Summit transcript

Business Travel Coalition Summit on European Union CRS Liberalization

June 2005, Brussels, Belgium

Good morning Ladies and Gentlemen and welcome to the Business Travel Coalition conference on European Union CRS liberalization. My name is Kevin Mitchell and I am the founder and Chairman of BTC. It’s great to be here with you this morning. I would like to thank the BTC members and C-fare for sponsoring this event and all the others who contributed their time and in-kind services to make this possible today. BTC was formed in 1994 by some 25 major corporations to advance reforms within the airline industry distribution system and to represent their interests in industry and public policy matters. BTC members include global corporations such as Stuttgart-based Daimler Chrysler, Black and Decker Corporation, and Ford Motor Company and Rich Products. These are companies with a very large stake in potential EU CRS liberalization. Corporate net airfare and travel agency fee-based pricing programs were among the reforms BTC advocated during the 1990s in North America and in Europe. BTC has remained heavily involved in the distribution system of reform initiative since. In the late 1990s, BTC led a national debate in the United States, regarding barriers to entry for start-up, low fare airlines. CRS abuse was central to our concerns with respect to how these systems can be used by their airline owners to frustrate new airline entry. The kind of anti-competitive, this kind of anti-competitive behavior can forestall the efficiencies and innovations and consumer benefits that can be derived from effective competition. To be sure, worldwide market conditions have continued to evolve. Developments include US CRS deregulation, Internet distribution, the rise of low-cost carriers with various distribution strategies, and technology companies new to the scene. However, one major issue has been a recurring theme over the past 25 years. And that is the vertical integration of airlines with computer reservation systems. While all the major CRSs were launched and developed within major airlines, airline control and manipulation of those systems created competition concerns that led to the imposition of CRS rules in several jurisdictions throughout the world. That also has been evolving. From 2000 to 2003, all three US CRSs became completely independent of airline ownership and indeed, divestiture was a prerequisite for full deregulation in the United States. In Europe, Amadeus has recently announced a restructuring but not a complete divestiture from its three airline owners. Clearly, this restructuring needs to be well understood before any final decision is taken regarding how to sensibly reform the EC CRS rules. Legislation to reform CRS rules has been under review for three years by the EC. We hear that this year, the EC intends to finalize its proposal for revising current CRS rules. Our purpose today is to elevate the public policy discourse and provide the EC with fresh CRS industry and stakeholder perspectives on the very complex issues that they face. Here are the five threshold questions that in BTC’s view we need to explore this morning if we are to leave here today better informed and more motivated to find solutions.
The first question: Is full deregulation possible now or does continued airline ownership of Amadeus lock into place economic incentives and therefore risk of owner-carrier abuse or has the recent Amadeus ownership restructuring yielded a governance model with independent directors and other safeguards sufficient to ease the concerns of potential owner-carrier abuse.
The second question: if owner-carrier abuse is the concern, is it then sensible to maintain some regulatory safeguards such as non-discriminatory participation and display rules. If those rules are maintained or revised what would the likely impact be on Amadeus and its owner-carriers on the one hand, and on other industry stakeholders on the other.
Question three: Are anti-competitive concerns lessened as the marketplace is changing with travel agent and consumer access to travel services content on the Internet as well as the announcement of technology company new entrants.
Question four: If there is carrier abuse, are there not EU competition laws and remedies available to those industry participants who feel harmed? And why aren’t these sufficient to deal with future problems? And finally are there creative and promising liberalization ideas that could address the concerns and meet the needs of GDS’s, of industry stakeholders and the EC regulators.
In examining these threshold questions this morning, an open and honest debate should help us better understand all parties’ concerns. And hopefully generate some solutions that would meet the needs of the industry and the regulators. We are tremendously advantaged this morning by having with us senior level, indeed world-renowned experts in travel distribution. I expect abundant debate and new insights for all of us. Today’s proceedings were expected to be broadcast live over the Internet but we’ve chosen instead to just do Part One today and film it so that we could index it and we will upload it next week so you can go into any portion of today’s event and listen to it. I’ve also asked all the participants today to provide me with their statements or presentations and that will be posted as well on the Internet. It is now an honor for me to introduce Mr. Robert Evans, Member of the European Parliament who plays a critical role in setting the EU’s regulatory policy concerning transportation and travel distribution matters. In 2004 Mr. Evans was re-elected for a third term to represent the London region in the European Parliament. Mr. Evans is a member on the transport and tourism committee and also sits on the Economic and Monetary Affairs committee in the European Parliament. Mr. Evans, welcome and thank you for taking the time to join us this morning.  

Well, good morning everyone and thank you very much indeed for those warm words of welcome. It’s a very great pleasure for me to be here with you. If I feel over-awed or if you think I’m struggling, it’s obviously because, as a member of the European Parliament, I’m not used to addressing such large audiences, but nevertheless I’ll carry on in the circumstances and you said in your remarks that this was an audience of world-renowned travel experts. Well I don’t satisfy either of those criteria so you may well be, I have no doubt, but I’m neither well renowned nor a travel expert. What I am is a member of the European Parliament for London representing the Labour Party and I have been, as you said in your introduction for the last 11 years, I’ve only been a member on the Transport and Tourism committee for the last year or so, so I’m still a new person to that and I’m learning. Where I do claim some experience and some expertise perhaps, I don’t know, more than you, is that I have spent inordinate number of hours playing around in the recent weeks on many of the, it’s not quite the Amadeus and Galileo things but I’ve been playing around on Expedia and Travelocity and those websites to try and find the cheapest possible fares for a family trip to America this summer. And what’s fascinated me is the way, and there’s a variety of these different search engines, with which you’re familiar I’m sure, a variety of ones where when I say I want to fly direct to San Francisco, then hop over to Vancouver and then come back from Kennedy, first of all many of the websites tell you it’s not possible. Some of them tell you that there are no direct flights from London to San Francisco which I always feel is interesting because I know full well that there are. And then when you do get into it and you start using the extra options, the way exactly the same flights with exactly the same airlines can vary by a huge amount. If I tell you that the trip that I’m doing, going to San Francisco then on to Vancouver then back again. In the end, it’s costing me something like 950 pounds and the highest quote I got from one of the websites was over 2000, still for an economy ticket. John you’ll be pleased to know that British Airways, in the end, came up with the cheapest quotation but it took them ten days by phone to come back to it, which, so the phone was cheaper than the Internet in the end but it took a lot longer. Anyway, within the European Parliament the Transport Committee, Transport and Tourism, deals with just about every issue that comes, could come under anything to do with transport or tourism. We also deal with postal services and I think that’s rather a tenuous link so we’ll leave that one out. My own background is that I was born and have always lived very, very close to Heathrow Airport, so I’ve always been close to the airline industry, close to airplanes and familiar with many of the issues related to that and of course I’ve got a great number of friends and colleagues who work at the airport for a variety of different airlines. Air travel is also very, very important to the European Parliament with an agenda of opening up the markets. The European Parliament, the European Union of course stem from the Common Market which was just that: to provide a market for goods and capital in Europe. And now it’s broadened out with a much wider agenda but certainly one of making the European skies more accessible and more competitive. And, the European Parliament has been a key player in the encouraging and helping the low-cost airlines and budget airlines to expand and to open up a whole range of new airports across the European Union which of course mean that more and more people are flying, going on weekend breaks and short trips. Personally, I think there’s a limit to the number of weekend breaks that people can actually have and it’s not absolutely certain that the graph on the number of flights and number of passengers will carry on going because there’s a limited number of weekends in the year that you can break for. We’ll see on that one because some people predict that the number of flights will continue and continue. I’m not certain that that will be so. The Transport Committee in the European Parliament, has, as the European Parliament does, representatives from all 25 EU countries and we meet usually every month for a period of about two days to discuss…For those of you  not familiar with the way the European Parliament works, or European legislative system, very, very briefly, the European Commission will usually propose the legislation and present it to the European Parliament. We go through it with a fine tooth comb, line by line, clause by clause, and we put down amendments to change it, we like to think to improve it, sometimes we might reject it altogether and then we send it back with the full Parliament will pass it and then when we can agree between the European Parliament and the Commission it will go off to the European Council which is the representatives of the governments to sign it off. If the European Parliament and the European Commission cannot agree, we have a fairly lengthy process called “conciliation” which is where we all sit around the table until the small hours of the morning quite literally thrashing it out and probably thrashing each other until we get a compromise. And European legislation is nearly always about compromise. Very few countries or very few players can ever have claimed to have got exactly what they wanted from a package because inevitably, with 25 countries you have to get compromises, you have to sacrifice something to get something else in. And it’s a very lengthy process. If you were to believe the British tabloid press, there’s some mythical body called Europe or indeed Brussels, which is, and it’s probably a reference to the European Commission, but they’re sitting around their tables on Wednesday morning rubbing their hands and thinking “What can we do now” that’s going to be most awkward, most inconvenient, and above all, most annoying to the people of Britain. That’s what a lot of people think, that it’s just there to interfere. Well of course, it isn’t. Europe in its broadest sense is actually very democratic, in some ways too democratic, and it takes a very long time to get things through because of the nature of 25 countries, respecting 20 different languages. Now you all have a variety of different languages here today, but this meeting, I suspect, is going to be conducted all in English. If it was a meeting in the European Parliament, either a committee meeting or the full Parliament, we’d have all the interpreters’ booths and you could speak in any language, be it Maltese, or Polish, or Czech or whichever you chose. And then when Romania and Bulgaria come in next year there will be even more languages. So, we are, we like to think, very democratic but it is a lengthy process. Anyway, the issue of the European policy on computerized reservation systems has a long and complex history and I think you’re aware of that. And in the Parliament like you were awaiting the Commission’s proposal, which I think we will have by the end of this year. It’s been undergoing Commission review for some time now and even though this issue has yet to reach the Parliament, it’s still important for both European consumers and the travel industry. It’s vital, it’s vital that new or revised legislation takes full and proper account of the market realities. And as we await this in the European Parliament Committee, what we’re trying to do, and I think it’s critically important that we remember the initial rationale for the current CRS rules and we now consider whether that rationale still exists. As I alluded to, the European aviation sector and even the way, I think, European companies work, the way they do business has changed a lot over the years and it’s important that the legislation takes this into account. I was just thinking this morning as I was coming along in 10, 11 years of coming to Brussels, and doing other flights as a member of the European Parliament, the massive changes that have taken place. When I first started in the European Parliament we didn’t have computers in our offices. That’s 11 years ago. We may have been a bit backward then, but we didn’t have computers in our offices. We were doing everything by fax. (Sorry I’m pushing buttons on here…If I close that down then I won’t start changing so just ignore what’s going on there.). So in 11 years, we’ve moved along and changed an awful lot and of course, we’ve had the advent of the e-tickets and all the other changes that have happened in the aviation industry: the changes in airports, in airlines, mergers, amalgamations with different companies, the growth of new companies, the collapse of companies and so on that’s happened over the last few years. And, as I said at the beginning, European citizens are traveling more frequently and more widely and they have more opportunities, more alternatives. They do have rail opportunities. But, whichever it is, the computerized reservation systems play a key role in helping consumers, helping companies for them to find the lowest fares available. But, above all, the best options for travel. And there are many, many options around at the moment. And I think it’s vital and this will be the role of the European Parliament and the members of my committee will be looking to make certain that the consumers have access to unbiased information and a full range of travel options. As you’ll be aware, significant changes have taken place in the CRS industry since the last revision of the EU rules in the 1990s, a dozen or fifteen years ago. And I’ve referred to the Internet. Consumers can check their own figures. A few years ago you’d go to a travel agent and he or she would tell you all the prices, all the flights that are available. Now, the consumers, most people can do it from the privacy of their own homes, they can find out the options and they can see what they want. They can then also involve their travel agent as well. And sometimes it is a question of telling the travel agency exactly what you want to find what’s going on. So I think therefore, the Commission’s review is both timely and well-intentioned. So in modernizing the current code, I think the European Parliament Committee will looking to consider and hope for, if possible, lessening the burden of legislation on industry and protecting interests of consumers at the same time. And this will be a question of striking the right balance. Re-addressing the problems that exist with unregulated markets which can distort competitions by the airline-owned CRSs in their home markets and these, you’ll be aware, sometimes deny competing CRSs access to the complete flight and pricing information. And that may or may not be why I had a lot of difficulties trying to find different options on the Internet as I said last week or so. Without this balance, I maintain that we only limit competition in these markets where these big companies are already dominant and we potentially push up ticket prices and reduce the customer choice for travelers to and from these markets. So what will the European Parliament be doing? Well, as I said, all the members of the Committee will consider carefully, I think, the effect of removing the key safeguards that are currently in place and considering the pros and the cons of doing so. We have to determine whether the competitive dangers that the code was designed to protect, to protect against, have now been eliminated in today’s environment. And, I know from talking with members of the Committee there are different views, or are a variety of different approaches and angles to that. The Commission’s impact assessment report prepared by the Brattle Group and I know that there’s a speaker about that in a little while. This clearly speaks about the dangers as long as the airlines continue to own CRSs in Europe. And so we will be wanting to study that and review it carefully. Above all we will be wanting to ensure adequate safeguards for consumers in the European Union so they do not face the higher fares and they do, but they do have access to real choice. And, so while the Commission is right in its intention to lessen the burden on the industry, the burden of the CRS code, it must look carefully at calibrated and well-thought out rules to protect the consumer’s interests. And I have to say, there will be members of my committee, some who will be coming entirely from the consumer perspective and there will be others who will be coming entirely from the business angle so there will be, if not a clash, there will be a meeting of minds and full and frank exchange of views as we say, and then, as I began by saying, there will be compromise and we will steer, I hope, a middle course. I am certain of that. I am certain that the Parliament will work towards achieving the right balance between those objectives so that we arrive at a revised code that is effective in today’s rapidly evolving travel distribution sector. So I welcome this, I think, very timely conference. I congratulate the organizers for putting it on at this particular time and as the European Parliament will be the body that will be available to amend, adapt, improve the legislation, feel free to contact me or any other of my colleagues at the committee stage and we will listen to, take on board, if we feel we want to, but certainly be interested in your remarks or suggestions so that I think we all share a collective aim, whichever our starting point, of getting the best possible legislation. Thank you very much indeed.

