SENT BY: 1-18-93 ; 4:13PM ; McCARTHY TETR.AllT-<:OMPETITION TRIBUNAL;# 3/13 SENT BY: NERA !nc. 21362.S'iJ36B .... 416 868 0673:~ 2 AP'IDAVIT OF GAR¥ J, DOHMAN I, GARY J. DORMAN. of the Chy of Los An&eles m 1he State of California, o:ne of the t:nited States of America. MAICB OATII A.l\ID SAY AS FOU..OWS: 1. I am a Senior Vice President of National Economic Research Associates. Inc. (NERA). NERA has been retained by counstl for American Airlines to analyze certain of the competition issues arising ill comiection with th• .Applicatio:a of Tho Direc+.or of Investigation and Research. 2. I have prepared the attached document entitled "'l'estimony of Dr. Gary J. Dorman.• The opinions expl'essed theroht are true to the best of my lmowledac. infonna.tion and belief. My qualifications to give tbis testimony are desenbed :in AJ>r>endix 1 of the atta~cd dOCllm.ent. SWORN before me1 ) a Noury Public for the State of ) C&li!onlia, in the United States ) of America, on the 18th day of ) Jam.wy, 1993 at Los Angeles, ) G .DormM-Celifornia ill the United States of America )----~~~~~~---) COMPETmON TIUBUNAl R I ~~ .... Q JAN 18 1993 M ·.~ J Notivy He c. actt'!.;·~~ ..., ,.,. ,,,.-.... 1 '\l11....,:.:c T ~ffAWA. Oi~T• . ·:1#7J1 j t~;i'! ft COMPETITION TRIBUNAL f 'TRIBUNAL DE LA CONCURAENCE i .F ~ ile i No. e r /b v:. m~ j 1 L/ (C. -~--~,~~ Exhibit No. , -~-r· .~ No. de la piece L - it! _ . F11od on - !oil> - ~·-r-. RO~o)qpiosstroaer ~'°)2 • l_'Z_~ -:J . 9_: $'~ Gro111er . -LL~ j ........_
SENT BY: 1-18-93 ; 4:13PM ; McCARTHY TETRAULT-<:OMPETITION TRIBL:NAL;# 4113 SENT BY : NERA l: nc. 416 ass os7s:# a TESTIMONY OF DR. GARY J. DORMAN I. INTRODUC'rlON 1. My name is Gary J. Dorman. I am an econamist and a Senior Vice President of National Economic Research AssodateS", Inc. (NERA), where I spedalize in antitrust cconomica. I have conducted research on the airline industry during the past nineteett years. and have publiahed a numbor of articles on the 5ubject. 1 have been a consultant to th~ United States Civil Aeronautics Board (CAB) as well as to several U.S. and foreign air carriers. 1 have testified as an expert witness ill five airline proceedings before the CAB. in three airline proceedinas before the U.S. Departnient of Transportation (DOT), and in two airline antltru1t proeeedi:Dp in the U.S. District Comtl. 2. I have studied airline computer reservation systems (CRS..111) durfng1he past ten years, and bave w.ritton a number of reports concerning CR.Ss. I have testified as an expert witness on CRSs before the Competition Tribunal (In the mawcr Qf the cpmhinatfon gf the Reservec and Peaa&Us comwrtcr rcset\!itipn 'lstcm.11; into the '1emini Gm\m), Jn the U.S. District Court for the Central District of California. (In Re Air Pwcnscr Commiw Rea;mtion S.Wtenu Antitnut Litiptjan), and by affidavit before the U.S. DOT (In & Onnwtcr B.esma:Uons Systems). My qu&..lificatiou are described in detail in Appendix 1 to this testimony. 3. NBRA bas been. retained by counsel for American Airlines to analyze certain of the compedtlon issues ari&ina in connection with the Applicatio!l of The Director of Investigation and Research in 1his proceeding. I do not own stock in any U.S. or Canadian airline or CRSt nor do 1 have any financial stake in the outcome of this proceedins. Based upon my research and analysis, my testimony is as follows.
