their revenues from
bookings made through a system.  See also Galileo Comments,
Guerin-Calvert, Jernigan, & Hurdle Declaration at 29.

Secondly, travel agents continue to rely on systems for booking airline
tickets.  ASTA states that, on average, 87 percent of travel agency
airline bookings are made through a system.  ASTA Comments at 23.
Galileo estimates that an even higher percentage of travel agency
bookings are made through a system.  Galileo Comments, Guerin-Calvert,
Jernigan, & Hurdle Declaration at 25, n. 37.  Travel agents generally
have access to the Internet and use it, primarily for research on travel
options, but they have not made much use of the Internet for airline
bookings, as noted above, because using the Internet is significantly
less efficient than using a system.  ASTA Comments at 12-13.

Thirdly, to operate more efficiently, most travel agencies use only one
system, as discussed above.  While the largest travel agencies tend to
have two or more systems, they do not seem to make substantial use of
all of them.  Those agencies typically rely predominantly on one system.
 The Large Agency Coalition states that its members -- all large
corporate travel agencies -- do not subscribe to multiple systems in
order to improve their ability to book airline travel, but because of
continuing business relationships between the agency and the dominant
airline in local markets, between some of their corporate customers and
airlines, or between an acquired agency and its system.  Large Agency
Coalition Comments at 1-3.  Carlson Wagonlit alleges that each of its
branch offices relies predominantly on one system even though the travel
agency firm subscribes to all of the systems: “Using multiple CRSs at
one location creates numerous operational difficulties related to
training agents on multiple CRSs and because client information is
maintained within the CRS.”  Carlson Wagonlit Comments at 11.

Fourthly, the airlines’ dependence on marginal revenues requires them
to participate in every significant distribution channel.  No commenter
denies that marginal revenues are critical in the airline industry.
Sabre’s experts agreed with our finding: “Air transportation
involves high fixed costs and low marginal costs.  Thus a few
incremental bookings can spell the difference between profit and
loss.”  Sabre Comments, Salop & Woodbury Declaration at 29.

We are unconvinced by the claims of several commenters that airlines can
nonetheless find substitutes for the travel agency channel and that
travel agents can use substitutes for the systems.  We recognize that
Southwest, JetBlue, and some other low-fare airlines operate
successfully without obtaining many bookings from travel agents.
Southwest and JetBlue reportedly obtain only 20 percent and 10 percent
of their revenues, respectively, from travel agencies.  Justice
Department Reply Comments at 15, n.14.  Other airlines, particularly the
large network airlines, cannot now practicably end their reliance on the
travel agency channel.  The low-fare airlines have traditionally focused
on attracting leisure travelers.  As shown, leisure travelers are much
more likely to book flights through the Internet without using a
“brick-and-mortar” travel agency (or an on-line agency).  Insofar as
other airlines follow a business strategy that involves attracting
business customers -- the travelers most likely to use travel agencies
-- those airlines continue to be dependent on travel agencies for the
largest share of their revenues and may have limited bargaining leverage
against the systems, at least in the near future.  The network airlines,
moreover, tend to operate more complex hub-and-spoke route systems than
the low-fare airlines, and that complexity limits their ability to
obtain direct sales, unlike airlines such as Southwest that primarily
operate point-to-point services.  It may be that the network airlines
would be more successful if they adopted the same business strategy as
the low-fare airlines.  They have not done so, however, and presumably
could not do so without significant expense.  American Comments at
17-21; 67 FR 69379.  As a result, these airlines rely on travel agencies
for the majority of their revenues.  Our determination of the relevant
market must rely on the choices actually made by airlines and consumers,
not on the choices that some think they should make.  Cf. U.S.-U.K.
Alliance Case, Order 2002-1-12 (January 25, 2002) at 42-43.

