THE RIGHTS OF AIRLINE PASSENGERS
TRAN 105

CHAPTER THREE
COMPUTERIZED RESERVATION SYSTEMS

1. Computerized reservation systems: definitions
2. Computerized reservation systems: background notes
3. Computerized reservation systems: the market
   Table III/1 - The main GDSs and their presence on the market
4. Reservations via the Internet and by computer
5. Computerized reservation systems: hosting and Community legislation
6. On-line reservation systems: current Community legislation
7. The application of Community legislation and proposed amendments

1. Computerized reservation systems: definitions

Before discussing this area, it would be useful to provide the legal definitions of some of the terms relating to the SIRs used in the text ⁽⁷⁴⁾:

Computerized Reservation System (CRS): a computerized system containing information about, inter alia, air carriers' schedules, availability, fares and related services with or without facilities through which reservations can be made or tickets may be issued to the extent that some or all of these services are made available to subscribers;

Distribution facilities: facilities provided by a system vendor to a subscriber or consumer for the provision of information about air carriers' schedules, availability, fares and related services and for making reservations and/or issuing tickets, and for any other related services;

System vendor: any entity and its affiliates which are responsible for the operation or marketing of a CRS;

Parent carrier: an air carrier which is a system vendor or which directly or indirectly, alone or jointly with others, owns or controls a system vendor;

Participating carrier: an air carrier which has an agreement with a system vendor for the distribution of its air transport products through a CRS. To the extent that a parent carrier uses the distribution facilities of its own CRS, it shall be considered a participating carrier

Subscriber: a person or an undertaking, other than a participating carrier, using, under contract or other arrangement with a system vendor, a CRS for the sale of air transport products directly to individual members of the public;

Principal display: a comprehensive neutral display of data concerning services between city pairs, within a specified time period, containing inter alia all direct flights by participating carriers;

To these official definitions we would add the commercial definition of Global Distribution System (GDS): a CRS separate from the internal system of an airline company.

2. Computerized reservation systems: background notes

The CRSs came into being in the 1950s as internal systems within individual companies, which as technology developed meant that they increasingly became available to travel agencies and thus to other companies on the basis of bilateral agreements. Their history is an interesting example of how a commercial operating tool can become an independent activity in its own right. They first developed by way of the extension of their functions: from reservation systems to yield management systems, in addition to containing information on passengers and seat coverage. They thus became an essential tool for competition, in that they enable companies to improve their profitability in a deregulated market competing on prices. A further stage in their development was their shared use by a number of companies ⁽⁷⁵⁾ and their extension to services other than transport. The penultimate phase was the so-called dehosting, that is to say their separation from the internal reservation system of one or more airline companies participating therein. This phase has been a crucial one, and will be examined in depth in the following section.

This progressive dissociation and the obligations imposed by US and Community legislation have eliminated the interest of airline companies in controlling the CRSs and we have now witnessed the start of the phasing out of their financial participation in the companies selling the systems. At the same time a commercial war has been fought, with important legal consequences, between the European CRSs and their US counterparts ⁽⁷⁶⁾.

Today, and this is the final stage, the GDSs are vital channels of communication between the airline and the traveller, and they have become highly profitable companies which have attracted shareholders and investors from outside the air transport sector. The quotation of GALILEO on the New York Stock Market, which occurred in 1997, represents a further step towards the development of an independent economic sector.

The progressive departure of airline companies from the shareholders of the CRSs, the increase in their profitability and the requirements of competition are encouraging merger processes that indicate a shift towards an oligopolistic structure for the sector worldwide, with dominant participants at a local level, which translates into a quasi-monopolistic situation with regard to participating airline companies, but it is just as likely that the airlines will tend to resist an increase in the CRS charges implied by the market structure contemplated here ⁽⁷⁷⁾.

3. Computerized reservation systems: the market

The situation of the GDS market in the USA is different from that in EUROPE: while in the former the large volume of air traffic makes it possible for individual companies to manage their own GDSs, in Europe there are two GDSs which take the form of joint ventures between a number of airline companies. The worldwide market is divided up as shown in Table III.1 ⁽⁷⁸⁾.

It will be noted that the first three GDSs account for almost three quarters of the sales outlets and over four fifths of terminals. The GDSs are distributed at a national level by the so-called national marketing companies, generally owned by the national airlines ⁽⁷⁹⁾, which primarily perform technical tasks, ensuring connections between the GDSs and the users.