SENT BY: 1-18-·93 ; 4: 14PM ; McCARTHY TETRALLT-<:OMPETITION TRIBUNAL;# 5/13 SENT eY!Nli~A Inc. 2136289368. ... 416 aes oe13:# 4 -2-II. THE LINKAGE BETWEEN AIRLINE SERVICES A.ND CRS SERVICES 4. Travel agencios tend to choose the CRS 11.fftliated with the airline with which the a.genty does th~ most bllliness, so Iona as that CR.S has reasonable functionality relative to eompetiJl& CRSs. Thor• ii little c.!ispu1c that this is true. For example. c:ovia has stated: [There are] facto.rs other than CRS that would he far more likely to influence Apollo agencies to book more on United or USAir. Thes,e faetors incl.l.lde (l) the fact that qonta ill m111y Ql.'SCS d:toose the CRS of the airline with which they a.re doing the most business; ... (Openina <Ammems of Covi.a Partnership in Rcagonse !D Notise of Pmppsed Bultm1kin1. June 24, 1991t page 22. U.S. DOT Docket No. 46494,J 5. The empiric:al evidence for this obsorvation is quite dramatic. 1n the United States. wh~re the four domestic CRSs are roujhly comparable in fu.nction.ality, SABRE's 1992. share of nationwide locations was ~8 percent and fts share of booldn1s was. 4 l peicent. In Minneapolis, however, where Northwest ha& its principal hub and is by far tbe laraest airline, SABRE's share of locations was 23 percent and Its share of bookings was 18 percent. In contrast. the WorldSpan CRS, which is sponsored by Northwest (alcmg with Delta and TWA) llld is the third largest CRS in the U.S., had a 57 percent share of locatiom and a 65 percent share of bookings ill Minneapolis. 6. In Houston, a Co~tinental hub, the SystemOne CRS (sponsored by Continental) had a 41 percent shue of locations a.nd a 46 percent share of bookings, even though it is the smallest of the four U.S. CRSs. In Raleigh~Durbam. an American hub, SABRE's CRS shares are S4 percent of locations and 66 peroent of bookings, wmch are higher than lts nati011al averages. In Pittsburgh. a USAir hub. Apollo (owned in pan by USAir) has a share of locations of 41 pcr«nt and a. share of bookings of 47 percentt even
SENT BY: 1-18-93 ; 4:14PM ; SeNT SY: NEAA : nc. , ~-1e-ss :11:.tsAM: though it is only the second largest CRS nationwide. Similar re&ults are found at most major hub cities in the: United States: a CRS sponsoring airline is the leading canier. [These data were calculated by American Airlines using data tapes provided by each of the U.S. CRS vendors; the data are for the first nine months of 1992.] The evidence is overwbelm:ing that travel agencies tend to choose the CRS sponsored by the airlille witb which the qency does the most bustnw.