We recognize that airlines have been shifting some bookings away from
the travel agency channel to their own websites.  This shift has been
much stronger for low-fare airlines than for the large network airlines.
 Despite these efforts, some believe that the Internet is unlikely to
produce more than 40 percent of airline revenues by 2005.  Galileo
Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 23-24.
Airlines have also taken steps to encourage travel agencies to bypass
the systems.  For example, American has an arrangement with American
Express that enables that travel agency to make bookings directly with
American.  Amadeus Comments at 12-13.   The record does not indicate
that direct booking arrangements will substantially reduce the
agencies’ use of the systems for airline bookings any time in the near
future.  As shown, the larger airlines still obtain the large majority
of their revenues from bookings made through the systems.

Several commenters contend that travelers can use alternative
distribution channels and are not locked into the travel agency channel,
or, alternatively, can switch between travel agencies if one agency uses
a system that provides inferior service.  See, e.g., Sabre Comments at
59-65.  We agree that consumers can choose where to book and need not
book through a travel agency if they do not wish to, and that many
consumers can easily switch between travel agencies.  At least for
corporate customers, however, changing agencies will impose some
switching costs.  Justice Department Reply Comments at 16, n.19.
Airlines do not enjoy such choices.  If a substantial number of
travelers choose to use travel agencies, as they do, and if those travel
agencies, with few exceptions, use only one system and do not readily
make bookings outside the system, as is true, then each airline must
participate in each system used by a significant number of travel
agencies in order to avoid losing bookings from those agencies.  As we
stated in the notice, 67 FR 69378:

The existence of one distribution channel that is attractive to a
significant and growing number of travelers does not make that channel
competitive with another channel that a larger if shrinking share of
travelers finds preferable.  With a very few exceptions, any airline
that uses only one channel will not obtain the business of those
travelers that prefer the other channel.

See also American Comments at 16-17 and Dorman Declaration at 5.  While
the airlines’ customers have alternatives, that does not make
irrelevant the question of whether systems have market power over
airlines.  Cf.  United States v. Visa U.S.A., Inc., 344 F.3d 229, 239
(2d Cir., 2003); In Re Visa Check/Mastermoney Antitrust Litigation,
E.D.N.Y. No. 96-CV-5238, April 1, 2003, Memorandum and Order at 5.

Some arguments made by the commenters opposing our preliminary analysis
mischaracterize our reasoning.  Sabre wrongly alleges that we concluded
that systems have market power over travel agencies.  Sabre Comments at
59, 71, 84.  Nothing could be further from the truth.  We expressly
found that systems compete vigorously for travel agency subscribers, 67
FR 69371, 69405, and nowhere did we state that systems have market power
over travel agencies.  Sabre additionally misstates our analysis by
asserting that we found that travel agencies control their customers.
Sabre Comments at 59, 63.

Sabre has failed to show that the relevant market is not each system,
but the broader market of providing travel information to consumers, or
airline ticket distribution, a market in which each system’s share
would be relatively small.  Sabre Comments at 57-59, 79.  As a practical
matter, airlines wishing to electronically provide information and
booking capabilities to travel agencies currently have no effective
substitute for participation in each system.  Similarly, because travel
agencies do not use multiple systems, Sabre’s observation that no
system has even a 50 percent share of the CRS business, Sabre Comments
at 81, is irrelevant.  Each system is a separate market insofar as
airlines are concerned.   Furthermore, each system has a dominant share
of the CRS business at cities where its former airline owners were the
dominant airlines.  Justice Department Reply Comments at 22.

4.	The Systems’ Market Power over Airlines

Because readopting CRS rules to block anti-competitive behavior will
require a finding that the systems have market power over most airlines,
we must determine whether they do have such power.  If systems have
market power over airlines, they will be able to charge them prices that
exceed competitive levels, and the resulting costs will be passed on to
consumers, even if many or most consumers can choose between different
distribution channels when buying airline tickets.

