Apollo could display an Alaska one-stop flight in the Seattle-Burbank
market well after connecting services that left Seattle as much as an
hour before the Alaska flight and that arrived in Burbank after the
Alaska flight had landed.  Apollo similarly displayed an Alaska one-stop
Orange County-Seattle flight after connecting services that took
substantially longer and that involved connections at Salt Lake City or
Phoenix.  61 FR 42208, 42212-42213 (August 14, 1996).  Apollo at that
time was owned by several airlines, not just by United, yet the owner
airlines agreed to adopt a display that would benefit United while
prejudicing the travel agents’ ability to find the best service for
their customers.  61 FR 42209.

Display bias also can reduce competition.  Bias can shift enough
passengers from disfavored airlines to a favored airline to make the
former’s flights unprofitable in the targeted markets.  That can cause
a disfavored airline to reduce or eliminate its service in those
markets.  As we stated above in our discussion of the systems’ market
power over airlines, the profitability of an airline flight often
depends on marginal revenues, so the shift of traffic that may result
from display bias can have large competitive consequences.  Justice
Department Reply Comments at 20, n.26.  The resulting reduction in
capacity and potentially in the number of competitors will enable the
favored airline to raise fares and reduce service.  Justice Department
Reply Comments at 7.  For example, two of the airlines that complained
about the Apollo display discussed above -- Alaska and Midwest Express
-- were point-to-point airlines whose services fared worst in the Apollo
display.  Alaska estimated that the display would reduce its annual
revenues by $15 million, and Midwest Express estimated that its annual
revenue losses would equal several million dollars.  62 FR 63837, 63841
(December 3, 1997).

Experience thus shows that bias can be effective, notwithstanding the
travel agents’ interest in finding and booking the services that best
meet their customers’ needs.  As noted, travel agents tend to book one
of the first flights displayed by the system.  Travel agency customers
depend on their travel agent to extract information from the system
display, which only the travel agent sees.  Travel agents generally work
under time pressure that often keeps them from searching through several
display screens to overcome the bias.  ASTA Comments at 41; AAA Comments
at 2; Carlson Wagonlit Comments at 16; British Airways Coments at 2-3.
The systems can also hide the extent of their bias.  49 FR 32540, 32547
(August 15, 1984).  A system arguably could choose to omit some services
altogether.  For example, Priceline, an on-line seller of airline
tickets, agreed with Delta that Priceline would not sell seats offered
by Delta’s competitors on flights to or from Atlanta, Delta’s hub.
Justice Department Reply Comments at 20, n.27, and 30, n.37.  As a
result, bias could keep consumers in many cases from obtaining accurate
and complete information on schedules and fares from travel agents
relying on a system for their information.

Display bias, moreover, provides no apparent consumer benefits.  It does
not function like advertising, because it provides no information.  In
fact display bias “would divert passengers without regard to
airlines’ prices or quality.”  Justice Department Reply Comments at
19.  Display bias is also unnecessary to help travel agents who, due to
a customer’s demands, are interested in seeing only services offered
by one airline.  The rules do not bar systems from enabling travel
agents to create displays listing the services of a single airline.
See also Galileo Comments at 61 (Galileo subscribers can create displays
tailored to the preferences of their customers, including customer
airline preferences).

When we readopted the rules against display bias at the conclusion of
our last overall reexamination of the CRS rules, we addressed several
theoretical arguments that assertedly showed that display bias was
“beneficent.”  Some commenters argued that a flight’s display
position would not affect travel agency bookings, that display bias
reflected the preferences of a system’s subscribers, and that other
airlines could buy display bias.  We found that these arguments were
disproven by experience.  57 FR 43786-43787.

Several commenters have presented somewhat similar arguments here that
bias would not work and that there is no reason to prohibit it.  While
these commenters may be correct in predicting that bias today would not
be as effective as it was in the past, we are not convinced that systems
could engage in display bias without causing consumer harm.

Systems clearly wish to be able to sell bias.  That indicates that they
believe airlines will be willing to buy bias, and obviously airlines
will be willing to buy bias only if they expect it to be effective.
Past experience with system efforts to bias displays suggests that their
expectation is correct.

We question whether airlines injured by display bias can practicably
take steps to offset it.  In response to our example of the Galileo
display that harmed Alaska’s display position, Mercatus argues that
Alaska could have either outbid United for the bias or cut its fares to
attract additional passengers.  Mercatus Comments at 10.  While Alaska
may have had the ability to take some steps to offset the effect of the
bias, Mercatus has failed to show that those steps would have been
practicable.  Our concern, moreover, is not limited to the Galileo
display’s impact on competition.  The display also caused travel
agents and their customers to receive incomplete or misleading
information on the available service options.  The display was designed
to cause travel agents to book customers on airlines like United even
when Alaska provided significantly better service.

Travel agents use the Internet at times to search for alternatives to
the services displayed by a system.  In theory, as argued by some
commenters, the Internet’s availability as a check on the quality of
displays offered by a system would deter a system from biasing its
displays.  See, e.g., Transcript at 123-124.  We have doubts, however,
whether travel agents regularly use the Internet as a test of a
system’s displays.  As shown, travel agents are commonly pressed for
time, which is why bias works -- travel agents often do not wish to take
the time required to search several screens to find the best service for
a customer.  The many complaints from travel agents about the
unavailability of webfares on the systems, and their assertions that
almost no travel agency is interested in using more than one system due
to the inefficiencies involved, is a further indication that travel
agents making a booking for a customer are unlikely to search several
sources of information before selecting a flight to recommend.
Sabre’s evidence is consistent with this conclusion.  A 2001 survey
indicated that only 11 percent of the travel agents with Internet access
had booked airline tickets on the Internet, that 13 percent often used
the Internet to check for lower fares, and that 23 percent occasionally
used the Internet for that purpose.  Sabre Comments, Salop & Woodbury
Declaration at 12.  We assume that the number of travel agents using the
Internet to check for other services will grow significantly, but not by
such an extent as to make display bias ineffective.

Travel agencies, moreover, cannot quickly shift to a different system if
the system they are using biases its displays.  While travel agencies
have some ability to switch systems, many agencies would likely incur
significant costs by switching from one system to another.  Galileo
Comments, Guerin-Calvert, Jernigan, & Hurdle Declaration at 81.

Any display bias by the systems would not be comparable to the practice
of grocery stores selling preferential shelf positions to their
suppliers.  Unlike the grocery store shelf, which the shopper sees and
can easily scan, the traveller never sees the system display used by a
travel agent, and systems can create display bias that obscures the
service alternatives to a much greater extent than the shelf position
used by grocery store suppliers.  Airlines would be willing to buy bias
because it would be effective, and its effectiveness means it is likely
that a significant number of consumers will be booked on inferior
services when other services would better meet their needs.

Delta contends that bias should not prevail if travel agencies really
desire unbiased displays.  Delta Reply Comments at 25.  As noted,
however, the systems assume they can sell display bias, and experience
indicates that systems have some ability to hide the extent of the bias.
 Furthermore, the travel agents’ interests are not our only concern --
we wish to ensure that travel agency customers can obtain accurate
information, and to prevent the harm to airline competition that could
result if CRS display bias reappeared.

A travel agency customer’s ability to go to another travel agency if
one travel agency provides bad advice due to its use of a system that
biases its displays would not prevent display bias from causing harm.
The consumers’ ability to switch travel agencies would deter bias if
customers find out that better service was available and know that the
travel agent booked the inferior service because the travel agent was
using a system that provided inferior displays.  That seems improbable.
Customers instead are unlikely to know why the travel agent did not book
the better service.  Customers might assume that the better service was
sold out, or that the better fare was not available when a customer’s
booking was made, as we concluded in our last major CRS rulemaking.  57
FR 43787.  See also American Antitrust Institute Comments at 11.
Furthermore, travelers with confidence in their ability to obtain
accurate fare information on the Internet would be less likely to use a
travel agent to book their tickets.

While we conclude that systems are likely to bias displays in the
absence of rules prohibiting such bias, we believe that on-going
developments are likely to reduce the systems’ market power over
airlines over time.  We further expect that these developments will
enable travel agents and their customers to easily use alternative
sources of information to an extent that should deter the kind of
display bias that would significantly mislead travel agents and
consumers.  Accordingly, we have decided to retain the prohibition
against display bias only for a transitional period of six months, with
a termination date of July 31, 2004.  Our expectation is that the notice
provided by this transition period will help to accelerate developments
in the market that reduce the harm display bias might otherwise
engender.

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

Having concluded on economic policy grounds that some rules will remain
necessary for the next six months, and that the remaining rules should
cover all systems, not just those owned by airlines, we must address our
statutory authority to adopt the rules and make them applicable to both
airline and non-airline systems.

The basis for our adoption of CRS rules has been our authority under
section 411 of the Federal Aviation Act, recodified as 49 U.S.C. 41712,
to prohibit unfair and deceptive practices and unfair methods of
competition by airlines and ticket agents in air transportation and the
sale of air transportation.  Section 411 states, “[T]he Secretary may
investigate and decide whether an air carrier, foreign air carrier, or
ticket agent has been or is engaged in an unfair or deceptive practice
or an unfair method of competition in air transportation or the sale of
air transportation.”  If the Secretary “finds that an air carrier,
foreign air carrier, or ticket agent is engaged in an unfair or
deceptive practice or unfair method of competition, the Secretary shall
order the air carrier, foreign air carrier, or ticket agent to stop the
practice or method.”  Congress modelled our authority under section
411 on the Federal Trade Commission’s authority under section 5 of the
Federal Trade Commission Act, 15 U.S.C. 45, to prohibit unfair and
deceptive practices and unfair methods of competition in other
industries.  United Air Lines, 766 F.2d 1107, 1111-1112 (7th Cir. 1985).
 In enforcing section 411, we must consider the public interest factors
set forth in 49 U.S.C. 40101.  68 FR 3293, 3294 (January 23, 2003).
Because section 411 limits our authority to practices affecting airline
distribution, we may not regulate the systems’ treatment of other
travel suppliers, such as hotels, rental cars, and Amtrak.  67 FR 69389.

As noted, section 411 covers airlines (both U.S. and foreign) and
“ticket agents.”  The statute defines a ticket agent as “a person
(except an air carrier, a foreign air carrier, or an employee of an air
carrier or foreign air carrier) that as principal or agent sells, offers
for sale, negotiates for, or holds itself out as selling, providing, or
arranging for, air transportation.”  49 U.S.C. 40102(a)(40).

The courts have construed the meaning of deceptive practices and unfair
methods of competition.  A deceptive practice is one that will tend to
deceive a significant number of consumers.  United Air Lines, 766 F.2d
at 1113.  An unfair method of competition is a practice that violates
antitrust laws or antitrust principles.  We may therefore prohibit some
airline conduct permitted by the antitrust laws.  See, e.g., Pan
American World Airways v. United States, 371 U.S. 296, 306-308 (1963);
United Air Lines, 766 F.2d at 1114.

When several airlines sought judicial review of the original CRS rules,
the Seventh Circuit affirmed the Board’s adoption of the rules on the
ground that section 411 authorized the Board to prohibit
anti-competitive conduct even though the systems’ conduct might not
violate the antitrust laws.  United Air Lines v. CAB, 766 F.2d 1107.
The Board’s underlying findings were very similar to those used in our
past rulemakings.  The Court stated that the Board's finding that some
of the systems had substantial market power was sufficient to authorize
the Board’s regulation of CRS practices: that finding "would bring
their competitive practices within the broad reach of section 411," for
the Board "can forbid anticompetitive practices before they become
serious enough to violate the Sherman Act."  The Court reasoned that the
types of conduct prohibited by the Board on antitrust grounds -- price
discrimination and denying a competitor access to an essential facility
on equal terms -- were "traditional methods of illegal monopolization"
that the Board could prohibit, even though no system had a monopoly
under Sherman Act standards.  United Air Lines, 766 F.2d at 1114.  In
determining whether the Board properly held that display bias was a
deceptive practice, the Court viewed the test as whether the practice
would tend to deceive a significant number of consumers.  766 F.2d at
1113.

While Section 411 allows us to prohibit some conduct that is not
prohibited by the antitrust laws, it does not give us broad authority to
regulate practices in the airline and airline distribution businesses.
Airlines are generally free to determine how to distribute and sell
their services, including sales through travel agencies, as long as they
do not violate antitrust principles.  The antitrust laws allow
individual firms to choose how to distribute their products and services
as long as they do not violate one of the provisions of those laws.  67
FR 69384, citing Paschall v. Kansas City Star Co., 727 F.2d 692 (8th
Cir. 1984) (en banc); and Auburn News Co. v. Providence Journal Co., 659
F.2d 273, 278 (1st Cir. 1981).

