May 31 - BTC: An Airline Development That Warrants A Competition Authority Investigation


David Currie

Chairman

UK Competition and Markets Authority

Victoria House, 37 Southampton Row,

London WC1B 4AD, UK

 

Dame Deirdre Hutton

Chairman

UK Civil Aviation Authority

45-59 Kingsway

London WC2B 6TE

 

Margrethe Vestager

European Commissioner for Competition

European Commission

Rue de la Loi / Wetstraat 200

1049 Brussels

 

Dear Chairman Currie, Chairman Hutton and Commissioner Vestager,

The Business Travel Coalition is writing to bring to your attention an anti-competitive and anti-consumer development in the UK and EU marketplaces for commercial airline services that warrants an investigation by the UK Competition and Markets Authority, the UK Civil Aviation Authority and the EC’s DG COMP.

International Airlines Group (IAG) recently announced that it would surcharge customers £8 per segment (£16 per typical roundtrip ticket) if they purchase a ticket anywhere other than its websites, service centers and airport ticket counters beginning on 1 November 2017 representing a possible abuse of its dominant market position.

In the marketplace for travel distribution services airlines, travel agencies and travel management companies are competitors. When a dominant airline participant in the direct distribution channel intentionally and discriminatorily forces a £8 per segment surcharge on indirect channel participants, it is potentially using its dominant market position in both the marketplaces for commercial air transportation services and travel distribution services to illegally drive up the costs of its indirect distribution channel competitors harming them and potentially causing many of them to exit the market.

While many current global distribution system (GDS) contracts with airlines preclude programs like the £8 surcharge proposal just announced by IAG, if successfully forced on the industry, on the heels of the 2015-implemented Lufthansa Group surcharge, the scheme could spread throughout Europe, North America and elsewhere – antitrust immunized alliances all but guarantee it. 

As a point of reference, back in 2006 and 2007, in the US and Europe respectively, major airlines threatened travel management companies (TMCs) and their corporate, university and government clients with denied access to schedules and fares through the GDSs. The goal was to decrease GDS segment fees. Those fees have fallen by more than 30 percent since.

IAG now claims that the goal of its surcharge program is again to reduce distribution costs. However, that claim is belied by the fact that the surcharge would not be applied to the two most expensive IAG distribution outlets – its own airport ticket offices and reservation centers. The positioning of the surcharge, as a cost-reduction initiative, is simply a head fake aimed at competition authorities.

IAG appears to be pursuing a three-part strategy to drive new revenues – all generated on the backs of consumers and the managed-travel community.

Part 1. An ambition of the IAG program would appear to be to drive leisure and business travelers seeking to avoid the £8 surcharge to the walled gardens of IAG airlines’ websites where comparison-shopping does not exist and where those airlines would generate higher yields – especially from unsuspecting, infrequent travelers. For managed-travel programs the surcharge represents a direct price increase with no corresponding benefits whatsoever for the corporations, universities and government entities that already underwrite the lion’s share of the airline industry’s cost.

Part 2. IAG also would seem to want to use its dominant market position to price online travel agencies (OTAs) out of the market and out of business, as many OTA customers would be unwilling to pay £8 (or £16 per roundtrip ticket) when, for instance, BA.com or calling BA, is free. IAG airlines and OTAs are direct competitors in the marketplace for distribution services, which has been very positive for consumers.

Strong, independent distributors are necessary to keep airlines honest on their own websites and in their offerings elsewhere to consumers. OTAs uniquely provide consumers with the comparison-shopping tools that keep pricing discipline in the system.

Part 3. Product distribution is a cost of doing business for any industry. Through the surcharge, IAG is likely attempting to turn its distribution cost centers into profit centers first by shifting all or at least a significant amount of the cost of distribution to TMCs and onto their clients’ travel departments and then eventually charging for access to their fares and schedules.

In the process of seeking to extract more revenue from the managed-travel community IAG would, of course, create substantial collateral damage and, not just transfer costs, but create new costs within the industry by effectively insisting on its clumsy and in fact often unworkable direct-connect strategy for its contracted customers. Examples of cost consequences follow.

• Substantial new TMC inefficiencies and productivity problems would develop, as more time with travelers on the phone would be required. If a 4-minute phone process turns into 8 minutes then support time would be increased by 100 percent and efficiency reduced by 50 percent. This outcome would have serious increased transaction fee implications for travel departments. Likewise, more frequent TMC consultations with travel managers would be necessary.

• TMCs, OTAs and consumers would lose much of the control they currently have over bookings in terms of single screen comparison-shopping, profiles, locating previously made bookings, ARC/BSP payment and negotiated fares.

• The surcharge would fragment today’s highly efficient reservations process where air, hotel, rail, car and other services are in a single booking. TMC information-technology costs would increase including for back office systems and the laborious use of passive bookings in the GDS to complete a record.

• Companies could lose data-reporting capabilities for policy and financial analysis purposes as well as the use of their online booking tools. IAG is silent on the data fields that they would make available to corporates who are accustomed to robust data support from their TMCs.

• How would normal or problematic ticket changes, cancellations, re-bookings, refunds, credit card reconciliation, strikes, emergencies, travel disruptions and interlining be handled? IAG has been silent on how it would manage these day in, day out issues other than the airline has phone lines. The massive British Airways technology meltdown in London on 27-29 May 2017 is hardly a reason to take comfort from any assurances by IAG that all will be well. 

• IAG carriers’ technology platforms would not effectively support corporations’ Duty of Care processes and expense report management tools would not be available from IAG carriers for pre-population of expense reports as today’s online tools support.

• According to press reports, the IAG £8 surcharge, to some industry participants, bears no resemblance to the GDS fee structure. And there is no basis for an argument – none – that reservations booked by IAG personnel at its airport ticket counters and reservations call centers are less expensive by £8 per segment (£16 per roundtrip ticket) than sales made via GDSs. In fact, those “high touch” outlets are an airline’s most expensive distribution channels.

Taken together, these substantial new costs, coupled with the impact of the surcharge, would undermine the model that TMCs and their corporate, university and government clients have labored to develop as the efficient and cost effective, compliance-driven modern managed-travel program.

IAG is attempting to substitute its judgment for the managed-travel community’s clearly articulated preferences. Without collaboration, IAG is forcing a choice between a highly inefficient process for travel managers and their TMCs, or paying higher fares. This is a bad choice. Corporate travel managers, in close collaboration with their TMCs and technology partners, have developed a professional and productive travel procurement environment that must not be poisoned.

IAG obviously believes that it now has the power to force this bad choice on the managed travel industry and consumers generally because of the massive consolidation in the airline industry over the last decade. Governments have acquiesced in a litany of mergers. They have also approved or at least accepted pervasive antitrust immunized airline alliances and code-sharing arrangements that have prompted erstwhile competitors to cooperate on prices and schedules rather to vie head-to-head for the business of travelers.

We trust that upon investigation that you will share our concerns about this highly anti-consumer and anti-competitive plan and that you will urge IAG to defer its surcharge implementation until such time that your investigation assures you that IAG’s plans and industry communications processes are and have been in accordance with all relevant competition and antitrust laws, statutes and principles. 

If you would find it useful, a representative group of industry participants would be pleased to meet with your staff to share first-hand and unfiltered why they are deeply concerned about this far-reaching industry development.

Sincerely,

Kevin Mitchell
Chairman
Business Travel Coalition

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