We are following the definition of market power applied by the Supreme
Court in antitrust cases.  In Eastman Kodak Co. v. Image Technical
Services, 504 U.S. 451 (1992), the Court stated that market power is the
power "to force a purchaser to do something that he would not do in a
competitive market," 504 U.S. at 464, quoting Jefferson Parish Hospital
v. Hyde, 466 U.S. 2, 14 (1984), and "the ability of a single seller to
raise price and restrict output,"  504 U.S. at 464, quoting Fortner
Enterprises, Inc.  v. United States Steel Corp., 394 U.S. 495, 503
(1969).  The courts have similarly stated that a firm is a monopolist
“if it can profitably raise prices substantially above the competitive
level.”  United States v. Microsoft Corp., 253 F.3d at 51.

Our notice of proposed rulemaking stated our belief that each system
still has market power over most airlines.   We noted in that regard
that some airlines that had otherwise supported the elimination of most
or all of the rules still conceded that the systems have market power.
Northwest had thus stated, as quoted by us at 67 FR 69378:

Sales to consumers made over the Internet, via both airline websites and
online agents, have provided significant new competition to CRSs, but
each CRS typically remains the only means by which to reach the travel
agents who use that system.  Each CRS therefore continues to have
significant market power based on the travel agents to which it has
exclusive access.

First, until now an airline or other firm could not practicably create
competitive alternatives for the systems.  Among other things, building
a new system would be costly and time-consuming, and the great majority
of travel agencies already had contracts to use an existing system.  67
FR 69381.  Entry into the business has become easier, as argued by
Sabre.  Sabre Comments at 52-85.  However, because travel agencies
generally rely entirely or predominantly on one system for information
and bookings on airline services, new entry is unlikely in the near term
to eliminate the systems’ existing market power.

Secondly, airlines have generally been unable to persuade travel
agencies to use one system rather than another.  If they could, they
would have some bargaining leverage against the systems.  Airlines could
then shift business to systems offering better terms for airline
participants and away from systems offering poorer terms.  Because
travel agencies do not pay booking fees, they have no direct incentive
to use the system charging the lowest fees.  The record suggests, in
fact, that the incentive payment programs used by the systems encourage
travel agencies to choose the system that is the most expensive for
participating airlines.    The systems then obtain subscribers typically
by offering to give them bonus payments.  The revenues used for those
incentive payments come from the fees paid by participating airlines
(and to a smaller extent by other travel suppliers).  See, e.g.,
American Reply Comments, Dorman Declaration at 2-4.

Airlines have had no effective incentives that they can offer travel
agencies to encourage the use of one system rather than another, except
in local markets where a dominant airline can influence travel agency
choices by denying access to its corporate discount fares and marketing
benefits to travel agencies that do not use its preferred system.  As
discussed in our notice of proposed rulemaking, airlines that dominate
an area’s airline markets, like Delta at Atlanta and American in
southern Florida, can influence local travel agencies to use the
airline’s preferred system, because those travel agencies cannot
easily succeed without the ability to sell the corporate discount fares
offered by the area’s major airline.    67 FR 69381.

Airlines have developed programs to encourage travel agents to agree to
terms that offset some CRS costs, or to bypass the systems, but those
programs do not yet seem to have had great success.  American’s
“Everyfare” program gave travel agencies access to American’s
webfares if they agreed to assume the airline’s booking fee liability.
 Amadeus Comments at 10-13.  Northwest and other airlines have created
websites designed for travel agent bookings.  Sabre Supp. Reply at 2.

We recognize that airlines have been gaining bargaining leverage against
the systems, a factor that caused us to propose the elimination of the
mandatory participation rule and the rule barring discriminatory booking
fees.  Nonetheless, the systems currently have significantly greater
leverage.  An airline’s greatest leverage for obtaining lower fees or
better terms for participation will be a threat to withdraw from the
system.  If an airline withdraws, however, it will immediately begin
losing bookings from that system, and those losses will not be entirely
offset by increased bookings through the Internet.  Any saving in CRS
participation expenses will arrive later, and will not quickly offset
the revenues lost from the reduction in bookings.  Booking fees, after
all, equal about two percent of the revenues obtained by an airline from
sales made through a system.  Orbitz Comments at 10, n.4.  Cf. Amadeus
Comments at 18-19.