Similarly, the courts have held that the FTC’s comparable authority to
prohibit unfair methods of competition in other industries does not
empower that agency to regulate business conduct in order to make an
industry more competitive.  In E.I. DuPont de Nemours & Co. v. FTC, 729
F.2d 128, 140 (2d Cir. 1984), the Second Circuit stated, "[I]n the
absence of proof of a violation of the antitrust laws or evidence of
collusive, coercive, predatory, or exclusionary conduct, business
practices are not 'unfair' in violation of §5 unless those practices
either have an anticompetitive purpose or cannot be supported by an
independent legitimate reason."  In DuPont the court therefore vacated
an FTC order prohibiting certain types of pricing conduct in an
oligopolistic industry, which the FTC had prohibited in the belief that
the industry's pricing would then become more competitive.  The FTC had
not found that the pricing conduct at issue violated the letter or the
spirit of the antitrust laws or was otherwise "collusive, coercive,
predatory, or exclusionary."  See also Official Airline Guides, Inc. v.
FTC, 630 F.2d 920 (2d Cir. 1980); Boise Cascade Corp. v. FTC, 637 F.2d
573 (9th Cir. 1980).

Our decision that most of the existing rules should be allowed to sunset
follows from our conclusions that those rules are no longer necessary.
That decision also reflects the limits placed by Congress on our
authority to regulate airline distribution practices.  As a result of
Congress’ decision to deregulate the airline industry, we may not
require firms in the airline distribution business to change their
practices without finding that those practices will violate section 411.

We based our proposal to readopt rules proscribing display bias on both
our authority to prohibit deceptive practices and our authority to
prohibit unfair methods of competition.  No one has contested our
authority to regulate the systems’ display practices under our
authority to prohibit deceptive practices, if the systems are ticket
agents and our regulations are consistent with the First Amendment
(several commenters dispute these assumptions).  The argument over our
authority to readopt the proposed rules involves both of our tentative
conclusions that the statutory definition of ticket agents includes the
systems and that system practices at issue could be unfair methods of
competition.  We address these issues in detail below.

In our notice of proposed rulemaking, we observed that section 411 also
authorizes us to prohibit unfair practices by airlines and ticket
agents, not just deceptive practices and unfair methods of competition,
but that we had not relied on that authority as a basis for readopting
CRS rules.  67 FR 69384.  The FTC has advised us that the FTC has
adopted a strict definition of “unfair practices” under the FTC Act
and that Congress has since codified the Commission’s definition.  FTC
Comments at 1-3.  In its reply comments, America West briefly suggests
that we should bar systems from charging supracompetitive booking fees
on the ground that such fees violate public policy.  America West Reply
Comments at 16, n.30.  We are unwilling to adopt America West’s
suggestion.  We have not previously based the CRS rules on our authority
to prohibit unfair practices, and we do not now intend to rely on that
authority, when our notice did not propose to do so and other commenters
have not had the opportunity to comment on America West’s suggestion.

	1.	Whether Non-Airline Systems Are Ticket Agents Subject to Section 411

The U.S. airlines’ divestiture of their CRS ownership interests
requires us to resolve whether we may directly regulate the systems
under section 411, because we based our authority to regulate system
practices in the past on the systems’ airline ownership.  Neither we
nor the Board ever decided that issue in the earlier rulemakings.  67 FR
69385.  We tentatively concluded in our notice of proposed rulemaking
that the systems were ticket agents subject to section 411.  After
considering the comments on this issue, we conclude that we may directly
regulate the systems under section 411, even though most of them no
longer are controlled by airlines.  However, we are also adopting a rule
barring airlines from attempting to induce systems to create displays
that would not comply with the standards established by our rule
prohibiting systems from engaging in display bias.

A few commenters have suggested that we need not decide whether section
411 authorizes us to directly regulate the systems, because each of the
existing systems has ties with its former airline owners.  We decline
this invitation to avoid the issue.  Achieving all of our goals without
directly regulating the systems would be difficult.  Neither relying on
the existence of marketing relationships between the systems and
airlines nor barring airlines and travel agencies from doing business
with systems that engage in unacceptable practices would provide a sound
basis for regulating all of the systems’ operations.

Section 411 authorizes us to regulate the systems directly if they are
“ticket agents” within the meaning of our statute.  As noted above,
the statute defines a ticket agent as “a person (except an air
carrier, a foreign air carrier, or an employee of an air carrier or
foreign air carrier) that as principal or agent sells, offers for sale,
negotiates for, or holds itself out as selling, providing, or arranging
for, air transportation.”  49 U.S.C. 40102(a)(40).  Our notice of
proposed rulemaking tentatively concluded that systems are “ticket
agents.”  67 FR 69384-69385.

Sabre, Galileo, United, Expedia, Travelocity, and ASTA contend that
systems are not ticket agents.  Amadeus and America West, on the other
hand, support our tentative conclusion that the systems are ticket
agents subject to section 411.

After considering the comments, we conclude that the systems are ticket
agents and that we may therefore prohibit them from engaging in unfair
and deceptive practices and unfair methods of competition in the sale of
air transportation.

As we explained in the notice, the systems are active participants in
the sale of air transportation, not just communications links.  67 FR
69384-69385.  The systems enable travel agents to conduct booking
transactions, require airlines to accept any bookings made by a travel
agent through the system, make credit card authorizations, and issue
tickets.  They charge airlines fees based on booking transactions.  A
system operates a central computer that collects information on airline
schedules and fares and the availability of seats, arranges that
information under its own editing and ranking criteria in displays that
are provided to travel agents, and provides a booking capability
enabling travel agents to make airline reservations for their customers.
 The systems also require airlines to allow any system user to make
bookings on the airline through the system.  See, e.g., Amadeus Reply at
34-35; America West Reply Comments at 7-8.  When the booking is made
through the system, either through its own central computer or by a
direct connection feature in a participating airline’s internal
reservations system, the travel agent’s purchase is complete.

The systems’ contracts with participating airlines reflect their
function as an integral part of the distribution of airline tickets, not
just as a communications link.  America West’s contracts with Sabre
and Worldspan thus state respectively that the parties “desire to
enter an agreement concerning the booking of reservations [and] the sale
of the Participating Carrier’s air services through SABRE” and
“[t]he parties desire to enter into an agreement and provide for the
distribution of the services of Participating Carrier through the
WORLDSPAN system.”  America West Comments at 13, 14.

In our view, the systems thus sell, offer for sale, and arrange for air
transportation, activities which bring them within the statutory
definition of ticket agent, because they are also carrying out these
functions as a principal or agent.

The statutory definition of “ticket agent” states that anyone
carrying out the listed functions as “principal or agent” is a
ticket agent.  This definition should cover everyone involved in
selling, offering for sale, or arranging for air transportation no
matter what status they may have under agency law principles.  A person
involved in the sale or offering for sale of airline tickets must be
either a principal or agent.  We do not see any third category of actor
that would be applicable here, and the commenters arguing that the
systems are not ticket agents do not contend that they are acting in
some capacity other than principal or agent.  We think Congress included
the phrase “as principal or agent” to ensure that all persons
conducting the listed functions were covered, whether or not they were
acting as an airline’s agent, acting under their own authority, or
acting under someone else’s authority.  By using the terms
“principal or agent,” Congress did not mean to make a person’s
status as ticket agent depend on whether that person was a party to an
agency relationship.   Congress surely meant to make section 411
applicable to persons who committed unfair methods of competition or
unfair or deceptive practices while engaged in the sale or offering for
sale of transportation, even if that person acted entirely
independently.

We believe that the systems operate as principals in the offering for
sale and arranging for air transportation.  The systems act as
independent firms that are involved in the distribution of airline
services.   The commenters arguing that systems cannot be ticket agents
largely ignore the statute’s inclusion of persons who act as principal
and assume that a showing that a system is not an agent necessarily
means it cannot be a ticket agent.  See, e.g., United Reply at 10-12.
This implicitly assumes that the principal in the transaction must be
the carrier.  The statute, however, states that a ticket agent is “a
person (except an air carrier, a foreign air carrier, or an employee of
an air carrier or foreign air carrier) that as principal or agent”
performs one of the listed functions, such as the sale of air
transportation.  Congress thus determined that other persons
participating in the distribution process, not just the airline, could
be principals and would be ticket agents.  The commenters’ arguments
that the systems cannot be agents suggests that they must be acting as
principals.

The commenters opposing the systems’ inclusion within the definition
of “ticket agent” argue that the systems are not the airlines’
agents.  They contend that the systems’ contracts with participating
airlines specifically disclaim any agency relationship.  See, e.g.,
United Comments at 6-7.  This argument misses the point -- as shown, if
the systems are not the airlines’ agents, they must be acting as
principals.  To some extent, however, the systems may be operating as
the airlines’ agents, for example, in obtaining credit card
authorizations for sales made through the systems.  Amadeus Comments at
27.  While the commenters arguing that systems are not ticket agents
cite the systems’ participating airline contracts, which state that no
agency relationship is being created, the contracts’ statements on the
parties’ relationships are not binding on us.  See, e.g., Board of
Trade v. Hammond Elevator Co., 198 U.S. 424, 437-438 (1905); State
Police Ass’n of Massachusetts v. C.I.R., 125 F.3d 1, 7 (1st Cir.
1997).

Furthermore, we disagree with the argument made by some commenters that
travel agents are the airlines’ agents and that the systems,
therefore, cannot be agents of the airlines.  See, e.g., Sabre Comments,
Fahy Declaration at 21-22.  This argument assumes that only one party in
any each transaction can act as the airline’s agent.  We see no
logical reason why only one party can act as an airline’s agent in the
course of a traveller’s purchase of airline tickets.

The statute states that a person is a ticket agent if the person
“sells” or “offers for sale” air transportation.  The systems
sell and offer for sale air transportation because they present the
travel agent with air service options that the agent can purchase
through the system.  A system tells the travel agent what flights are
being operated, what the fares are, and whether seats are available at
each fare, and enables the travel agent to book the seat and pay for it
on the customer’s behalf by entering specified keystrokes.  If the
travel agent follows the proper procedures for making the booking, the
airline is obligated by its contract to accept the booking as valid,
whether or not any record of the transaction appears in the airline’s
internal reservations system.  The system thus offers air transportation
for sale and sells it.

We further find that each system “holds itself out as selling,
providing, or arranging for air transportation.”  As discussed, each
system offers for sale and sells air transportation.  A system also
arranges for air transportation, because it enables the travel agent to
choose the services best suited for the travel agent’s customer and
enables the agent to book whatever combination of services may be
required by the customer.  The system holds itself out as performing
these functions, because it has informed its subscribers (and potential
subscribers) that it offers these functions.

We do not agree with the contention made by some commenters that the
systems may not be deemed as holding out the sale, provision, or
arranging for air transportation, because no system deals directly with
the public or holds itself out to the public as offering airline tickets
for sale. See, e.g., Sabre Reply Comments at 15.  Travel agents, after
all, act as the travelers’ agent, not just as the airlines’ agent,
and any representations made to a travel agent are necessarily
representations made to the travel agent’s principal, the customer.
The statute, moreover, does not state that the ticket agent must offer
to sell air transportation directly to the public, and we see no reason
why such a limitation should be read into the language of the statute.

We therefore conclude that each system is a ticket agent.  Interpreting
“ticket agent” as including the systems would enable us to apply
section 411 to firms whose critical role in airline distribution enables
them to substantially affect airline competition and the accuracy of
information provided consumers.

At the same time, our reading of the term “ticket agent” will not
make firms providing only information on airline services or
communications links subject to section 411.  As shown, the systems do
much more than just provide information or a communications facility
because they are active participants in the sale of air transportation.
As we explained in the notice, when a consumer uses the telephone to buy
goods and services, the telephone line links the consumer with the firm
selling the product or service, and the consumer conducts the
transaction directly with the retailer.  In contrast, a travel agent
using a system to make a booking communicates exclusively with the
system, not the airline, unless the travel agent uses a direct access
feature that enables travel agents to obtain information and make
bookings directly with an airline’s internal reservations system.
Furthermore, telephone companies do not choose which data will be sent
to the listener, but the systems edit their displays of airline
services.  More importantly, a telephone company has no apparent
interest in whether transactions conducted by telephone are honored by
the parties.  Each system, in contrast, requires airlines to accept
bookings made through the system and imposes fees based on the number of
transactions made by subscribers, not on the number of messages
transmitted by them.  Similarly, as described above, the systems’
productivity pricing arrangements with subscribers award incentive
payments (or impose penalties) based on the number of transactions made
by the subscriber, not the number of messages, as discussed above.