llL SABRE'S POSl'nON IN CANADA 7. SA'BRB has achieved some success in Canada and presently accounts for approxima~ly 35 percent of the CRS business in Cana [Beqxmac..Qf the Romondenta. Covia Omada COJ+l. and Cgyia Canada PanncabiP Com· to Notice of Apglimtion, paragraph 19]. However. it is important to note that this success was achieved during the period when the systems offered by its primary competition were RoservC4: and Pegasus, which were functionally inferior to SABRE by a aubsta:ntial margin. [See• . ;,a.. AiI Canada's Responses To lnterraptories Of The Bureau Of C'.ompetition Pnticy Dated May 2!, 1987, Director Production Item 85, Oroupe lmlova Inc. study. pa1e.s DHF'K 12.S to DHFK 21.5.J In f.act, R.eservec and Pegasus have recently been si;rapped by Gemini as traVel ageIK.)' systems and replaced wftb Apollo. 8. Since mid·1992, Apollo by Gemini (APO) has been made available to all Reservec/Pesuus/Gemini agents, and Gemini officials believe it to be at lea.st the eciual of the SABRE system: Gemini. Covia, and Galileo are forainl a truly worldwide CRS plat.form jointly owned by 13 airlines tl!at will have a lastina competitive advantage over American Airlines' Sabre ••.• Gemini will ensure that Apollo by Gemini remains competitive with Sabre
McCARTHY TETRAULT-(:OMPETITION TRIBUNAL;# 6/13 2136:2S936a- 416 ass 0673:ir 5 1 1 share in a (:ity tends to be higher where its
SENT BY: 1-18-93 ; 4:14PM ; McCARTHY TETRAULT-<:OMPETITION TRIBUNAL;# 7113 SENT SY:NERA Ine. i-1a-a:; : , i !49AM : 2135299366 ... 41a ase oa7a:# a -4-in functionality and will add 10 its already sizable i.nveat.mou.t to ensure that Apollo by Gemini «lntinues to meet tho oD&Qing neecls of ihe Canadian market.
Gemini and Covia have. built a stat~-tbe-a:rt product that competes witb American Airlines' sabre system. ("Interpretation of Cu.rrent Bv•nts Affe*' ~mfni," lbe Gemini Group, November 2S. 1992, paJe 2.J If, in fact, SABRE's substantial technological advantage has been el.lmibated, then SABRE's cunent market penetration may well represent its hiah water mark. 9. MorCO\l'er. even if Canadian Airlines were to be hosted in SABRE rather than Gemini, the tendency of travel agen~ to choose the CRS of the airline with which they do tbe most business would still create a marketing advantage for Gemini. At present. Ai.r Canada and it4' afrline partners acCOWlt for approximately 55 to 60 percent of the airline traffic in Canada, while C.anadian and its airline partners account for appromnately 3S to 40 percent of tbe traffic. Bvcn if one were to add Americau 's am.all traffic share (limited to transborder flights) to Canadian's. purportedly as some measure of SABRB's prospective airline base in caaada. it is still substantially smaller than tbat of the airlines affiliated with Gemini and Covia: Air Canada. United. USAir. British Airways. SwWair, KLM and Alhalla There is uo basis for the proposition that a linkup between Cawld.ian Airlines and SABRE would create an insurmountable marketing barrier for Gemini. especially aiven Gemini's self. .p rofessed technical equality with· SABRE.
IV. IMPROBABILITY OF A SABRE CR.S MONOPOLY JN CANADA 10. Even U olic were to assume that the transfer of Canadian Airlines hosting from Gemini to SABRE wowd result in tho d~mi&e of 'the Gemini partnership. this would be quite unlikely to result m the creation of a SABRE CRS monopoly in Cl.Dada. The
SENT BY: 1-18-93 ; 4:14PM : McCARTHY TETRAULT-<OMPETITION TRIBUNAL;# 8!13 SENT BY:NERA Inc. 21ae2es3se ... pr.ilD.uy reason is that over 60 ~rcent of tbe travel agencies in Ca.Dada ar~ ~ently using Apollo by Gemini, and those CRS services almost certainly would not cease if the GenUni partnership is dissolved. The partnership would have eve:ry incentive to transfer the Gemini operation directly to Covia because it would obvioualy be the best way to salvage as much as posSJ'ble of the partnors' illvestmeau in Gemini. 11. The logic of such a tramfer is, reinforced by the following CODSideration.s. (1) Tbe Gemini CRS service is actually provided by computer hardware and software which are physically located in Covia's facility in Denver, Colorado. Ge~ itself provides the Canadian communications network and a switch ill Winnipeg which connects the Gemini subscn'bers to the Denver computer "nter. (2) A tramfcr of Gemini operati011S directly to Covia <i0uld be made with no disruption to subscribers, since the system is already in place and the agents. are already trained. Moreover, Gemini's contract terms permit it to transfer the 1ervice to a new CRS provider without the consent of the travel agents. (3) Tnmsfening the Gemlni CRS service' (as distinct from. the hos1ing services) to CoYia would almost certa.i.nly be attractive and profitable to Covia, because its incremental COs1s of serving the Gemini subscn'ber base would likely be low and many of the necessary in\lestments have already been made. (4 ) OperatiDg a CRS in a foreian coWLUy in conjunction whb one or more local airlines is a comrnon ~ce of U.S. CRS vendora; and bas occurred in Asia (Abacus), Australia (Fantasia, Southern Cross) and Europe (Galileo). 