It is true that an airline’s withdrawal from a system will make that
system less attractive to travel agencies, and over time the system will
lose subscribers.  Because the average travel agency contract has a term
of three years, however, only a relatively small portion of the
system’s subscribers will have the ability to switch to another system
in the short term.

  Thus the airline’s revenue losses from withdrawal will be
substantial and begin occurring immediately, while the system’s losses
in subscribers will be gradual and occur only over a period of some
months.  In these circumstances, the system should have the upper hand
in bargaining.  See, e.g., Orbitz Comments at 10.

An airline could also put pressure on the system by attempting to reduce
the number of tickets sold through the system without withdrawing
completely.  One possibility would be to increase their efforts to
encourage travelers to book directly with the airline.  These lost sales
would lower the systems’ revenues, but may also increase the
airline’s distribution costs.

An airline could put pressure on the system by lowering its
participation level, because doing so would make the system less
attractive to travel agencies that frequently book the airline without
drastically reducing the airline’s bookings from that system’s
subscribers.  The lower level of participation would make it somewhat
harder for travel agents to obtain information and reliably make
bookings, and could block travel agents from conducting functions that
are important to their customers.  These functionality differences would
not lead to a loss of as many bookings as would withdrawal but
presumably would still result in lower revenues from the travel agents
using that system.  On the other hand, the lower level of participation
would have less impact on the system’s ability to market itself to
travel agencies in the future.  We  expect that airline changes in
participation levels will give airlines  bargaining leverage.

Our notice of proposed rulemaking predicted that the airlines’ control
over access to their webfares could enable them to obtain better terms
for system participation.  67 FR 69381.  As discussed above, Sabre and
Galileo have begun programs that give airlines a discount from the
standard booking fee levels in exchange for a commitment to provide all
publicly-available fares, including webfares.  The commenters disagree
over the implications of these programs.  Some commenters assert that
airlines have gotten little in exchange for the commitments required of
them.  See, e.g., American Reply Comments at 21-23.  America West states
that Orbitz has offered substantially larger fee reductions for airlines
that agree to its most-favored-nation clause.  America West Reply to
Supp. Comments at 2-3.  Other commenters contend that the programs
demonstrate that airlines have bargaining power and that the systems do
not have market power.  See, e.g., Sabre Reply Comments, Salop &
Woodbury Declaration at 15-16.

We believe that the airlines’ ability to change their participation
levels and their control over access to webfares is reducing the
systems’ market power.  Overall, however, we find that the systems
currently still have market power over most airlines, although the
continuing changes in airline distribution, particularly the growing
importance of the Internet for airlines, travel agents, and travelers,
should continue to erode the systems’ market power.  Our finding that
the systems have market power is consistent with the Justice
Department’s conclusions.  Justice Department Reply Comments at 2,
16-17.

We disagree with Sabre’s contention, first made in its reply comments,
that the airlines’ contracts with corporate customers keep systems
from having market power.  Sabre asserts that system practices cannot
significantly affect airlines, because ”much business travel”
involves fares directly negotiated with specific airlines, often booked
through direct links.  Sabre Reply Comments at 36; Sabre Reply Comments,
Salop & Woodbury Declaration at 7-9.  Airlines obtain substantial amount
of business from corporate customers that do not have such contracts,
and the contracts do not normally bar employees from traveling on
alternative airlines.

We have based our finding of market power on the industry’s structural
characteristics, not on an analysis of whether the systems’ fees are
at supracompetitive levels.  The best evidence of a firm’s monopoly
power would be a showing that it has been able to profitably charge
prices that significantly exceed competitive levels.  Because direct
evidence of this ability is usually not available in Sherman Act
monopolization cases, the courts usually rely on market structure
evidence to determine whether a firm has monopoly power.  United States
v. Microsoft Corp., 253 F.3d at 51.   We have taken the same approach
here.

When we last compared the systems’ prices with their costs, we
concluded that the larger systems at least were charging
supracompetitive prices.  See 56 FR 12586, 12595 (March 26, 1991).  We
have not done such an analysis since then, as we noted in our notice,
but stated our belief that the systems’ booking fees were probably
above competitive levels, because they were not disciplined by market
forces.  67 FR 69382.   t with our findings that the systems must
compete for travel agency subscribers but do not compete for airline
participants.

