TCS Daily


What's Fair, What Fare?

By Radley Balko - June 16, 2003 12:00 AM

Ever wondered how the whole airline fare system works? Why is it, for example, that the guy you sat next to on that flight to Schenectady got a fare that was half of what you paid? Why is it that fares booked a month out are cheaper than fares booked two weeks out, but not nearly as cheap as last-minute fares?

It works something like this: the ultimate goal of an airline, obviously, is to fill each seat on every flight. As soon as an airplane leaves the runway, every empty seat represents lost revenue. Fuel, food and amenities for each passenger on an average flight typically amounts to about $20-$25. So as departure times approach, airlines grow increasingly inclined to cut you a deal ever closer to that $20-$25.

In the late 1970s, the major airlines began to invest heavily in what are called computer reservations systems (CRSs) in an effort to automate and manage the distribution of tickets by travel agents. As these systems developed over the next several years, Department of Transportation officials grew concerned that the CRS companies would bias fare information in favor of those airlines that had invested most heavily in that particular CRS, denying consumers access to the best or least expensive flights.

So DOT issued a set or regulations - first in 1984, then again in 1992 - designed to level the playing field. The aim: give no airline a significant advantage for having invested in the CRS system, and give consumers access to all available fares, not just those of those airlines who have good relationships with whatever CRS his travel agent happens to use.

Like most federal regulations, the CRS guidelines effected some unfortunate and unintended consequences. One rule forced every airline to participate in every CRS, effectively shutting off the CRS market from upstarts, and preventing existing CRSs from competing with one another. The result? For the last twenty-five years, there's been precious little innovation, adaptation or change in the CRS market. An oligopoly of four companies (Sabre, Galileo, Worldspan, and Amadeus) stands guard over the gateway to flights and fares, and controls nearly 90 percent of U.S. travel distribution. Every time a consumer books a flight by any means other than through the airline itself, he pays a CRS to find his seat.

Consumers and airlines have suffered as a consequence. Because there's no competition among CRSs, the companies can set their own fees for their services, free from market controls. Consequently, the charge per segment of each flight has risen from about $1 per flight segment in 1984, to about $3.50 today. Last year, airlines paid $2.2 billion in fees to CRSs.

As economist James DeLong explains in a Policy Analysis published by the Cato Institute, if those fees had kept pace with inflation, they would today be about half their current cost, and if they had kept pace with the cost of similar computer services, they'd cost just a few cents. Instead, CRSs tack on an extra $14 for each typical round-trip, one-stop-each-way ticket.

Enter the Internet.

Web technology has been a boon for air travelers. Airlines now sell tickets directly from their websites, free from CRS fees. Innovators such as Priceline.com have filled the gap between a plane's empty seats and the bargain-hunters who want to sit in them.

The problem is that those old DOT regulations - last revised in pre-Internet 1992 - are getting in the way of newer, even more efficient technologies that would bring even more benefits to consumers. The DOT is now considering a plan to revise those regulations, and to implement a new regulatory scheme that would strip away the old rules and allow for emerging technologies that could, in effect, render the old CRS system obsolete. They ought to go through with those plans.

One example of this new technology is Orbitz, a service started by the five major airlines, and which has at least a working partnership with most of the others. Orbitz has developed a more extensive new search engine system built on Internet technology, rather than the outmoded mainframe technology still used by CRSs. The new technology enabled Orbitz to enter the travel distribution market at a relatively low cost. Orbitz' technology reduced the price of tickets generally, and introduced price competition to the travel distribution market for the first time.

Because of the technology on which the Orbitz system is built, the web site is able to offer suppliers an even lower cost alternative by directly connecting to all the airline databases, giving customers direct access to flight information and bypassing the CRSs and the $14 fee altogether.

Orbitz's technology is novel, innovative, and efficient - exactly the kind of consumer-friendly change that's been missing from the CRS system since the DOT regulations effectively shut off outside competition.

Predictably, the old guard feels threatened, as well it should. The CRSs and travel agents have leveled a vicious public relations campaign at Orbitz. Oddly, it is the same CRSs who have strangled the fare booking market for years that now charge Orbitz with seeking a monopoly.

Orbitz is chartered to list all fares in a non-biased fashion. The monopoly charge just doesn't stick.

Time and again, we've seen regulatory agencies fall into bed with the very industries they're supposed to be regulating. Inevitably, these close relationships lead not to protecting consumers from anti-competitive business practices, but to just the opposite - incumbent corporations using regulations, close ties to regulators, and anti-trust accusations to prevent upstarts from ever entering the market.

With its proposal to strip away obsolete regulations and recognition of the power of the Internet to encourage new competition, grant consumers and travel agents access to better technology, more choice and lower airfares, the DOT seems to be bucking that trend. Here's hoping DOT follows through.

TCS contributor Radley Balko is a freelance writer and publisher of the weblog: www.TheAgitator.com
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