Friday, July 18, 2008

The CRS Effect in Europe

Last November, the European Commission issued a proposal to revise its decades-old "Code of Conduct" for Computerized Reservation Systems (CRS). When the Commission began its work on revising the CRS code back in 2002, some speculated that full liberalization of the CRS market was on the horizon. These hopes (or, for some stakeholders, fears) were dashed once the Commission’s proposal appeared. Responding to concerns that the old CRS code led to market distortions, specifically with regard to the limits placed on the CRS providers themselves to freely negotiate services and fees with individual airlines, the new proposal would finally allow real competition by removing these archaic strictures. At the same time, however, the so-called "safeguards" which mandate that airlines which own or control a CRS share the same information with competing CRS systems as they use with their own and that neutral information is provided to travel agents and consumers is maintained in the proposal. While this is certainly not the first time consumer interests have set the tone for EU legislation, this may very well be another instance of maintaining regulation where none is needed. After all, the Untied States let its CRS code go the way of the dodo in 2004 and since that time has seen a 20-30% drop in booking fees. The effect has been to reduce costs to U.S. airlines, making them more competitive in this respect than their EU counterparts. Similarly, CRSs whose business deals with the airlines tend to be worldwide can offer competitive pricing for U.S. market bookings which, up until now, remains restricted in the EU. Perhaps some of this will be redressed should the CRS proposal go into effect, but why risk hampering the EU aviation market at all when the US experience tells a different story?

There is no easy or, rather, clear answer to that question. In a consultation paper produced prior to the CRS proposal, the European Commission recognized substantial changes to the CRS market which, arguably, lifted any perceived need for continued regulation. The most substantial change, of course, is the fact that CRSs, particularly the "big four" (Amadeus, Galileo, Worldspan, and Sabre) are no longer owned and controlled by the airlines. Only Amadeus still has significant airline investment from KLM/Air France, Iberia, and Lufthansa. If the original CRS code was intended to stop the once carrier-controlled industry from using CRS displays to give preferential treatment, should not this sea change be a sign that the rules are no longer necessary? Apparently not for the Commission. Concern that Amadeus or even other CRSs with minor amounts of airline investment can still harm the consumer appear to have won out despite the lack of clear evidence that this is even still a substantial risk. More confusingly, the Commission opted not to follow the suggestion of some stakeholders that a "sunset clause" be placed into the CRS code where it would finally expire once all airlines have fully divested from the CRS market.

Also inexplicably bypassed by the Commission is the reality that alternative booking channels have grown exponentially since the arrival of the original code in 1989. According to the Commission’s own findings, the Internet, when combined with airline office sales and call centers, accounts for 40% of all airline ticket sales in the EU. The rise of the low-cost carriers in the EU have depended heavily on direct sales as a means of keeping their costs down and reaching out directly to consumers who might otherwise frequent the longstanding flagship carriers. CRSs are thus no longer "the only game in town"; the competitive pressure now placed on them from alternative booking channels is substantial. Why, then, keep their hands tied with regulations? If a free and open aviation market is desirable (and certainly no one can deny this has been EU policy for over a decade now), then so too should be a free and open CRS market. The Commission’s attempt to excuse itself from taking these market developments into account on the grounds that Internet penetration remains low in some areas of the EU may be relevant, but not for long. Given that Europe as a whole has experienced 263.5% usage growth since 2000 and shows no signs of slowing down, an argument which hinges on Internet access rates has its own "sunset clause" attached to it.

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