March 15, 2003

Computer Reservations Systems

Key materials
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Stated Purpose:

To examine whether DOT’s existing airline CRS rules are still necessary, and if so, whether the rules should be modified. DOT is also looking for ways to reduce its regulations in ways that could give airlines more flexibility in bargaining with the CRS.

Summary of RSP Comment:

CRS were initially developed and owned by the airlines. Asserting that airline ownership of a CRS might distort airline competition by providing unfair competitive advantages to the owner airlines, first the Civil Aeronautics Board and then DOT adopted CRS regulations in 1984 and 1992 respectively. Since the adoption of the rules, two major developments have affected the airline industry: (1) airlines have substantially divested themselves of CRS ownership, and (2) the Internet has blossomed as an alternative flight-booking venue to the CRS.

DOT, in revisiting its regulations, seems disposed to lifting previous encumbrances on the air travel industry, though it seems inclined to do so in only a piecemeal fashion. For example, DOT opted to retain its old rule prohibiting biasing of CRS screen displays in favor of one air carrier over another—despite the fact that DOT produces no evidence suggesting that a biased ranking system harms consumers. Indeed, for biasing to cause harm, it must be able to persist against the wishes of travelers and/or travel agents, and travelers and their agents must have no recourse to correct or work around such biasing.

On the other hand, DOT proposes to eliminate its rule requiring airlines to participate equally in all CRS if they choose to participate in any of them. In lifting this rule, DOT is effectively strengthening the bargaining position of airlines with respect to the CRS and by implication, benefiting air travel consumers.

The rest of the DOT’s CRS proposals address various contract practices by restricting some contract terms. We would suggest that contract terms are integral to price formation, and thus any restriction on contract terms is essentially an attempt to regulate price. However, the ability to regulate prices and contract terms effectively—as DOT has concluded in several places—is at best ineffective (as industry participants innovate along non-regulated margins), and at worst counterproductive (as costs are raised and air travel is thereby made less attractive). It may prove easier, and far less socially costly, therefore, simply to allow the entire set of CRS rules to sunset.