The contentions made by the commenters arguing that systems are not
ticket agents are not persuasive.  On the ground that the large majority
of CRS bookings are now made directly with an airline’s internal
reservations system, Sabre characterizes the systems as communications
links.  Sabre Comments, Fahy Declaration at 23.  However, Sabre concedes
that a significant fraction of its bookings are not made directly in an
airline’s internal system.  Furthermore, the widespread use of direct
access (referred to as seamless connectivity by Sabre) does not negate
the systems’ role as distributors of airline transportation, not mere
communications links.  The system, not just the airline’s internal
reservations system, creates a record of the booking transaction, the
passenger name record.  Sabre Comments, Fahy Declaration at 23.  The
system, moreover, created the display that enabled the travel agent to
choose which flights to book.

Our notice of proposed rulemaking cited the passive booking capability
offered travel agencies by the systems as an example showing that the
systems were more than communications links.  67 FR 69385.  In response,
Sabre argues that a passive booking -- a booking record stored in the
system’s computer but not sent to any airline’s internal
reservations system -- cannot support our conclusion that systems are
active participants in the distribution channel because passive bookings
are “not active.”  Sabre Comments at 28 and Fahy Declaration at 23.
The systems’ creation of the passive booking functionality, however,
demonstrates that they operate as more than just communications links.
As Sabre states, a passive booking does not cause any communication to
go to an airline’s internal reservations system.  The passive booking
functionality, however, benefits many travel agents.  Sabre Comments at
28.  Travel agents can use the passive booking function to issue tickets
for customers who booked their seats directly with the airline and to
facilitate group bookings.  67 FR 69400.  The systems created the
functionality in order to assist their customers, the travel agencies,
in their sale of airline services.  This effort by the systems
additionally confirms their role as active participants in the sale and
offering for sale of air transportation.

Sabre further argues that the system contracts requiring participating
airlines to accept all bookings made through a system do not show that
the systems are active participants in the sale of air transportation.
Sabre contends that the systems require airlines to accept all such
bookings, even if they have no record of the transaction, as a result of
travel agent demands and to avoid libel attacks.  Sabre Comments at 27,
n.29.  Sabre has understated the importance of the systems’
requirement.  Firms operating as communications links, like a telephone
or telegraph company, would not normally require the alleged recipient
of a message to assume the obligation of complying with the message,
whether or not the recipient actually received it.  The requirement that
airlines honor bookings made by subscribers demonstrates the systems’
role as participants in the sales process.

Sabre additionally notes that the systems operate automatically as
machines, unlike human travel agents, which assertedly shows that a
system operates only to provide information and process transactions.
Sabre Comments, Fahy Declaration at 22.  We disagree.  On-line travel
agencies also operate automatically, except when a customer needs advice
or has a problem, but surely no one would argue that an on-line travel
agency is not a ticket agent because the great majority of its bookings
are made on-line without human intervention.  More importantly, the
systems were not created by machines -- they were developed by people,
who also decide what services will be offered, how the systems will be
marketed, and what kinds of contractual relationships they will have
with their airline and travel agency customers, and who carry out these
business strategies.  The machines have not chosen the algorithms used
to edit and rank air services, and they do not determine the types of
restrictions, if any, included in the systems’ contracts with
participating airlines and travel agencies.

We are aware of the statement made in United Air Lines v. CAB that
suggests that section 411 does not authorize us to regulate the
practices of non-airline systems.  In the course of affirming the
Board’s rules, which by their terms covered only systems owned by
airlines, the Court stated, “[T]he Board’s rules are limited to
systems owned by airlines; it has no regulatory authority over the
independent provider.”  766 F.2d at 1110.  Whether the Board could
regulate a non-airline system was not an issue in that case.  The Board
rules did not cover any non-airline system, the parties in the judicial
review proceeding were not arguing that the Board should have covered
such systems (or urging the Court to hold that the Board could not
regulate them), and the definition of “ticket agent” and the
Board’s authority to regulate such systems were not issues in the
proceeding.  The Court’s statement thus is dictum and not binding on
us.

In arguing that past judicial and administrative precedent otherwise
shows that systems cannot be ticket agents, commenters cite other
decisions which are not controlling.  United, for example, cites
Official Airline Guides, Inc. v. FTC, 630 F.2d 920, as allegedly setting
limits to the scope of section 411.  United Comments at 7, n.12.  The
decision actually addressed questions about the extent of the FTC’s
jurisdiction under section 5 of the FTC Act, not ours.  Sabre cites
Foremost Int’l Tours v. Qantas Airways Enforcement Proceeding, 79 CAB
86, 102 (1978), for the administrative law judge’s statement that the
“Board has no jurisdiction over wholesale tour operators.”  Sabre
Reply Comments at 22.  The judge did not explain his conclusion but
noted elsewhere that wholesale tour operators do not issue airline
ticket stock (or deal with the public), and that a travel agent selling
a tour sends the payment for the air transportation directly to the
airline, not through the tour operator.  79 CAB at 100.  The district
court, moreover, had thought that wholesale tour operators were ticket
agents.  Foremost Int’l Tours v. Qantas Airways, 379 F. Supp. 88, 95
(D. Hawaii 1974), aff’d, 525 F.2d 281 (9th Cir. 1975).  Because the
systems, unlike wholesale tour operators, do issue tickets, the Foremost
case is not dispositive.

Expedia also argues that Congress amended section 411 to cover ticket
agents in order to prevent the fraudulent conduct by individuals
ostensibly selling tickets, especially on behalf on nonscheduled
airlines.  Expedia Comments at 17, citing S. Rep. No. 82-1508 and H.R.
Rep. No. 82-2420 (1952).  While it is true that Congress understood the
need to prevent such conduct, the authority granted by the legislation
enacted by Congress is broader than that.  Our authority under section
411 is not limited by Congress’ primary intent at the time of
enactment, when the statutory language is not so narrow.  Consumer
Electronics Ass’n v. FCC, D.C. Cir. No. 02-1312 (decided October 28,
2003).  Cf. Independent Insurance Agents v. Ludwig, 997 F.2d 958, 961
(D.C. Cir. 1993).

Thus section 411 authorizes us to regulate the systems as ticket agents
when necessary to prevent unfair and deceptive practices and unfair
methods of competition, despite the divestiture of their ownership
interests by the U.S airlines that formerly controlled the systems.
Determining whether a system’s conduct would be unfair or deceptive
would not be affected by a system’s ownership.  The lack of U.S.
airline ownership, however, could be very relevant to the question of
whether the practices barred by our rules would constitute unfair
methods of competition.  We discuss that question next.

2.	Antitrust Principles Relevant to System Practices

A system or airline practice will be an unfair method of competition if
it violates antitrust laws or antitrust principles.  In our past
rulemakings, we determined that the system practices barred or
restricted by our rules would be unfair methods of competition, either
because the practices unreasonably limited competition in the CRS
business or because they represented an effort to reduce competition in
the airline business.  We relied on the systems’ ownership and control
by airlines and airline affiliates.  Because the systems are no longer
controlled by U.S. airlines, we must reexamine whether the practices
barred by our rules would be unfair methods of competition.

Our notice of proposed rulemaking tentatively concluded that section 411
authorized us to readopt most of the existing rules, because we found
that the practices prohibited by them could be unfair methods of
competition, even though two of the four systems then had no airline
owners.  67 FR 69385-69387.

Several of the commenters, especially Sabre and United, argue that the
practices at issue could not be unfair methods of competition. They
primarily argue that, even if the systems had market power in the CRS
business over airlines, system practices that affected airline
competition could not violate antitrust principles because the systems
did not compete in the airline industry.  United Reply Comments at
16-20; Sabre Comments at 41-45.

We are readopting only the rules prohibiting display bias and adopting
certain rules prohibiting parity and most-favored-nations clauses in
contracts between systems and participating airlines, if those clauses
are a condition to participation in the system.  The record does not
provide a factual basis for finding that the other system practices at
issue would be unfair methods of competition.

We may prohibit display bias under section 411 on the grounds that it
would constitute an unfair and deceptive practice and an unfair method
of competition.  We have found that display bias is likely to mislead a
significant number of consumers by causing their travel agents to book
relatively inferior flights when other flights would better meet the
travelers’ needs.  The Seventh Circuit upheld the Board’s rules
barring display bias on the basis of findings that display bias would
tend to deceive a significant number of consumers.  We have made the
same finding here.  We may therefore readopt rules barring display bias
under our authority to prohibit unfair and deceptive practices.

Display bias could also constitute an unfair method of competition to
the extent that the system biases displays in order to benefit one
airline at the expense of competing airlines.  Presumably a system would
not bias its displays in favor of one airline at the expense of rival
airlines unless the favored airline had given the system inducements to
engage in display bias.  In that event, the system and the favored
airline would be engaged in a joint effort to distort competition in the
airline industry, an effort that could succeed only because of the
system’s market power over the disfavored airlines.

Display bias does not promote competition on the merits.  Instead, it is
designed to suppress competition by causing consumers and their travel
agents to select inferior airline services over other available services
that would better suit their needs.  As the Justice Department points
out, display bias “would divert passengers without regard to
airlines’ prices or quality.”  Justice Department Reply Comments at
19.  Display bias could deter entry or expansion by more efficient
competitors and possibly cause competitors to exit some markets.  Id. at
19-20.

Contracts that unreasonably restrict one party’s ability to buy
products or services from competitors of the other party (or
unreasonably restrict competitors of one party from buying products or
services offered by the other party to the contract) can be unlawful, if
they significantly restrict competition without promoting efficiency.
For example, the FTC held that a series of contracts between a major
retailer and its suppliers that restricted each supplier’s ability to
sell their products to the retailer’s competitors violated section 1
of the Sherman Act.  In the Matter of Toys “R” Us (October 13,
1998), opinion at 86-87, aff’d on other grounds, Toys “R” Us, Inc.
v. FTC, 221 F.3d 928 (7th Cir. 2000).

In some cases, the courts have suggested that contracts giving one party
a competitive advantage by causing consumers to be misled may violate
the Sherman Act.  As one court stated, “Competition would be harmed if
consumers were routed to particular glass repair companies based on
factors other than competitive pricing or quality in the marketplace.”
 Stewart Glass & Mirror, Inc. v. U.S.A. Glas, Inc., 940 F. Supp. 1026,
1035 (E.D. Tex. 1996).  In United States v. Microsoft Corp., the Court
held that Microsoft had violated section 2 of the Sherman Act by
providing software development tools to software companies writing Java
programs without telling them that Java applications written with the
Microsoft tools would work on the Windows operating system sold by
Microsoft.  Microsoft’s intentional deception was unlawful, because it
supported the maintenance of Windows’ existing monopoly.  253 F.3d at
76-77.

While these cases involve different factual circumstances and were in
part decided under section 2 of the Sherman Act, they support a
conclusion that arrangements between a system and an airline to bias
displays would constitute an unfair method of competition that violates
section 411.  Display bias would be designed to undermine the
competitive position of the targeted airlines by misleading consumers
and their travel agents about which airline services would best satisfy
a consumer’s preferences.  Any such arrangements would be intended to
handicap the ability of competing airlines to compete on the basis of
price and service quality.  As such, they would be comparable to the
agreements condemned in Toys “R” Us.  While the FTC based its
decision on the existence of a series of agreements between the retailer
and the supplier, we think that a bias agreement between one airline and
one system would unreasonably restrict competition, because the system
has market power over airlines in terms of access to the travel agencies
subscribing to its services.  In Toys “R” Us, on the other hand, the
retailer, unlike the airline buying display bias, could not undermine
the competitive position of competing stores without obtaining
agreements from a number of toy manufacturers.  Given the nature of
airline markets, many of which are served by only a few airlines,
display bias in some cases could facilitate an airline’s acquisition
of monopoly power in some such markets.