The GDSs are companies that achieve good balance sheet results and offer airlines services at moderate prices: on average their services claim 1% of the ticket cost in the context of the 20% required for covering the airline companies' marketing costs. However, there are complaints concerning the financial problem of cancellation of reservations which amount to almost 50% of reservations made. Consequently some GDSs now claim a minimum charge for any reservation, even if it is cancelled.

In most cases it is not only a matter of financial investment, but of processes of integration and diversification, on the part of both firms operating in adjacent sectors and the GDSs themselves in the context of a strategy of geographic expansion. Therefore the first mergers are occurring, involving delicate problems of competition, and it is on these that the public authorities have focused their attention ⁽⁸⁰⁾.

The delicate nature of the problem lies not so much in achieving a dominant market position, but in close relations, including share ownership, between the GDSs and associated airline companies, which can cause real distortion of competition for other airlines. There is thus the problem of protecting all airlines, particularly participating companies ⁽⁸¹⁾, from discriminatory practices, and the US and Community authorities have been attentive to this.

Table III/1 - The main GDSs and their presence on the market

The types of discrimination affecting a company can vary:

• price, when the GDS offers the associated companies a lower price than that offered to the others;

• service, when the GDS provides the associated companies with certain facilities from which the others are excluded;

• security of data if, thanks to certain facilities, a company is able to access data relating to other companies and their passengers;

• display of the flights of various companies on the screen: this is probably the most subtle discrimination, consisting of giving priority to the flights of a company depending on the order in which companies are displayed on the screen ⁽⁸²⁾.

Most of these forms of discrimination have their origin in hosting, already referred to in the preceding section. The CRSs used to host, and in part still host, the own reservation system belonging to a single company or a group of companies, to which access was open only to the employees of the latter; in some cases this took the form of a service which a large CRS offered to a number of smaller companies. Though this "cohabitation" did not create any problems as a general rule, in 1992 the American authorities had recorded some complaints, in that some CRSs maintained that the way they were set up "made it easier to obtain more reliable information and a simpler reservation from the host company than from other companies ⁽⁸³⁾. The US report on this indicated that this type of set-up "could adversely affect competition, resulting in the transfer of passengers, and thus of earnings, from the companies that did not control the CRSs to those that did control one, which would create unfair conditions for the sale of air transport services" ⁽⁸⁴⁾. This explains why the authorities were inclined to promote dissociation, a move which, at the European level, has been expressed in Community legislation since 1989 and which meant that the two major European CRSs were designed from the outset as dissociated CRSs. It is this dissociation which really marks the beginning of what were given the name GDSs.

4. Reservations via the Internet and by computer

The Internet sites of airlines enable consultation of the timetables of their flights and in some cases those of the competition. A smaller number also allow booking, sometimes only for Frequent Flyers. As many act as GDS for their services.

Finally there are on-line reservation services that use the telephone, developed primarily in the USA.

These systems give travellers the advantage of immediate access to flight timetables, and thus make it easier to choose an itinerary than is the case through a travel agent's where the sales assistant acts as a filter between the screen and the customer, and where the need to serve other customers reduces the time available ⁽⁸⁵⁾. However, the main advantages are the economic benefits companies gain in terms of the cutting of distribution costs: a reservation via the Internet with a GDS as an intermediary costs just 2 dollars, via a GDS it costs 3.5 dollars, and by telephone it can cost up to 15 dollars.

However the airline companies have not yet taken full advantage of the possibilities offered by this outlet for their sales, for reasons to do with the security of data and because they have not yet found means of promotion other than the travel agencies. For this reason in the USA, whose airline companies have developed sales over the Internet more than their European counterparts, the proportion of Internet sales out of the total number of tickets sold is no more than 5 percent at best. Consequently, the lower distribution costs made possible by the Internet have not yet become a financial benefit for the traveller, for whom the Internet so far offers special fares for only a limited number of flights and destinations. Of more dynamic significance to the airline companies, however, is the use of the Internet when dealing with their FFPs, because the latter can be rewarded with points.

Despite the present uncertainty, the Internet is arousing attention: it may be used to sell the last available seats, and some travel companies are specialising in this area, as well as for auctioning tickets, but the author is not aware of this possibility having yet been used, though the theory has been considered in terms of optimising yield management.

As things stand, then, the debate on computerized reservations remains in the realm of the CRSs and GDSs, and it is on these that Community legislation is focused.