Mr. Evans, thank you very much for that very thoughtful address and let me dispense with this. It now gives me great pleasure to introduce one of the world’s foremost authorities on CRS industry issues, Dr. Dorothy Robyn. Dorothy brings 20 years of experience analyzing industry, implementing and working to reform government regulatory and economic policy. As a senior economic advisor to President Clinton, she was responsible for coordinating administration policy on transportation and infrastructure, aerospace, defense and competition. She oversaw the administration’s strategy to promote domestic airline competition. As senior consultant with the Brattle Group, Dr. Robyn was a major contributor to a project commissioned by the EC in 2002 to study CRS industry market conditions and to make recommendations for regulatory reform. Dorothy, welcome.

Thank you, Kevin. I’m sorry, I don’t have slides. This is such a gorgeous setting to use slides, Unfortunately, I don’t. This is…I’m going to be talking today about a report that my colleagues, a couple of my colleagues at the Brattle Group and I did. It’s been now about two years. In fact, we actually wrote the proposal close to three years ago. So it goes back a bit in time. When we submitted it, I didn’t hear a lot from people. It seemed to kind of go into a black hole so I’m gratified that there’s now some interest but I may be a little bit, a little bit rusty on some of the details. I’m here with one of my colleagues, Boaz Mosel who was in our London office and wrote the proposal to the Commission that ended up in us getting this project. He was the project director. About a month or two into the project Boaz got an offer he couldn’t refuse from Ofgem, the UK energy regulator, so he left us to do this project without him, went off to Ofgem. He’s now on gardener’s leave from Ofgem, a concept that I love and I wished the United States had something like and he’s rejoining Brattle in August and in fact opening up a Brussels office. When we applied to do this work, I was very, very interested in the subject because, although I didn’t have a deep understanding of the CRS issue, I had been lobbied very heavily when I was in the White House by, including by some people here in the room, particularly on the Orbitz people who lobbied me very heavily on all the reasons that Orbitz was a bad idea. They never persuaded me. I thought Orbitz was a good idea and I still believe that. Anyway, but that made me particularly interested in the, in the project and when we got the nod from Ludolf that we had gotten the, that we had won the contract we were extremely pleased and I thought, well this is good. It’s a good sign that they like our, the report that we had just done on an open aviation area. Ludolf quickly informed us that we were the only firm that had applied to the project. Everyone else, and that was an indication as to how divisive this issue was, that all of the normal suspects that might apply to do the work had by then sided with one interest group or another so we were the only so, by process of elimination we won the contact. So let me today what I want to do is summarize briefly, hopefully not take as much time as there is on the program for me, summarize the results of our report and let me just set the stage a little bit. Three years ago the Commission and the US government were both looking at some sort of CRS deregulation and it was prompted by three things. A major issue was a sense that the existing rules had created an unintended consequence of aggravating CRS market power. That the mandatory participation provision and the non-discrimination provisions had dealt with the original problem, the problems that Kevin alluded to, targeted abuse of market power on the part of the CRSs and the airline owners in the 1980s. But in the course of dealing with that problem had taken away some of the countervailing power that airlines would normally have in dealing with CRSs and therefore had actually aggravated the problem of CRS market power. That was a concern, number one. Number two, airlines were divesting CRSs. Three of the four airlines had at that point divested fully, or two had and Worldspan went on to and then third, technology was radically changing the situation. The Internet was replacing the CRS to some degree. So that was sort of the setting for looking at this. We did a, we looked at the travel distribution industry using sort of traditional anti-trust approaches and focused in particular in two areas: CRS, to what degree did CRSs exercise market power with respect to airlines and was that a factor in the very high booking fees that airlines were complaining about. And then secondly, what was the potential for abusive market power through vertical integration of CRS and airlines where the airline continued to own a CRS. So let me talk first about the CRS market power then about the vertical integration issue, then, third, the three options that we looked at. First, with respect to CRS market power, four key things that we found. The first is a, a we really reiterated or underscored what others had already said which was at the time and the Justice Department had in the United States as part of their proceedings said something fairly similar just a few months earlier that CRSs, individual CRSs did continue to have the potential to, the potential to exercise market power over airlines for three reasons: one and the traditional reasons that brick and mortar travel agencies in particular continue to account for a very large share of airline passenger revenue. That those agencies were still heavily dependent on CRSs and most of them subscribed to a single CRS. So that gave individual CRSs market power with respect to, or potential market power with respect to airlines. Second, there was this issue of the asymmetric market structure that CRSs, I’m sorry that travel agents were the ones that decided which CRS they wanted to use, but they did not have an incentive to use necessarily the lowest cost CRS. So, this sort of market discipline that might lead, put pressure on CRSs to lower their costs was absent. And then third, that CRS regulation had itself, as I mentioned earlier, contributed to the problem. The mandatory participation provision limited airlines’ ability to withdraw or threaten to withdraw from individual CRSs as a way of putting pressure on the CRSs with respect to booking fees. And the non-discrimination provision also limited CRSs need to be more responsive. If they lowered prices to one person, they had to lower them to everybody so there was a, so both of those provisions limited the sort of pressure that would normally come to bear to keep booking fees low.  Now, so that, number one, yes, CRSs did have the potential to exercise market power with respect to airlines. That was our first finding. Second, however, and I think this is, this is our major contribution and this was to try to cast the issue in a slightly different way than it had been seen. Despite these sources of CRS leverage, the exercise of CRS market power isn’t inevitable and high booking fees alone are not proof of competitive harm, competitive harm either to consumers or to airlines. And the logic of this notion is that the CRS market, the air travel distribution market is a two-sided intermediary market. This is a term that economists have come up with to describe certain markets and I’ll give another example. You have the CRS as the intermediary with airlines upstream and travel agents downstream. CRSs provide a linkage between airlines and travel agents. They charge airlines booking fees, they pay money to travel agents in the form of signing bonuses and other payments so they are a mechanism for transferring money from airlines to travel agents. And when CRSs compete to sign up travel agents that is a form of price competition. And potentially, if that price competition is sufficiently rigorous, that has the potential to offset any market power that CRSs may exercise upstream with respect to the booking fees that they charge airlines. And let me give you an example of this in another industry. If you take the cell phone industry, cellular service providers, mobile service providers are an intermediary between their subscribers, their users and people who are trying to connect to their users. These mobile phone service providers typically charge fairly high prices if you’re calling one of their subscribers because they have a monopoly in getting to that subscriber but they then take those monopoly rents and dissipate them through, in various ways designed to try to compete with one another to sign up subscribers. So, monopoly rents upstream get dissipated downstream as multiple service providers compete with one another to sign up subscribers. A similar thing, in theory could work with respect to CRSs. And let me say, this is the theory behind it. If you have sufficient competition downstream, that would dissipate rents, any rents upstream from excessive booking fees. This is, can I, does this make sense? I see nodding, people nodding. Alright, so that was the second, our second key finding was to lay out the logic of that two-sided intermediary market theory. The third, the third key thing was to look at whether is in fact, that is in fact that the way that it works. Do you have that kind of perfect or very aggressive competition downstream with CRSs trying to sign up travel agents such that you would dissipate the rents collected from excessive booking fees upstream. And we found mixed results. There was clearly evidence that CRSs competed very aggressively to sign up some but not necessarily all travel agents. There was a nice little study done for Sabre by Steve Salop, a US anti-trust economist looking at total distribution costs from 1995 to whatever it was, 2003 to see, and in fact concluding that the increase in booking fees that had been observed and the airlines complained so much about had been fully offset by reductions in airline payments to travel agents. So, if you looked at total distribution costs, which is the right thing to look at, when you look at this as a two-sided market you found that the booking fees, that total distribution costs had not, had not gone up. On the other hand, there was other evidence that downstream competition was less than perfect. Orbitz, which I mentioned earlier, Orbitz was itself, I think, an example in my view that downstream competition was not perfect. If the two-sided intermediary market notion was valid, airlines would be indifferent. If booking fees were high, they would be indifferent because that would, those rents would be worked out below. In fact the creation of Orbitz, airlines, a group of airlines spent 200 million dollars to create Orbitz as a way to introduce competition into the setting of booking fees. So, Orbitz was itself an example, evidence that competition downstream was not, was not perfect. Also I think that probably the most dramatic, if you looked at the market shares that individual CRSs had in European countries and Amadeus or Galileo tended to have a very, very high market share in particular countries and that suggests, that and some other things suggested that the level of downstream competition was not perfect and was not adequate to dissipate fully the rents from excessive booking fees upstream. So, we concluded that under these conditions, that, where you’ve got less than perfect competition downstream, that it’s nevertheless true that the CRS serves as an intermediary. But it is a less than a fully efficient intermediary and that results, that means that CRS market power likely does cause some harm to consumers although it’s less harm than airlines typically maintain. In other words, the mechanism I described that the rents being dissipated downstream through the CRS competition to sign up travel agents, that mechanism is working, it’s just not working perfectly. But, you cannot simply look at high booking fees and conclude that that’s evidence of CRS market power. Now this seems like a fairly, it’s clearly a very important notion. Also seems like, it seems like something that ought to be part of this debate but I continue to be surprised at how few people do look at it in those terms. I read the Department of Transportation’s final rule the other night and there’s absolutely no mention of this notion in their discussion of CRS market power. Absolutely no discussion of the idea that you have to look at total distribution costs. It’s not simply enough to look at booking fees you have to look at what’s happened to payments to travel agents. Often you hear airlines complaining about high booking fees but with no seeming recognition that they are paying travel agents far less than they did before booking fees went up. Similarly you hear travel agents complain that airline commissions have gone way down but the travel agents don’t acknowledge that their payments from CRSs have gone way up. So, this notion of the two-sided market is enormously important and I think it’s our major contribution to the debate. But it’s surprisingly absent in much of the debate. Alright, and then finally, our fourth finding under CRS market power is that and again this is not new, but that new technology is putting, is promoting competition on both sides of the two-sided CRS market and in particular, what was particularly dramatic was the evidence in the US where because the CRS rules didn’t cover web fares, US airlines were able to withhold web fares as a way of introducing competition into booking fees and web fares had amounted to a kind of a natural experiment in CRS deregulation. What happens when airlines aren’t covered by mandatory participation and these other rules? What happens?  And the answer is that the airlines are able to use, to withhold fares strategically as a way to force booking fees down. So that was to us a very positive indication of the benefits to come from CRS deregulation. So we concluded the market power, CRS market power analysis by saying, yes, there is, the current regulations are contributing to the problem. The problem of excessive booking fees is not fully dissipated by downstream competition among CRSs to sign up travel agents, and the natural experiment provided, in the US, by the ability to withhold web fares suggest that getting rid of CRS regulations can bring real consumer benefits. So for all, so that portion of our analysis led us to say, yes, the Commission is on the right track in trying to get rid of CRS regulation. So, we then looked at whether, if you did that, if the Commission were to roll back or eliminate the CRS code, you would have a re-emergence of the sort of a problem that you had in the 1980s where an airline ownership of a CRS would lead to some sort of vertical abuse. And we laid out the economic argument for why, under certain circumstances, the incentive would be therefore that to happen when you have airline ownership but not necessarily ownership. It could take another form as well of a CRS when both of them have a large share of their respective market and when some sort of vertical abuse has the potential to maintain or increase their market power you have the ingredients for, the potential ingredients for the sort of abuse that was seen in the 1980’s. It need not be just ownership. It could, this sort of thing could happen under a non-ownership relationship, particularly where you had some sort of profit sharing but typically, it’s more likely under an ownership situation because the incentives between the CRS and the airline are aligned much more closely if the CRS is owned by the airline. And so in, in theory Amadeus and its owner-airlines had a, in their home markets they had what amounted double dominance of the owner-airline and the CRS. And that created the potential, in the home market for the sort of problems that we’re seeing in the 80’s. Now, we were quick to point out that there are benefits from vertical integration of CRSs and airlines and we went through a lengthy discussion of the three basic benefits and I won’t go through them here but there are fundamental economic benefits to some sort of a vertical relationship between a CRS and the airline. We laid those out but we concluded that the fact that three of the four CRS airline-owners had divested their ownership of the CRS suggested that you could, airlines could achieve those benefits short of ownership. At one time, ownership may have been, probably was necessary to achieve the positive benefits. It probably no longer is or at least circumstantial evidence would suggest that that’s no longer the case given that three of the four owner-airlines have divested. So, we concluded that there was a potential for problems in the home markets of Air France, Iberia and Lufthansa. We then did an impact analysis of three different options. We started off saying that the appropriate goal for CRS policy was to deter anti-competitive conduct by airline-affiliated CRSs while allowing efficient vertical arrangements. So, ideally you want to prevent the abuse while allowing the good aspects of vertical integration to be achieved and to do this using some sort of a policy mechanism that doesn’t create unintended consequences, because, arguably the current policy solves the first two problems. It prevents anti-competitive conduct and it allows the vertical integration benefits to be achieved but it creates these unintended consequences. So you want an alternative to that. The major policy choice is whether to regulate ex-ante or ex-post; ex-ante using some sort of a CRS regulation that’s set out in advance or ex-post using the competition laws. We looked at three different options (How am I doing on time? Am I, Kevin, am I? OK.)  We looked at three different options. Option 1 was elimination of the CRS code of conduct altogether. Option two was the proposal that DG TRAN put on the table in December 2002 which was essentially elimination of mandatory participation and non-discrimination. And then we looked at a third option that was designed to respond to the potential for problems in the home markets of the Amadeus owners and that would have required in Spain, France and Germany, for the parent carriers which would include airlines that market a CRS to abide by a mandatory participation requirement in their home market and that would require an airline owned CRS to provide any improvements in service to all participating carriers on an equal basis in the owner-airlines home markets. So that was designed to try to target narrowly the potential for problems, limited to the markets where there was this double dominance problem and tailor it as narrowly as we could. We laid out the pros and cons of each of these options. We didn’t come down explicitly in favor of one or the other although it’s fair to say that Option Three was the one that we thought made the most sense. But let me say that this was not a slam dunk. There were arguments for all three of the options. It wasn’t weighted entirely in favor of, in other words the benefits weren’t entirely with Option Three. Boaz Mosel, before he left was a, we were somewhat divided internally among the Brattle team and Boaz was the advocate for complete deregulation. I’ll let him defend this position today. When Boaz left, the rest of us agreed with one another that that wasn’t the right approach but it was not, my point is that this wasn’t a black and white issue, that there were, there were pros and cons to each of those approaches. And, and they’re laid out. So, it’s a, in the end it’s a question of, it’s an important issue. There are potential trade-offs. We felt that Option Three, which preserved some degree of regulation over the airline-owned CRSs was the best approach  and it created some on-going incentive for an airline, for the airline owners to completely divest. But, it was not a, it was not a slam dunk. Alright, yeah. I think there’s a question or two. I take questions now or do I wait?