The other practices being prohibited by our rules are airline parity
clauses and clauses requiring airlines as a condition to participation
in a system to provide the system with all fares, including fares such
as webfares that an airline would otherwise choose not to sell through
the system.  We are not prohibiting parity and most-favored-nation
clauses that result from bargaining between a system and participating
airlines, such as the clauses accepted by the airlines participating in
the Sabre DCA and Galileo Momentum programs.

When we initially prohibited the enforcement of airline parity clauses,
we found that such clauses constituted unfair methods of competition,
because they unreasonably restricted airline choices on participation
levels in different systems and were analogous to unlawful tying.  62 FR
59793-59797.  As we said then, and as is still true, parity clauses
imposed by a system may violate antitrust principles, because such
parity clauses will maintain a system’s market power.  By denying an
airline any opportunity to choose different levels of participation in
competing systems, a system’s parity clause makes it more difficult
for other firms to enter the CRS business and undermines the airline’s
ability to offer higher-level information and booking capabilities to
travel agencies through direct connections.  62 FR 59796.  Parity
clauses may also constitute an anti-competitive tying of services.  A
parity clause imposed on participating airlines represents a system’s
use of its market power to compel airlines to purchase services they may
not want as a condition to obtaining any service.  We therefore reaffirm
our past finding that parity clauses may represent unlawful tying.  62
FR 59795-59796.  Our conclusion is supported by the recent decision in
the Visa/MasterMoney case, where the court’s ruling largely denying
various cross motions for summary judgment held that contract clauses
imposed by the two credit card companies requiring stores to accept
debit cards as a condition to obtaining authorization to make credit
card sales could be an unlawful tie.  In Re Visa Check/MasterMoney
Antitrust Litigation, E.D.N.Y. No. 96-CV-5238, April 1, 2003, Memorandum
and Order.

System clauses requiring participating airlines to provide all fares as
a condition to participation may similarly constitute unfair methods of
competition, because they unreasonably limit each airline’s ability to
choose how to market its services.  That would buttress the systems’
market power, by eliminating the potential development and use of
alternative information sources and booking channels by travel agents
who want to book webfares.  The Justice Department thus states that such
clauses “may reinforce CRS market power over airlines, particularly if
they discourage the development of alternative distribution channels.”
 Justice Department Reply Comments at 26.  Such clauses, moreover, would
eliminate the airlines’ ability to use their control over access to
webfares as bargaining leverage to obtain better prices and terms for
participation from the systems.  The airlines’ control over access to
webfares has caused Sabre and Galileo to offer lower booking fees to
airlines that agree to provide them with all such fares.  A system’s
contract clause requiring an airline to provide access to all fares as a
condition to any participation would also be analogous to an unlawful
tying arrangement.  The system would be denying access unless the
airline agreed to make all fares available, even though airlines have
typically chosen to make some types of fares, like webfares, available
only through selected distribution channels.

Our decision not to readopt the remaining rules largely reflects our
policy and economic judgment that those rules are unnecessary or
unnecessarily restrictive.  That decision also reflects the limits on
our authority under section 411.  We may adopt rules regulating system
practices only if necessary to prevent practices that would violate the
antitrust laws or antitrust principles or cause consumers to be misled.

While we are finding that each system has some market power over most
airlines, that finding by itself does not authorize us to regulate
system practices under section 411, even if a system’s practices
impose unduly high costs on participating airlines, as seems to be true
with respect to booking fees.  As the Justice Department points out,
“Supracompetitive fees, even when not used to target specific
airlines, are inefficient and harm consumers by artificially raising the
cost of air travel.”  Justice Department Reply Comments at 3.
Nonetheless, a firm’s possession of monopoly power in itself is not an
antitrust law violation, even though the firm necessarily has the power
to charge prices substantially above competitive levels.  United States
v. Microsoft Corp., 253 F.3d at 51.  See also United States v. Colgate &
Co., 250 U.S. 300, 307 (1919).  If Congress finds that firms in an
industry have market power and should be restrained from exercising that
power, for example, by barring supracompetitive prices, Congress
typically will establish a public utility-type regulatory structure.
Congress has not done so with respect to the airline distribution
business, and it determined 25 years ago that the comparable regulatory
regime for the airline industry should be abolished.  A monopolist will
violate the antitrust laws only if it acquires or maintains, or attempts
to acquire or maintain, monopoly power by engaging in exclusionary
conduct that does not represent legitimate competition, such as the
development of superior products or services.  United States v.
Microsoft Corp., 253 F.3d at 58.  Our authority to prohibit practices
that violate antitrust principles, not just the antitrust laws, would
not give us the power to generally regulate the conduct of a non-airline
firm that is a monopolist, even if the firm’s actions can
significantly injure airline business operations, although we may
prohibit practices by firms with market power that are designed to
maintain that power if they do not provide efficiency benefits or
represent legitimate competition

America West nonetheless contends that section 411 authorizes us to
regulate system practices even if we have no evidence that relationships
between one or more airlines and a system will likely cause the system
to take action to prejudice airline competition.  According to America
West, “charging a supracompetitive booking fee is . . . an unfair
method of competition in the sale of air transportation.”  America
West Reply Comments at 16.  America West provides no analysis showing
how a system would be violating antitrust principles by charging
supracompetitive prices.  As shown above, the antitrust laws do not bar
a firm from charging supracompetitive prices.  America West’s
contention is inconsistent with the Federal Trade Commission’s
position that it would not consider practices by a monopolist to be
unfair methods of competition if they affected a market in which the
monopolist did not operate.  FTC Reply Comments at 4.

On the ground that the primary purpose of section 411 is allegedly the
prevention of consumer deception, Expedia argues that we cannot regulate
the systems’ practices in order to prevent unfair methods of
competition.  Expedia Comments at 17-18.  This claim runs counter to the
language of section 411, which prohibits unfair methods of competition
as well as unfair and deceptive practices.  Furthermore, when Congress
transferred the section 411 authority to us upon the Board’s sunset,
Congress specifically stated that it did so in order to maintain the
authority to prevent anti-competitive conduct.  Congress cited the
Board’s then pending CRS rulemaking as an example of regulatory action
that should be maintained.  H.R. Rep. No. 98-793, 98th Cong., 2d Sess.
(1984) at 5.

When airlines controlled the systems, the systems were likely to engage
in conduct that would violate section 411, and seemingly had done so
before the Board adopted the initial CRS rules.  Without airline control
of the systems or other evidence of anti-competitive arrangements
between systems and airlines, system practices that affect airline
competition are not likely to violate antitrust laws or principles,
except for display bias.  The record does not indicate that the existing
relationships between systems and their former owners, whether based on
marketing agreements or otherwise, are likely to cause the systems to
take actions that would distort airline competition.  The commenters who
urged us to readopt most of the rules, including the rule barring the
systems from charging discriminatory booking fees, have failed to show
that such rules must be adopted to prevent conduct likely to violate
section 411.

Our notice of proposed rulemaking proposed an analysis that could enable
us to make our rules applicable to the non-airline systems.  Including
the non-airline systems within the reach of the rules could be justified
if the record indicated that systems would take actions intended to
benefit the competitive position of some airlines at the expense of
disfavored airlines.  67 FR 69387, citing, inter alia, Official Airline
Guides v. FTC; 68 FR 12622 (March 17, 2003).  The record, as noted, does
not show that such conduct is likely to occur, except for bias.  As a
result, we need not decide now whether that tentative analysis is valid.
 We recognize that the FTC submitted comments stating that it no longer
follows the cases cited by us.  The FTC additionally recommended that we
reexamine our analysis in light of the brief jointly filed by the FTC
and the Justice Department in Verizon Communications v. Law Offices of
Curtis V. Trinko, LLP, U.S. Sup. Ct. No. 02-682, which argued that
neither the monopoly leveraging principle nor the essential facilities
doctrine provided an independent basis for liability under section 2 of
the Sherman Act.  FTC Reply Comments at 4.  In view of our decision that
the record does not provide a basis for readopting most of the current
rules, further discussion of these questions is unnecessary.

We find that the practices regulated by the rules that we are adopting
here may violate section 411, because they may unreasonably reduce
competition in the airline and airline distribution industries and are
analogous to antitrust law violations.

	3.	First Amendment and International Law Issues

Our decision to readopt the rules against display bias and only a few of
the other rules presents two other important legal issues, whether our
regulations are consistent with the First Amendment, and whether our
decision is consistent with the United States’ obligations under its
air services agreements with foreign countries that require the United
States to prevent certain types of system conduct that would deny
foreign airlines fair and nondiscriminatory treatment.  We address the
First Amendment issues in connection with our discussion of the display
bias rules, and we discuss the United States’ obligations under the
air services agreements in our discussion of the international issues.

G.	The Specific Rule Proposals

Our reexamination of the need for CRS rules in light of the changes in
the systems’ ownership and the on-going developments in airline
distribution has convinced us that most of the rules are no longer
necessary.  This section states our conclusions on the need for the
individual rules on which the notice of proposed rulemaking requested
comments.

As discussed above, we are willing to adopt rules regulating system
practices only if they are reasonably necessary to prevent
anti-competitive or deceptive practices that are likely to occur and
that market forces are unlikely to remedy, if the rules will also be
effective and enforceable.

We will begin our discussion of the major rulemaking issues by
discussing the scope of the rules and certain definitional issues, which
will be followed by our discussion of the rules that we have decided to
readopt, the rules prohibiting display bias and certain contract clauses
in the systems’ contracts with participating airlines that appear to
be anti-competitive.  After that we will discuss (i) mandatory
participation, (ii) booking fees, (iii) booking and marketing
information, (iv) the use of third-party hardware and software by travel
agencies and their ability to use one terminal to access several systems
and databases, (v) travel agency contracts, (vi) Internet regulation,
and (vii) international issues.

1.	The Scope of the Rules

In our notice of proposed rulemaking, we proposed to modify the scope of
the rules by making them applicable to all systems without regard to any
airline ownership or marketing relationships.  67 FR 69382-69383.  The
existing rules cover systems owned or marketed by airlines that are used
by travel agencies to obtain information, make bookings, and issue
tickets for passenger air transportation.  They do not cover computer
systems that do not provide all of these functions, systems that are not
owned or marketed by an airline or airline affiliate, and system
services that are not used by travel agencies (for example, they do not
cover CRSs when used by corporate travel departments).  The rules also
do not govern the operations of traditional travel agencies or on-line
travel agencies.  The description of the current rules’ applicability
is set forth in section 255.2, and the definition of “system” is in
section 255.3.

We proposed to make the rules applicable to all systems, whether or not
owned or marketed by airlines, but to maintain the systems’ exclusion
when providing services to users other than travel agencies.  67 FR
69389.  The non-airline systems generally argue that there is no reason
to regulate their practices due to their lack of airline ownership (and,
as discussed above, they argue that section 411 does not authorize us to
regulate systems not owned by airlines).  Other commenters, notably
Amadeus, argue that the rules should cover all systems equally.  While
no commenters advocate extending the coverage of all rules to the
systems when providing services to corporate travel departments and
other non-agency users, a few commenters essentially contend that the
rules should cover selected CRS practices when corporate travel
departments are using a system, because they urge us to regulate access
to marketing and booking data and access to corporate discount fares.
See, e.g., NBTA Comments at 18-24; American Express Comments.

We have determined, as discussed above, that the rules should cover
non-airline systems.  Systems are likely to engage in bias whether or
not they are owned or controlled by airlines.  We are prohibiting a few
specific airline contract practices -- mandatory parity clauses and
demanding most-favored-nation clauses -- because they would tend to
maintain each system’s market power and reduce the ability of airlines
to obtain better terms for participation.  Such clauses would have
harmful effects no matter whether the system is owned by airlines or by
non-airline firms.  We accordingly are revising the language of the
definition of “system” by eliminating the current limitation that a
system be owned or marketed by an airline.

While including non-airline systems within the definition of
“system” represents an extension of the current rules, as a
practical matter this change will have no immediate impact, because all
four of the systems are either owned or marketed by airlines.  Applying
the rules to all systems will also be equitable, because all competing
firms providing essentially the same kind of services will be subject to
the same rules.  Cf. Amadeus Comments at 31-36; Orbitz Comments at
43-45.