12. In summary, the likelihood of • SABRE monopoly of CRS services in Canada is quite remote. Covia is the second largest CRS in the United States. and operates globally through its cross-ownership with Galileo. CoYia is a one-third owner of Gemini. whicb currently has over 60 percent of the CRS locations in Canada. In the event of the
SENT BY: 1-18-93 ; 4:15PM ; McCARTHY TETRAULT--COMPETITION TRIBUNAL;# 9/13 SiNT BY: NERA Inc. 2136259356. .. failure of the Oemmi partnership. it is implausible that Covia would simply abandon Canada aod the thousands of subscnben now using its CRS pursuant to contracts with Gemini. 13. Moreover, even if Covia were to withdraw from Canada. another CR.S wouJd likely seize tbe opportunity to enter Canada and compete with SABRE for chose thousands of' traveJ agencies. One pos.dbilfty would be WorldSpan,, which is now backed by three major U.S. carriers: Delta, Northwest and 1WA. Note that at the time 0£ SABRB's entry into Canada. WorldSpan's predec.essor-PARS."'Nas owned so1ely by TWA and was a much weaker cornpetitor. A second po&sibility would ~ the entry of SyitcmOne, especially now that Air Cacada hu agreed to purcbaat a substantial share of Continental Airlines, SystcmOne's owner. In view of a11 of the above factors. the prospect ot a SABRE CRS monopoly in Canada is extremely remote.
v. THE PROPER FOCUS OF nus INQUIRY 14. All of the analysis presented above addresses a secondaiy issue in this proceeding~ tbe posS1'ble consequences of the proposed remedies with respect to CRS competition in C&nada. The primary issue, which cannot be overemphasized, is the pomble COJ:ISequences of the proposed rcmedl~s with reapect to afr!iDe competition in Canada. Jn my view. competition policy-whe*-ber i:n tho form of antitrust laws or reaulatory requiJements-hu as its goal tbe protection of the welfare of consumers. The consumers who need protection here are alrllne travelers to, from and within Onada. They need to be protected from the airline monopoly which would be the inexorable result of the failure and liquidation of Canadian Airline.s. (I leave it to other experts to analyze in dotail the andcompetitive eD.llStquences of such an t\'enL)
SENT BY: 1-18-93 ; 4:15PM ; McCARTHY TETRAULT-(;OMPETITION TRIBLiNAL;#l0/13 SENT EIV \ NEFM Inc. : 1-1B-Q3 :11:!51/\M: 416 see oe7a:# s -7-13. With this focus firmly in mind, it is apparent that the CRS market is simply an upstream (input) market wherein airlines and travel agents purchase CRS services to assist them in selling air transportation services to their cwtom.ers. The aeconda:ey risk to cocsumen (if any) of an upstream CRS monopoly is dwarfed by the primary risk to consumers of a downstream airline -monopoly. Moroovet1 it is difficult to see how the establisbtaent of a SABRE CRS monopoly m Canada (however remote a posaoility) would create an airline monopoly in Canada. It is not plaUStble that the proposed remedies would ca.use the demise ol Air Omada and the establishment of a Canadian Airlines monapoly irl Canada. However, denial of the proposed remedies may well cause the demi1e of Canad;a n Airlines and the establishment of an Air Canada monopoly in Canada. (Again, I leave this proposition to other experts to analyze in detail.) 16. Finally, it is worth noting that in the disastrous event of an airHne monopoly in Canada, a monopoly of CRS services mC anada would likely be of little
additional consequence to ~OWiWilc::rs. The primary benefit to consumers of CRS coanpotition is the m.creased functionality of CRSs, the most important aspect of which is the capability of these systems to find the lowest fare available. While other CRS capabilities are ~mainly convenient amJ desirable~., bouding passes), comumers have consistently shown that their primary co11c:em is obtainina the lowest possible a.ir fare. In the event of an airline monopoly mC anada, the availabiley of disc:ount fares is likely to be she.rply <:urtailed, l50 the prlina.cy benefit to consumers of (upstream) CRS competition wi11 become of little co:nsequenee. lt js therefore vital, a.s a matter of public polic;y, to foCU! on the preservation of airline competition in Omada, •specially beca\lSO tho propoaed remedies do not threaten to ere.ate a CRS monopoly in Canada.