 We have time for a couple of questions? Any questions?

Come on, somebody. Yes?
 
A lot of the discussion at the moment is purely about the relationship between CRSs and airlines.

Right.

CRSs are not just about airlines. CRSs also cover ground transportation, they cover hotels and so on and it’s very well to talk about that and yet in Europe, that’s where a lot problems are especially in ground transportation.

Yeah.

And also in terms of the BSP or (can’t understand)

I’m sorry, what’s BSP?

BSP (someone coughs –cannot make out the sentence). There’s a lot of underlying issues which are not just purely about the airlines.

No, I know that’s true. We did not get into them. I was talking with somebody yesterday about some interesting rail issues and ways in which CRS policy inadvertently discourages use of rail. And we simply did not have an opportunity to get, to get into those. I’m not, you know, I’m not surprised. There’re… we just did not get…we limited our scope to the airline industry issues.

Dorothy?

Yes.

Do you think the three US CRSs would have divested themselves of their ownership positions were it not for the CRS rules to begin with that mitigated against abusive behavior. It’s a hypothetical question.

Yeah, I don’t know. My guess is that the, some of the benefits required ownership at one time and you reached the point where you did not need ownership in order to achieve the benefits and the regulations imposed a cost on trying to use the system in ways that were not good for consumers, so I suspect it was a combination of the two, but I think that it was both.

Yes.

You kept referring to the excessive booking fees. Can you give us an idea of how excessive they might be?

Well let me... Is there someone here from an airline who can quote statistics? I mean the airlines have been…this is really what the debate was, I think about. At a point where the airlines were facing major financial problems and were figuring out ways to lower a lot of their costs, including some of their distribution costs, CRSs booking fees were going up. I think the figures are 5 to 6% a year. I think American Airlines had some figures that were consistent with other figures we saw in Europe that were in the record. CRSs like Sabre, didn’t dispute the numbers per se. They said yeah, they are going up about 5 to 6% a year but they’re going up for a couple of reasons. One, they’re going up, and by the way, and airlines were quick to say this is happening at the same time that computing power, the cost of computing power is plummeting. So not only are booking fees going up, they’re going up despite the plummeting in the cost of computing. They’re not a problem to the degree that airlines would have you believe precisely because of what’s going on downstream with the CRS competition to sign up travel agents and, money going to travel agents from CRSs that otherwise would be going from airlines directly to travel agents. I hope that I’m clearer on that. That’s sort of our key, our key contribution. Yes.

Can I ask you to explain your position on MIDT tapes.

Oh, gosh, I was afraid somebody was going to ask me that. Let’s see. There were two issues. One was the price, the high price of the MID tapes, MIDT and was that a function of CRS market power and we concluded, no, that, that it wasn’t and I can’t remember now why we… Boaz do you remember that?

(can’t hear beginning)…the regulation does not allow people to sell MIDT at different prices to different users which is why (speaker talks over Boaz).

I mean one of the Commission’s proposals was to have group, a lower rate for group purchasers and we argued if you deregulate, you will naturally, the CRSs will start to package these things and in fact that was already happening, packaging them for small businesses that would be sold at lower prices. So we said, you don’t need to do anything there. We took a fairly hard line on, though, on the problems of airlines using MIDT to, I mean we, we don’t like commission overrides basically. I mean, the problem with commission overrides and MIDT, their basic function is to allow airlines to implement commission override systems by which they reward travel agents who meet targets and the problem with commission overrides is that they turn a travel agent into an agent for a particular airline without the consumer knowing. And the last part is the key. If the consumer were aware of that, that would be fine, but consumers aren’t aware. When you’re dealing with a travel agent and they are getting a commission override from a particular airline and you don’t know that, that’s a problem and that’s made possible by MIDT. So we took a surprisingly hard line. Here I think my economist colleagues probably weren’t paying close enough attention and let me get away with taking a hard line on MIDT. We did not recommend elimination of MIDT because we, you know, the airlines claim that there are these benefits and that only MIDT can be used, no other data source. I wasn’t convinced of that but… could respond and tell me where you, who you…

In your, in the Brattle report which I’ve got in front of me here it actually says about airline market power, in fundamental ways MIDT appears harmful to competition. Where I’m coming from is not so much the way you’ve described it there in terms of price, the more expensive the better in some respects, the issue is about the ability for the people who receive this data to get comprehensive sales data on their competitors. And then use that in a bargaining position with their customers, their corporations. So where I’m coming from is from the corporation’s perspective in that, in a normal buyer-seller situation, you would have a certain amount of knowledge of each other’s business or you would agree to exchange data about each other’s business. In this situation with MIDT, one part of the relationship has complete knowledge of the others, so it isn’t actually a buyer-seller relationship anymore. And there are good examples in Europe of certain airlines who use this data to manage their corporate deals which seems very unfair from a corporate point of view. And certainly in our business we have many corporations who are very unhappy about the fact that any airline can get access to their data without their permission. So, that’s why I asked the question for MIDT because a lot of people tend to forget about that because the issue tends to be about the cost of the CRS to the airlines and the relationship between the airline and the CRS. Let’s not forget the corporation. Unfortunately there aren’t many here today. Let’s think about the corporation who actually picks up the bill, and you can argue, is severely disadvantaged by MIDT.

