25 Consumer Leaders Urge DOJ to Modify Orbitz Launch Vehicle

May 22 2001
Testimony and Interventions

25 Consumer Groups Ask Justice to Modify Orbitz Launch Vehicle

May 22, 2001, Washington, D.C. A delegation representing 25 leading antitrust and consumer advocates met with senior officials of the Department of Justice Antitrust Division on May 15 to present a letter calling on the Division to stop a joint venture of the airline industry unless changes are made that will assure it competes on a level playing field.

The delegation consisted of the American Antitrust Institute, the Aviation Consumer Action Project, the Consumer Alliance, the Consumer Federation of America, and Consumers Union.

Orbitz is a joint venture owned by five major airlines, with most of the remaining airlines (other than Southwest and a few low-fare carriers) participating. It offers an on-line air reservation service that is operating experimentally and will soon launch its national effort in competition with ticket agents and e-commerce agencies like Expedia and Travelocity. The Department of Transportation announced on April 13 that, despite concerns about possible anticompetitive aspects of the joint venture, it will monitor activity of Orbitz, but not intervene in its launching. The consumer delegation argued that this decision is "shortsighted and dangerous," requesting antitrust authorities to require amendments to the joint venture in order to avoid problems that will be very difficult to correct once the venture has been launched.

The group raised questions about several aspects of the joint venture, particularly exclusivity and the "most favored nation" provision. Exclusivity refers to the incentive structure of the joint venture that makes it likely that the airlines will provide their lowest fares only to Orbitz, thereby substantially disadvantaging the independent "navigators" who help consumers find the lowest fares and best routes. The "MFN" clause assures that airlines will not make better deals with independent navigators than with Orbitz, thereby dampening competition and restricting the possibility of secret deals that can undercut cartel behavior.

The combination of the MFN and exclusivity will allow Orbitz to advertise that it offers the only one-stop shopping and that lower fares cannot be obtained elsewhere. This, the group said, will represent a powerful marketing tool that has the potential of driving competitors from the market. If this occurs, after-the-fact antitrust intervention will be too late and too uncertain to restore competition.

"We are very pleased that the Justice Department is concerned with the interests of the millions of American consumers that will lose out if Orbitz becomes fully operational and succeeds in pulling the wool over the eyes of government regulators," said Mark Silbergeld, a spokesperson for the Consumer's Union.

Contacts:American Antitrust Institute: Albert A. Foer, 202-244-9800Aviation Consumer Action Project: Paul Hudson, 202-638-4000The Consumer Alliance: Don Rounds, 517-487-6001Consumer Federation of America: Mark Cooper, 301-384-2204Consumers Union: Mark Silbergeld, 202-462-6262

May 15, 2001

John NannesActing Assistant Attorney General  For AntitrustU.S. Department of JusticeWashington, DC 20530

Re: Orbitz

Dear Mr. Nannes:

The U.S. Department of Transportation on April 13 concluded that it will not prevent Orbitz, the online travel agency being developed by five major airlines and including virtually all airlines other than Southwest and some other low-fare carriers, from beginning operations. As leading antitrust and consumer advocates, many of the signers of this letter had urged D.O.T. to block the launch unless the potential anticompetitive aspects of this unique joint venture were first resolved.

Because we have communicated with the Antitrust Division previously on this, we will not reiterate our specific analysis of the joint venture, which we continue to believe raises serious antitrust issues. Our focus here is on (1) the question of whether the government should wait until harm is actually done before acting, and (2) the implications for antitrust enforcement more generally, if the joint venture proceeds untouched by governmental hands.

DOT's April 13 letter to Orbitz recognizes the anticompetitive potential of the joint venture, but concludes that it would be premature to act. Rather, Orbitz would be required to report on its own operations six months after the launch so that DOT could keep an eye on its actual behavior. This strikes us as shortsighted and dangerous.

The type of behavior that is most in question relates to the exclusive availability on Orbitz of the airline industry's lowest fares, known as e-fares. E-fares include the last-minute bargain prices that an airline uses to fill empty seats, but they also include special discounts, such as the current Delta "on-line discount" of 5% on most shuttle fares. This category, which was ignored by DOT, appears to be growing and could become quite large. Orbitz denies that its joint venture agreement compels these lowest fares to be sold exclusively through Orbitz. But this is not the issue. The question is whether this extraordinary venture of virtually the entire industry is so replete with incentives to keep the lowest fares in Orbitz that this is indeed what is likely to occur. DOT says it would be concerned if "Orbitz substantially reduces charter associate carriers' incentive to make their lowest fares (including webfares) available through other online travel agencies," and that it will monitor developments closely. DOT also says, "We have serious concerns about incentives toward exclusivity, however limited," but DOT is prepared to reserve judgment until it sees how things work out.

