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The
issue before this committee today transcends the air travel industry. The
current situation in this industry is part of the natural struggle between
entrenched business models and the ongoing drive toward greater efficiencies and
consumer benefits through innovation in the marketplace and on the Internet. The
Association for Competitive Technology (ACT) has always supported the creation
of innovative e-commerce technologies and business models such as the one
developed by its member company Orbitz. In
the online travel space, Orbitz has created a new, lower-cost technology
platform that provides consumers with easy access to a broader selection of low
fares in a guaranteed unbiased display. The fastest growing IT organization in
Washington, ACT represents over 3,000 technology companies and professionals.
The bulk of our membership is comprised of small and mid-size companies and
their executives .
Following
a worldwide trend, Orbitz represents a move away from inefficient proprietary
networks toward more open and cost effective, open, Internet-based networks.
Orbitz uses superior server-based technology to provide consumers with
more information about all available fares. Their technology is better than
first generation search engines, thus it can search billions of flight-options
to find more choices. Moreover, the server technology can handle the huge volume
needed to search billions of airline routings at a much lower cost, allowing
Orbitz to charge the airlines less to distribute their tickets.
Since
the launch of Orbitz, consumers have been given a much larger set of choices
when searching for fares. In addition, there has been significant distribution
cost savings for airlines and other travel suppliers at a most critical time for
them. Orbitz is providing the first
real downward pressure on one element of distribution costs in particular;
booking fees charged by the dominant Computer Reservation Systems (CRS), which
average nearly $14.00 per ticket. These
CRS’s have thus far refused to invest in Internet-based technologies that
could help bring these costs down.
Beyond
the Investigations
It
is time to move past the seemingly interminable investigative process. By way of
background, Orbitz has been scrutinized by more government agencies and
congressional committees than any other online venture.
Not one of these reviews has asked for any change in the Orbitz business
model. Moreover, each review has noted the pro-competitive impact
that Orbitz brings to travel consumers. The
Department of Transportation report released last month found Orbitz
implementation has been consistent with plans and that current evidence shows
that no Orbitz charter associate airline has provided exclusive fares to Orbitz.
The Department of Justice review has been "open" for more than
two years. We are confident if
there were any problems with Orbitz structure or joint ownership, the DOJ would
have acted. Despite the results of
the investigations, the chorus of Orbitz detractors continues the “Most
Favored Nation (MFN) Indignation” refrain.
Simply put, the MFN is a necessary part of the Orbitz business model that
benefits consumers. James DeLong,
senior fellow with the Competitive Enterprise Institute’s Project on
Technology and Innovation, noted in a paper prepared for the CATO Institute,
that:
“if
good information [regarding airfares] is to exist, each participant must bind
itself to provide Orbitz with its lowest fare.
That is why the Orbitz charter contains, and must contain, a [MFN] clause
whereby each participant makes available to Orbitz all fares that are made to
the general public.”
Despite
this logic and without regard to the fact that Orbitz charter is consistent with
the DOJ collaboration guidelines,
some of Orbitz's protectionist competitors continue to insist that the DOT and
DOJ pursue investigations without demonstrating in any way that competition
would be hindered or that consumers would not benefit.
Indeed, these same competitors continue to complain about their lack of
access to special deals and fares while making public announcements about
airline fare deals they havle negotiated, including deals for web-only fares,
and specially negotiated fares that give those two sites exclusive fares that
Orbitz does not have.
State
of Competition in the Online Travel Space
Despite
the wild claims that Orbitz means the end of all other online travel services,
the industry is healthy and competition alive and well.
The travel market is $140 billion annually.
Online travel bookings are on the rise.
Online bookings comprise 13% of total bookings.
Forrester Research estimates that online travel spending will grow to $60
billion in 2006. Currently, there
are over 25 independent online travel sites vying for consumer dollars and
eyeballs.
It
is difficult to overestimate the challenges facing the travel market.
Forrester estimates that 60% of consumers have no loyalty to any
one travel site and often choose among several.
Clearly it’s a case of “what have you done for me lately?”
This fact means that the online travel space can, and does, support
multiple competitors with varying business models and value propositions.
Indeed, Neilsen/Net Ratings noted that the consumer’s ability to easily
comparison shop for fares means that there can be several tiers of contenders.
Turning
to the stories of these “contenders,” you can see the promise of the online
travel market for producing consumer value.
SideStep.com, a Santa Clara, California company has produced a web
application that is devoid of graphics and rich content.
The premise is that SideStep.com can deliver a consumer a list of fares
faster than Orbitz or the individual airline web site.
Consumers with dial-up Internet access would be particularly well served
by this approach. SideStep.com was
launched in 2000 and produced a profit in April of 2002.