Well there’s also, I think that your views are consistent with ours that price is not the issue, it’s the impact on competition. But, it’s not just corporations, it’s also in the US, there’s an issue with low-cost carriers, when the big network carriers have had enormous… there’s been a lot of transparency into the pricing strategy of the low-cost carriers and the low-cost carriers… it’s just unrealistic for them to get MIDT data. So, you share at least my bias on this issue… Mia.

(can’t hear the beginning of the question) …in America and regulated in Europe and what were the side effects of that? Did you ever study that?

No, we didn’t. Because we finished this report before DOT had issued its final rules so, I know that that’s an issue, but no, we didn’t.

(can’t hear question) 

I don’t. No. It’s great…I’d love to see both places do the same thing but I don’t think that’s the single most important issue is harmonization with the US. I mean the patterns are surprisingly similar in both places. This report may appear to some European readers to be too US-centric. There was this incredible docket of information and nice summaries by the Department of Justice of the history of the problems and the problems in the US were so similar, the US tended to be ahead of Europe in terms of both the good and the bad by three to five years merely because we deregulated our airline industry. So, the patterns and the structural issues are very, very similar there and here. The one big difference is the continued ownership here of Amadeus and you will have to figure out how to deal with that.

Dorothy, thank you for that very insightful presentation and for taking the time for a few questions.  It’s now time to take our scheduled 20 minute break, so why don’t we plan to be back here at five minutes past. Thank you.

Welcome back everyone. It’s now time for our stakeholder discussion. We have with us a panel that represents a near full range of interests on this issue and we are fortunate to have with us such high caliber government and industry officials no doubt underscoring the importance of the issue before us. I’d first like to introduce our esteemed panelists, from left to right, Michel de Blust, Secretary General of the European Travel Agents Association, welcome; Ludolf Van Hasselt, Head of the Economic Regulations Unit of the European Commission is with us; Deborah Dickens, Senior Manager, Global Distribution for British Airways, welcome; David Jones, Executive Vice President, Commercial, for Amadeus Global Travel Distribution, welcome to you David and David Schwarte, Executive Vice President and General Counsel for Sabre Holdings. Before we begin I would like to go over the ground rules. First, the panel will go the better part of 90 minutes to ensure sufficient time to explore below the surface on many of these issues. Each panelist will have up to five minutes, up to five minutes, to make an opening statement. If we touch five minutes, I will ask for the panelist to wrap his or her comments up. I will also ask the panelists questions and they, in turn, are free to offer comments on other panelists’ responses. All will endeavor to be concise with their contributions so that we can dig deeper and deeper into the issues. Time will be reserved for questions from the audience. And, finally, two minutes will be allocated at the end for each of the panelists to leave us with some final comments. With that, Michel, would you like to lead us off with your opening statement?

Thank you, Chairman. I am Michel de Blust. I am Secretary General of ECTA which is the European Confederation of Travel Agents and Tour Operator Associations and of GEBTA which is the Guild of European Business Travel Agents. You gave me five minutes, Chairman, you gave us five minutes each, I will therefore raise three problems and offer three solutions to be debated later on. Over the last twenty-five years, of course, as we all know here in this room, CRSs have become the most efficient and therefore probably one of the most indispensable working tools for travel agents and travel management companies. But we have also witnessed in the past ten years that the historical triangular relationship between airlines, agents and their customers has changed dramatically. Today, there is not any more one distribution channel, I would say there is a tree, or there are a number of distribution channels in the market where every actor is not anymore confined in his historical role as either as either a carrier or a conveyor belt between carriers and distributors which were the CRSs and travel agents. Today, these three actors have interpenetrated each other’s roles. The three problems, which, as an industry, as travel agents, we would like to raise and have raised with regulators are the following ones. The first problem is related to Article 3A of the current code: the mandatory participation of parent carriers and whether this rule should be maintained. We say, yes, the rule must be maintained as long as there is one CRS which is dominant on a number of markets, which has among its shareholders three airlines which are also dominant in that market. There are many aspects to justify this rule to be kept in place but I can tell you, if you look at the market structure, and if you look at what is going on for instance in France, Germany or Italy, in Spain, sorry, this rule is absolutely indispensable. And in the handover text which you will be finding later on the table or on the ECTA website www.ecta.org or www.gebta.org, as from 12 today, you will find a full presentation and a full explanation of the reasoning behind keeping in place fee mandatory participation of air carriers. Issue number two: and of course, you will not be surprised for me to raise here the MIDTs issue. Yes, there are aspects related to the cost of MIDTs when airlines want to buy them but once again, the rules regarding MIDTs which is set up under Article 6.1 of the code is a rule which goes back basically to 1989, sixteen years ago. Those who were working in this industry sixteen years ago know perfectly that over the last sixteen years, there is no comparison whatsoever, both on the airlines, CRS and agents sides’ in respect of how the market does operate. According to Article 6.1, CRSs must make MIDTs available to airlines at a given price. I’m not going to enter discussions on how much do airlines pay for MIDTs. This is a matter for airlines and CRSs to sort out. The major issue we have here is that through MIDTs, airlines have a perfect visibility, a full and thorough knowledge, of what an agent is selling on behalf of whom and with which carrier. Now, can you please tell me, in which industry, within the EU, a regulation is setting up a rule according to which competitors are having a perfect knowledge of what their competitors are doing in terms of marketing and sales. This is exactly what MIDTs are about. Airlines know exactly what travel agents are selling, to whom, and at what price. It is obviously affecting the competition between carriers, but it is even moreover affecting the competition between carriers and agents because both today are distributors, which they probably weren’t in such an extent fifteen years ago. And last, but not least, it is also affecting seriously the way airlines remunerate travel agents. If we wouldn’t have had this provision in the code of conduct I’m sure that the colleagues of DG TRAN at DG COM wouldn’t have had to take a decision in 1999 in a dispute between Virgin Atlantic and British Airways. Last issue, therefore that’s a problem for us and our solution is, MIDTs in the future should not include any more any identification of the travel agents. Problem, solution we are offering. That should be completely removed. A step in a good direction has already been made by the Commission when they requested the withdrawal of identification of implants which were allowing airlines to identify corporate customers. However, we have clear signals that identification of corporates still occur through MIDTs and I will be pleased to elaborate on that later on. Third and last issue: access to fares. As I said earlier, there are today various channels to distribute and this is fair enough. We are in a market economy and in market economy there should be freedom to trade. However, we are of serving as travel agents but more and more a growing number of airlines are withdrawing, sometimes a substantial part of their fares from the CRSs. If that continues as it goes today, we will end up in a situation where unfortunately, and I’m sorry for the four CRSs who are represented in this room, CRSs will become totally irrelevant to travel agents. Already today on a number of markets, agents are forced to use different channels to have access to the various fares available on the market and Robert Evans made it abundantly clear this morning when he referred to the difficulties he was meeting to find the cheapest fare to go with his family to San Francisco. That’s a clear illustration of that aspect. Therefore, we are saying, we need a guarantee that whenever an airline is participating into a CRS, that airline will make available to that CRS, all the fares which that specific airline is also making available to the traveling public through other channels. We are not against airlines choosing with which CRS they want to work, provided they are not parent carriers, but we want to make sure that once they have elected one or several CRSs to work with, at least all their public fares are available through that CRS. Three questions, three issues, three tentative solutions. Thank you very much, Chairman. I hope I remained within the five minutes and I’m available for questions later on. Thank you very much.

Thank you, Michel. Deborah. No, I’m sorry, Ludolf.

Thank you very much. I was involved in the drafting of the original Rule 2989 Regulation and Michel de Blust just reminds me that that is 16 years ago now. Thank you very much Michel. I just needed that as a starter. Ladies and gentlemen, I’m here to say absolutely nothing, so I apologize already now for that. I’ll make some remarks. Fortunately I have only five minutes but I’m trying to say as little as possible and learn as much as possible because, as you will have understood, we are in the midst of an assessment of developing new approaches to CRS and I can not tell you at this moment in time which way it is going. But, I’ll try to make nevertheless a number of points. The current CRS rules were designed at a time when the CRSs were the dominant if not the only distribution channel for air tickets. And all the CRSs were owned and controlled by airlines. The temptation was great for parents to use their CRS in order to divert customers from competitors, for example, by biasing display in their favor. Thus, CRS rules were developed in the EU but also in the US and elsewhere while in ICAO, a code of conduct was developed for worldwide application. Of all these rules, the EU rules are the most detailed, particularly on addressing display bias. But, by and large, they have worked well, they’ve been updated a number of times and now we are confronted with a number of fundamental changes in the market. One of those fundamental changes is the development of alternative distribution channels. It has been said already today, airlines are under severe pressure to drive down costs and the costs for marketing and distribution are, after labor costs, the second largest cost item upon which airlines can exert any influence. As a result, a large number of airlines have successfully promoted direct booking via the Internet drawing on the example first set by Easyjet. Sales of airline tickets has grown dramatically in Europe, through other distribution channels, has grown from 7.7 billion euros in 2002 to 26.6 billion in 2005. And we expect for 2006, 41.6 billion. Today, 40% of all bookings are done via the Internet or call centers and bypass the CRS. The part of Internet bookings represents between 10 and 25% for the network carriers and more than 95% for the low-cost carriers. In addition, a growing number of travel agents link directly with corporate customers and with the airlines’ internal reservation systems, also bypassing the CRSs. As a result, one of the main drivers behind the rules back in ’89, the dominance of few CRSs in the distribution market is gradually disappearing. The second main development is the divestment of air carriers. Also, the ownership structure of all major CRSs has been modified over that time. Three of the four dominant CRSs have changed their ownership structures so that they are no longer owned directly by an airline parent. The fourth CRS, Amadeus, has also changed its structure but it is still partly owned by three airlines. The Cinven and BC Partners have recently entered into Amadeus’ capital by taking a majority ownership share giving them effective control over the company. This development and the fact that the three parent carriers, Iberia, Air France and Lufthansa belong to competing alliances reduces the scope for coordinated competitive abuse of the CRS. For some time now and given the changes in the market structure, the majority of stakeholders agree that the CRS rules need to be adapted as they stand in the way of greater market efficiency. The market is ripe for a relaxation of the rules in order to give more room to market forces. That has been recognized obviously in the United States where the CRS market has been fully deregulated now. It’s a bit early to judge on the effects of the deregulation as it only happened in July 2004 and many of the contracts which airlines have with the CRSs have not yet lapsed. However, first indications show that the deregulation seems to favor lower booking fees and the use of new technologies such as the new Internet-based low-cost CRS called GNEs, GDSs for new entrants. That’s a new one, isn’t it? Also, in the EU, there is pressure to deregulate and allow the various parties more freedom to negotiate their contracts. However, Europe is not the same as the US. Internet penetration is not as developed as in the US, and the market share of the partially airline-owned Amadeus CRS is high in some of the European countries. Therefore the Commission has to judge in how far the recent market developments counterbalance the risk of market abuse, to what extent ex-ante regulation should be maintained to avoid anti-competitive conduct or, if, given more transparency, the competition rules can deal with any problems that may arise ex-post. In the post process of reflection on the CRS regulation, we also take account of the Commission’s policy objective to stimulate intermodal transport. In this regard, more flexibility in the pricing of booking fees would not only restore the play of market forces in the determination of the fees, but it would also avoid that combined air-rail products be priced out of the market because the same booking fees as for air services have to be applied to that combined ticket. You’ve heard about the results of the Brattle report, an excellent report, which underlies a lot of our current thinking. So we are now at the moment of truth. We have to make a proposal to Council and to the European Parliament. We are focused in the Commission, more generally, on trying to deregulate markets; we try to implement the Lisbon agenda now with less and better regulation, but of course, as Mr. Evans has indicated, we have to avoid that potential consumers will lose out. And consumers are the first and foremost in our minds. There’s one last remark which I would like to make and that is the relationship between CRSs and security. This is new, it’s under development and we don’t know what impact it’s going to have. But, clearly today, in obtaining information, P&R data on passengers, the US government draws upon the CRS inventory systems. And Amadeus is developing a product which would allow the data to be pushed to the US authorities in the future. Any such developments need to be looked at very, very carefully. Mostly in order to avoid that there are new rules or regulations coming in place which would hamper the development of alternative booking methods. In other words, we must avoid that for security reasons, it becomes important that bookings are made through CRSs. But that indeed also the Internet bookings can develop as they develop today. So those were my few remarks, thank you very much.