5. Computerized reservations systems: hosting and Community legislation

The question of hosting was not clearly formulated when the Community began to take an interest in CRSs in 1989 with regulations in the form of a code of conduct in the area of computerized reservation systems ⁽⁸⁶⁾, the purpose of which was to resolve the problems raised by the CRSs in terms of distorting competition, but the introduction to which also addressed the interests of passengers, defining the problem in these terms: the " improper practice in terms of denied access to systems, or discrimination in the area of supply, access to the data display system, or the unfair conditions imposed on participants or subscribers may represent a serious loss for air carriers, travel agencies, and ultimately for the consumer". The regulations of 1989 were limited by incomplete knowledge of the problem or, what is more likely, by the absence of technical instruments for resolving the matter of hosting in a way acceptable to all. They nevertheless filled a void in the regulatory provisions represented by the absence of agreements between companies in connection with the acquisition, development and joint management of computerized reservation systems; this took the form of Article 85(1), of the treaty ratified by Regulation 2672/88. From the outset Community legislation has been based on a philosophy shaped by the policy of competition, with the aim of ensuring equal treatment for participating companies and of protecting them from harsh conditions. But it was with the regulations of 1993 that the legislation began to have a significant effect on the sector, and also began to produce positive results for protection of the consumer.

For a thorough examination of Community legislation in effect, it is necessary to refer to the debate on hosting that took place in Europe when the European Commission began to tackle its revision of the 1989 regulations. Though it fully appreciated the role played by hosting in connection with the problems of distortion of competition, the Commission doubted that dissociation would in itself be sufficient for eliminating practices that favoured the controlling companies, and took the view that the adoption of barring techniques ( Chinese walls as they became known) might guarantee the hoped - for equal treatment. The European airline companies were involved in this debate, perhaps not only because they were concerned about distortion of the air transport market, but also because they were eager to support the two CRSs in which they participated, AMADEUS and GALILEO, against the US system SABRE which had already acquired 11 percent of the European market.

It is in this context that we must read the position expressed by the AEA in some of its letters to the Commissioners for Transport and Competition in March 1993 ⁽⁸⁷⁾: " in view of the unfair advantages that might be enjoyed by competing companies, those subscribing to the AEA demand that the CRSs operating in Europe, and enjoying the completely neutral environment created by the CEAC and EEC codes of conduct, be required to dissociate ... [the Commission's position] is not acceptable to the AEA. If it is thought that a dissociated CRS is still able to offer favourable treatment to a controlling company, that same CRS might also evade all the mechanisms introduced by a Community code aimed at achieving the said objectives of dissociation. Secondly, in a dissociated environment the parent carriers could not automatically enjoy the current technical advantages. Thirdly, by requiring dissociation, the undue burden of statutory equality between the parent carriers and the subscribers would be transferred from the latter to the former who would have the burden of dissociating the system".

The debate at the technical level was a difficult one because no one was then able to say with any certainty whether the Chinese walls and the process of dissociation would work in practice and it was further complicated by the relations with the USA which feared, not without justification, that dissociation was a barrier to entry to the European market, in as much as this would mean high reprogramming costs for the systems and would therefore make the European market unattractive below a certain high percentage. In the end the solution adopted was that of the Chinese walls, accompanied by the separation of the company of the system vendor and the owner/carrier ⁽⁸⁸⁾. The fact that after the 1993 regulations the airline companies started to phase out their stockholdings in the GDSs is evidence that they had begun to lose the competitive advantages that accompanied control of the systems and that the Community decision was therefore a good one ⁽⁸⁹⁾.

6. On-line reservation systems: current Community legislation

Community legislation applies to all the CRSs, anywhere in the world, that are offered for use and/or used in the Community.

With regard to the clauses of the contract between the system vendor and the participating carrier, these may not be unreasonable conditions or conditions which, in light of their nature and in accordance with commercial practice, do not have any connection with participation in the CRS; indeed exclusive CRS clauses are banned ⁽⁹⁰⁾. Furthermore, the rates and other conditions applying to use of the system must not discriminate between the various participating carriers, including parent carriers. In addition to these bans, the code of conduct recognises that the participating carrier has the right to withdraw, the only requirement being that six months' prior notice is given once the contract has been in effect for at least one year, and that it pays the costs incurred by the vendor in connection with this termination of the contract.

Alongside this ban on an exclusive clause, the parent carrier is also prohibited from refusing to provide other CRSs, on request and with the same degree of promptness, with information on timetables, fares and availability, and from refusing to distribute its own services through them ⁽⁹¹⁾. We would stress that this ban on refusal relates only to parent carriers and not to participating carriers: the reasoning here is that of avoiding the creation of dominant positions between the CRSs through the conduct of the carriers that control them, but the result is a better service for the consumer.

