Major Changes Occurred in the Use of the Internet and Travel Agent Compensation in the Airline Ticket Distribution Industry

Since the airlines began selling their shares in the GDSs in the mid-1990s,  the ticket distribution system has undergone two major changes. These  changes have helped airlines, faced with generally high operating expenses,  cut distribution costs. However, these  changes have not eliminated the airlines’ dependence on the GDSs for the  selling of air tickets. Internet Sites That Cost Airlines Less Are Increasingly Used to Book Tickets, Some without the Use of Global Distribution Systems

Airlines have developed new Internet-based ticket booking processes that  bypass GDSs and their associated booking fees. Second, five major U.S. airlines collectively underwrote the development of  a travel technology company called Orbitz. Consumers also typically pay a $5-$10 fee to the new on-line sites  for each ticket. In 1999, on average, each ticket booked via a traditional travel agent cost an  airline a total of $45.93, compared to $23.40 and $25.12 for airline Website  and on-line travel agency sites, respectively. Airlines have taken steps to encourage travelers to book tickets through  less expensive, on-line distribution methods. By comparison,  the percentage of tickets booked on line (using both on-line travel agencies  and airlines’ own Websites) increased from 7 percent to 30 percent from  1999 to 2002. Airlines Reduced Travel Agent Payments, While GDSs’ Payments to Travel Agents Increased

Travel agent reimbursement patterns have shifted significantly since the  late 1990s. Changes in the Airline Ticket Distribution Industry Appear to Have Benefited Very Large Travel Agencies and Consumers Who Use the Internet

Large travel agencies and consumers who use the Internet appear to have  benefited most from recent changes in the airline ticket distribution  industry. Travelers who choose not to buy airline tickets on line, or who do not have  Internet access, may be at a relative price disadvantage. Sufficient Data Were Not Available to Determine the Relationship between Booking Fees and Costs and the Presence and Use of Market Power

Because we lacked access to proprietary company data on costs and  revenues, we could not develop the sort of evidence that would allow us to  determine whether GDSs exert market power in the airline ticket  distribution industry. Computing costs and travel agent incentive payments do not encompass all  airline ticket booking-related costs, and we were unable to get financial  data on other costs (e.g., booking-related hardware costs) related to GDSs’  airline ticket booking function, which might have allowed us to determine a  relationship between booking fees and related costs and to consider what  the relationship indicated about the presence and possible exercise of  market power by the GDSs. DOT  provided us with technical comments, which we incorporated where  applicable. We limited the scope of this review to the three global distribution systems  (GDS) that handle over 90 percent of U.S. airline bookings. To determine the relationship between GDSs booking fees and booking- related costs and what it may suggest about the presence and use of market  power, we analyzed GDS booking fee and cost data (e.g., computing costs  and travel agent incentives).
Why GAO Did This Study

In 2002, when major U.S. airlines posted net operating losses of almost $10 billion, they paid over $7 billion to distribute tickets to consumers. Of these total distribution expenses, airlines paid hundreds of millions of dollars in booking fees to global distribution systems--the companies who package airline flight schedule and fare information so that travel agents can query it to "book" (i.e., reserve and purchase) flights for consumers. Each time a consumer purchases an airline ticket through a travel agent, the global distribution system used by the travel agent charges the airline a set booking fee. Concerns have been raised that the global distribution systems may exercise market power over the airlines because most carriers are still largely dependent on each of the global distribution systems for distributing tickets to different travel agents and consumers and therefore must subscribe and pay fees to each. Market power would allow global distribution systems to charge high, noncompetitive fees to airlines, costs that may be passed on to consumers. GAO was asked to examine changes in the airline ticket distribution industry since the late 1990s and the effects on airlines, the impact of these changes on travel agents and consumers, and what the relationship between global distribution systems' booking fees and related costs suggest about the use of market power.

What GAO Found

Since the mid-1990s, two major changes occurred in the airline ticket distribution industry, and these have produced cost savings for some major U.S. airlines. First, airlines developed less expensive Internet ticketing sites that bypass global distribution systems and their fees and encouraged passengers to book via Internet sites. Between 1999 and 2002, on average, the percentage of tickets booked on-line, including airline-owned Websites and on-line travel agencies, grew from 7 percent to 30 percent. Second, in a related effort to trim costs, airlines cut the commissions they traditionally paid to travel agencies. However, these changes have not eliminated airline dependence on global distribution systems. These changes have had mixed effects on travel agents and consumers. Very large travel agencies (those with more than $50 million in annual air travel sales revenue) appear to have benefited from volume-based incentive payments from airlines and global distribution systems, while smaller travel agencies have closed or lost business, especially to on-line travel Websites. Consumers who use the Internet have benefited from lower internet-only fares. Travelers who do not buy airline tickets on line may be at a disadvantage in not having access to these fares. Because we lacked access to proprietary company information, we could not determine the precise relationship between global distribution system booking fees and related costs, and thus could reach no conclusions about potential exercise of market power by global distribution systems in the airline ticket distribution industry. Since 1996, booking fees and some costs related to the booking function--computing costs and travel agent incentive payments--both increased. However, we could not obtain data on all expenses related to the booking function, and thus could not accurately compare these costs to booking fees. DOT provided us with technical comments, which we incorporated as appropriate.