In our view, either Orbitz expects the joint venture to be the exclusive source for the lowest fares or it does not. If it does not, let Orbitz enter into an agreement with the government that will assure the government, consumers, and competitors that this will not occur. Let Orbitz agree to act as if the CRS rules applied by having its five owning carriers agree that any information they provide to Orbitz will also be provided to other distributors on commercially reasonable and non-discriminatory terms. If Orbitz refuses to enter into such an agreement, then this should be taken as evidence of the anticompetitive nature of the joint venture.

Our view is that the type of harm that Orbitz is capable of doing may not be remediable, from a public perspective. Suppose Orbitz does market itself successfully as the only website with the lowest air fares, and that this draws a substantial part of the market away from other distributors. What could realistically be done-and how quickly? Travelocity and Expedia are only now on the edge of profitability, after five years of operating history, despite Orbitz' depiction of them as entrenched incumbents. If Orbitz succeeds dramatically because of its unique relationship with the carriers, it could force one or both of the incumbents out of the market, by denying them critical mass. Possibly, with difficulty, such a victim could win an antitrust case for monetary damages, but that would not restore it as a realistic competitor. So what could the government do at that point? It could do then what it can do now, viz., require that any fares made available to Orbitz also be made available to other ticket distributors. The problem with this remedy at some later date, after the competitive damage is done, will be whether a badly wounded competitor can be restored to health.

DOT has focused on the value of Orbitz as a new entrant in the electronic ticketing market. We have no doubt that this would be valuable to consumers if Orbitz has to compete on a level playing field. But if Orbitz is given an advantage on the basis of its airline ownership that is denied to other competitors, and the result is the weakening and perhaps demise of one or both of its principal competitors, any benefit to consumers will quickly be eroded. An ounce of prevention now can assure a competitive market going forward.

If the Division follows the lead of DOT, uttering its concerns but permitting the launch to go forward without modification, saying only that it will monitor the situation, there will be a clear message to other industries. That message will suggest that the federal government is not particularly concerned when virtually all the members of an industry join together in a marketing venture, provided that the precise words of their chartering document are lawyered in such a way that an exclusive dealing agreement is not explicitly spelled out. As Orbitz demonstrates and as a recent article by three FTC attorneys spells out, competitors are becoming more subtle in the ways they structure relationships so that they will not appear exclusive, but will contain incentives to achieve an anticompetitive degree of exclusivity. It is up to antitrust enforcers to understand these subtle arrangements and to deal with them effectively. We call on the Justice Department to require Orbitz to play on a level field.

Sincerely,

Albert A. Foer, PresidentThe American Antitrust Institute

Authorized to sign on behalf of:

Mark CooperConsumer Federation of America

Linda Golodner, PresidentNational Consumers League

Paul Hudson, Executive DirectorAviation Consumers Action Project

Don Rounds, PresidentThe Consumer Alliance

Anne Werner, Executive DirectorUnited Seniors Health Council

Mark Phigler, Executive DirectorConsumers for Competitive Services

Rick Gamber, Executive DirectorMichigan Consumer Federation

Jim Conran, PresidentConsumers First

Alma Morales Riojas, President and CEO MANA - a National Latina Organization

Ernest Wm. Bach, Executive Director Florida Action Coalition Team

Sharon Miller, President Alliance for Small Business Advocacy

Dorothy Garrick, President Columbia Consumer Education Council

James L. Brown, Director Center for Consumer Affairs University of Wisconsin - Milwaukee

Phyllis Rowe, President The Arizona Consumer Council

Esther K. Shapiro, Consumer Consultant Director Emeritus, Detroit Department of Consumer Affairs

Michael Rulison, Vice President - Governmental Affairs North Carolina Consumers Council

Lora H. Weber, President Consumers Alliance of the South East

Albert Sterman, Secretary/Treasurer Democratic Processes Center

Henry Clay White, Treasurer Wisconsin Consumers League

Theodore R. Debro, Jr., President Consumers for Affordable and Reliable Service

Les Foster, Vice-President Floridians Against Government Waste

Kenneth J. Benner, President American Council on Consumer Awareness

Ellen M. DeWind, President Niagara Frontier Consumers Association

Jude (Judith) Filler, Executive Director Texas Alliance for Human Needs