SENT BY: 1-18-93 ; 4:15PM ; se NT BY: NE'.RA In e. ; i-18-93 :11 :5:?AM : GARY J. DORMAN Alrltae Industry Experleaee
Edy c:a 1lcUJ. Ph.D. 11) :Ecooomic11 Univcn.ity of C&Jifornia, Berkeley, 1976 Fields· of apeeializadon: In.duatrial Orsanization, Microeconoml~ Theory, Eoonometrice:
Doctoral ditaertation: Airline $;Qmpetitjgn; A Tbgoretic•l gnd Empirical Analy5j1
A.B. with Hish Distlnctio!l and Hish Honors ia Eco11.om.ic1i Univenity of Michisaa., 1972 lmpJOYDltDt National Econoaie Jtosearoh Assoc:iatcs, I11c.1 198~presemt (current position: Senior Vice President and Dircotor or Los Angeles otfi") Senior Eoonomjst, Of!ic:e of Polic:y A11alysb and Development, National Toloeomm11nlcatla1u1 and [nformatil)l'l Administration, U.S. Department o( Commc:rce, 1979·1980 Start Economis.t, Policy and !"Valuation. U.S. Department ot Ener1y. !978· 19?9 (c>11 leave from University or Maryland) Assistant Professor or Economics. U.11ivcr.sity of Maryland. 1976--1979 (on leave dudn& 197&•1979 academic year) ProhH!gnal ActMtl11 At National Econnmic Res.earclli Acsociate1: FieJds of sptcialization: Htitrust and trade re1u1ation matters, economic clamasea
Primary imd111trie1 studied: airlioes, soft drinks. telecommunications equipment and senices Editorial Consultant ror The Amerjean Economic &eviA:W· 1977-J98l Consultant to Office or Economic Analysis, U.S. Civil Acron..uUcs Board. 1977-1971
McCARTHY TETRAULT-<:OMPETITION TRJBUNAL;#ll/13 2136299368. . .A..,endlx 1 Pase I of 3
SENT BY: 1-18-93 ; 4:15PM ; SEl\IT BY:NERA Inc. ; 1-15-93 :11:52AM ; Sclcrtcd PubJlc1ttgn5 "Monopsotay Rtvis.lted: A Commont on Blair .t Harrison,• wi1b J, Jacobson, ,AntiUYlt BuUsti,r. Sprina J9 92
•Joint Purcbasin~ Monopsony and Antl1ru11c."' with J. 1a~bson. Antitrv.11 Rnll§tin. Sprins 1~01 ·A Model or Uare1ul1ted Airliae Marbt9." in lhuarcb jn TrtDIDJ2ttetion i;pngmips, Volume J, •dit•d by T. K.ooler, JAI Pre.