September 29, 2014 Docket Management Facility, U.S. Department of Transportation, 1200 New Jersey Ave., SE, Room W12–140, Washington, DC 20590–0001 Re: Docket DOT-OST-2014-0056 Dear Sir or Madam: Enclosed is the filing of Airlines for America (A4A) in response to the Notice of Proposed Rulemaking titled “TRANSPARENCY OF AIRLINE ANCILLARY FEES AND OTHER CONSUMER PROTECTION ISSUES,” Docket No. DOT-OST-2014-0056 (the NPRM). The A4A filing is in three parts, as follows:  Part I are comments that address the subject identified as “Disclosure of Certain Ancillary Fee Information through All Sales Channels” (79 Fed. Reg. 29974-29980; proposed section 399.90)  Part 2 is the Report of Professor Daniel L. Rubinfeld, Compass Lexecon, on the Initial Regulatory Impact Analysis accompanying the NPRM with respect to the proposal to require “Disclosure of Certain Ancillary Fee Information through All Sales Channels” (79 Fed. Reg. 29974-29980; proposed section 399.90)  Part 3 are comments that address the other subjects covered by the NPRM Together, these three filings comprise A4A’s comments on the NPRM. A4A’s comments in Parts 1 and 3 rely on and incorporate the Rubinfeld Report (Part 2). Thank you for considering our views. Please contact the undersigned if you have any questions. Very truly yours, David A. Berg Senior Vice President and General Counsel Airlines for America Part 1: A4A GDS Comments on the Proposed Rule; Transparency of Airline Ancillary Fees and Other Consumer Protection Issues BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ) In the matter of ) ) TRANSPARENCY OF AIRLINE ) Docket DOT-OST-2014-0056 ANCILLARY FEES AND OTHER ) CONSUMER PROTECTION ISSUES; ) PROPOSED RULE ) COMMENTS OF AIRLINES FOR AMERICA ON THE DISCLOSURE OF CERTAIN ANCILLARY FEE INFORMATION TO CONSUMERS Communications with respect to this document should be sent to: DAVID A. BERG Senior Vice President & General Counsel DOUGLAS K. MULLEN Assistant General Counsel Airlines for America 1301 Pennsylvania Ave., N.W. Washington, DC 20004 (202) 626-4000 [email protected] [email protected] TABLE OF CONTENTS Page I. Introduction & Summary ...........................................................................................................1 II. Requiring Display of Ancillary Service Fees Through All Sales Channels Is Unnecessary, Beyond DOT’s Statutory Authority, and Too Costly in Comparison To Any Benefits the Requirement Might Provide.................................................2 A. DOT Has Already Decided Not To Directly Regulate GDSs, and No Justification Exists To Change That Position ........................................................................2 B. DOT Lacks Compelling Evidence of Significant Consumer Injury Regarding Current Fee-Disclosure Practices To Justify Taking Further Regulatory Action Targeting Airlines and Ticket Agents .....................................................6 1. Existing DOT Regulations and Market Forces Have Led To Enhanced Fee Disclosure Practices, and Further Developments Are Helping Consumers.........................................................................................................................7 2. The Rulemaking Record Does Not Establish Current Fee Disclosure Practices Are Causing “Substantial Consumer Injury” ..................................................13 3. The “Basic Ancillary Services” Identified in the NPRM Are Optional Services Incidental, Not “Intrinsic,” To Air Transportation ...........................................18 4. Enhancing Comparison Shopping Is Not a Legitimate Justification for Promulgating Additional Fee-Disclosure Rules for Ancillary Services .........................19 5. DOT Lacks Authority To Dictate the Terms of the Airline Distribution System .............................................................................................................................20 C. By Reducing Consumer Options and Highlighting Irrelevant and Misleading Information, the Costs of More Demanding Fee-Disclosure Requirements Will Outweigh Any Benefits ........................................................................21 1. The NPRM Fails To Acknowledge the Full Costs of DOT’s Proposals .......................21 2. DOT May Not Reasonably Assume Unquantified Benefits Will Shift Its Net Negative Cost-Benefit Analysis ...............................................................................27 III. Although DOT Has Not Specifically Proposed a Transactability Requirement, Any Such Requirement Would Increase Harm To Consumers Without Any Offsetting Benefits ...................................................................................................................28 IV. Conclusion ...............................................................................................................................30 BEFORE THE DEPARTMENT OF TRANSPORTATION WASHINGTON, D.C. ) In the matter of ) ) TRANSPARENCY OF AIRLINE ) Docket DOT-OST-2014-0056 ANCILLARY FEES AND OTHER ) CONSUMER PROTECTION ISSUES; ) PROPOSED RULE ) COMMENTS OF AIRLINES FOR AMERICA ON THE DISCLOSURE OF CERTAIN ANCILLARY FEE INFORMATION TO CONSUMERS Airlines for America (“A4A”)1 submits these Comments in response to Provision 2 in the Department of Transportation’s (“DOT”) Proposed Consumer Rulemaking Regarding Enhancing Airline Passenger Protections 3, as explained in its May 23, 2014 Notice of Proposed Rulemaking.2 Provision 2 of the NPRM is entitled “Disclosure of Certain Ancillary Fee Information to Consumers,” and DOT refers to it as the “GDS Issue.” 