During execution of the contract the rules of conduct imposed on the carrier and on the system vendor are a mirror image of one another. The first has the obligation of providing the CRSs with accurate, transparent and complete information, without discriminating between CRSs, including those competing for subscribers, and information which is particularly suited to enabling the vendor to observe the classification criteria applying to data displayed.

For its part, the system vendor must ensure a prompt, accurate presentation of data which has not been tampered with for all participating carriers, taking into account the technical requirements governing the method of entering data chosen by the carrier and the standard formats of the system. Moreover, it is required to ensure that every participating carrier has the same functions and in particular to maintain a distinction, in a clear, verifiable way, between its distribution facilities, on the one hand, and the administrative, commercial and data storage functions of the carriers, on the other. The ban on transferring data of a personal nature on passengers to third parties not involved in the transaction (and thus in the first instance to other participating carriers) constitutes the specific details of the obligation of separation, the aim of which is to prevent any carrier from accessing data on the sales of its competitors.

Further specific details of this regulation are found in the series of provisions governing display, to which the attachment to the 1993 regulations is devoted. This display is in fact a crucial element in this area, both in terms of competition, and in terms of protecting the traveller: the system vendor must provide for the initial display of each individual transaction with the data supplied by the various carriers, in a clear, complete, impartial and non-discriminatory manner, with regard in particular to the order of presentation stated in the attachment. It is only at the request of the consumer that display of scheduled flights or non-scheduled flights may be omitted, or that the data displayed be based on departure times, arrival times or flight duration, but a request to modify the displayed information on the part of the consumer would seem to eliminate any liability of the vendor on the grounds of infringement of the code of conduct. Further regulations ensure the neutrality of the CRS in the display of fares.

The regulations also govern relations with the subscriber, on the part of both the carriers and the system vendors. The philosophy on which these regulations are based is that of ensuring that the subscriber has the greatest possible degree of freedom. Thus the carrier may not make the use of a CRS dependent on a commission or on some other incentive or disincentive for the sale or issuing of tickets for its services, nor may it stipulate the use of a given CRS. Since these regulations affect relations between the airline companies and the agencies, the regulations disregard any conditions imposed by the latter in connection with the sale of tickets: thus the only ban that the agencies may impose is that relating to stipulating a given CRS.

As for the system vendor, this party is required to comply with similar rules to those laid down for the contract with the carriers, and their purpose is to exclude the creation of dominant positions ⁽⁹²⁾; in particular the rules ban exclusive rights and the principle of equal treatment of subscribers is safeguarded: an integrated service must be offered to all subscribers. Finally, the contract must contain two provisions that forbid the subscriber from modifying the displays ⁽⁹³⁾ and from tampering with the data supplied by the CRS.

The Commission has the appropriate powers of control and will accept appeals against any infringement of the code of conduct.

7. The application of Community legislation and proposed amendments

The assessment which the Commission's offices reach on the current Community legislation is positive, but with the modifications that those offices recommend from their experience. This experience includes both the points of view that can be concluded from the Commission's control activities, and the observations gleaned from contact with carriers, system vendors, subscribers and their associates, and finally the changes that one observes in the market and about which we have already spoken in the preceding sections.

The Commission's control activities include first of all an examination of the claims submitted to it. Since the 1993 regulations came into effect there have been 21 of these, of which 20 have already been prepared for trial: 6 relate to the favourable treatment which a CRS granted to its parent carriers, 4 relate to CRSs showing discrimination between companies in the area of fares; 2 relate to the security of data, 5 to the display of flights, 2 to access to the market, and finally one claim relates to the refusal of the US CRSs to provide foreign carriers with commercial information on internal traffic ⁽⁹⁴⁾. Sixteen of these cases, only three of which were unfounded, had to do with discrimination in the form of favourable treatment, fares, the display of information and the refusal of information on US internal traffic. This fact may mean that such discriminatory practices are very widespread, or that the airline companies are more active in defending their interests than are other categories of users. It is likely that the second interpretation is closer to the truth, since the overall number of claims is very low in terms of the number of carriers, subscribers and transactions that the CRS sector has experienced during the period lasting more than three years between the 1993 regulations coming into effect and the date of the communication from the executive body, and in as much as the Commission's other control activities ⁽⁹⁵⁾ would seem to confirm that essentially the regulations work well.