The airline commenters generally support our finding that booking fees
are not disciplined by competition and contend that the fees
substantially exceed competitive levels.  They point out, for example,
that the network airlines’ financial crisis since 2001 has enabled
them to drive down costs from other suppliers while the systems have
been raising their fees and reporting large profits.  See, e.g., America
West Comments at 7-9.

In response, the systems have denied that their fees are not disciplined
by competition, and they argue that the fees are reasonable.  They
contend that their costs have been rising due to increased functionality
provided airlines and the growing number of messages carried by their
communications links.  See, e.g., Galileo Comments at 38-39.  While the
systems thus contend that several important cost factors have increased
significantly in recent years, they have not submitted a detailed cost
analysis that would show that their booking fees do not significantly
exceed their costs, nor have they attempted to demonstrate that the
booking fees charged before the beginning of the cited cost increases
did not significantly exceed their costs.

We continue to believe that the systems’ fees exceed competitive
levels for the reasons set forth in the notice of proposed rulemaking.
We have not seen evidence that the systems’ fees generally respond to
market forces, although two of the four systems have made modest
concessions in exchange for access to airline webfares.  However, we
have not done an analysis of the systems’ costs and revenues that
would demonstrate that their fees exceed competitive levels.  As
explained above, a finding that the fees are at supracompetitive levels
is not necessary for our determination that the systems have market
power over airlines.

We also cannot accept Sabre’s claim that bookings made through a
system are relatively inexpensive for airlines while bookings made
through airline websites are not (and that bookings made through airline
websites are more expensive than those made by an airline’s
reservations agents).  Sabre Comments, Wilson Declaration at 22.
Sabre’s analysis is belied by the efforts of virtually every airline
to shift bookings to its own website.  Several low-fare airlines have
claimed that their ability to obtain most of their revenues from direct
sales gives them a great cost advantage over other airlines.  See
American Reply Comments at 32.  See also 67 FR 69373, 69374.  Sabre in
any event has failed to demonstrate that its calculation is valid.
American Reply Comments, Dorman Declaration at 8-9; United Reply
Comments at 35, n.96; America West Reply Comments at 27.  See also
Northwest Reply Comments at 19-20.

5.	The Potential for System Conduct Undermining Airline Competition

Our finding that each system has market power over airlines is not
sufficient by itself to justify the adoption of rules.  To adopt rules
regulating the systems in order to prevent potential unfair methods of
competition, we should have evidence that, if there were no regulations,
systems would likely engage either in anti-competitive conduct designed
to preserve their market power, a subject discussed below, or in conduct
intended to distort airline competition.  Any such conduct would harm
consumers, either by causing airlines to pay supracompetitive prices for
CRS services or by denying consumers the benefits of lower fares and
better service created by competition between airlines.

When each system was owned and controlled by one or more airlines or
airline affiliates, experience demonstrated that systems were likely to
engage in conduct designed to prejudice the competitive position of
rival airlines, for example, by biasing displays against the owner
airlines’ competitors and charging competing airlines discriminatorily
high booking fees.  See 56 FR 12589.  None of the systems now operating
in the United States, however, is owned by a U.S. airline.  Obviously a
system that is not owned or controlled by a U.S. airline will not have
the same incentives to prejudice the competitive position of rival
airlines.  Justice Department Reply Comments at 13-14; Sabre Comments,
Salop & Woodbury Declaration at 26-30 and McAfee & Hendricks Declaration
at 53-59.  We must therefore determine whether a non-airline system (a
system not owned or controlled by an airline or airline affiliate) is
likely to engage in unfair methods of competition.