79 Fed. Reg. at 29,970. In addition to the points made in these Comments, we incorporate by reference, and attach hereto, the comments previously submitted by A4A (then known as Air Transportation of America, Inc.) in response to the notices of proposed rulemaking in Docket Number DOT-OST- 2010-0140-1881 (Sept. 23, 2010) and Docket Number DOT-OST-2007-0022-0250 (Mar. 9, 2009). See Attach. A at 51-53 (discussing GDS market power) & Attach. B at 43-45 (discussing costs of updating GDS-to-airline links).3 I. Introduction & Summary A4A urges DOT to not impose new regulatory requirements on the locations at and methods by which U.S. airlines and travel agents disclose fees for so-called “basic ancillary services.” DOT correctly characterizes this proposal as a “GDS issue”: under any formulation, DOT’s proposed requirements would entrench the market power of Global Distribution Systems (“GDSs”), along with their outdated technology and high cost structure, to the detriment of consumers. As explained in Part II.A of these Comments, DOT has repeatedly avoided calls to directly regulate the airline distribution system and has instead relied on market competition and the antitrust laws 1 A4A Airline Members are Alaska Airlines, Inc.; American Airlines, Inc.; Atlas Air, Inc.; Delta Air Lines, Inc.; Federal Express Corp.; Hawaiian Airlines; JetBlue Airways Corp.; Southwest Airlines Co.; United Continental Holdings, Inc.; United Parcel Service Co.; and US Airways, Inc. A4A’s Associate Member is Air Canada, which joins in these Comments. 2 See Notice of Proposed Rulemaking, Transparency of Airline Ancillary Fees and Other Consumer Protection Issues, 79 Fed. Reg. 29,970 (D.O.T. May 23, 2014) (“NPRM”). 3 Southwest Airlines does not join in the A4A comments concerning the disclosure of basic ancillary fees. Southwest’s position on this issue is set out in its own comments filed in this docket. and principles to lower prices and to give consumers more options. That approach is the correct policy, and there is no justification for DOT to depart from it. As Part II.B explains, consumers already have ready access to the information DOT now seeks to further highlight – access that the industry has fully provided in response to existing regulatory requirements and to the pressure of a robust competitive market. Those existing industry disclosure practices are not unfair or deceptive practices under the Airline Deregulation Act (“ADA”). Further, those practices are not causing any injury to consumers, and neither the NPRM nor the record discloses any basis for DOT to conclude otherwise. DOT therefore lacks statutory authority to impose new fee-disclosure requirements. Even if DOT had authority to promulgate its proposed rules, DOT has failed to justify the massive costs they would impose. Part II.C of these Comments describes why, as DOT has already conceded, the costs of its new regulatory proposal outweigh any quantifiable benefits; and DOT’s estimates of those costs are in any event significantly understated because they fail to account for lost consumer time and consumer confusion that would result from its fee-related proposals, the problem of entrenching incumbent GDSs against competition, and the cost of forcing airlines to build new infrastructure to accommodate outdated and inefficient systems. DOT’s assumption that asserted unquantifiable benefits will overcome the negative valuation of the proposed rule is unrealistic and unreasonable. DOT should abandon this unjustified new regulatory effort and instead focus on the proposals in the NPRM that would provide a net benefit to passengers, such as its proposal to impose certain customer service requirements on ticket agents that mirror the services already provided by airlines.4 II. Requiring Display of Ancillary Service Fees Through All Sales Channels Is Unnecessary, Beyond DOT’s Statutory Authority, and Too Costly in Comparison to Any Benefits the Requirement Might Provide A. DOT Has Already Decided Not To Directly Regulate GDSs, and No Justification Exists To Change That Position DOT has long recognized that GDSs possess market power in their relationships with airlines. See, e.g., Computer Reservations System (CRS) Regulations, Dkt. Nos. OST-97-2881 et al., 69 4 These