Although limited for statistical purposes, the cases that have occurred permit us to highlight certain significant problems and if we also take into account the problems that have arisen outside the control activities, we can draw up the following list of problems: the obligations of subscribers, fares, the display of flights in the context of co-sharing, passive reservations and advertising in the display screens.

One gap in the current code of conduct, pointed out by the consumers' and users' associations, has to do with the obligations of subscribers, that is to say the neutrality of travel agencies both towards the carriers and towards their customers. Indeed the current code of conduct, as we have already seen in the preceding section, stipulates that the subscriber must not tamper with the data supplied by the CRS, but the current wording of the Community regulations does not seem sufficiently detailed. The Commission's proposal ⁽⁹⁶⁾ requires a specific attachment to govern the subscriber's conduct and to protect both the carriers and the customers. The carriers are protected by the ban on multiple bookings by the same passenger ⁽⁹⁷⁾, and the obligation of immediately deleting a reservation in the event of a customer cancelling. This solves two yield management problems for companies. Establishing a legal obligation upon subscribers makes it possible to anticipate problems. However the author is of the view that the regulations should have provided a better definition of double booking by referring not only to the unique nature of the customer but also to that of the destination in a given period of time.

Nevertheless, the following obligations apply to travellers: reservations may only be made at the request of the passenger; the travel agency must ensure the correctness of the fare and may not issue a ticket until the seat has been confirmed.

The CRS fares have been the object of lengthy discussions with the interested parties in order to guarantee equal treatment of carriers, avoiding external restrictions on competition between CRSs. Moreover, the problem of fares is of a two-fold nature: it relates to those of the carriers, as the amount involved in transactions carried out through the CRS, and those requested of subscribers for use of hardware and software. The two problems are linked, since the airline companies complain that the incentives, in terms of discounts, granted to subscribers to promote the use of the CRS mean an increase in the fares they are charged. The Commission's proposal resolves the problems of fare discrimination between carriers, limiting the principle of equal treatment to the carriers alone, and considering the incentives given to subscribers as distribution costs. In this way a complete distinction is made between the fares applied to carriers and to subscribers, solving the problem at its root. Connected with the question of fares is that of passive reservations which is essentially the problem of the carrier's right to be informed of a reservation made via a CRS, for which a commission is charged, and to cancel it. The Commission's proposal does not change the existing regulations, but the executive has promoted the drawing up of a code structure for the reporting and cancellation of these reservations, and this has been adopted by the sector.

The displaying of co-sharing flights is a problem arising out of a change in the transport sector; there has been a recent proliferation of associations between airline companies, in many cases in the form of co-sharing in terms of flight codes. This is a practice which also favours the traveller, in that it improves the corresponding services, but it has also been subject to criticism in terms of transparency. A contribution towards eliminating this drawback may be found in adapting the criteria applying to display in the case of co-sharing. The existing regulations permit the display of no more than two flights, and in cases where the flights involved in co-sharing are greater than that number this requires making an arbitrary choice.

At the technical level a CRS has found a solution to the problem, but it is not without drawbacks. There is thus need for a legislative solution, and there are two possibilities for this: to permit the displaying of all flights involved (the actual flights and those indicated for the sole purpose of commercial promotion), or to limit display to the actual flight. The first solution involves the risk of displaying the actual flight on the second or third screen, whereas the passenger normally opts for the first; the second solution has the overall effect of cancelling the advantages of co-sharing for the passenger. The Commission's proposal has not imposed a choice, but it showed a preference for giving the system vendor a right to make a non-discriminatory choice if the actual carrier has not indicated the two carriers who must appear in the display. This choice seems more likely to favour carriers than to provide passengers and subscribers with full information.

With regard to advertising, the possibility of including this in the display has been requested by the CRSs for the obvious reason that it would increase their revenue, and the Commission has resolved the matter at an administrative level, stipulating the condition that there must be a distinction between this and the information contained on the screen, in order to avoid distorting competition.

In its first reading ⁽⁹⁸⁾ of the Commission's proposal, the European Parliament approved, amongst others, amendments aimed at strengthening protection of the traveller, especially in terms of the clarity of displays to which there is direct access, e.g. via the Internet.

The Council of Transport Ministers, at their meeting of 17/18 June 1998, reached an agreement on a common position which " after it has been developed ... by the Committee of Permanent Representatives ... will be formally adopted in one of the forthcoming Council sessions" ⁽⁹⁹⁾.

© European Parliament: 1999