We have found, as shown, that the systems have market power over
airlines.  To the extent that they do, their booking fees may exceed the
fee levels that would exist in a competitive market, and the service
offered airlines by the systems may be below the level of service that
would exist in a competitive environment.  The systems’ possession of
market power, however, by itself would not justify rules regulating
their practices.  The antitrust laws permit firms with monopoly power to
use that power as long as they do not engage in conduct that is designed
to maintain or extend that power.  “[M]erely possessing monopoly power
is not itself an antitrust violation.”  United States v. Microsoft
Corp., 253 F.3d at 51.  As explained below in our analysis of our
authority under section 411, we may prohibit unfair methods of
competition, which are practices that violate the antitrust laws or
antitrust principles.

Our notice of proposed rulemaking stated our belief that there was a
risk that non-airline systems would engage in anti-competitive conduct
in order to prejudice airline competition.  Each of the non-airline
systems still had ties with its former U.S. airline owners, and each of
the non-airline systems was being marketed by one or more of its former
owners.   The record suggested, moreover, that marketing airlines took
actions favoring a system even when doing so appeared to be contrary to
their interests in selling their own tickets.  We therefore proposed to
apply the rules, to the extent they were readopted, to non-airline
systems.  67 FR 69383.

The systems continue to have marketing relationships and other
relationships with their former owner airlines.  See, e.g., Amadeus
Comments at 25, n.24; Galileo Supp. Comments at 3.  The lack of control
by any U.S. airline will not eliminate the possibility that a system
would agree with an airline to engage in conduct that would undermine
the competitive position of the airline’s rivals.  Each system, after
all, continues to have market power over most airlines, and each of the
larger airlines dominates some local markets, primarily at its hubs.  A
system and such an airline might agree that the system would change its
operations so as to benefit the airline while the airline would use its
local dominance to strengthen the system’s marketing efforts.  Justice
Department Reply Comments at 19.

The record suggests that the systems are willing to sell preferential
treatment to airlines at least insofar as display bias is concerned.
Their willingness to do so is apparent from their own comments, which
argue that we should allow systems to sell bias.  Amadeus Comments at
53-54; Sabre Comments at 141-142.  The Justice Department believes that
the systems are likely to engage in display bias.  Justice Department
Reply Comments at 19-21.  See also American Antitrust Institute Comments
at 8.  Our notice cited evidence that display bias is sold to suppliers
in other travel industries.  67 FR 69383.  Although Amadeus has denied
that it biases its displays for hotels and rental cars, Amadeus Reply
Comments at 12, n.16, the other systems’ comments do not address this
issue.

Apart from bias, however, the record does not indicate that systems are
likely to seek to operate in ways designed to prejudice airline
competition.  Our notice of proposed rulemaking expressly invited
commenters to submit evidence on whether systems had sought to distort
competition in other travel industries.  67 FR 69383.  One speaker at
our public hearing stated that he did not know of any system practices
that distorted competition in other industries, Transcript at 85, and
one commenter asserted that there is no evidence of competitive harm
resulting from the systems’ treatment of firms in other travel
industries.  Worldspan Reply at 17.  See also Transcript at 116-117,
151-154.  The record further suggests that the marketing relationships
between systems and airlines currently give the marketing airline little
incentive to help the system and that marketing airlines, in fact, do
little to help the system being marketed.  American Comments at 30;
Large Agency Coalition Comments at 14-15; Large Agency Coalition Reply
Comments at 16-17.  This suggests that the ties between airlines and
systems may have weakened enough so that systems would have little
interest in taking action that undermined airline competition in order
to favor one airline.  The Justice Department additionally believes that
contractual arrangements between airlines and systems do not pose a
sufficient threat to competition to justify the adoption of general
rules at this time.   Justice Department Reply Comments at 1-2.  See
also Expedia Reply Comments at 3, n.1.   We note, nonetheless,
Amadeus’ complaint that American, Delta, and Northwest have recently
tied a travel agency’s ability to sell corporate discount fares with
the use of the system affiliated with the airline.  Amadeus Comments at
91-92.  However, this tying affects competition between the systems and
does not necessarily show that systems will engage in conduct designed
to distort airline competition.