We recognize that this change in the definition of a system departs from
our earlier reasoning on whether the practices of non-airline systems
required regulation.  In our last rulemaking, however, we were focusing
on system practices that were designed to prejudice airline competition,
such as the use of architectural bias, and on practices that
unreasonably restricted the travel agencies’ ability to switch systems
or use multiple sources of information and booking channels when
competition between the systems represented a form of competition
between the airlines owning the systems.  At that time, of course, every
system was owned and controlled by one or more airlines.  In this
proceeding we are adopting only rules prohibiting display bias and
certain contract clauses that would unreasonably deny airlines the
ability to choose how to distribute their services and fares.  This
change in focus, and the possibility that both non-airline and airline
systems will engage in display bias and seek to restrict airline choices
on distribution channels, explain our decision to expand the scope of
the rules.

As noted, some commenters suggest that the rules should cover some
system operations when being used by corporate travel departments.  We
have decided not to extend the rules to cover the use of the systems by
persons other than travel agents.  In the past, even when we found that
the systems’ practices required strict regulation insofar as the
systems were providing services to travel agents, we concluded that we
did not need to regulate CRS practices when the system was being used by
a corporate travel department or someone else besides a travel agent.
57 FR 43794-43795.  The record in this proceeding does not show a need
to expand the regulation of the systems’ practices.  Doing so would be
inconsistent with our decision that virtually all CRS regulation should
be ended.

Furthermore, the proposals for expanding CRS regulation involve areas
such as directing certain airlines to make all of their services and
fares, such as corporate discount fares, available through all systems
and barring airlines from obtaining unrestricted access to the booking
and marketing data generated by the systems from bookings made by travel
agencies and corporate travel departments.  See, e.g., NBTA Comments at
18-24; American Express Comments.  As explained elsewhere in this
document, we have decided not to adopt rules on these issues.

	2.	Exclusion of Internet-Based Systems

We proposed to revise the scope of our rules in a second respect, by
excluding firms that do not provide airline information and booking
capabilities to travel agencies under formal contracts.  We expected
that Internet-based firms such as Orbitz could enter the CRS business by
providing CRS services on a transaction-by-transaction basis.  We
tentatively found that such Internet-based firms would be likely to
offer new competition in the CRS business but not likely to obtain the
kind of market power that made CRS rules necessary.  We doubted that
such firms would present a potential for anti-competitive conduct and
deceptive conduct.  We expected that travel agencies would use such a
service as an alternative to one of the existing systems, either on a
transaction-by-transaction basis or under short-term contracts.  67 FR
69389-69390.

Several commenters oppose this proposal on the ground that all systems
should be treated the same and that Orbitz in particular should be
covered by the rules because, unlike the four existing systems, it is
owned and controlled by major U.S. airlines.   Some commenters argue
that using the existence of a formal contract to distinguish between
systems covered by the rules and those not covered by the rules would be
irrational.  See, e.g., Amadeus Comments at 42-43, 98-100; Southwest
Comments at 7-10.

Orbitz supports the proposal.  If a travel agency used a system on a
transaction-by-transaction basis, the system would assertedly have no
assurance that the travel agency would continue using its services, and
thus the system would have no market power.  According to Orbitz, that
would eliminate any basis for regulation.  Orbitz Comments at 41-43.

We have decided not to modify the definition of “system” to exclude
firms that do not offer services under a formal contract, as was
proposed, or to create a different exception for Internet-based firms
that offer services that are comparable to those being offered by the
existing systems.  Normally all competitors in an industry subject to
general regulations should be treated alike, unless there are
substantial reasons for a different result.

Moreover, we see a likelihood that any firm providing system services,
even on a transaction-by-transaction basis, may engage in the kind of
practices prohibited by our rules.  Our proposal essentially assumed
that travel agents would use an Internet-based system in addition to one
of the existing systems, not as a substitute for such a system.  The
commenters generally agree, however, that the great majority of travel
agencies will use a single system, not multiple systems.  See, e.g.,
ASTA Comments at 3-4; Large Agency Coalition Comments at 20.  As a
result, travel agencies using an Internet-based system would probably
use it as their only system.  If such a system built a subscriber base
consisting of travel agencies using its services for almost all CRS
functions, that system in time would acquire the kind of market power
that the existing systems have -- airlines would have to participate in
that system if they wanted their services to be readily saleable by its
travel agency subscribers.  In addition, travel agencies will be
reluctant to switch systems, whatever the form of contractual
arrangement, so subscribers using a system without having a long-term
contractual arrangement will likely continue using that system for a
substantial period of time.  Furthermore, the firm most likely to
benefit from the proposed redefinition of “system” would be Orbitz.
Given Orbitz’ affiliation with five major airlines, and its access to
the webfares offered by most airlines, Orbitz may in time obtain a
significant number of subscribers.

The proposed distinction between systems providing services to
subscribers under formal contracts and those that do so without formal
contracts would likely be difficult to administer.  Even a short-term
commitment by a travel agency to use a system would arguably constitute
a formal commitment.  Amadeus Comments at 42.  Galileo contends that
such a distinction would encourage firms to game the system by
developing business relationships that in form would not appear to
involve formal contracts.  Galileo Comments at 44.  See also Amadeus
Comments at 42-43.

We also do not believe that our decision will deter Orbitz or other
firms from entering the CRS industry, assuming that doing so is
otherwise an attractive business proposition.  The remaining rules will
prohibit display bias and certain types of restrictive clauses in
airline contracts.  Orbitz’ business plan has included commitments to
offer unbiased displays, which Orbitz has honored.  Office of the
Inspector General, U.S. Department of Transportation, “OIG Comments on
DOT Study of Air Travel Services” (December 13, 2002), at 7-8.  We
assume that our individual rules against display bias would not force
Orbitz to restructure its displays.  We see no evidence that Orbitz has
planned to impose parity clauses and similar restrictions on airlines
using its services.  Orbitz’ most-favored-nation clause is consistent
with the limited rule barring systems from demanding access to all
publicly-available fares as a condition to any participation in a
system, because Orbitz gives airlines a rebate on their booking fees if
they agree to the most-favored-nation clause and will sell their
services through Orbitz if they do not agree.

One firm, AgentWare, urges us to revise the definition to make sure that
it does not inadvertently cover Internet-based software applications
such as AgentWare’s Travel Console.  AgentWare Reply Comments.
AgentWare does not explain why our definitions would create a problem,
describe in detail how AgentWare provides information and booking
services to travel agencies, or propose a change to the rules’
definition that would avoid the stated problem.  Our review of the
description of AgentWare’s products set forth on its website suggests
that the rules should not apply to AgentWare, which appears to provide a
link to other sites where bookings can be made, does not provide a
booking function itself, and presumably is not charging airlines any
fees.  See also Galileo Comments at 66-67.  If AgentWare believes that
the rules would interfere with its operations and can show that the
application of the rules to its services would be unnecessary to protect
the public interest, we could exempt it from the rules under 49 U.S.C.
40109.  We do not wish to discourage firms like AgentWare from offering
new technology and new information services to travel agencies and
travelers.

American Express asks that we be sure to exclude direct connections
between travel agencies and airlines and proprietary software used
internally by a travel agency.  American Express Comments.  Our revised
definition of “system” expressly does not cover direct connections
and would not cover software used by a travel agency.

3.	Definitions

The rules currently govern the operation of each “system,” defined
as a computerized reservations system that, among other things, is
offered to subscribers, charges any airline other than its affiliated
airlines fees for system services, and provides travel agents with the
ability to make reservations and to issue tickets.  The rules define
“subscriber” as a ticket agent “that holds itself out as a neutral
source of information about, or tickets for, the air transportation
industry and that uses a system.”  Section 255.3.

We proposed to change the definition of “system” and
“subscriber” to reflect current industry conditions.  Because the
airlines are trying to phase out paper tickets, we stated that we
planned to eliminate the requirement that a system be able to issue
tickets.  When we adopted the current rules, we assumed that travel
agencies would not choose a system that did not offer a ticketing
capability.  Since then airlines have developed E-ticketing, and they
often discourage passengers from demanding paper tickets (an E-ticket,
unlike a paper ticket, is just a printed confirmation of the purchase of
air transportation).  The ability to issue tickets therefore may no
longer be a crucial function needed by travel agencies.  67 FR 69390.

Similarly, because many travel agencies have incentive commission
arrangements with some airlines that are designed to encourage the
travel agency to shift bookings to those airlines, we proposed to
eliminate the requirement that a subscriber be impartial.  While travel
agencies generally offer impartial advice, the existence of preferred
supplier relationships between many travel agencies and individual
airlines might lead some to question whether the agencies were entirely
impartial.  We therefore proposed to amend the definition in order to
eliminate any possible uncertainty over the rules’ applicability.  67
FR 69390.

No one commented on our proposal to change the definition of
“system” by deleting the ticket issuance function, and some support
the proposed change in the definition of “subscriber.”  ASTA
Comments at 50; Amadeus Comments at 44.

We will therefore adopt these changes for the reasons stated in our
notice of proposed rulemaking.  In addition, our decision that most of
the rules should not be readopted has made other definitions
unnecessary, such as “system owner.”  We are not readopting these
definitions.

4.	Rules Barring Display Bias

	(a)	Background

We have found, as explained above, that we should continue to prohibit
display bias for a six-month period.  Display bias may both harm airline
competition and cause consumers to be misled, especially if it is not
clearly disclosed, and accordingly we believe it necessary to allow
additional time for an orderly transition to a deregulated marketplace.

Our rules prohibit systems from biasing their displays in favor of
individual airlines but do not prescribe how a system must display
airline services.  Each system may develop its own criteria for editing
and ranking displays of airline services.  Section 255.4.  The rules
define display bias as using carrier identity in selecting flights from
the database and ordering the listing of flights in the display.
Galileo, for example, may not give United’s flights a preference just
because they are operated by United.  Other provisions additionally
limit the potential for bias.  One such provision requires each system
to apply its editing and ranking criteria consistently to all markets.
The system must select connecting points (and double connect points) for
constructing connecting flights for each city pair on the basis of
criteria that are applied consistently to all airlines and all markets.
Participating airlines can designate five points to be used as
connecting points in a market.  Section 255.4(b)(1), (c).

Each participating airline must ensure that it provides complete and
accurate information to each system in a form that will enable the
systems to display flights in accordance with our rules on display bias.
 Section 255.4(f).

The rules do not prohibit systems from selling advertising on their
displays.

The current detailed rules on display bias stemmed from findings by us
and the Board that rules prohibiting or restricting specific display
algorithms were necessary, due to the systems’ creation of editing and
ranking criteria that, while often ostensibly neutral, in fact gave the
services of favored airlines an unwarranted advantage in the system’s
displays over the services offered by competing airlines.  See, e.g., 62
FR 63837.

The rules do not regulate the displays created by travel agencies and
thus do not prohibit a travel agency from biasing the displays used by
its travel agents.  We determined in our last overall rulemaking that
such a rule was unnecessary because competition between travel agencies
appeared likely to deter them from offering customers misleading or
incomplete advice on airline service options.  57 FR 43809.

In our notice of proposed rulemaking, we proposed to maintain the
existing rules against display bias.  We also proposed to bar airlines
from inducing, or attempting to induce, a system to create a display
that would violate the rules on display bias.  67 FR 69385, 69397,
69428.

We further proposed to modify the rules to address two other display
issues.  First, we proposed to limit the number of times an airline
service could be displayed under different airline codes.  69 FR
69396-69397.  Secondly, American had once offered travel agencies
software that would enable an agency to create displays that gave
American a strong preference.  We tentatively determined that the rules
should prohibit any airline from offering programs to travel agencies
enabling agencies to bias their displays.  67 FR 69397.  We did not
propose to regulate the displays created by travel agencies.  67 FR
69397-69398.

The commenters disagree over our proposal to readopt the existing rules.
 Sabre, Delta, and Travelocity argue that no rules on display bias are
necessary, and the Competitive Enterprise Institute (“CEI”) argues
that any restrictions on system displays would violate the First
Amendment.  Other commenters assert that rules prohibiting display bias
remain necessary.  See, e.g., America West Comments at 39; American
Comments at 35; Continental Comments at 24; Northwest Comments at 12;
ASTA Comments at 41.  Commenters similarly disagree over our proposals
on limiting the display of code-share services and barring airlines from
providing software that could be used by a travel agency to bias its
displays.

After considering the comments, we have determined to maintain the
existing rules prohibiting the systems from biasing displays for an
additional period of six months.  We will not adopt our proposals to bar
airlines from distributing software that can bias displays and to limit
the number of times a single service is displayed under different
airline codes.