Comments are directed primarily to DOT’s specific proposals to require disclosure of fees for so-called “basic ancillary services” in Proposed § 399.85(b) and Proposed § 399.90 Option A and Option B. See NPRM, 79 Fed. Reg. at 30,000-02. A4A urges DOT not to adopt any of these provisions. The NPRM also includes roughly 30 open-ended questions related to the GDS issue such as whether “carriers and agents [should] be required to display all possible advance seat assignment fees, or a range, or the fee for each seat assignment available at the time of the search for a particular city-pair?” Id. at 29,978. A4A has attempted to answer those questions in its Comments, but further notes that the extreme complexity and open-ended nature of those questions underscore the difficulty of creating a regulatory structure that could accommodate the vast number of options that airlines might wish to offer and consumers might wish to buy. 2 Fed. Reg. 976, 989 (D.O.T. Jan. 7, 2004) (“GDS Deregulation Order”) (“Each CRS therefore continues to have significant market power based on the travel agents to which it has exclusive access.”). Customer groups, often large corporations, rely on third-party travel agencies to manage their corporate travel spending programs. Travel agents, in turn, rely almost exclusively on GDSs to obtain fare and flight information, to make the booking, and to issue tickets. Each travel agent usually has access to the fare and flight information from only one GDS. As a result, each GDS controls airline access to a distinct group of traveling customers representing a large share of airline revenue, and airlines have traditionally needed to participate in each GDS to obtain access to each of these distinct customer groups. Because each GDS provides access to a different customer group, the GDSs (Sabre, Travelport, and Amadeus) are not substitutes for one another. That is to say, if an airline is not participating in Sabre, it cannot use Travelport to reach the customers of a travel agent that uses Sabre. Thus, each GDS has market power over airlines that want to sell tickets to their customer bases and can charge supracompetitive fees for each flight segment booked via that GDS. As a consequence, distribution of airline tickets through a GDS costs the airlines substantially more than distribution through the airlines’ websites.5 In addition, as DOT knows, the GDSs have imposed restrictive contract terms on the airlines. Those terms limit the airlines’ ability to develop and expand alternative means of distributing their services through travel agencies, including the requirement that airlines provide the GDSs with access to “full content” – meaning the ability to sell every fare the airline offers, even if it would be economical for the airline to offer that fare only to alternative distribution channels that are less costly or more efficient.6 This situation is different than what DOT envisioned in its GDS Deregulation Order. In that order, DOT anticipated that airlines would be able to compete with GDSs and travel agent outlets using “web-only” fares and that the distribution market would see new entrants. See 69 Fed. Reg. at 977. Airlines have not historically been dependent upon GDSs as a distribution channel for ancillary services, and the airlines’ “full content” contractual obligations to GDSs typically have not extended to those ancillary services. As the supply of and demand for ancillary services has increased, the GDSs have often sought to negotiate for access to this content. In recent years, many airlines and GDSs have successfully negotiated agreements that enable the GDSs to 5 GDS abuses remain the principal obstacle for market forces in airline distribution. For example, Sabre has prohibited one new market entrant, Farelogix, from directly connecting airlines to travel agents’ Sabre-controlled systems. See, e.g., Travelport joins Sabre in ending Farelogix developer agreements, available at http://www.tnooz.com/article/travelport-joins-sabre-in-ending-farelogix-developer-agreements/ (last visited Sept. 28, 2014) (For the record, all online articles and websites cited in these Comments are provided in Attachment C.); see also Report of Dr. Daniel L. Rubinfeld at Part V.A (Sept. 29, 2014) (“Rubinfeld Rep.”). Unfortunately, the proposed rules do nothing to address those abuses. 6 See Brett Snyder, Why You So Rarely See Web Fares in the US, The Cranky Flier (Aug. 25, 2014), http://crankyflier.com/2014/08/25/why-you-so-rarely-see-web-fares-in-the-us/. 