Furthermore, we cannot predict at this point what kinds of relationships
may arise as a result of the CRS industry’s deregulation.  We do not
wish to adopt rules now when we do not know what types of potential
anti-competitive practices, if any, may occur.  We therefore do not
agree with the arguments of some commenters that rules should be
maintained on the ground that systems have continuing marketing and
other special arrangements with selected airlines.  See, e.g., Galileo
Comments at 7-11.

We fully agree with the Justice Department, however, that there is a
potential for contractual relationships between systems and airlines
that would be designed to reduce competition in either or both the CRS
and airline industries.  The Justice Department has stated its intent to
take action against any such agreements that violate the antitrust laws,
and we also have statutory authority to take appropriate action if such
contractual relationships appear to be unfair methods of competition
that violate section 411.  Under 49 U.S.C. 41708, formerly section 407
of the Federal Aviation Act, we can obtain copies of any agreements
between airlines and systems if we see a need to investigate contractual
relationships between systems and participating airlines.

6.	System Practices that Preserve Market Power

While we have determined that most of the rules should not be readopted,
even though each system continues to have substantial market power over
airlines, we are readopting for a short transition period the rule
prohibiting parity clauses and adopting an analogous rule prohibiting
most-favored-nation clauses demanded as a condition for any
participation in a system.  These types of contract clauses would tend
to maintain the systems’ market power and reduce the bargaining
leverage of participating airlines.  Because we are essentially
deregulating the CRS business notwithstanding the systems’ market
power, we decided to adopt the parity and most-favored-nation clause
prohibitions for a period long enough allow affected parties to respond
to the transition to complete deregulation.

We originally adopted the rule prohibiting systems from enforcing parity
clauses (except as to airlines that owned or marketed a competing
system) because three of the systems had imposed parity clauses on
airline participants.  These clauses required each airline to
participate in the system at at least as high a level as it participated
in any other system.  Thus, for example, Sabre’s parity clause
required Alaska to participate in Sabre at the full availability level
as long as Alaska participated in any other system at that level, even
if Alaska considered Sabre’s service at that level too costly or not
as attractive as the comparable service offered by other systems.  62 FR
59786-59787, 59791-59792.  Because these parity clauses eliminated some
possibility of system competition for airline participants, and required
each airline to buy a level of service that an airline might not wish to
buy, we adopted a rule prohibiting the systems from enforcing airline
parity clauses except as to airline participants that owned or marketed
a competing system.  62 FR 59784.

We have concluded that this rule should be readopted for another six
months.  We are also adopting for the same period an analogous rule that
will prohibit each system from requiring airlines as a condition to any
participation in the system to make all publicly-available fares
saleable through the system.  If we did not provide for an orderly
transition, a contract clause requiring a participating airline to
provide all webfares as a condition to participation, sometimes referred
to as a most-favored-nation clause, would deny the airline the ability
to use its control over access to its webfares as bargaining leverage to
obtain better terms and prices for system participation.  Such a clause
would additionally tend to prevent the development of alternative
sources of information and booking channels, for a travel agency would
have less incentive to use alternatives if the system used by the agency
already provided complete information on webfares.  It is our
expectation that the six-month period during which our prohibition on
such clauses will remain in place will enable airlines to prepare more
effectively for the termination of these rules.

On the other hand, we have decided not to readopt rules designed to
prohibit system contract practices that would unreasonably restrict
travel agency subscribers from switching systems or using alternative
systems or booking channels.  In the past, the systems engaged in
subscriber contract practices that appeared to be designed to preserve
their market power.   Travel agencies accepted such contract clauses
even though most travel agencies could choose between systems.  67 FR
69405.  We therefore adopted rules barring subscriber contracts from
having a term that exceeded five years and giving travel agencies the
right to use their own third-party equipment and software in conjunction
with a system.