Following the natural evolution of e-commerce, Qixo, a San Francisco
company, has developed an application that searches across numerous sites
including online travel, carrier and specialty sites. This application takes advantage of the fact that the
carriers time to send the data to sites like Orbitz from their servers.
This data can be mined before it can be posted to Orbitz. The goal is to
find the cheapest fare no matter where it may be hiding.
Finally, AgentWare, based in Atlanta, provides travel agents with all
fares from online and offline sties. AgentWare
is a $40 per month alternative to Sabre. At a recent meeting of the National
Commission to Ensure Consumer Information and Choice in the Airline Industry in
San Francisco, Commissioner Patrick Murphy stated that government intervention,
in the face of technological innovation, is “very challenging indeed.”
Without question, this level of innovation and competition has produced manifold
benefits for consumers.
The
Consumer’s Endgame: Efficient
Intermediation
The Orbitz machinations are
part of a larger issue. This is
what is to become of intermediaries or “middlemen” who provide little or no
added value. The Progressive Policy
Institute (PPI) has studied this issue and published the seminal paper in this
field.”
In the paper, PPI estimates that American consumers pay a minimum of $15
billion more annually for goods and services as a result of such e-commerce
protectionism by middlemen. The
CRS’s and many of the “brick and mortar” travel agents fall squarely into
this category. Rather than adapting
to a changing marketplace, they have mounted a campaign to stifle the growth of
online travel services.
Without a doubt, traditional
travel agents have provided consumers value by serving as a buffer between them
and the airlines. However, as more
and more consumers book their travel through online travel sites and directly
through the carriers’ sites, travel agents fear the elimination of their
business model. For online buyers,
it’s not just about saving a few dollars per ticket.
It’s more about the control, information, and convenience
consumers get by online searches for schedules, routes, and fares, then buying
an e-ticket—in the middle of the night, when all the travel agents are asleep.
Technology has repeatedly
enabled new information distribution that takes market power away from existing
middlemen. (e.g.,
real estate, books, stock brokers, and car dealers).
“Survival of the fittest”
favors those travel agents who find ways to charge consumers for the value they
provide in counseling consumers and booking their travel.
And many travel agents are learning how to survive—even thrive. In
2001, travel agents accounted for $63 billion in sales an increase of 40%.
These travel agents account for nearly 70% of all airfares, as compared
to 2% for Orbitz. This does not
take into account the fact that traditional travel agents still process 90% of
cruises and 95% of tours. The
American Society of Travel Agents has acknowledged that while consolidation has
taken place, the total amount of business remains constant.
Arguments of mass unemployment are specious indeed.
More
important than the absence of erosion, travel agents who do embrace
technological change can still add value to a consumers travel experience.
For example, in areas underserved by the Internet, these agents could
offer to search fares, research and build customized vacation packages, add some
mark-up and hire a delivery person to bring a person their e-ticket print out
(while including brochures on activities to do while on the trip). The
possibilities are endless.
Traditional
travel agents make baseless claims that the online distribution models are
“anti-consumer” because they take away “truly independent choice.”
This completely misses the point. The fact of the matter is that airlines
pay between $22 and $32 per ticket in distribution fees to travel agents. In 2001, this totaled $380 million. This cost is passed
through to consumers. Online
distribution models can cut this cost to $6-$8 per ticket. A simple equation
follows: A cheaper distribution model equals a cheaper ticket.
The disruption of costly and inefficient distribution channels is part of
the “creative destruction” process of technology-driven innovation and must
be acknowledged. It is now being
applied to the travel space. Traditional
travel agents who do not incorporate Internet distribution models risk being
held hostage by the CRS. The CRS
distribution model supported biased display and kept information away consumer.
In fact, a Consumer Federation of America paper from 1999 complained that:
"Traffic is diverted to the dominant incumbents through a number of
marketing mechanisms that extends market power over travelers:
. . . deals with travel agents to divert traffic, . . . and manipulation
of computerized reservation systems.”
This era is over. It is irrefutable that consumers enjoy the control,
information and convenience achieved through booking online.
Travel agents should shed the CRS shackle or they will sit idly by while
consumers move further and further toward the near perfect choice model provided
by the Internet.
Conclusion
ACT
vigorously supports any competitor that invests in information technology to
serve consumers better, faster, and cheaper.
ACT is just as vigorous in opposing the use of government regulation to
prohibit competition on the merits of investment and innovation.
As you contemplate the issue of Internet-based distribution, I urge you
to focus on promoting robust competition and meeting the needs of consumers, not
the protection of business models that are threatened by new technology and
changing consumer preferences.
Freeing
Public Policy from the Deregulation Debate:
The Airline Industry Comes of Age (and should be held accountable for
its anticompetitive behavior), at p.7. Http://www.consumerfed.org/abaair1.pdf.
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