Thank you very much, Ludolf. Deborah.

Good morning everyone. I’m going to put my cards on the table straight away and say I fully support a lighter degree of deregulation in Europe. I think we should all remember that the GDSs provide benefits not just to airlines, not just to agents, but it benefits the consumer as well. It provides one integrated shelf space for air and for non-air content and it’s presented in a neutral way to travel agents. No one here is debating the value of the mechanics that the GDS provide. However, the evolution of the pricing structure where airlines fund not only the cost of the system but also the competition between GDSs for market share is not appropriate and has been already highlighted as an unfortunate byproduct of the current regulatory regime. As an airline, I’m actually ambivalent about what GDS an agent chooses to use. All I’m worried about is whether that agent chooses to book British Airways or one of our competitors. Deregulation for non-parent carriers, in their commercial dealings with GDSs would enable airlines to redress this balance and have not just potentially a reduced booking fee, but also more flexible contractual terms that best match each airline’s needs rather than the current one-size-fits-all contract and structure that we’re currently presented with. Market forces would work to commercialize the relationships between the airline and the GDSs and this can only be good. However, I chose my words carefully. What I want is a lighter degree of regulation not total deregulation. The market in Europe is, as we have already heard, markedly different to the market in the US. We still have three major airlines Iberia, Lufthansa and Air France that have a significant ownership stake in Amadeus. And, although people have highlighted the fact that there has been some restructuring, this actually has changed very little the actual percentage that those airlines own of Amadeus. While this ownership stands, there is a need to protect against anti-competitive practices that we have seen in the past. The regulations were put in place precisely to safeguard against this and, as we can all imagine, it’s a complicated area and it’s much easier for regulations to be enforced in a timely and simple manner where they are specifically defined rather than to rely on competition law which can be both costly and time-consuming for people to try to make a case that way. There’s potential for competition to be warped as a result of the GDS or airline owners taking action. The GDSs potentially by favoring their owners perhaps by introducing capability to them first in particular markets or by owning airlines consolidating the position of their owned GDS in other markets. This will further warp the market power of those two particular entities in the, particularly in the markets where they have double dominance and that’s already been talked about today. It’s been mentioned as well that perhaps because the US is deregulated that it would be appropriate to deregulate in Europe because it would tilt the balance of competition between the US and the EU. From my perspective, it’s much more important a bigger chunk of bookings for British Airways and for many European carriers comes from within the EU market place than are generated by the bookings made in the States. It’s much more important we get the regulations right within our core market than just simply look to mirror what has been done in the US. And even in the US, the DOT stated that they were only able to deregulate fully precisely because none of the US majors had a stake in a GDS anymore. So, in summary, there is a need to simplify and to remove regulations to allow non-parent carriers and GDSs to restructure their commercial agreements. However, there still needs to be some regulations to protect airlines and GDS from anti-competitive practices where ownership stakes remain particularly where market power is strong. Thank you.

Thank you, Deborah. David Jones.

Thank you Kevin and good morning everybody. I can’t exactly say I’m happy to be here given the nature of this event but I must say, I do appreciate the opportunity to be here and hopefully I’ll be able to contribute to a balanced debate, which I’m sure is the objective of most people in the room. We were impressed, I was impressed, my colleague was impressed by the sincerity of Mr. Evans and we’ve no doubt he will examine this issue when it comes before him fairly and objectively in the interest of the consumers. I think he’s left us now, which is a pity. But nevertheless, we do respect the sincerity with which he will be addressing these issues. We absolutely admire the academic objectivity of Dr. Robyn and if I may say so, as a former academic economist myself, although many, many moons ago, I found it particularly interesting. Thank you very much for that. We respect and admire BTC. They do a lot of useful work and most of the causes they espouse are very worthwhile. We do have one complaint against them and that is that they have unfortunately joined C-fare. C-fare is funding this conference, at least in part. C-fare is a lobby group for Sabre and Cendant, designed to enable them to attain some competitive advantage against Amadeus in the European market place. Let me not use my own words, let me just quote a recent few words from a journal, an organ called The Beat which despite its name is actually a rather well-respected commentator on the travel scene, the aviation scene in North America. Under the heading it says, the heading says “Cendant and Sabre fund group to oppose full European deregulation.” Fund. It goes on to say: “Another observer called C-fare anti-Amadeus wolves dressed up as consumer protectionist sheep. So, we do respect Mr. Evans, Dr. Robyn, but quite honestly, we don’t believe that the primary interest of our competitors is the interest of the European consumers. Nevertheless, intelligent, well-meaning people have expressed some genuine concerns and we need to address those very seriously. The first question is whether the airlines that have a shareholding in Amadeus control Amadeus in their own interests. The answer is that they have never done so except in a broad economic sense. They have never done so and they certainly don’t today. How can I possibly justify that assertion? This is one of the many, many ways in which Europe is different from North America. Each of our North American competitors was set up by a single airline and in the early days was indistinguishable from a department of that airline. The executives, the employees came and went, they moved around between different departments of the airline and one of those was the CRS. In the case of Amadeus, we had four founding airlines. Trust me, it’s very difficult to belong to the department of four different airlines simultaneously. In fact, obviously, it’s impossible. The only way it could ever have worked and did work was for the management of Amadeus to run the company subject, of course, to normal supervision of a board of directors which met once every three months. There is no way that the airlines had any involvement in operational decisions. Did the airlines control Amadeus? Yes, in a sense, of course they did. When we were publicly, well we still are as of today. As a publicly owned company, our shareholding airlines have, what is it?...about 46% of the equity, 47% of the equity but and this is not generally well known, they have 86% of the voting power in the shareholders assembly. So, of course, they control Amadeus in that sense. But they also have fiduciary responsibilities. The majority of Amadeus, as of today, is owned by the public. We have independent directors. The individual directors have to be aware of their responsibilities as directors of a publicly quoted company. They cannot distort the decision-making of Amadeus in the interest of their own airlines except at very considerable personal risk to themselves. And believe me, they don’t do it. However, probably, that is about to change. The results of the recent offer are not yet known but probably the outcome will be that the ownership of Amadeus will change within the next few days and in this situation, the voting power of the airlines will be reduced to about 45%. Moreover, the other 55% will not be owned by a widely dispersed shareholder base, it will be owned by precisely two private equity companies which have paid a devil of a lot of money for the privilege of owning the majority of Amadeus. There is no way that they are going to let the biased interests, the specific interests of the owning airlines determine the way in which Amadeus evolves. They are going to run Amadeus in the interest of Amadeus and therefore in the interest of its many customers. The airlines are not a block. There is no voting pact. They compete with each other extremely vigorously. The three of them all belong to different, each a different one of the three main alliances as Ludolf has said. They never have controlled the operational decisions of Amadeus in their own interest and this latest change absolutely ensures that there’s no way they will do so or will be able to do so going forward. The second point I want to make is, what is the market? We hear a lot about double dominance in the three home markets of those three airlines. But the relationships between the airlines and the GDSs are global. They are global suppliers, they operate globally. No one market is determinant in the relationship between a GDS and a major airline. Again, Europe is different from the States. I’m not sure what percentage of Sabre’s bookings, I don’t know off the top of my head or Galileo’s bookings come from North America. I think in the case of Sabre it’s something like 60 to 70%. No individual market for Amadeus accounts for much more than 10% of our business. No one market is determinant. The airlines have to negotiate with the GDSs having in mind a global business. In March of this year, the Sabre vice-president for Central and Eastern Europe was quoted as saying about Lufthansa “Is Lufthansa going to see its flights from the United States leave empty?” Of course not. Sabre has considerable negotiating leverage vis-à-vis the Amadeus airline owners but what this lobby is all about is minimizing that negotiating leverage so that they can get better deals from the Amadeus owners which they can then use to further their competitiveness against Amadeus. There’s been some reference, considerable reference made to the changes that have occurred and are continuing to occur in travel distribution. Dr. Robyn’s got enough knowledge that her proposal was developed some three years ago. Since then, the travel distribution scene has changed pretty much beyond recognition. I don’t want to go into it. We have the Internet, we have direct distribution, we have the online players which are completely unregulated. If Mr. Evans had still been here, I would have explained to him that Expedia is powered by Worldspan, Travelocity is powered by Sabre and the fact that he couldn’t find the information he wanted had nothing to do with the airline ownership in Amadeus, nor indeed with the information which is available in those two, actually not bad GDSs. The fact that he had so much difficulty finding that information was because Expedia and Travelocity chose not to show it in the way which is most easy for him because they are deregulated and they act in their own interests not the interest of anybody else. We have the low-cost carriers, we have the so-called new entrants. Why on earth does anybody think it’s appropriate to regulate this one tiny little corner of the worldwide travel distribution business? Airlines’ core business is much more important than their holding in Amadeus. Anybody who has listened to any of the recent public speeches of Thierry Antinori who is the commercial boss of Lufthansa will be in no doubt about where he interests lie. He never says anything without, never talks about anything without saying: “GDS fees must be reduced in half.” We are the majority GDS distributor of Lufthansa. Most of that will have to come out of our hide if that is going to happen. Mr. Antinori and his colleagues in the other airlines act in their own interests, in the interests of their airlines not in the interest of the GDS. And let’s suppose at the end of the day, there is some anti-competitive behavior. There is a question about ex-ante regulation or ex-post regulation. In Amadeus, we happen to believe, and I’m sure everybody in this room believes, that the combination of market forces and the rule of law is the best possible combination to ensure the smooth and efficient functioning of the economic system in the interests of consumers. Market forces and the rule of law, that is what we are asking be applied to us, that is what is applied today everywhere else in the world, not only in North America, but every where else in the world. Surely, in this worldwide universe of commerce, this micro-element which consists of Amadeus GDS distribution in France, Germany and Spain, surely this micro-element should not be the one component which is regulated. The burden of proof, ladies and gentlemen, has to be on those that would continue this outdated regulation. Thank you.     