	(b)  Maintaining the Rules Prohibiting Display Bias

We explained above why we have decided to readopt rules prohibiting
display bias, for the next six months, in our discussion of why we find
that limited CRS regulation remains necessary.  As discussed there, the
record demonstrates that systems are likely to have the wherewithal to
bias their displays of airline services if we allow our prohibition
against such bias to terminate immediately.  Undisclosed display bias
could prejudice airline competition and cause consumers to receive
misleading information on airline services.    Display bias makes it
more difficult for travel agents to find the airline services that best
meet a customer’s needs.  ASTA accordingly states, “Travel agencies
should not be required to waste time in an effort to defeat biased
displays so they can serve their clients.  Airlines should win clients
with better fares and service, not by burying their competitors’
information in computer displays.”  ASTA Comments at 41.

No commenter has argued that we must revise the existing rules, should
we decide to keep regulations against display bias.  The commenters who
argue that rules on display bias are unnecessary have not suggested rule
revisions that would minimize the regulation of the systems’ editing
and ranking of airline service options, nor have they shown that the
rules impose any significant burden on the systems.  We will therefore
readopt the existing rules for a period of six months with a sunset date
of July 31, 2004.  We will actively continue to monitor market
conditions.  We, of course, retain the ability to propose readoption of
rules against display bias if conditions indicate, contrary to our
present expectation, that continuation of such rules is warranted.

	(c)	Barring Airlines from Encouraging Display Bias

We proposed to adopt a rule, section 255.11(a), that would prohibit
airlines from inducing or attempting to induce a system to bias its
displays.  If section 411 were not read as enabling us to directly
regulate system practices, we could prohibit some potentially
prejudicial practices, like display bias, by barring airlines from
entering into contracts with systems that would encourage or facilitate
such practices, as explained in our notice of proposed rulemaking.  67
FR 69385.

No one has objected to this proposal, assuming that we have a basis for
regulating display bias at all, so we will adopt it.  While we believe
that systems are ticket agents and thus subject to section 411, this
rule provides an additional basis for enforcing the prohibitions against
display bias during the six-month transitional period.

(d)	First Amendment Issues

While section 411 authorizes us to regulate the systems’ displays, in
exercising that authority we must comply with the First Amendment, which
restricts the ability of government agencies to regulate commercial
speech.  Two commenters -- CEI and Sabre -- raise questions about
whether our proposed rules would violate the First Amendment (several
other commenters argued that our proposed policy on the disclosure of
travel agency service fees would violate the First Amendment, an
argument that we will address in a separate rulemaking on that issue).
CEI contends that our proposed rules on display bias are contrary to the
First Amendment’s protection for commercial speech.  CEI Reply
Comments at 2-3.  Sabre does not argue that the proposed rules are
unlawful and instead only suggests that they may present First Amendment
issues.  Sabre Reply Comments at 73.

We believe that our rules against display bias will not violate the
First Amendment, as was true when we adopted the existing rules.  57 FR
43792.  The Supreme Court has held that government agencies may regulate
commercial speech.  As the Court has explained, “Commercial speech . .
. is ‘linked inextricably’ with the commercial arrangement that it
proposes, so the State's interest in regulating the underlying
transaction may give it a concomitant interest in the expression
itself.” Edenfield v. Fane, 507 U.S. 761, 767 (1993) (citations
omitted).  As a result, courts and agencies may enforce competition laws
against firms despite First Amendment claims.  The Supreme Court has
refused to block suits and administrative actions taken to enforce the
antitrust laws despite assertions that the targeted conduct represents
an exercise of First Amendment rights.  See, e.g., FTC v. Superior Court
Trial Lawyers Ass’n, 493 U.S. 411 (1990); Allied Tube & Conduit Corp.
v. Indian Head, Inc., 486 U.S. 492 (1988).  The same principle should
apply to our implementation of our statutory authority to prohibit
unfair methods of competition.

Furthermore, the First Amendment protects commercial speech that is not
misleading.  As the Court stated in Central Hudson Gas & Electric Corp.
v. Public Service Comm’n, 447 U.S. 557, 563 (1980), “The government
may ban forms of communication more likely to deceive the public than to
inform it,” for “there can be no constitutional objection to the
suppression of commercial messages that do not accurately inform the
public about lawful activity.”  The Court has declared, “But when
the particular content or method of the advertising suggests that it is
inherently misleading or when experience has proved that in fact such
advertising is subject to abuse, the states may impose appropriate
restrictions.”  In re R.M.J., 455 U.S. 191, 203 (1982).  We are
adopting the rules on display bias because we seek to protect the public
against misleading communications, and experience has shown that systems
are likely to bias their displays if not barred from doing so.  The
courts have sustained restrictions on speech where necessary to prevent
possibly misleading messages.  Nutritional Health Alliance v. Shalala,
144 F.3d 220 (2d Cir. 1998); Bristol Myers Co. v. FTC, 738 F.2d 554, 562
(2d Cir. 1984).

However, if displays of airline services of the kind proscribed by our
rules were considered protected by the First Amendment, our rules would
satisfy the test set forth in Central Hudson Gas & Electric Corp. v.
Public Service Comm’n, 447 U.S. 557 (1980); Lorillard Tobacco Co. v.
Reilly, 533 U.S. 525 (2001); and Board of Trustees v. Fox, 492 U.S. 469
(1989).  A government may restrict commercial speech that concerns
lawful activity and is not misleading, if the government has a
substantial interest and if the restrictions directly advance that
interest and are no more extensive than necessary to serve that
interest.  Central Hudson, supra, 447 U.S. at 566; United States v. Edge
Communications, 509 U.S. 418 (1993).

In considering whether our rules on display bias are consistent with the
First Amendment, the limited nature of the restrictions imposed by our
rules is important.  Unlike the typical commercial speech case, our
rules do not prohibit the listing of any airline service or fare, nor do
they prohibit airlines from advertising their services on CRS screens or
elsewhere.  Our notice of proposed rulemaking thus stated in the context
of proposals to regulate on-line travel agencies that we do not consider
banner advertisements to constitute bias.  67 FR 69412.  Our rules,
moreover, are in large part designed to keep systems from hiding or
omitting information, for example, by constructing displays of
connecting services that arbitrarily exclude the hubs of disfavored
airlines as connecting points.  The rules merely require systems to
follow certain requirements in listing flights in their displays of
airline services rather than prohibit the inclusion of information.

Our rules satisfy the first element of the commercial speech test,
because we have a substantial interest in preventing system practices
that would mislead consumers and harm airline competition.  Congress has
given us the responsibility to prevent unfair and deceptive practices
and unfair methods of competition in the airline industry.  Our
readoption of the rules against display is, as shown, consistent with
the Justice Department’s position that display bias will injure
consumers by causing a reduction in airline competition.

Our rules meet the second element of the test, because they directly
advance our interest in preventing display bias that would harm
competition and mislead consumers.  Our rules impose display
requirements that experience has shown are necessary to prevent systems
from presenting displays that would mislead travel agents and their
customers and that would harm airline competition.

Finally, our rules meet the third part of the Central Hudson test.
Under that part of the test, there must be a reasonable fit (but not
necessarily a perfect fit) between the advertising limitation and the
government's asserted interest, and the restriction need not be the
least restrictive means for defending that interest.  The rules are
tailored to prevent display bias.  They do not, for example, prohibit
systems from advertising airline services on their displays, nor from
providing a display of only one airline’s services.  The rules also do
not generally prescribe how airline services must be edited and ranked.
The Court upheld the advertising prohibition in Edge Broadcasting
because it was "reasonable" without examining whether the prohibition
was better than available alternatives, 509 U.S. at 429-431.  CEI, the
commenter arguing that the display bias rules violate the First
Amendment, has not suggested any alternative regulations that would be
less burdensome and still prevent consumers from being misled and
prevent the harm to airline competition that would result from display
bias.  Cf. Trans Union v. FTC, 295 F.3d 42, 53 (D.C. Cir. 2002).

(e)  Display of Code-share Services

The display of services operated under a code-share arrangement can lead
to the multiple listing of single flights, because the service may be
listed under the code of each airline that has a code-share agreement
with the airline operating the flight.  We asked for comments on whether
we should adopt one of the following limits on the number of times a
single flight was displayed under different codes: (i) an American
proposal for a rule requiring that all airline codes displayed for a
flight be displayed in one listing, as is the case for flights operated
under one airline code, (ii) the European rule allowing a service to be
displayed under no more than two codes, and (iii) a Continental proposal
allowing one listing of an international nonstop flight or set of
connections for each code-share partner.  Because we have found that
code-sharing usually benefits consumers by creating more integrated
services, we did not propose to prohibit code-sharing altogether.  57 FR
43805.  We further noted that airlines engaged in code-sharing
understandably expect their services to be listed under each partner’s
code.  Code-sharing is a significant feature of the international
alliances that we have found provide significant consumer benefits.
International agreements also provide bilateral rights to offer
code-share services.  67 FR 69396-69397.

Several commenters urge us to adopt the European rule, which bars a
single service from being displayed under more than two codes.  Amadeus
Comments at 55-56; American Comments at 35; Midwest Comments at 24-25;
Air Carrier Ass’n of America Comments at 13.  Southwest contends that
no service should be listed more than once.  Southwest Comments at
10-12.  US Airways prefers limiting the display of a domestic service to
two codes and an international service to three codes.  US Airways
Comments at 9-12.  Continental argues that each service should be
displayed once under each airline code.  Continental Comments at 24-25.
See also ASTA Comments at 41.  Northwest opposes any limits on the
display of code-share services.  Northwest Comments at 22.

During the comment period, we reviewed under 49 U.S.C. 47120 the
domestic alliance planned by Delta, Continental, and Northwest.  We
concluded that the alliance presented significant competitive concerns
but that we would not begin a formal investigation of whether the
alliance’s operations would constitute unfair methods of competition
in violation of section 411 if the three airlines agreed to conditions
alleviating our concerns.  One of the conditions required the three
airlines to ask the systems to display their services under no more than
two of their three codes while we completed this rulemaking.  We
developed that condition because we believed that the use of all of the
partners’ codes on their services could create an unreasonable
competitive advantage for the three airlines.  68 FR 10770 (March 6,
2003).

We have decided not to limit the display of code-share flights.  While
we remain concerned about the potential competitive effects of the
multiple display of code-share services, we do not see a compelling
reason to regulate the display of code-share services at this time.
However, nothing in our rules, or in this discussion, should be read as
prohibiting or discouraging systems from limiting the display of
code-share services if they wish to do so, and two of them -- Sabre and
Amadeus -- have done so by listing a flight under the codes of no more
than two airlines, the operating airline and one of its code-share
partners.  They are thereby following the European Union rules, which
allow each airline service to be displayed under no more than two
airline codes.  We assume that the other systems will adopt similar
limits if the display of code-share services under multiple airline
codes is disadvantageous for travel agencies, who can choose between
systems and should prefer a system that has the most useful displays.
That no system is now owned or controlled by U.S. airlines should make
it more likely that systems will respond to travel agent and consumer
preferences in this area.

Orbitz suggests that the adoption of the European Union rule by Sabre
and Amadeus violates our rule barring systems from discriminating
against airlines that sell services under another airline’s code, 14
CFR 256.4.  Orbitz Reply Comments at 16, n.8.  We disagree.  The Board
adopted that rule because United’s system, Apollo, planned to stop
displaying flights of airlines that operated entirely under another
airline’s code, such as the Allegheny Commuter airlines, which had no
codes of their own and instead used US Airways’ code.  Under
Apollo’s plan, the system would list connecting services only under
the code of the airline that operated the flight.  49 FR 9430 (March 13,
1984).  In contrast, the practice followed by Sabre and Amadeus does not
prevent an airline’s code from being used on flights operated by a
second airline.  Instead, the two systems limit the number of times the
code is displayed.  We do not think that violates the rule, which
prohibits a system from denying access to its system to airlines that
share a single code or from discriminating against an airline on the
basis of its use of another airline’s code.

(f)  Biasing Software Provided by Airlines

While we did not propose to bar travel agencies from creating biased
displays, we did propose to bar all airlines from providing software to
travel agencies that could be used to create biased displays.  This
proposal grew out of an enforcement proceeding prosecuted by our
Enforcement Office.  That Office had filed a complaint against American
and Sabre based on American’s distribution to some travel agencies
using Sabre, then controlled by American, of a program that enabled them
to bias their displays in favor of American.  American Airlines and
Sabre Travel Information Network Enforcement Proceeding, Docket
OST-95-430.  The software enabled travel agencies to create several
different displays, including one that would show only American flights.