3 distribute ancillary content. Some airlines have been able to use the GDSs’ desire for access to ancillary content to bargain for concessions on booking fees – lower booking fees that, because of the intense price competition among airlines, translate into lower ticket prices for consumers. Negotiations between airlines and GDSs over ancillary services benefit consumers for another reason. As described more fully below, GDSs have agreed to develop new technologies for accessing and distributing content for airline products and services. These new technologies are more flexible and robust than the older technologies on which the GDSs rely to access and display basic fare and flight information. These new technologies enable the airlines to price their products and services in a dynamic way and enable the information to be displayed to travel agents and consumers more effectively. GDS concessions on both pricing and technology were the product of commercial negotiations, in which the airlines had the option (and a market incentive) but not the obligation to provide ancillary content to the GDSs. If DOT were to mandate that airlines provide content to the GDSs, either by express requirement as provided in Option A, or as a practical consequence of Option B,7 it would remove that entire topic from the negotiating table and would permanently empower GDSs in their negotiations with airlines. The Department would, in essence, deputize the GDSs. In the past, DOT has recognized that GDS contract provisions that require an airline to “provide all fares as a condition to participation may . . . constitute unfair methods of competition because they unreasonably limit each airline’s ability to choose how to market its services. That would buttress the [GDS]’s market power.” GDS Deregulation Order, 69 Fed. Reg. at 999. The GDSs are unsurprisingly the greatest proponents of DOT’s current proposals, which would require airlines to provide valuable content to them through regulation rather than negotiation. DOT acknowledged in its Passenger Protection II Rulemaking the danger of “unintended consequences” of a rule entrenching GDS market power, “particularly given the sensitive nature of the market and the negotiations currently taking place between carriers and the GDSs.” Enhancing Airline Passenger Protections, 76 Fed. Reg. 23,110, 23,150 (D.O.T. Apr. 25, 2011) (“Passenger Protection II” or “PPII”). DOT recognized a similar sensitivity when it deregulated GDSs in 2004. At that time, DOT acknowledged that Congress gave it “no comprehensive oversight authority over airline distribution” and concluded that, because airlines had divested their GDS ownership, ending GDS regulation would “produce the best results for consumers over time.” GDS Deregulation Order, 69 Fed. Reg. at 978. Accordingly, DOT 7 As the NPRM correctly acknowledges, DOT’s proposed Option B will likely require airlines to continue to rely on GDSs to distribute airline fee information “as a practical matter.” 79 Fed. Reg. at 29,977. DOT’s Initial Regulatory Impact Analysis (“RIA”) similarly and rightly assumes that airlines will be forced to continue to use GDSs regardless of whether DOT adopts Option A or Option B (even though, as explained below, the RIA significantly underestimates the costs of that use). See Initial Regulatory Impact Analysis for Proposed Consumer Rulemaking Regarding Transparency of Airline Ancillary Fees and Other Consumer Protection Issues at 69 (D.O.T. Apr. 16, 2014). 4 decided to let most of its GDS rules lapse and “not to adopt rules governing the use of the Internet in airline distribution.” Id. “Airline deregulation has provided lower fares and better service for consumers, in part by enabling new firms to enter the airline business. . . . The deregulation of the [GDS] business should also benefit consumers, even though we cannot forecast how it will play out.” Id.; see Order, Complaints of United States Travel Agent Registry Against Delta Air Lines, Inc. United Air Lines, Inc. American Airlines, Inc. Continental Airlines, Inc. Northwest Airlines, Inc. Violations of 49 U.S.C. § 41712 et al., Dkt. Nos. OST-98-4776 et al., Order 2004-6-17, 2004 WL 1380503, at *4 (D.O.T. June 21, 2004) (“[A]s a general matter we have consistently read the pro-competitive policy directives in 49 U.S.C. § 40101 as allowing each airline the same freedom to choose the channels and the terms for distributing its services that firms in other unregulated industries enjoy.”). Since 2004, Congress has not suggested that DOT should change course, even though it has elsewhere demonstrated that it knows how to protect particular segments of the air transportation system when it wants to. See, e.g., 49 U.S.C. § 41731 (small community air service program); id. § 41719 (requiring air service termination notices in certain circumstances); id. § 41761 (regional air service incentive program); id. § 41705 (protecting travelers with disabilities). DOT’s current proposals would return to a regime of regulating airline distribution through GDSs, despite the absence of “compelling evidence” of consumer deception or unfair competition. See Order of Dismissal, Petition of Rulemaking of Joel Kaufman re Ticket Change Penalties, Dkt. No. OST 2003-14334, Order 2003-3-11, 2003 WL 23097368, at *1 (D.O.T. Mar. 18, 2003) (“Ticket Change Penalties Order”). Worse, DOT’s proposal would regulate in a manner that would strengthen the negotiating position of entrenched market players (the GDSs) at the expense of players exposed to fierce price competition (the airlines), and therefore at the expense of consumers. Those proposals are therefore a significant change from DOT’s deregulation decision in 2004 and from its decision not to reintroduce heavily intrusive regulations in 2011. Should DOT adopt such a proposal, it has an obligation to supply an explanation for this dramatic change in position. See, e.g., Greater Boston Television Corp. v. FCC, 444 F.2d 841, 852 (D.C. Cir. 1970) (“[A]n agency changing its course must supply a reasoned analysis indicating that prior policies and standards are being deliberately changed, not casually ignored.”); FCC v. Fox Television Stations, Inc., 556 U.S. 502, 515 (2009); Motor Vehicle Mfrs. Ass’n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 41-42 (1983); Philadelphia Gas Works v. FERC, 989 F.2d 1246, 1250-51 (D.C. Cir. 1993). That obligation is especially strong here, because GDSs’ market power has not subsided since deregulation.8 And, even without considering this market power, DOT has conceded that the mandate it is considering has “significant costs” that outweigh the quantified benefits. See infra Part II.C. 8 If anything, ongoing antitrust litigation indicates that GDSs’ market power over the past decade has grown. See U.S. Airways, Inc. v. Sabre Holdings Corp., No. 1:11-cv-2725-MGC (S.D.N.Y.); In re Online Travel Co. (OTC) Hotel Bookings Antitrust Litig., -- F. Supp. 2d --, 2014 WL 626555 (N.D. Tex. Feb. 18, 2014). 5 This fundamental flaw in DOT’s proposals would not be cured merely by the added regulatory step of requiring that GDSs with an existing distribution agreement not charge a separate fee for the distribution of ancillary fee information. See NPRM, 79 Fed. Reg. at 30,001-02 (Proposed § 399.90(g) Options A & B). Because, “as a practical matter,” carriers will still be forced to comply with the proposed rule through GDSs, see id. at 29,977, the rule is an unwarranted and harmful intrusion into the marketplace. Making matters worse, as soon as those existing GDS agreements expire, the proposed regulation would deprive airlines of one of the few bargaining tools they have with GDSs – the ability to bargain over information about ancillaries. The resulting increase in distribution costs will harm carriers and consumers. B. DOT Lacks Compelling Evidence of Significant Consumer Injury Regarding Current Fee-Disclosure Practices To Justify Taking Further Regulatory Action Targeting Airlines and Ticket Agents DOT has suggested that new fee-disclosure requirements for ancillary services would be justified because travel agents’ and air carriers’ current methods of disclosure are “unfair or deceptive” under the ADA. 49 U.S.C. § 41712; see NPRM, 79 Fed. Reg. at 29,970. The record contains no basis for any such conclusion and therefore no basis for further DOT action in this area.9 The NPRM’s analysis of the market is concededly incomplete and outdated. In assessing the contents of the record, DOT must satisfy a demanding standard before it can exercise its authority under section 41712. A practice is only “deceptive” under section 41712 if it is likely to “mislead” reasonable consumers. Order Dismissing the Complaint and Denying Petition for Rulemaking, Rulemaking Petition of Association of Discount Travel Brokers on Frequent Flyer Programs and Awards, Dkt. Nos. 46280 & 47539, Order 98-5-60, 1992 WL 133179, at *6 (D.O.T. June 4, 1992) (“Frequent Flyer Order”); see also Southwest Sunsites, Inc. v. FTC, 785 F.2d 1431, 1435 (9th Cir. 1986) (explaining that “deception” under the related FTC Act is “a representation, omission or practice that is likely to mislead the consumer acting reasonably in the circumstances, to the consumer’s detriment”) (internal quotations and emphasis omitted). A practice is “unfair” if “it violates public policy, is immoral, or causes substantial consumer injury not offset by any countervailing benefits.” Frequent Flyer Order, 1992 WL 133179, at *8. Free-market competition is a countervailing benefit, and “[t]he marketplace is normally expected to be self-correcting because consumers are relied upon to survey the available alternatives, choose those that are most desirable, and avoid those that are inadequate or unsatisfactory.” Unfair or Deceptive Acts or Practices, 74 Fed. Reg. 5498, 5502-03 (Treas. Jan. 29, 2009) 9 The NPRM and RIA are arbitrary and capricious and therefore violate the Administrative Procedure Act because the (1) estimated costs far outweigh any speculative benefits (2) Department has failed to justify its change of position, by now seeking to regulate distribution channels (3) Department fails to identify consumer injury. 5 U.S.C. § 706(2)(A). 6