March 4 - BTC Briefing Paper Regarding IATA Initiative


IATA’s New Distribution Capability - An Agreement Among Horizontal Airline Competitors That Raises Significant Antitrust And Privacy Law Issues


Overview

Certain large international airlines have used the International Air Transport Association (IATA), the worldwide trade association for airlines, as the vehicle to reach an agreement establishing a new airline industry-wide business model for the pricing and selling of air transportation services.  This new model would apply to travel to and from, and within the United States, and in fact, air transportation services across the globe. 

This proposed new business model, agreed by IATA member airlines at a conference held on October 19, 2012 as so-called Resolution 787, would negatively and significantly impact airline competition and would drive up airline prices for consumers.  It is designed to terminate by agreement among airline competitors the current market-driven and transparent model for pricing and sale of tickets, where airfares are published and publicly available for comparison-shopping and purchase by all consumers on a non-discriminatory basis. The airlines themselves have confirmed publicly that the current transparent airfare model has constrained their ability to raise airfares. 

This new business model would also violate the privacy rights of consumers.  Under the Resolution 787 the airlines have agreed among themselves that they have the right to demand that extraordinarily intrusive personal data about specific consumers be broadcast to all airlines that might offer service, even though consumers in most cases enter into a contract of carriage with just one of those airlines. Resolution 787 on its face (Section 3.1.1) explicitly says that before they quote prices for a consumer the airlines have the right to demand from consumers personal information that “includes but is not limited to” the customer’s:  name, age, marital status, nationality, contact details [including email address], frequent flyer numbers [on all carriers], prior shopping, purchase and travel history, and whether the purpose of the customer’s trip is business or leisure.

The Details About NDC

This new business model is called “New Distribution Capability” or “NDC” for short. Because the proponent airlines of NDC and IATA chose to incorporate this new business model in an IATA Resolution as opposed to an IATA Recommended Practice, under IATA’s governing rules, this new business model is an agreement that is binding on all of the roughly 240 IATA-member airlines worldwide. As set forth in the preamble of this Resolution, all IATA airlines that choose to distribute “enhanced content” (an undefined term but overtly one that means when an “ancillary service” such as checked luggage or pre-reserved seating is sold along with the base fare) across “multiple channels” would be obliged to adhere to this new business model, and to do so both with respect to sales made by intermediaries (that is, travel agencies) and those made in their direct sales channels, such as via their websites. 

For carriers adopting NDC for particular markets, airfares and schedules would no longer be publicly filed and available on a non-discriminatory basis for any and all consumers to anonymously comparison shop and then purchase through intermediaries such as brick-and-mortar and online travel agencies, or via their websites. Instead, NDC airlines would create “unique” offers each time a particular consumer requested a fare for a specific route/date. The offers made by each airline would be “customized” based on personal details the airlines have agreed in Resolution 787 they will have the right to demand from consumers before quoting any prices. 

The personal information about each specific traveler the airlines have agreed among themselves they will have the right to demand is quite detailed and intrusive, as explained above. Many of these items of sensitive personal information can be used very effectively to pinpoint, and extract higher prices from, those travelers who are likely to be less price elastic -- such as business travelers and travelers whose shopping and travel history demonstrate they do not regard connecting services as viable substitutes for non-stop services on particular routes or do not consider alternate airports serving the same area as substitutes for one another.

Importantly, the airline industry, and IATA in particular, has decried publicly what it describes as the “commoditization” of airline services caused by the low-fare search capabilities on-line and brick-and-mortar travel agencies have made available to consumers, capabilities that only work because of the current system of publicly available and transparent fares. And airlines have done so even as they acknowledged at the same time the benefits for consumers of the current system of fare transparency.  For example, in July 2012, Tony Tyler, the Director General of IATA, just after the NDC project had been officially launched, stated as follows in an interview with Flight Global:

“We’ve done a great job of improving efficiency and bringing down costs, but we’ve handed that benefit straight to our customers,” Tyler says. “As soon as someone’s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers – and you’ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditise ourselves.”

[http://www.flightglobal.com/interviews/tony-tyler/the-interview/]

On other occasions as well, airlines have confirmed publicly that this fare transparency and efficient comparison shopping have sharpened price competition among airlines on competitive routes and have forced them to keep their prices low, lest they lose sales to airlines offering more attractive published fares to consumers.

The current distribution system has indeed been responsible for an unprecedented degree of comparison-shopping opportunities for air travelers, who can, with just a few clicks of a mouse, learn in seconds the best priced options on any carrier for their journey. 

It might be proper for individual airlines, at least those not holding a dominant position, to unilaterally adopt and pursue distribution business model changes that increased consumer search costs and otherwise undermined the current fare transparency they admit has been a source of significant competitive pricing pressure. However, BTC firmly believes that horizontal competitors (and indeed nearly the entire airline industry) banding together to jointly adopt such a new business model by express agreement crosses the line. In short, BTC believes that NDC is an agreement among competitors that has the purpose and will have the effect of stabilizing or raising prices and thus violates U.S. antitrust laws. 

BTC also submits that any ticket distribution system that, like NDC, requires consumers to surrender the types of personally identifiable information spelled out at Section 3.1.1 for the privilege of being quoted a price for travel between points A and B is a flagrant violation of consumers’ elementary rights to privacy.  The processing of these personal details is not for a legitimate purpose but rather to allow airlines to engage in acutely targeted price discrimination that extracts higher fares from those judged to be less price-sensitive. Further, the data enumerated by the Resolution is excessive in relation to the purpose of quoting airfares for consumers. Airlines, of course, have been quoting prices to consumers for decades and have never before demanded these intrusive details as a condition for being told what the costs of travel would be.  In addition, BTC strongly holds the view that none of a person’s age, marital status, frequent flyer membership, nationality, shopping, travel and purchase history and whether the purpose of a trip is business or leisure can be a proper basis for price discrimination by an airline. 

For example, BTC is convinced that no reasonable person would suggest that it fair or defensible to charge someone 40 years of age more, or less, than someone who is 50.  And BTC would strenuously object to any suggestion that those who are married can be favored or penalized in terms of prices relative to those consumers who are not.

IATA has stated publicly that adoption of NDC will begin early this year.  Thus, NDC may pose an imminent threat of higher prices for consumers of air travel as the competitive discipline that flows from the current regime of published, visible and easily comparable posted air prices is supplanted with one based on the ultimate in fare shrouding. Under NDC, consumers would be unable to conveniently and easily test what the “market price” for their trips should be as every fare would be “unique” to particular travelers.  And consumers could not be confident that they were being quoted offers that were the best deal for them, or even a good one.  And NDC will soon violate consumers’ rights to privacy on an unprecedented scale.

BTC calls on the U.S. Departments of Justice and Transportation to block the deployment by airlines – who are acting collectively under the supposed cover of their trade association - of this anti-consumer and anti-competitive model for the pricing and selling of airline tickets.

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