We thought that an airline’s distribution of software to be used for
biasing displays was essentially the same as a system’s offering of a
biased display.  We recognized that travel agencies would decide whether
to accept such software, but we anticipated that a travel agency would
be under some pressure to accept such software from an airline that was
the major airline in the agency’s market.  We saw no reason for
allowing any airline to distribute such software.  67 FR 69397.

We have decided not to adopt a new rule that would prohibit airlines
from distributing software that could be used to create biased displays,
although we are prohibiting airlines from attempting to induce any
system to create biased displays.  Travel agencies have to compete
against other travel agencies, and their need to satisfy their customers
should check their willingness to create biased displays.  The
airlines’ divestiture of their system ownership interests should
alleviate any problem that might otherwise exist, because the airline
affiliated with the system used by the travel agency would be the
airline most able to cause the travel agency to accept biasing software.
 American, for example, distributed its software to travel agencies
using Sabre.  Furthermore, a travel agency that is intent on creating a
biased display could probably obtain the necessary software from other
sources.  Delta Reply Comments at 60.  Banning airlines from providing
biasing software therefore seems unlikely to stop such conduct.

ASTA, moreover, alleges that the proposed rule is unnecessary.  “A
travel agency would only want to bias a display when it was working with
a corporate client that had made an independent preferred fare
arrangement with the favored airline.  In such cases the agency’s
efficient servicing of that client will be enhanced if the agency has
available to it a display that shows the favored carrier’s flight
first.”  ASTA Comments at 41.

The lack of a rule may lead to some harm.  Some travel agencies, despite
their need to obtain repeat customers, may bias displays in ways that
would cause customers to book flights that do not best meet their needs,
and a rule prohibiting airlines from distributing biasing software would
help prevent such conduct.  The competitive pressures on travel agencies
nonetheless should make the adoption of a general prohibition
unnecessary.  We do not wish to adopt rules that would prevent all
potential problems, because doing so would impose a large body of
regulation on industry participants and stifle innovation.  As is true
on other issues, however, we will monitor the conduct of airlines and
travel agencies to see whether the lack of general rules is leading to
deceptive or anti-competitive practices that are not being corrected by
market forces.

Amadeus argues that a system should also be able to sell software to
travel agencies that would allow agencies to create biased displays if
they wish.  Amadeus Reply Comments at 12.  Our proposed rule would have
prohibited such conduct.   We have decided not to bar systems from
selling such software.  A travel agency always has the option to decline
to use such software and a system, unlike an airline that dominates a
region, should have little ability to compel a travel agency into
accepting software that the agency prefers not to use.  In contrast, we
are prohibiting systems from biasing their displays, because then an
unbiased display is not available as an option.

5.	Contract Clauses Restricting Airline Choices on System Usage

(a)	Background and Our Proposals

We have found that the systems continue to have some market power over
most airlines, as explained above, although we expect that power to be
diminished by the on-going developments in airline ticket distribution.
Airlines should have some bargaining power against systems if each
airline can choose which services and fares will be saleable through
each system and the level at which it will participate in each system.

There remains a significant risk that systems may use their market power
to compel conduct that would limit the potential for competitive
discipline in the CRS business.  First, until we prohibited them from
doing so, three of the four systems enforced parity clauses against
participating airlines.  A system’s parity clause required each
participating airline to buy at least as high a level of service from
the system as it did from any other system.  To ensure that each airline
can choose its participation level in each system, we adopted a rule
prohibiting systems from enforcing parity clauses against airlines that
do not own or market a competing system, because we found that parity
clauses denied airlines the ability to select their participation level
(and therefore prevented competition that might otherwise exist).
Section 255.6(e), adopted at 62 FR 59784 (November 5, 1997).  Parity
clauses made it unnecessary for systems to compete for airline
participation at higher levels of service (while almost all airlines
must participate in each system, as discussed, many airlines do not need
to participate at the higher levels, which are more expensive).  As we
additionally explained, “[P]arity clauses cause airlines either to buy
more CRS services than they wish to buy from some systems or to stop
buying services from other systems that they would like to buy, which
creates economic inefficiencies and injures airline competition.”  62
FR 59784.  We proposed to readopt that rule in this proceeding.  67 FR
69392.

Secondly, we saw a risk that systems could try to take away the
airlines’ control over access to their fares, especially webfares,
which airlines could otherwise use as leverage to obtain better terms
from the systems.  Travel agencies wish to be able to find and book
webfares through their systems, because doing so is more efficient than
using an alternative booking channel.  67 FR 69373, 69381.  As discussed
above, after we completed our notice of proposed rulemaking, two of the
systems -- Sabre and Galileo -- began offering lower fees to airlines
that agreed to make all their webfares available through the system.
Sabre’s comments on our advance notices of proposed rulemaking,
however, indicated that a system might by contract attempt to compel
participating airlines to make all fares saleable through the system.
Sabre stated that its contracts required participating airlines to make
all publicly-available fares saleable through Sabre, although Sabre had
not yet required any airline to comply with that provision.  See 67 FR
69392-69393.  Since then, Sabre has been giving reduced fees to airlines
that provide their webfares, although Sabre had earlier sued American to
compel that airline to provide its webfares, albeit under a contractual
provision applicable to airlines that owned or marketed another system.
American Comments at 24-26; Orbitz Comments at 36.

We also proposed to prohibit each system from enforcing clauses that bar
airlines from discriminating against travel agencies because they used
that system.  Sabre had such a clause in its participating airline
agreements.  We thought that clauses barring discrimination could block
airline efforts to persuade travel agencies to use systems that were
less expensive for a participating airline.  67 FR 69393.

We believed that these proposals would be consistent with our rule
prohibiting parity clauses, section 255.6(e).  We did not propose to ban
such clauses if they resulted from negotiations between the system and
participating airlines.  67 FR 69392-69393.

The Justice Department states that most-favored-nation clauses like
those that we proposed to prohibit can be anti-competitive, that the
Justice Department supported our proposal to prohibit parity clauses in
1996, and that the Justice Department has filed antitrust enforcement
actions against the use of similar clauses in other industries.  Justice
Department Reply Comments at 25.  The clauses “may reinforce CRS
market power over airlines, particularly if they discourage the
development of alternative distribution channels.”  Justice Department
Reply Comments at 26.  Such clauses can be beneficial, however, and any
broad prohibition of most-favored-nation clauses by us would be harmful
if it prevented airlines and systems “from freely negotiating mutually
acceptable contracts,” especially when systems are willing to offer
discounted fees to airlines willing to accept such a clause.  Justice
Department Reply Comments at 25-26.  The Justice Department concludes
that we could reasonably decide to prohibit parity clauses and clauses
requiring an airline to make all publicly-available fares saleable
through a system but that the opposite decision could also be reasonable
(the Justice Department seemingly assumed, however, that our proposed
rules would prohibit airlines from agreeing to accept parity clauses and
clauses requiring them to make all fares available, which was not our
intent).  The Justice Department recommends against adopting the
proposal to prohibit systems from barring airlines from discriminating
against their subscribers.  Justice Department Reply Comments at 27.

Orbitz and several airlines argue that we should prohibit
most-favored-nation clauses like parity clauses and should not allow
systems to enforce them against airlines that own or market a competing
system.  Orbitz Comments at 35-39; Alaska Comments at 8; American
Comments at 24-29; Continental Comments at 14-17; Delta Comments at
33-39.  Galileo supports the readoption of the existing rule barring
parity clauses with the exception allowing a system to enforce such a
clause against an airline affiliated with a competing system.

United contends that parity clauses clearly violate the antitrust laws
but that enforcement action, not the adoption of a general rule, is the
proper way to prevent such anti-competitive conduct.  United Reply
Comments at 46-54, 75-77.

Several commenters argue that systems should be able to negotiate for
parity clauses or most-favored-nation clauses from participating
airlines.  Amadeus Comments at 46-48; Galileo Comments at 24; Sabre
Comments at 133-135; Amadeus Reply Comments at 16; Mercatus Comments at
8.

	(b)	Summary of Final Rule

We have determined to readopt for a transitional period of six months
the rule prohibiting parity clauses as a condition to any participation
in that system, but without the existing exception that allows a system
to enforce such a clause against an airline that owns or markets another
system.  We are also adopting for six months a rule barring systems from
requiring airlines to provide all publicly-available fares to a system
as a condition to any participation in that system.  We have decided not
to adopt the rule barring a system from prohibiting participating
airlines from discriminating against its subscribers.

These rules will sunset on July 31, 2004.  The six-month period, we
believe, will furnish the parties with notice of the forthcoming changes
and an opportunity to prepare for the absence of these rules.  The
six-month period will, we believe, allow affected parties to arrange for
an orderly transition to complete deregulation of computer reservations
systems.  We, of course, retain the authority to reexamine these issues
at any time if warranted.

We agree with the commenters who contend that a system should be able to
negotiate for most-favored-nation clauses from participating airlines.
Amadeus thus states, “CRSs and airlines should be free to bargain for
[parity clauses] as part of their overall negotiation of fees and terms
of participation,” and “CRSs should have the right to bargain with
airlines concerning whether an airline must provide to the system fares
provided to any other system, or to any online travel site, or to any
other distribution channel.”  Amadeus Comments at 47.  Our rules will
not bar systems and airlines from doing so, and will not affect the
ability of Sabre and Galileo to continue their existing programs to
trade lower fees for access to webfares.  Orbitz, of course, has a
similar program, which enables airlines to obtain a partial rebate of
their booking fees if they agree to make all of their publicly-available
fares, including webfares, saleable through Orbitz.

We disagree with United’s contention that we should rely on
enforcement action rather than rules to prevent systems from demanding
most-favored-nation clauses that are anti-competitive.  United Reply
Comments at 23.  United itself agrees that parity clauses are
anti-competitive.  United Reply Coments at 76.  We would be using our
authority more efficiently if we establish rules barring specified
anti-competitive clauses rather than seek to block the imposition of
such clauses through enforcement proceedings.

Nonetheless, while we are not barring systems from creating and
enforcing bargained-for parity clauses and clauses requiring an airline
to provide all publicly-available fares to the system that are saleable
through other distribution channels, most-favored-nation clauses can be
anti-competitive in some situations, as pointed out by the Justice
Department.  America West complains that the Galileo and Sabre Momentum
and DCA programs will insulate the two systems from competition from
alternative distribution channels:  “These programs essentially
require America West to relinquish control over how and to whom it will
distribute its inventory for a minimal discount off of Galileo’s and
Sabre’s booking fees” and would require America West to “forego
any opportunity to encourage the development of alternative distribution
channels by providing special fares exclusively through such alternate
channels.”  America West Reply to Supp. Reply at 3.  The systems’
market power possibly may enable the CRSs to obtain access to webfares
without significant reductions in booking fees.  At this time, however,
we believe, as does the Justice Department, that systems should be able
to negotiate for most-favored-nation clauses, which do offer
participating airlines some reductions in booking fees and enable travel
agents to obtain more comprehensive information on airline services from
their systems.

	(c)	Airline Parity Clauses

We have determined to maintain the prohibition against the enforcement
of parity clauses that are demanded as a condition of participation for
an additional six months, and to eliminate the exception allowing
systems to use such a clause against an airline that owns or markets
another system.  Each airline should be able to choose its level of
participation in each system.  Prohibiting parity clauses for this
additional period should give airlines additional bargaining leverage
against individual systems, and furnish time to make adjustments in
anticipation of the termination of the prohibition.

The existing rule, as noted, has an exception allowing a system to
enforce a parity clause against an airline that owns or markets a
competing system.  We created that exception because an airline
affiliated with one CRS as an owner or marketer might participate in
competing systems at a level lower than its level of participation in
its own system in order to induce travel agencies in regions where it is
the dominant airline to choose its affiliated system rather than a
competing system.  We therefore allowed a system to enforce parity
clauses against airlines that owned or marketed a competing system.  A
system could not enforce a parity clause, however, until it had given us
and the airline 14 days advance notice of its intent to do so.  62 FR
59797-59799.

Keeping such an exception would be inconsistent with our decision that
the mandatory participation should not be readopted.  An airline that
owns or markets a system should have the ability to determine at what
level it will participate in any system.  In theory, such an airline may
choose a lower participation level in some systems in order to give an
advantage to the system that it owns or markets, but substantial changes
in participation levels do not seem likely.  The major network airlines
need to be in every significant distribution channel, and most of them
have chosen to provide their webfares to Sabre and Galileo rather than
reserve them for Orbitz, even though they own Orbitz.

