Letter to DOJ Claims That Service Fee by Orbitz Is a Form of Price Fixing. AAI urges close scrutiny of industry-wide joint venture whose service fee amounts to a uniform price increase for 90% of the industry.

Mar 08 2002
Testimony and Interventions

Letter to DOJ Claims That Service Fee by Orbitz Is a Form of Price Fixing.

The Honorable R. Hewitt Pate Deputy Assistant Attorney General for Antitrust U.S. Department of Justice 950 Pennsylvania Ave., NW Washington, DC 20530

Re: Orbitz and the Transaction Fee

Dear Mr. Pate:

We note that Orbitz, the ticket-selling joint venture of the airlines, has implemented a $5.00 fee for each transaction. This raises interesting antitrust issues that ultimately go to the very question of whether this joint venture should survive antitrust analysis.

Keeping in mind that the five airlines that own Orbitz account for some eighty percent of U.S. airline ticket sales and that the additional forty participating airlines account for another ten percent, it is fair to say that Orbitz is the sales arm of the industry. Put differently, the U.S. airline industry has vertically integrated into travel reservation sales by creating a single, industry-wide joint venture. True, there are other channels of distribution not directly controlled by the airlines: travel agents and on-line distributors such as Travelocity and Expedia. But, primarily by its ability (thus far unhampered by DOJ or DOT oversight) to exclusively control the lowest, web-based fares of their members, Orbitz has grown from its zero base to become the second largest on-line distributor of airline tickets (based on both passenger bookings and website visitors) in a mere six months. If current trends continue, it will probably become the largest.

From the perspective of the consumer, the price of air transportation includes the ticket, taxes, airport fees, and any service charges: it is the total price that the consumer cares about when making a purchasing decision. When Orbitz implements a transaction fee, this has the effect of raising the price of tickets by a uniform amount at exactly the same time for all air carriers (except the very few, like Southwest, that are not part of its venture) with respect to the class of customers who make their purchases through Orbitz.

One can argue whether this is Per Se illegal price fixing or whether the Rule of Reason must be applied because the agreement operates through a joint venture which, in ordinary circumstances would have a right to charge the public for its service. One can also argue whether the market will self-correct, in that other reservation companies might gain business at Orbitz' expense if they choose not to match the Orbitz fee. (This is complicated by the fact that the other companies depend on the very same airlines for commissions, which have been cut and cut again in recent years in such a lock-step manner as to make one wonder if there isn't a master plan of the airlines at work.)

The nature of the antitrust problem is made clear by two analogies. First, if travel agents were to get together and agree to charge their customers $5.00 for each transaction, is there any question whether this would be per se illegal? Of course it would be. Second, assuming for a moment that Orbitz does not exist, if the airlines were to get together and agree to charge a $5.00 service fee each time they sold a seat on their individual web sites, is there any question whether this, too, would be illegal? Again, the answer is clear that this would constitute a per se violation of the Sherman Act. Why should it be any different if the airlines get together through an executive committee, the joint venture they have created, in order to set a service fee that raises all their ticket prices in a uniform way?

Keep in mind that while the current fee is only $5.00, once Orbitz is allowed to impose a fee, the only thing that limits the fee is the competition of other reservation channels. The larger Orbitz gets, the more market power it will have and the greater its ability to manipulate prices. If, as appears to be the case, a high proportion of Orbitz customers are drawn by the availability of low priced web fares, it is likely that a $5.00 increment will not raise these prices enough to redirect customers to other channels. As mentioned, moreover, the other channels are dependent on the airlines' commissions. The airlines are now in a position where they can eliminate agency commissions, thereby forcing the agencies to charge fees that will likely be higher than the $5.00 currently charged by Orbitz.

Even with a mere $5.00 fee, the system is now in place whereby the airlines can use Orbitz to raise -- or lower-- the price of air travel in accordance with a centralized view of the market. When capacity utilization is high, raise the fee. The industry needs to sell more seats? Reduce the service fee. At least with respect to industry-wide adjustments of a relatively small magnitude, the unpredictability of a market can be avoided. Indeed,

It can be said, of course, that this degree of price fixing only applies to travelers who purchase through Orbitz. But horizontal price fixing is defined by an agreement on price with respect to any class of customers. When a cartel sets different prices for different classes of customers, it is nonetheless a cartel, and this remains true even if there is leakage and non-members of the cartel offer comparable products to the public or "cheaters" offer the product at a lower price through different channels.

An interesting by-product of the Orbitz service fee is its potential for raising the costs of rivals of the airlines that own Orbitz. That is, all airlines that sell through Orbitz have their fares increased by the fee, which (in a competitive market) should result in fewer tickets being sold. But the fee gets passed through to the owners of Orbitz either in the form of profits or of reduced losses. Thus while all airlines are open to a degree of reduced demand due to a uniform price increase, the owners are arguably harmed less because they alone receive the benefit of the fees. (It is also possible that the smaller airlines have a more elastic demand curve, hence will be disproportionately hurt by fare increases.) This is therefore a scheme that imposes a competitive disadvantage on the competitors of the owning airlines. While the amount of money at stake today is small, as we have argued, if Orbitz continues to gain market share and alternative channels become less available both for airlines and for consumers, the significance of this argument will increase.

The problem illuminated by Orbitz is inherent in the structure of a joint selling venture that represents virtually an entire industry. As an overly broad joint venture, it cannot raise or lower its price without regulating in a uniform way for an entire industry the price of the product its owners and other members are selling. We urge the Division to scrutinize this joint venture with great care. If the structure is permitted, then it is essential that the exclusive control of low-price web fares be eliminated before the joint venture succeeds in utilizing this anticompetitive advantage to drive out competing channels of distribution.

Sincerely,

Albert A. FoerPresident