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The battle behind airfare bookings

Buying an airline ticket requires more than your credit card. The booking agent usually taps into a massive computer system to confirm details and actually grab you a seat. These systems have become the focus of a scalding debate.
/ Source: msnbc.com

Buying an airline ticket requires a lot more than offering up your credit card. The booking agent — whether it’s an online site or your local travel storefront — usually must tap into a massive computer system to confirm details and actually grab you a seat. How these massive systems operate has become the focus of a scalding debate in the travel industry.

The networks, known as computer reservations systems, or CRSs, link airlines with folks who actually sell the tickets. They store almost all airline fares and flight data, and are crucial for travel agents to actually book flights.

Many online sites use CRSs to complete bookings. Almost every travel agent has a CRS-linked computer on his or her desktop. And many airline reservation centers turn to CRS systems — which were created by the airlines and then sold off — to process sales.

Even as the travel industry has wobbled in the past couple years, CRSs have kept making money. Online travel sites have hit CRSs hard, dropping the industry’s own estimated share of bookings from about 90 percent a decade ago to around 50 percent. But even with the inroads made by online retailers, the systems still control a massive portion of more than $70 billion in U.S. airline revenue each year.

A CRS pulls in cash whenever a flight is booked. Travel agents are charged a fee when they use a CRS to book a flight, though marketing deals often rebate those fees if an agent signs up for a long-term contract. When a ticket is booked, airlines also pay fees that average $3 or $4 per flight but can easily soar. In 2001, American Airlines paid almost $425 million in CRS fees.

The systems are heavily regulated by the Department of Transportation, in part to make sure that they didn’t lock competing airlines out of their systems or limit access.

The regulations imposed in 1984 and revised in 1992 were specifically designed to give airlines and travel agents a level playing field. (That’s one reason airlines still pay booking fees to all the CRSs.)

But airlines have mostly divested from the CRS business. American, Delta and Northwest spent much of this year selling off Worldspan, though documents show they continue to give marketing support and maintain some ties. Sabre Travel Network was sold off in 2000 by American Airlines’ parent company, but maintains marketing deals with American and Southwest. Galileo is now owned by Cendant Corp., though it retains a marketing deal with former parent United.

An online role
Though the systems’ roots are in the past, they are also entrenched in the new online world. Not only do many online agencies use CRSs to book tickets, but Sabre owns Travelocity, and Galileo owns Cheaptickets and Lodging.com. (Worldspan doesn’t do retail but handles many Orbitz and Expedia bookings. Amadeus, founded by foreign airlines, mostly handles international traffic.)

CRSs insist the regulations unfairly punish them for their former airline ties and want many limitations lifted. After reviewing their options since last November, the Department of Transportation is getting set to issue new rules, perhaps within the next two weeks.

The new rules will likely loosen oversight. One key provision DOT hinted it will rescind is the “mandatory participation” rule, which forced any airline that owned a CRS to offer competing systems its best fares. Since the airlines gave up their stakes in the CRS business, that won’t make a huge difference to them.

Airlines see some rule changes as a way to give them more negotiating room on fees. And new rules could give CRS owners more flexibility to renegotiate deals with travel sellers, both online and offline. That in turn could spur more competition between the online sites, which spend millions to try and differentiate their services.

But the rules could also limit deals between airlines and CRSs, which help cover travel agents’ CRS fees. That, in turn, could put additional pressure on agents and create what Paul Rudin, of the American Society of Travel Agents, calls “an unprecedented interference in the marketplace by the federal government.”

Rules and risks
In the most radical scenario, DOT would simply lift the restrictions and allow CRSs to live or die on their own.

That’s the outcome Worldspan and Sabre are hoping for. They see it as a chance to rewrite deals with agents and airlines in a competitive marketplace. “This is the golden opportunity for the administration to deregulate industry,” says Bruce Charendoff, Sabre’s senior vice president for government affairs. Under that scenario, anticompetitive issues would be handled by the Justice Department.