We note that Sabre argues that a rule barring parity clauses (or clauses
requiring an airline to make all publicly-available fares saleable
through a system), if such clauses are imposed as a condition to any
participation in the system, would not violate antitrust principles.
Sabre Reply Comments at 58-61.  We disagree for the reasons set forth
when we adopted the existing rule prohibiting the enforcement of parity
clauses.  Sabre, however, does not seem to oppose the actual rules we
proposed.  Sabre states that it seeks “the right to bargain for
nondiscrimination.”  Sabre Reply Comments at 57-58.  We wish to give
the systems that opportunity, for the record suggests that the result
should be pro-competitive.  The existing Sabre and Galileo programs
whereby systems agree to charge lower fees in exchange for guaranteed
access to all publicly-available fares should benefit all parties to the
arrangements and consumers as well.

	(d)	Clauses Mandating Access to All Fares

We also proposed a rule barring systems from requiring an airline, as a
condition to participation, to provide the system with fares that the
airline had chosen not to sell through any system.  Any such condition
could unreasonably restrict a participating airline’s ability to
bargain with the system for better pricing and terms.  Airlines should
be free to choose to offer their webfares, or other types of fares, only
through their own websites, without being obligated by system contracts
to make them available through other distribution channels.  Airlines
can use their control over webfares to win better terms for CRS
participation.  As Amadeus states, “Airlines have attained, and are
increasingly using, the leverage of access to webfares to wrest better
deals from the CRSs.”  Amadeus Comments at 10.

Contract clauses that required access to all publicly-available fares as
a condition to any participation in a system could frustrate our efforts
to allow airlines to create ways of bypassing the systems when doing so
is more cost-effective and likely to establish competitive discipline
for the systems’ prices and terms for participation.  As American
contends, if we allow systems to demand that an airline provide all of
its publicly-available fares as a condition to any participation,
“Airlines would lose their most effective tool for creating and
encouraging the growth of lower cost distribution channels.”  American
Comments at 27.

We originally proposed to bar contractual requirements that an airline
provide fares that it had chosen not to distribute through travel
agencies or any system.  67 FR 69393.  On further consideration, we have
determined that the proposal was too narrow.  As shown, several airlines
have agreed with Galileo and Sabre that they will provide all webfares
to those systems in exchange for reduced booking fees.  The original
proposal would allow the other two systems to require those airlines to
provide the same fares to them, even if they have offered nothing in
exchange for the ability to sell the fares.  Our rules should not be
used to aid Amadeus and Worldspan in insisting that they be given access
to the same fares when they have not offered better terms to
participating airlines in exchange for the fares.  Cf. Orbitz Comments
at 39.  We are therefore barring systems from requiring an airline, as a
condition to participation, to provide access to fares that the airline
does not wish to sell through that system.

We are adopting this rule for six months even though our proposal
stemmed from a Sabre contract clause that that system is not now
enforcing.  We think there is some likelihood that another system would
seek to take such action.  While this rulemaking was pending, Worldspan
threatened to expel US Airways unless that airline made all of its
webfares saleable through Worldspan.  US Airways refused to agree, and
Worldspan did not follow through on its threat.  Sabre Comments at 75;
Sabre Reply Comments, Salop & Woodbury Declaration at 17.  While
Worldspan did not carry out its threat, its decision may have been
influenced by the pendency of this proceeding.  Cf. 57 FR 43817.
Because we believe that a system’s demand that an airline provide all
publicly-available fares as a condition to any participation would be
anti-competitive, adopting our proposed rule is the best course of
action.

This rule, like the rule barring parity clauses, will not have an
exception allowing systems to demand access to all publicly-available
fares from airlines that own or market a competing system.  All airlines
should be able to withhold access to attractive fares from a system
unless the system offers acceptable terms for the right to sell the
fares.

We recognize that travel agents could operate more efficiently and
provide their customers more complete advice if every airline’s
publicly-available fares were saleable through each of the systems.
Nevertheless, allowing systems to compel airlines to provide all such
fares without providing any benefits in return would maintain the
systems’ market power and deny airlines an opportunity to use their
control of webfares as a way to obtain lower fees.  In addition, as
explained below in our discussion of proposals that we require airlines
to make all fares available for sale through all distribution channels,
such a requirement would be contrary to long-established operating
practices.  Airlines have long chosen to offer some special fares only
through selected distribution channels.

Two airlines -- Delta and Northwest -- urge us to adopt a broader rule
that would prohibit systems from also demanding access to information
and benefits such as frequent flyer awards if an airline has chosen not
to provide those to the system.  Delta Reply Comments at 34-35;
Northwest Reply Comments at 11-12.  We have no evidence that systems
have attempted to compel airlines to provide such information and
benefits.   A broader rule, therefore, seems unnecessary at this time.

America West seeks a rule prohibiting each system from providing access
to any airline’s webfares for their subscribers, if the airline has
not chosen to distribute the fares through that system.  America West
Comments at 31, 34-35.  This proposals stems from the systems’ use of
firms like FareChase to search airline websites for better fares not
available through the system and to tell the travel agent using the
system when such fares are being offered.  The travel agent who wishes
to book such a fare, however, cannot do so through the system and must
instead make the booking through the airline’s website (or another
site that has obtained access to the fares from the airline).  Sabre
Reply Comments at 48.

We are unwilling at this point to adopt such a rule.  When FareChase
searches airline websites for fares, it does not cause airlines to pay
additional booking fees to a system.  Sabre Reply Comments at 48.  It
may, however, increase the airline’s costs for operating its website
and internal reservations system.  The record does not provide a basis
for a careful analysis of the possible competitive effects of the
systems’ use of such services.  We would need more information and
comments from more interested persons before adopting a rule like that
requested by America West.  Barring systems from obtaining fare
information from other sources for their subscribers could also present
difficult questions of intellectual property law.

	(e)	Non-Discrimination Clauses

We are not adopting the proposal that would bar systems from enforcing
any prohibition against an airline’s discrimination against its
subscribers.  The proposal would effectively allow airlines to treat a
system’s subscribers differently from subscribers to other systems if
the difference in treatment was based on the system’s providing lower
quality service, or charging higher fees, than other systems.

Several commenters complain that the language was ambiguous and would
lead to problems of interpretation.  See, e.g., Amadeus Comments at
40-41; Amadeus Reply Comments at 53.  Delta argues that the rule would
be unnecessary if airlines could deny a disfavored system access to
webfares.  Delta Comments at 41-42.  The Justice Department recommends
against the adoption of the proposal, in part on the ground that the
contract clause that led to the proposal had not been used.  Justice
Department Reply Comments at 27.  Continental, on the other hand,
supports the proposal.  Continental Comments at 14-16.   ASTA objects to
our proposal on the ground that travel agencies should not be used as
weapons in disputes between an airline and a system.  ASTA Comments at
42-43.

We continue to believe that an airline should be able to offer better
service to the subscribers of one or a few systems without having to
offer the same service to the subscribers of every system.  An
airline’s ability to take such action could be used to encourage
travel agencies to use the system that offers the airline better terms
and lower prices for participation.  However, commenters did not express
strong support for the rule proposal, and the proposal’s qualification
that the difference in treatment should be based on lower fees and
poorer service could create disputes about whether those conditions were
met.  Moreover, we think the rules barring systems from demanding access
to all fares as a condition to participation will be a more effective
and practicable means of providing airlines some additional bargaining
power.  In addition, no system thus far has enforced such a clause.  If
a system does so in circumstances suggesting that the system seeks to
maintain its market power and deny an airline some bargaining leverage,
we will consider taking enforcement action under section 411.

	6.	Equal Functionality

In our last reexamination of the rules, a number of commenters had
complained that the systems engaged in architectural bias in an effort
to obtain more bookings for their owner airlines.  Architectural bias
means the creation of system design features and functions in a way that
enables travel agents to obtain information and make bookings on the
owner airline more reliably and quickly than on other airlines.  These
features caused travel agents to book the favored airline in cases where
another airline provided service that satisfied the customer’s needs
better.  57 FR 43810-43811.  As a result, we adopted several rules
designed to equalize the functionality for owner and non-owner airlines.
 We required systems to give all participating airlines equal access to
enhancements and to provide equal treatment on the loading of
information, and we prohibited systems from using default features that
favored the owner airline.  57 FR 43814-43816.  Because these rules had
been effective, and because no one complained that they were unduly
burdensome or unnecessary, we had proposed to readopt the equal
functionality requirements without change.  67 FR 69398.  On the other
hand, we also proposed to eliminate the rule that essentially requires
equal booking fees.

The Justice Department contends that we should eliminate the equal
functionality rules, except for a rule requiring equal treatment on the
loading of information.  The Justice Department reasons that airlines
should be able to bargain for special functionality as well as lower
fees.  Justice Department Reply Comments at 31-32.  Amadeus alleges that
allowing systems to sell special functionality to individual airlines
will encourage innovation and efficiencies.  Amadeus Reply Comments at
13-14.

We agree with the position taken by the Justice Department.  Maintaining
the rules requiring equal functionality would be inconsistent with our
decision to end the rule barring discriminatory booking fees.  Airlines
and systems should be able to bargain over functionality along with
fees.  Eliminating the rule, moreover, could encourage a system to share
in the cost and risk of developing new functions, as the Justice
Department points out, Justice Department Reply Comments at 32:

Such freedom might also allow CRSs greater leeway to share with airlines
the development cost and risk of new functions.  For example, an airline
might be made the “launch partner” for a new CRS function and be
granted a certain period of exclusivity in exchange for sharing in the
development and testing cost for that function.

See also Amadeus Reply Comments at 13.

At the same time, the systems’ interest in increasing revenues should
encourage them to make new functionality available to all airlines,
because doing so would increase their fee revenue.  As Delta contends,
systems have an interest in selling as much functionality as airlines
will buy.  Delta Comments at 19.

We will, however, maintain a requirement that each system provide
participating airlines equal treatment in the care and timeliness with
which information is loaded in the system, as suggested by the Justice
Department.  We agree with the Justice Department’s position that
“it is difficult to imagine a legitimate business reason for
differential treatment” in the loading of information.  Justice
Department Reply Comments at 32.  This requirement is essentially
equivalent to the requirement that displays be unbiased.  Any
significant disparity in the loading of information would result in
displays that did not equally list each airline’s most up-to-date
services and fares.  See Justice Department Reply Comments at 8, n.9.
We are not persuaded by Amadeus’ argument that systems should be able
to bargain with airlines over the timing of information loading.
Amadeus Reply Comments at 14.  A system’s willingness to give some
airlines preferential treatment on the loading of information would be
akin to display bias.  For example, if a disfavored airline instituted
new discount fares, there could be a significant delay before the fares
became available in a system, which would deny important information to
travel agents and their customers and harm the airline’s ability to
compete with other airlines.

Under the current rule, systems must load information from participating
airlines with the same care and timeliness as they do for an airline
with a system ownership interest.  However, because only Amadeus
currently has airline owners, the rule does not cover the three systems
with the largest market shares in the United States.  To make the rule
effective, we will revise it to require that systems load information
for all airlines with the same care and timeliness.  This change should
not impose any significant burden on the systems.

7.	The Mandatory Participation Rule

Under our mandatory participation rule, section 255.7, an airline that
has an ownership interest of five percent or more in a system (a
“system owner”) must participate in competing systems at the same
level at which it participates in its own system, if the other
systems’ terms for participation at that level are commercially
reasonable, and must provide all systems with the fares that are
commonly available to subscribers in its own system.  We imposed this
requirement because some U.S. airlines with an ownership interest in one
system limited their participation in competing systems in order to
encourage travel agencies in their hub cities to use their own system.
Some airlines also withheld complete information on their fares and
services from competing systems.  U.S. systems have encountered similar
conduct internationally by foreign travel suppliers that own or market a
competing system.  56 FR 12608.

As a result of the U.S. airlines’ divestitures of their system
ownership interests, the only airlines currently subject to the rule are
the three foreign airlines that own Amadeus: Lufthansa, Air France, and
Iberia.

The commenters on our advance notices of proposed rulemaking disagreed
over whether the rule should be kept, strengthened, or eliminated.
Several major airlines and Orbitz argued that the rule was
counterproductive, because it allegedly enabled systems to dictate terms
for airline participation.  Some other airlines and systems asserted
that the rule should be maintained and extended to airlines that market
a system, not just airlines with a significant ownership interest.