Thank you, David. David Schwarte.

May I borrow that? Thank you. Good morning everybody. The good news about being last in a panel is that you get to hear everybody that goes before you and the bad news is sometimes you have to ditch your prepared remarks and sort of scramble and play tennis at the net. And, I think that this is one of those times. Let me just cut to the chase and give you Sabre’s core position, then I’ll try and respond in the five minutes that I have and I’ll be watching my time closely. To some of the points you’ve heard this morning: first of all, our core position is that any ownership stake of any significance in a CRS by a carrier that enjoys dominance in one or more air transport markets provides that carrier the ability to distort competition in two spheres, in transport and also in airline distribution. Now, what I think I’ve heard from my colleague David, and I’ve known David for a very long time, is that, not to worry, the Amadeus carriers do not behave in that way, and in fact there will be appropriate governance in place to ensure that Amadeus is not used for a tool to favor its airline owners. And my rhetorical question to that is, if that is true, then why in the world would you object to rules that many have said are necessary to deal with the risk of competition which will only require you to do what you say you are going to do anyway. My view is that what is needed in this industry is clear, bright-line regulations. They have proven over the twenty-five years that I have been in this business to really be the only proven tools for assuring that abuses of competition do not occur. Now, I’m not talking about personalities here. It is natural economic incentives. When an airline owns a system, it has an inexorable temptation to use that system in a way which steers additional bookings in its favor. Period, full stop. When an airline owns a system, it has an inexorable temptation to use its clout as an airline in a market where it is strong in order to steer travel agents to use its system. And the playbook for this is long-standing. What you do, is you selectively participate in GDSs that you don’t endorse, that you don’t own, you withhold fares, you scale back your level of participation so that access to your flights are not as readily accessible and over time, travel agents learn that if you’re going to do business in the home market where that airline is large, some say dominant, then you have to subscribe to the system that is owned by that particular airline. Now, the risk to competition and the risk to consumers is actually the touchstone I think for this debate. We’ve heard that a number of times and I fully agree with that. And, in this industry writ large in the history of this industry is the fundamental point that when airlines own systems, there is an inexorable temptation to use the system in ways which are against the interests of both competition and consumers unless checked beforehand by competition rules. I’m sorry, by CRS rules. Now we’ve heard, why isn’t competition rules alone sufficient? The Brattle Group report did an excellent job of summarizing the issues. I will simply give you at a very high level, my final answer to that and that is we had competition rules in 1984 in the United States. They were insufficient to check the behavior of airlines and as a consequence, rules were put in place. You had competition law in force in Europe in 1989. It proved insufficient to check the behavior of airlines with respect to how they engaged with the CRSs and, as a consequence, bright-line rules were put in place. Now, we are no the only individuals who have noted the temptation for airlines to abuse their ownership of the means of distribution. In 2002, the Association of European Airlines submitted testimony to DG TRAN in this rule-making issue which said: “As long as the airlines have ownership stakes in any of the CRSs, there will remain risk that they could abuse their position in either the CRS market or airline market or both.” Amadeus itself has echoed very similar concerns in a very similar setting. In 2002 when Apoda was launched it was owned by airlines and Amadeus, as did Sabre thought that the most appropriate solution was undertakings or rules up front so that we would know how they would behave. Amadeus said “Airline owners of these new entities could use their control over these entities to prejudice airline competition, resulting at the end in consumers not being able to obtain accurate and unbiased information.” We’ve also heard that the United States DOT only deregulated this industry because it first observed that the ownership links that had been the basis for any regulation of this industry between airlines and CRSs had evaporated in the United States entirely. So, the question is: Have the Amadeus carriers severed the links that have been shown to contaminate the behavior of airlines and CRSs? And my answer to that emphatically is no. The documents show that after this transaction is completed, the three Amadeus carriers will still own 45% of the equity of Amadeus, which means 45 cents of every dollar in profit that Amadeus generates will inure to the benefit of the three carriers. Ladies and gentlemen, that is an enormous incentive to use your clout as an airline in order to steer the travel agencies and consumers in your home market to the system that you own. We’ve heard that they are operating competing alliances and as a consequence this sort of behavior won’t happen. Well the fact of the matter is, their interests would be perfectly aligned since their owners and Amadeus are seeing Amadeus as the sole system used in all three of their home markets. There is no conflict of interest whatsoever with respect to that issue. In summary…well, let me make one other point. It’s also very clear to the CRS that if you want to do business in France, Germany or Spain, you have to have competitive access to the inventory. I liken not having competitive access to those three in those home markets as trying to operate a string of ATMs in Brussels when you can’t distribute euros. We would be at exactly the same position. So in sum, the current market structure is such that throwing the whole of the rules overboard is simply not a responsible option. As Brattle foresaw in Option Three, when it sort of recommended Option Three, throwing the rules overboard really invites the introduction of exactly the sort of misconduct that gave rise to the rules to begin with. At Saber, what we favor is substantial liberalization of the rules. I will expand on that in response to questions, but as I close, I want to try and dispel any lingering doubt you might have about the extent to which you should be concerned if the appropriate regulatory safeguards are not kept in place. I would urge you to read footnote 75 of the Brattle Group report. At footnote 75 you find the following chilling passage: “In one interview, an official from one of the Amadeus parent carriers explained the benefits of eliminating mandatory participation and non-discrimination requirements. We asked him why the airlines simply did not sell its ownership share so as to get out from under the burden of the mandatory participation requirement. He said his airline would never sell its share while the other Amadeus airline owners retained their share because it would be vulnerable to discriminatory treatment.” Thank you for your attention and I look forward to your questions.

Thank you, David. I’d like to move to some questions and first to Michel. Your first concern was non-discriminatory aspects or mandatory participation. Could you give us some examples of where your concerns are rooted?

Yes, thank you Kevin. Well I may just perhaps quote an information which came from one of my GEBTA members a week ago. While preparing this conference I sent some information around to my membership all over Europe. One of the GEBTA members came back and made the following example. He said, and I’m almost quoting, try to be a Sabre user in France and have access to all Air France fares including Nago fares in France or have access to all SNCF functionalities and how can you be a travel agent in France if you don’t have access to all Air France fares and if you don’t have access to all SNCF functionalities. I think a good example is better than a long answer Kevin.

Very good, thank you. Deborah, could you be a little bit specific about how British Airways and more importantly its customers would be impacted if we were to move straight away to a full deregulation?

British Airways would have the potential to not have fare competition in three of its key main European markets. So in France, in Germany and in Spain which outside of the UK are our three largest markets we could potentially not be able to compete on an equal basis for access to customers. Customers therefore would not necessarily have the best prices and the best availability shown in a neutral way to them which, at the end of the day, is a disadvantage to the consumer.

And, Ludolf, you have referred to the growth of European alliances as an alleviating factor. Could you elaborate on that and is there a risk that these alliances actually compound the opportunity for mischief in terms of quid pro quos; if you do this for me in the French market place, I’ll be able to do this for you in the German market place.

I’m not sure. I mean, it’s obvious that the risk of abusive action by a parent is much larger if there is a single parent than if there is a combination of parents who keep each other in balance, be they airline parents or other parents and a combination of three airline parents plus private investors is obviously a different proposition of one airline parent holding one CRS. How far that takes away every potential for abuse I don’t know. That is the multi-million dollar question here, isn’t it?

David Schwarte, David Jones listed a pretty impressive list of safeguards within the new ownership structure, but the proposed new ownership structure. Why isn’t that easing your concerns if, or perhaps it has.  

Thank you, Kevin. It certainly hasn’t. And I previewed a little bit of this in my comments as I was scrambling to respond to the speaker before me. My friend opposite as they say in Canada. The fundamental problem is one of economic fare. One of the functions CRSs have developed and if you think about it, it’s really adverse to an airline’s interest, is the ability to identify unused tickets which allows the corporation to claw back a whole bunch of refunds. Now, that functionality has been developed by all the CRSs because CRS competition has been robust. If you have an airline-owned system, it’s substantially owned by an airline and it is in an airline home market, what incentive does that airline have to allow that sort of features and functionality? Now the last thing I would say on safeguards is something I also mentioned in my comments. If, in fact, the Amadeus carriers will not abuse their position on board, the Amadeus carriers really do mean to allow the system to operate in a way that doesn’t favor Amadeus airlines over others, and if they really do mean not to favor Amadeus over competing CRSs why object so strongly to the retention of a few rules that would only require that.  

David Jones, what doesn’t Mr. Schwarte understand on this issue?

I tried to explain in my opening remarks, but I was probably going too fast. Why would we and why would our airlines object to these rules when they won’t affect our behavior? What we don’t want to do, is favor our competitors. What we don’t want to do is ensure that the negotiating leverage of those three airlines vis-à-vis our competitors is less than the negotiating leverage of any other airline in the world and that is what , of course, my airline owners can speak for themselves. But their interest also is to ensure that their negotiating position vis-à-vis Sabre and Galileo is as it should be: a free-standing, arms-length position between two major, global entities in each case. If this rule, the mandatory participation rule is maintained, that negotiating leverage will be substantially reduced. That will mean that Sabre and Galileo will get better terms from those airlines than they would otherwise get and that economic benefit will be used to Amadeus’ disadvantage. That is what this is all about, that is what we don’t want to happen. I hope, I hope that’s reasonably clear. If not, please come back to me. May I comment on a couple of other points?

Sure.

I guess the chilling quotation about needing to retain ownership in order to ensure that there was no discrimination by another owner illustrates one point if one believes it at all and that is that three owners are better than one. And, I think that most of my friend Dave’s remarks reflect the behavior and the situation in North America twenty years ago, not the actual situation in the industry as it is today. There is no doubt that when GDSs in North America were owned by a single airline, they behaved as a sort of offshoot of the distribution department of that airline, there was some outrageous abuses. There is no doubt about that and regulation was necessary. That is not at all the situation today but there continues to be a very strong element of thinking which seems to believe that the world hasn’t moved on since then. On economic incentives: economic incentives can take on many forms. It’s no secret, it’s public information, clearly, that when Sabre were spun off from American Airlines, they entered in to a longstanding market and support agreement, the two entities, Sabre and American Airlines. Under this marketing support agreement, American Airlines gets financial benefit from supporting the success of the Sabre GDS in the worldwide market place. And, there’s no doubt according to current American Airlines executives that every month they get a fat check from Sabre for supporting them in the market place. Let me give one example which I acknowledge is extreme, but just to make a point. One of our competitors, one of our customers, sorry, one of our customers, a large customer in one of the strongholds of American Airlines, Florida, was approached by American Airlines and told that if they didn’t switch from Amadeus to Sabre, American Airlines would surcharge them 12 dollars a booking for every booking that they made on Amadeus. Now, fortunately that was obviously just a salesman being over-enthusiastic. Our customer said to go away and that didn’t come about but it does illustrate that there are tremendous economic incentives for American Airlines to support Sabre. Let’s look at Galileo for a second. Here’s a quote from Henry Silverman, Henry Silverman, the chief executive of Cendant. He said: “The company will give discounts on Cendant brands, remember Cendant is a huge owner of hotel and car rental content which is not regulated. Cendant would give discounts on Cendant brands to travel agencies that switch from rival systems to Galileo.” A blatant case of cross selling. I’m not particularly complaining about these things. It makes my life a bit more difficult. But, look this is just the rough and tumble of competitive activity in the market place. Let’s not kid ourselves. It goes on all the time, everywhere, specifically the two GDSs behind this lobby, Sabre and Galileo, clearly benefit from this sort of activity in the market place today. Last point I would like to make: the concern that has been expressed about content. Would Sabre and Galileo have access to full content of the fares of those airlines that have a shareholding in Amadeus? Let me try and make it extremely simple. If one of the airlines that has a shareholding in Amadeus says to Sabre or to Galileo, you’re not going to get all our content, they will say: “Then you’re not going to get distributed in North America.” That’s to simplify the negotiating process. You give us the content, you get distributed, you don’t, you won’t be. What’s going to happen? It’s perfectly obvious. By the way, that’s not forgetting the fact that between them Sabre and Galileo have approaching 40% of the market in Europe and in the United Kingdom, for example, not an unimportant market for Iberia, nor for Air France nor for Lufthansa, Sabre and Galileo between have them 60%. It’s nonsense to pretend that these negotiations take place market by market. They are global relationships; they are global negotiations about the global relationship. Let’s not forget that, please.    