As discussed above, the record shows that travel agencies in recent
years have been obtaining more flexible contracts from the systems.  The
term of the average subscriber contract, for example, is well under five
years.  While most subscriber contracts still have productivity pricing
clauses, the productivity pricing clauses in the contracts currently
offered travel agencies do not seem to effectively block travel agents
from using alternative booking channels.  And travel agencies appear to
have a substantial ability to switch systems at the end of their
contract term.  While systems may have some contracts that may be
unreasonably restrictive, their contracts in general do not seem to
block travel agents from obtaining information and making bookings
outside the system.  Moreover, the market is moving in a more
competitive direction -- travel agencies are obtaining more flexibility,
not less, in their newest contracts.

As a result, the current record shows that rules regulating travel
agency contracts are no longer necessary.  Several airline commenters
and Orbitz have argued that we should continue to regulate the
systems’ subscriber contract practices, because the existing contracts
are alleged to unreasonably lock travel agencies into using their
existing system.  See, e.g., Orbitz Comments at 46-49; America West
Comments at 26-29; American Comments at 33-35; Continental Comments at
17-20; Delta Comments at 41-42.  For the reasons discussed below in
connection with the specific subscriber contract issues, the systems’
current contracts do not appear to unreasonably keep travel agencies
from using alternative booking channels.

	7.	The Systems’ Ability to Engage in Display Bias

Display bias has been a concern since the systems were first developed.
Experience has demonstrated that travel agents are likely to book one of
the first services displayed by a system in response to a travel
agent’s request for information, even if services shown later in the
display would better satisfy the customer’s needs.  If systems give
preferential display positions to one airline’s services, that display
bias will harm airline competition and cause consumers to be misled.  57
FR 43801-43802, 43807-43808.

Our rules have prohibited systems from biasing their displays in order
to prevent unfair methods of competition and deceptive practices.
Display bias both prejudices airline competition, by reducing the
airlines’ ability to compete on the basis of the relative
attractiveness of their schedules and fares, and causes travel agents to
give misleading or incomplete advice to their customers.

Display bias is possible because of the way in which the systems present
information on airline service options.  The systems display information
on computer screens.  Each screen can display only a limited number of
flights, so a system must use criteria for ranking the available
flights.  Display position is important, because travel agents are more
likely to book the flights that are displayed first.  The number of
airline services available in most markets also requires the systems to
edit their displays, because many services will be unattractive to
travelers (Los Angeles-San Francisco travelers, for example, will not
choose connecting services over Denver or Salt Lake City).  Systems
display airline services in several different ways.  The display
traditionally used by travel agencies ranks flights in a market on the
basis of the criteria developed by the system and shows whether seats
are available on the listed flights.  Some systems rank flights in this
type of display by listing all nonstop flights first, then one-stop
flights and other direct flights, and finally connecting services.
Others have ranked flights on the basis of relative quality, such as
each flight’s elapsed time or its displacement time (the time
difference between the departure time requested by the traveler and the
time of each flight).  67 FR 69370.

Every system also has a display that ranks flights on the basis of
price, with the lowest being listed first.  Travel agents use that
display for customers whose major concern is finding the lowest fare.
67 FR 69370.

We have concluded that we should continue to prohibit display bias, both
to prevent anti-competitive conduct, as recommended by the Justice
Department, and to prevent consumer deception, but only for an
additional six months.  Were the rule terminated immediately, systems
would likely be in a position to bias displays, as discussed above.
Display bias could cause consumer harm by reducing airline competition
and by causing travel agents to book customers at times on flights that
do not best meet the traveler’s needs.

Display bias can mislead travel agents (and thus their customers),
because by definition it means ranking and editing airline services on
some basis other than neutral criteria based on general consumer
preferences.  Before the Board adopted the rules on display bias, when
each system was owned by one airline, systems constructed displays that
put their competitors at a disadvantage by omitting services and fares
offered by competing airlines that would be attractive to many
consumers.  Each system often listed flights operated by its owner
airline above flights operated by competitors that better met the
customer’s travel requirements.  56 FR 12589.  We later found it
necessary to revise our rules on display bias because Apollo,
Galileo’s predecessor, created displays that essentially gave the
connecting services operated by network airlines a preference over
one-stop flights operated by point-to-point airlines.  For example,