But other big travel players, like Orbitz, see risks to throwing out the rules.

“If there were no rules in place, the CRSs could set whatever rules they want for airlines participating in their systems,” says Orbitz’s vice president of corporate communications, Carol Jouzaitis. “You let the 900-pound gorilla out of its cage, what do you think its going to do the next day?”

She contends that the CRS system is an oligopoly and deregulation would essentially give the systems unlimited leverage to raise fees. Many travel agents don’t see it that way. They expect a deregulated market to create greater competition and drive fees lower.

Galileo — another CRS — has a slightly different take on deregulation. It generally backs the rule changes, with one exception: It wants the mandatory participation rule to stay. Why? Because, it argues, Orbitz is actually an airline-owned CRS and needs to be regulated as one.

“It is operating as a CRS today,” says Dawn Lyon, vice president of corporate communications for Galileo’s parent division at Cendant. “As long as airlines own or control distribution, there have to be rules.”

Definitions and differences
Is Orbitz a CRS, or trying to become one? It continues to deny it’s interested in that sector, but competitors point to a partnership this May with AQUA Software that lets travel agents check Orbitz for Web fares from their desktop. Though travel agents don’t view Orbitz as a traditional CRS, they do see it as a way for airlines to re-enter the game. “While they’re leaving the field in one way, they’re coming back in another,” says Rudin. “We’re going back in time to 1984.”

Jouzaitis is adamant about Orbitz’s strategy: “We are not a CRS because we don’t have a product that is used by travel agents to book tickets.”

Sabre’s Charendoff doesn’t put Orbitz in the CRS category either. But he believes Orbitz wouldn’t mind tossing the CRS system and letting customers and agents book tickets directly.

In a counter strategy, Sabre announced deals this week with Continental, Delta and Northwest, all Orbitz owners, offering discounted booking fees in exchange for access to the lowest fares. (It already had similar deals with United and US Airways.) The new arrangement will allow Travelocity users, as well as offline customers, to get the same bargain-basement fares available on Orbitz.

Why would Sabre pen the deal, especially since it could cost tens of millions in revenue? Perhaps because it’s betting the CRS model will thrive, especially for the half of the tickets that aren’t sold online. And Charendoff says he has no problem with Orbitz in the mix, driving price pressure, so long as they play fair: “No one should discourage them or anyone else from developing alternate, less expensive ways of doing things.”

To that end, while Orbitz relies on Worldspan for some bookings, it has created a “Supplier Link” program to book directly with American, Northwest and Continental — plus low-fare carrier America West — for an estimated savings of $150 million or more. (The deal is one way it has supplanted the CRS role, though it is careful to point out that’s not the same as becoming one.)

The fight goes on
So who is the 900-pound gorilla in all this?

Orbitz is edging up from its No. 3 slot in online traffic; an aggressive growth strategy, backed by its airline ties, has gained traction. Sabre and Galileo have deep ties throughout the travel industry and profits from the offline travel sector, while their online entries have extensive CRS ties and remain competitive. Expedia leads the online category with $199 million in revenue last quarter, and is signing deals with suppliers almost daily.

“It’s not like Orbitz has unfair advantage and is competing against a bunch of paupers,” says Forrester Research analyst Henry Harteveldt. “You’ve got some of the most brilliant minds in the business world running these companies.”

And while some online travel sites have folded, like Galileo’s Trip.com, the remaining contenders have deep pockets and strong backing, and there’s plenty of market share to fight for. Airlines, meantime, seem unlikely to retreat from the CRS systems, Orbitz or no; half of the industry is still an awful lot.

In any case, changes to the rules are likely to prompt a competitive frenzy. Someone’s bound to feel like the music’s stopped and there are no chairs left, but as industry players scramble to win, pressure grows to cut fares and fees, and consumers reap the benefits.

And that’s a hard deal for any traveler to pass up.