Thank you. And, let me remind the panelists that you will have two minutes at the end to wrap up anything that perhaps you wanted to comment on. David Schwarte, is it not unfair to the owning airlines of Amadeus to be required to participate in Sabre in Amadeus home markets? Would not Sabre itself be tempted to abuse that regulatory requirement to charge above-market rates to those airlines?

Thank you, Kevin. I’ve heard a couple of times a very similar question. Actually a point from David which this is all about competitive advantage and my answer to that is as follows: Let me explain to you what we’re proposing be adopted and the flexibility that we give those carriers and hopefully that will address that problem and I’ll do it fast. First of all, Sabre is not suggesting that the parent carriers have to participate in Sabre no matter what price we charge. That would be silly. Instead, we’re suggesting that under the mandatory participation requirements, as they should be amended, a parent carrier will only be obliged to participate in a competing system if it offers commercially reasonable terms. You should define commercially reasonable as no more than the prevailing rate for the system owned by that carrier in its home market and therefore I would say we would have no entitlement to the participation from Lufthansa in Germany if we charge more than the prevailing rate that that system charged other carriers in Germany and, if that was the rule, if that was the rule, how can Amadeus or Lufthansa charge that our fees that are excessive when all we’re doing is matching a rate that they have already assessed in the market place. What was you second question? I missed the last part of the second one. Hearing is not my strong point. Listening is.

I was asking you exactly…what was I asking you? You answered it.

Good.

David Jones, you touched on this in your opening comment about the competition laws. Article 82 of those laws governs abusive business conduct of a single party in a dominant market position. In other words, doesn’t Article 82 forbid the use, by airlines of their dominance as airlines to maintain their dominance over the CRS. So are not Sabre, Galileo and other industry participants protected already against potential abuse?

Yes.

Mr. Schwarte.

I knew it was coming back. Would you like me to respond to that?

Yes.

Apart from saying no? Competition laws do not work well in this sort of sphere when you’re dealing with a vertically integrated enterprise. The problem is that, and Brattle covered this quite well, I would only refer you to their analysis. But let me say, that the problem when you have ownership like this is that the incentive to misbehave is high and therefore the likelihood is high. It is very difficult to detect. There needn’t be a paper trail. The other problem in this particular industry is there are so many interactions, during a given day between a CRS and an airline, millions of pieces of data being sent back and forth, that it’s almost impossible for a CRS to detect whether it’s been denied availability or fares. And then imagine the argument in return that would say, oh that was a mistake, that was an accident, oh, that was only one fare. The problem is that without clear bright-line rules that say I’m entitled to whatever it is that they make available through their own system, any CRS is subject to death by a thousand cuts. And let me also remind you of a point I made in my introductory remarks which is the competition laws existed in the United Sates in 1984. They were insufficient. The competition laws existed here in Europe in 1989. They were insufficient and bright-line rules had to be adopted.

Thank you. So, to follow on then, David Schwarte. Because of the continued ownership of Amadeus by airlines, you don’t believe the EU market place is ready for immediate full deregulation. Is that correct?

That’s correct.  

What would you propose, then? Simply staying with the status quo and protecting the benefits from that to you, Galileo and others?

Absolutely not. And I hope this goes to the argument that all this is about competitive advantage. Here is what Sabre proposes and I’ll point to it as what we would view as a compromise solution and it is the Brattle Group Option Three. We would day, implement it quickly. What that would do would be to eliminate the pricing that today requires CRSs to charge every airline the same fee. That’s a pretty silly rule and it has no doubt distorted the market place and pricing to airlines. That would give plenty of negotiating strength to all airlines, be they parent carriers or non-parent carriers. In terms of the specific items in Brattle Group Three that I’ll just mention quickly in case you haven’t wasted your youth reading this stuff and it’s this: I think that the bedrock of Brattle Group Three is mandatory participation by owning carriers in their home markets. That is, whatever they make available through Amadeus in their home market should be made available to competing systems on commercially reasonable terms. This leaves the carriers plenty of leverage. You heard Dorothy Robyn mention the natural experiment with web fares in the United States. Carriers held back web fares, even carriers that were parent carriers of US systems because the rules there didn’t touch fares that you didn’t make available through your own system. They don’t here either. So, Lufthansa, Air France and Iberia would have plenty of leverage to say, if you don’t give me the price that I want, I’m going to put these fares only on the web site and I’m not going to make them available to you. I think that this proposal is one that is a compromise. Quite frankly, I am concerned about a game of crisscross being played in the Amadeus markets and it makes me nervous to only focus on the Amadeus home markets. However, in the interest of getting a rule moving that has been stuck for some time, this strikes me as one where nobody wins everything but protections are put in place and it’s less risky for consumers.

David Jones, what’s wrong with that proposal and could Amadeus support this kind of approach?

What seems to be being proposed here is not a simple continuation of one rule with all the disadvantages that I tried to explain in my several interventions, Kevin. What seems to be being proposed is a significant re-invention of regulation around this one issue. We have been told that somebody in their wisdom, Ludolf, I guess. A great guy by the way and I trust his wisdom tremendously, that Ludolf and his colleagues in their wisdom are going to have to define commercially reasonable terms. Commercially reasonable terms, when in every other market in the world, between every other pair of GDS and airline in the world, there is free negotiation. That’s going to be quite an undertaking. Moreover they have the tricky issue, it hasn’t come up so far, the tricky issue, what is a parent carrier? The definition of a parent carrier today is any carrier which directly or indirectly, alone or jointly owns or effectively controls a GDS. Any carrier directly or indirectly…today British Airways has a 9% share in Iberia and a seat on the Iberia board. Indirectly it seems to us it can be at least argued and it would need clarification that British Airways is a parent carrier of Amadeus. I’m sure that’s not what Deborah has in mind. I don’t know whether the 1% of American Airlines would fall into the same category because they also have 1%, I think that they still have it in Iberia. So the question of what is a parent carrier would need some sorting out. So we’re going to have to address the issue of parent carrier, we’re going to have to address the issue commercially reasonable terms; we’re going to have to re-regulate substantially. Is this really in the spirit of the times? Is this really deemed to be worthy activity, a worthy undertaking of the European Commission in this capitalist world that we inhabit? And I truly don’t understand, we in Amadeus don’t understand why the competition rules which apply to all other industries which have their element, by the way, of ex-post regulation, of ex-ante regulation. Mergers and so on have to get approval. I can assure you that the recent change or the current change about to happen probably in the ownership of Amadeus was approved by the European Commission specifically from the perspective of whether it was compatible with the existence of proper safeguards for competition going forward. Why on earth are the competition rules deemed not adequate for this little part of this little industry of travel distribution? Again, the burden of proof for anybody that is arguing for a substantial re-regulation has to be on them and not on the people who say the trued and tried elements of the rule of law and market forces are what count.

I would like to open it up to the floor for questions. Please wait for the microphone and please announce who you are and while we’re waiting for a question, I would just like to make an observation that five years ago, or four, five years ago I visited with a GDS and I was informed that they had developed a product to help corporations track all the non-refundable tickets. When one of the owning parent carriers found out about it, the five million dollar investment in that software was put aside and it was never implemented. And that is the concern that customers have with respect to looking at these issues after the fact. That is very difficult to uncover, but the damage is pretty significant. Any questions for the panel?

Good morning, Mr. Chairman. My name is Tom ??? from Galileo and one comment based on what I heard from the panel and one question for Mr. De Blust, if I may. The comment relates to conversation from the panel this morning relating to multiple airline owners of CRS systems and how multiple carriers may diminish the threat to competition and I think to the Asian market today and the existence of Abacus which is multi-airline owned and the market is rampant with CRS abuse and parent carrier abuse in the Asian market based upon the airline ownership. So, I think that there’s still an example in the world that demonstrates very clearly that airline ownership is anti-competitive and harmful to consumers. That’s the comment I wanted to make. My question is to Michel. Michel, your option, your question Number Three and your solution Number Three: access to fares. There’s been talk today about limiting mandatory participation to three home countries of France, Germany and Spain. My question to you is: is your solution, access to fares, limited to three countries or would that be all 25 European Union states?  

Tom, we would view it as a rule applying to the 25 countries of the Union.

Another question?

Thank you. My name is Hubert Beuve-Mery and I’m from the European Commission. It was argued today that… the question is to all members in the panel and also representatives of the Brattle Group. It was argued today that the situation in the EU and the US is very different because all US CRSs have no airline owners any more. Now in the successive debates which have surrounded this industry over time, it was also argued that marketing agreements between airlines and CRSs may both create similar efficiencies to airline ownership and create or pose similar risks in terms of anti-competitive behavior. And, indeed in the current rules, in the EC there are still traces of that. To what extent would this assertion about marketing agreements still be true and to the extent that it would be true, do such marketing agreements still exist, whether in the US or in the EU, in certain member states and could they indeed create both similar efficiencies and pose similar risks? And, if that’s the case, can it be that some other CRSs and some other carriers are also concerned by some of the things we are discussing today?

Members of the panel first, there were a few questions, very good questions, but, if you would endeavor to be concise so we can take other questions, that would be appreciated. Whoever would like to…

Thank you, Hubert, for your question. I can only address the marketing agreement that we have with American that David refers to. And, I can tell you that in the Brattle Group report, they put their finger on the problem, which is, that if it involves the sharing of profits, that is when you have the greatest temptation for an airline to do the same things it would do if there were an ownership position. And, in our case, there is no sharing of profits with American and, I can also tell you that if you watch the market place behavior closely in the United States, you will see there is far from an alignment of positions on most issues between Sabre and American, that the DOT rule-making, for example some of the most hostile comments towards Sabre came from my dear friends at American who argued for things that were completely against Sabre’s interests. I noticed that David was arguing for things in favor of Lufthansa’s interests. I didn’t get the benefit of that from our friends at American, and lastly recent proof of the pudding that this hasn’t contaminated American’s incentives at all is they are one of the launch airlines backing a new system called G2. So, it is a loose marketing agreement which certainly hasn’t tied them to Sabre’s welfare. As to others here in Europe I guess what I would say is, you raise a legitimate question. And., in fact, if there was behavior in the market place that led you to believe there was perhaps too close of an alignment of interests, you might want to inquire. You have to be careful to be sure that it isn’t just because there is a lower booking few being paid. David mentioned earlier an apocryphal story about an agent being told he had to use Sabre. I don’t know about that conversation, I can tell you that, because of our discount program in the States, we charge airlines a very low booking fee and it might have been because he pursued, there was a booking fee differential, I don’t know. On a case by case basis, you’d have to look marketing agreements and the ones that exist in the United States, I think have not affected competition.