-, 1983 R.Hlew ot Afrljn1 Ptrfl\llatlon: Ibc Earb Jxpsriapqe. by J. Mc)'cr, '1 IJ.., tD Jo»rHl ar Ec2nomjc J.iS•rasurc. March 1983 •Air Sorv.ico to Small Commurtltia After Airli.ae J)er~suJadon,• NEBA IAAics. Jan11ary 19&2 Air It1111portatjop ReJU!atory Rcfprm,Amcricu Enterprise In•tituto for Pu.blic Polloy R.eaearch, W11hiD1ton, J:>.C<i Maroh 1978 T11tlmon:r Ip Ah:llJH c;.,,, ldan tb• u.s, CJyll A1raD19tlu B111d <CAil aod the \ML pq1rtmtn1Qf "(ran1urtatlon CDOT\ Chica10-Midway Low-Fare Ro1.1tc Procecdi111. Dockcl #30277 (CAB) Trans~oiniacntal Low·Parc Route ProoecdJns. Docket •30SS6 (CAB) C1litornia•Nevad1 J..ow•Fare R.oute Proceedina. I>ocket •31!574 (CAB) Appfa:1tioD or Eastc:rn Alr Lines, Inc. for Approval ot Acq~isiUon of Cofltrol of National Air Lines. Inc., Docket •34226 (CAB) Texas lntcrnational-Co11.tinental Acquisition Cue. Docket •39215 (CAB) :Pacifig Dlviaion Transfar Cue. 0b()ket #43063 (POT) NWA-Republic Acq11isition Case, Docket •0754 (DOT) U.S.-London Oateways Cue. Docket #44432 (DOT) In R.e Computer Reservatlcns S~sterM, Docket 11114649.4 (DOT)
McCARTHY TETRAULT-<:OMPETITJON TRIBUNAL;#l2/13 ;l13!5269368. .. Apptadbt l Pa1c:: 2. of 3
1-18-93 ; 4:16PM ; SENT BY: $ENT BY t NERA In i;:. ; 1-1a-ll3 :11:s3AM :
T11tlmou tn AtrUgc Ct"' Before tbt Courtr In the Matter of the Combination or the Resuvec and Pesasu Computer Reservation Systems into the Gemini Group, The Competition Tribunal of Canada, CT H/l
In Re Air l'assenaer Computer Restrvadoa Sy1tcm.1 Andtnut Lhiastion, u_s. Didrict Court (Central Di1trict of' Cal.il'orn.i.a)t MDL 667 ER (T.1t)
Pacific Express, Inc. and Pa<:ific Express Holding. Inc. v. 1Jnito4 Air Lines, lac., U.S. District Coutt (Central District of Calitornla), Cast No. CV 84·$1BS·ER (Mel)
In R.e I>omtatic Air Tra:naportatio1l A.ndCrult l.ititation. U.S. J:>latrjcc Court (Northern D.istrict oi Geor1ia)1 Matter File No. h90·CV-248S~ MHS & MDL No. &6J Fellowabf Jtt Hd Honan Fac:ulty ReHarcll Award, U11.iv=rs.ity or Maryland, l977 Sloan Tranaportation Fellow1bip. Utilvcrsity ot' CaUtornia, krkcle}', 197,-1976
William H. Probert &iholar1blp, Univorshy ot Ca.Ufe>rnia, Berkeley, 1972· 1973
Sim• Scaio.- Honors Scholar in Eeot1omics, UaJvc:rslt}' of Mic:hfaan. 19'71· J972
Mcmbenbtpi Amcricu Ecoiiomic Associ!ltion Associate. American Bar Association Phi Beta Kappa Offis;:t National Ecoaomio R.caeareh Assoi;:iatca, Inc. :)'3 Sou th .Flower !&tre~t 1 Su he 4100 Los Anseles, Callforaia 90071 (213> 621·013 l
McCARTHY TETRAULT....COMPETITION TRIBUNAI..;#13/13 41e sse os73:ai~ A:..pndb: 1 Pagel or 3