David.

Well with respect, Dave, I do think it’s sophistry to argue that because there is no profit sharing, there is no alignment of economic interests when checks are being written. The fact is, it’s a complex world. And, it’s a confusing world right now and nobody’s quite sure where all this turmoil is going to end up. Dave refers to American Airlines position on G2. I would remind everybody that there was a great stir caused, at least on this continent, a couple of weeks ago when it was reported that the Star Alliance was putting out an RFI to determine their global GNE. Everybody was saying: “Well what on earth does this mean for established relationships between airlines and GDSs and what about Amadeus and so and so forth. Lufthansa is one of the leading lights in the Star Alliance. It makes my point that the interests of Lufthansa as an airline is to get the best possible distribution for the lowest possible cost. That will continue to be their objective, irrespective of their shareholding or not in Amadeus. It is a complex world. With respect to the question, outside the European Union, marketing service agreements are rampant. They’re just all over the place. They are perhaps particularly prevalent in Asia and South America, not unconnected with the Abacus issue. That is a part of the world where I think the rule of law and competitive practices is by no means as evolved as it is in Western Europe or in North America. Indeed, they produce benefits, they produce inefficiencies, as I said, it’s complex. I haven’t done a full-blown economic study, I’m not competent any more to do a full-blown economic study of them. This is a modern, capitalist universe that we are inhabiting where competition is very tough, all sorts of things go on, some of them shouldn’t go on but they do. That is the way of the world. The fact is, that there is no system that has been created so far as everybody in this room knows perfectly well that generates as much benefit for consumers as this rough and ready capitalism that the world enjoys today.

Is there one more question from the audience, then we’ll go to the two-minute, then we will go to the two-minute closing comments... two more questions.

I would just like to make one comment. I’m Barbara Hunter from BMI. I’d just like to remind the room that we’ve heard about the GDSs and the larger airlines. But, I’d just like to remind everybody that the smaller airlines have a lot of concern in this as well. We have some big issues on the GDS booking fees and for the length of time that this debate goes on, we will have to continue looking at alternate distribution which becomes more fragmented until this is resolved. I’d just like to remind the room, don’t forget us smaller guys as well.

Thank you for that.     

It’s 12h22 and we need to be out of here by 12h30, so please be concise so that we have time for wrap up. Yes?

I’m John Steele of the Prisma Consulting Group We’ve heard a lot about airline domination of, or non-domination, of CRSs and we’ve heard about CRS’s domination of particular markets. I notice from the Financial Times recently that CRSs are now beginning to buy travel agents. I wonder whether there isn’t an embryonic problem developing in a market which might said to be one step further downstream from that which we have been discussing. Because we will have travel agents that are owned by airlines, travel agents who are owned by CRSs and travel agents who are owned by neither. Is there a potential problem there?

Someone want to briefly answer that? It’s a little bit outside the scope of today but it’s a very, very…

I’m afraid my brief answer is that’s a long answer. It’s a very good question John but that’s a five minute dissertation.  

Yes, one more.

Last short question. Jeff Mason from Reuters. My question is for Mr. Van Hasselt. I understand that the Commission has been looking at deregulation or doing something on this for several years. What has taken so long and when do you expect to have a proposal out?

What has taken us so long is demonstrated by this debate. It is not an easy subject. The advantage is, the longer we wait, the more competition there is in the market. So, I guess if we wait another three years to do anything, the GDSs will be totally overtaken by Internet sales and the problem has gone away. So, perhaps, that’s the best solution. Can I use my two minutes right away? I would like to come back to my one remark on security; and I take this very seriously. There is a huge debate going on at the moment on providing immigration authorities with passenger information. The obvious source for that information is the P&Rs, the inventory systems of the CRSs and that’s the first where the US authorities, but also other authorities look at to obtain information from individual passengers. That has created an enormous pressure in the discussion on security. We are now facing new rules on what’s called APIS, Advanced Passenger Information Systems, where the information is collected at check-in. Now that, if that continues will create an infarct at airports. You can obviously see that any half-minute longer interrogation of a passenger will lead to huge lines at check-in and our airports, nor airports in the US, nor airports anywhere else in the world can deal with that. I am pretty convinced that the pressure on CRSs to provide information to security services will increase. I’m pretty convinced that that will require re-regulation and to some extent of the CRS market. I’m just putting this up as a flag. It’s not there yet but it is, in my view the longer term development we are having to face and perhaps even regulation of Internet bookings. God forbid, if that comes. It is something which is out there. It is very evident in the discussion. We’ve had long negotiations with the US authorities on data protection and other elements, and I know it is very much under discussion in Amadeus how they can respond to requests from their airlines to provide that information to customs authorities throughout the world. It is another area, I realize it has nothing to do with ownership of airlines, but it is something which is very worrying if it goes down that road. Otherwise, I’ve learned a lot. I’ve listened very carefully, I’m very grateful for the few questions I got. Thank you.

(Can’t hear question.)

It’s on our work program for this year, but it was also on the work program of last year.

One last, very brief question?

Actually, this is just a very brief comment. This is Brandon Mitchener, the Executive Director of C-fare. I just feel compelled to respond to what David Jones has said, and it’s unfortunate that Amadeus would want to perpetuate this image that C-fare is nothing but Galileo and Sabre. We don’t have them here today, but there are members of C-fare which represent one of Germany’s biggest ticket consolidators, a UK travel management company. Kevin has been very diplomatic in not responding directly himself but I think it’s hard to say …

I have the last minute. I paid for this microphone.

I think that it’s unfair to insinuate that his members are in any way the stooges for Galileo and Sabre. The second point that I’d like to make is that kind of comment also ignores the fact that what C-fare is saying is nothing other than what the Brattle Group recommended in its report, bought and paid for by the European Commission, what EGTA is essentially saying on behalf of the travel agents and what the European consumer group BEUC has also said in response to the European Commission. So you can criticize the nature of the organization if you want, but the message is exactly the one which is being espoused by a number of different voices. That’s all, thank you.

Well, let’s move to the 90 second closing comments. Michel, would you like to go first?

Thank you, Kevin. I’m glad that at least this conference will assist the Commission in making two progresses on the MIDTs issue and on the issue of access to fares. I haven’t heard any questions against the EGTA/GEBTA proposals. I haven’t seen anybody jumping on the tables so Ludolf at least I’m sure that on these issues you know which direction you need to go, mandatory participation, with your permission, obviously, mandatory participation of parent carriers. Well we have heard the various positions. I wish only to make one comment. The market in Europe is not a global one yet. The markets in Europe are still very fragmented when it comes to airlines business. If you make a very quick fare research through various CRSs, regarding access to fares, you will find out that sometimes airlines open some booking classes in some countries which are simply invisible in the same CRS in other markets. So there might be global agreements but markets are still to be considered market by market and therefore there is an obviously and sorry for what I’m going to say, David, but there is, of course, a genuine interest for the Amadeus shareholders to make a market by market agreement with Amadeus national distribution company in each of these countries where Amadeus and parent carriers are dominant irrespective whether these three carriers are participating to three different alliances. Thank you very much, Kevin.

Thank you. Deborah.

I just wanted to make a couple of comments, particularly Ludolf, about what you said about just waiting and it will all sort itself out. Internet sales are not the panacea here. We heard earlier that it can be very difficult to do complex journeys through Internet booking engines or direct with airlines. There is a natural threshold for how far Internet sales can go. With British Airways, we have about 20% of our worldwide bookings on the Internet. That can grow, absolutely, but, there’s no way, it will take, for a network carrier, or even for some of the smaller carriers in Europe, the same way that that will become the sole means of distribution. Waiting is not an option. We should also focus on the fact that what we’re asking for is reduced regulation which will free up the majority of carriers in Europe to have more flexibility in their relationships. This is, take Barbara’s point, it affects all carriers at the moment. The fact that we cannot have flexibility in our commercial agreements with the GDSs because there’s a one-size-fits-all agreement whether you’re a small carrier, a medium-sized carrier or a large carrier, having the flexibility to structure your commercial agreements to best structure your agreements to best suit your own distribution strategy is absolutely critical. And, it shouldn’t be forgotten that the majority of carriers will benefit from deregulation. We’re not asking for the status quo to be retained. We’re also, David mentioned the fact, that, you know, these are global relationships for most airlines. We’re not asking for global restrictions. What we’re asking for is limited restrictions to put very clear guidelines in place for what can and can’t be done, theoretically also covered by competition law, but covered by competition law in a much more… covered by specific regulations rather than competition law to ensure very timely and clear guidelines are there for all parties. So, what I would say is, please don’t wait too long Ludolf.

David Jones.

Just three quick points, if I may. Firstly, I don’t think anything I said implied that BTC members are stooges for Galileo and Sabre. Indeed, in my own opening remarks, I was careful to say that we admire BTC and we admire practically everything that it’s doing but we do have an issue with it on this one point as nobody would be surprised to hear. Basically, we think Kevin and his colleagues do a great job. Second point I would make more to the substance of this debate is just to re-emphasize that the US, North America and indeed the rest of the world already has the benefits of full deregulation. We do not understand why they should be denied to some European consumers. And, finally, I would like just to refer to Ludolf’s point about security. This is obviously an extremely serious issue. Security unfortunately is a very dominant factor in all our lives today but I think Ludolf used the words that this could lead to a re-regulation of the GDS industry. With respect I don’t think that would be quite right. I think that what will be implied would be a regulation of all reservation systems. That is what will be needed to address that particular issue. It’s a much wider issue than simply GDSs and let’s think about it in that context, rather than just this narrow point of three airlines and one GDS.

Thank you.

You have thirty seconds now.

Three quick points. First of all, the proposal that I suggested on demanding mandatory participation rule was characterized as one that requires a great deal of work. Actually, I can Photostat a page out of the Department of Transportation rules where they applied exactly the same formula and I can Photostat another page where they say a carrier is a parent carrier if it owns more that 5% of a GDS and I’ll send that. Now you may not want to adopt it wholesale but it will be quick. Second point is you’ve heard, I think that there are risks involved from most commentators to carrier ownership of a CRS. You’ve also heard that this is a hard issue. And what I would suggest to you is that you have to focus on the wisest course going forward and the wisest course may be one that doesn’t involve a great deal of risk. And, one that doesn’t involve a great deal of risk is the proposal put forward by Brattle which I’ll urge you to take a close look at. Lastly, on the subject of mandatory participation, I want to close with one quote, in a pleading Amadeus submitted to the Department of Transportation when they had a different view of mandatory participation. They say: “The department established the mandatory participation rule to prohibit the carriers with equity interest from abusing their market position to distort airline and CRS competition by discriminating in favor of the CRS in which they hold and interest over other CRSs. The rule remains essential to DOT’s laudable non-discrimination goals.” Thank you.

Thank you, David. I have a question for the audience. I think we had great information and debate today. Can I have a show of hands if everyone has learnt something from coming out here to