Documentation

It -- XV/JI -s :io (a) COMPB'liTJON TJUBUNAIJI'IIBUNAL DB LA CONCUDENCE

IN THE MATl'EI. OP an application by the Difec:tor ol lnvettiption and hHuc:h undtr aubsec:ti.on M(1) of the Compdltion Act, R.S.C. U70, c. C-23, u amended; AND IN nm MA'ITBI. OF a Limited Partnenhip formed to combine the operattoN of the ReMl'ftC and Peaum computer menatlan aysh!1n1; AND IN TH! MATTD. OP 'nw Gemlnt Croup Automated Dlltributlon lyltemlnc., ANt> IN 1111! MATI'EB. OP an appllcatlon by the Dll'edor of Investigation and lleteuch ancler MCtlon 106 al the ComJ11tltion Act, LS. 1985, c. C...U to vary the Coment Order of the Tdbuna1 dated July ,, 1989. 8ETWH!N: The Director of Investlpdon and Reaeuch ·and- AUCanad& PWA Colporatlon c:anacUan Altlin11 Intemational d. The Gemini Group Umlted Partne Mp The Ceminl Croup Automated Oittdbutlon S etem11MT~~?-~'.E~ Covia Cmacla Corp. Com Cmada Partnenhlp Cmp. • llld· Comume .... a _ ' . _ A __ u odation o .A.t..11- Am~ AIU• ftl.IJ.&&ill, Attornly Genml Of Manitoba ~ AllianCf of Canadian Tnvel AlsodatiOftl IBM Canada Ltd. Via :Rall~ Ine. Unisyt Canada Inc. Council of Canadian Alrlinet Employee• Deposee le ~ Affidutt pf Gloda I. Hurdle ,._r,

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-2-I, GLORIA ]. HURDU:, of the County oE Arlington l.9\ the Commonwealth of Virginia in the United States oE Ameriea, MAICB OAn i AND SAY AS FOLLOWS:

1. Ta m a Senior &:onomist at ECCl\omittl Inc:orporatecl and have been rebined by the Director oE Investigation and Rewrc:h, Compcti&n Ast. to provide my oph\.ion on the competitive effects in CRS marlcets and .In airilne markets il, u ~result o£ m Order ol DiAAnlution, the CRS Rules and Consent Order are no longer h\ force. Now shown to me and attached u Hxhibtt "A" to thi1 my affidavit is a copy of my Report.

3. My qualificaticn1 to give l!Xpert evidence on these issues are aet out in my Resume, which is attached as Exlu"bit '1l" to this my affidavit.

4. The contents of this Report attached as -Hxhlblt A" to thiJ my affidavit and the opinions expressed therein are true to the best of my knowledge, hUonnation, and belief.

5. J make this affidavit pursuant to Rule 42(2) ol the Cnmpetition Tribunal Ruld and for no improper purpose. SWORN BBPORE me, a Notary Public for the District of Columbia, in the United States of America,. cm the ltl.. day ol Noveznber, 1993 at the District ofColwnb!A 1n the United States of America

REPORT OP (;LORIAJ.liURDLE

Gemini 106 Application I \

Exhibit A Novembers, 1993

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L Introduction and Purpose In a Rebuttal Report filed January 29, 1993, I concluded that c:ompetitlon in Cal\adian ~omputer Kaervat1on System (CRS) markets is not likely to be lessened substantially 11 a ·result of Canadian Airlinea' CCDN) termination of Its hcsting contract with Gemini 1n order to h<>1t on Sabre or u a IUUlt of th@ failure or d.isaolution ol Cemhd. I concluded that AJr C.anada (AC) had numerous alternatives to Sabre for hosting services, and that AC and Covia have incentiva. to continue to market Apollo by Gemini to travel agents in Canada. In the alternative, AC cxntld align itself with another CRS.

At the time of the formation of Gem1n1, AC and CDN entered into a Consent Order with associated CRS rules. nu. report consider• whether my conduafon concerning the eomp:etttive effects of the cilssolutlon of Gemini would be altered in th. event that the CRS rula and other previsions contained In that Consent Order are no longer 1n effect.

My economie evaluation of these issuea ii based on my review of the terms of the Conaent Order ·and the Rules; the economic analysla in my Rebuttal Report; my expertise as exJ>la!ned tn that report and in oral testimony before the Competition Tribunal on P~bruary 24, 1993; and a review ol informati~n 1n the Gemini proceedings. Based on my Rebuttal Report and my further review, I condude that ellmmation of the CRS rules will not alter my ccndusion that dissolution of Gemini would not result in a

substantial leuening of competition in the short run. Any longer run effects could be alleviated by further regulatory approaches.

If the CRS rules that were part of the Consent Order are no longer applicable, I conclude as follows:

• The changed stnictUre of the CRS tnd\lStry In Canada and reciprocal rules in other countries make the rule1 leH net'eSlary than they were at the time of the Consent Order.

• While CRS rules have been shown to ~nstrain undesirable behavior in Canada (as weJJ as in the rest of the world), ellminat1on of the rules woUld have a more or less neutral effect on the two CRSa operating in Canada and would not give Sabre such a competitive advantage over its rival that it could moncpoliz.e the CRS industry.

• With respect to airline markets, AC and CDN are similarly aituAted with comparable airline shares, and each could be associated with CR.Sa of 1ub1tantfal sf?..e in Canada, thm iNurlng that neither airline ts at a competitive disadvantage.

• Thw, the possible elimination ol the Consent Order and the CRS rules does not alter my earlier conclusion that dissolution ol Cemini will not result in a significant lessening of competition in the s~ort run.

• If there are long-term effects from elimination of the CRS niles asROdated with the Consent Order, then replacement rules could be implemented through future regulation.

Il. Effect of Dissolution of Gemini If CRS Rules Are Not In Force It has been suggested that if Gemini is dissolved. then the Consent Order and CRS Rules might cease to be In force. In this section I ahow that my prior conclusion that dissolution of Gemini will not Ulcely result in a substantial lessening of competition ls not dependent on continuation of the Col\Unt Order or the ~ rules. Changes in the structure of the industry since the time of the Consent Order make it less likely that the carriers and CRSs themselves will gain a competitive advantage from the types ol practices prohibited by the Consent Order. As a consequence, the importance of the CRS niles for maintaining competition has declined. NevertheleH, there are economic benefits to CRS rules, and in the Ion& run rules should be implemented by regulation.

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Stmchml Cumgn that lleduce the Need fm CRS Kula The structure of the CRS industry has changed from one with Gemini having 90.3 percent of travel agents in June 1987,t 1D one where the largest ~ hu lt11 than 60 percmt of travel agents.2 Chal\get in 1tru~ generally are more effective m eUminating anticompetitive effects than are regulations.

In her testimony, Margaret Cuerln-Calvert recommended dissolution ol Gemini u the simplest and most effective solution to the substantial lessening ol competition from the Cemini merger.

This (dissolution] Is llkely to result ln c:ompetition among U.S. and European CRS vendors to establish· Joint ventures with each .of Retervee and Pegasus, whose owners each control about hall of the Canadian airline market. Dlssolutkm Is thus llbly to resull In two major Canadian CRS players u well SABRE. The opportunity for this market structure is what is lost by the Gemini merger. · Ditsolutton Is also almple to implement and requires no addition [lie] regulation.3 Dissolution of Gemini today would r~ult In an industry structure that is not substantially different from the 1tructure Ms. Guerin·Calvert envisioned had the d!uolutlon taken place at that time. Imtead of both AC and CDN seeking to find "jOint venture partners" with other CRSs, CDN hu already found its partner, Sabre. AC could remain with Covia, align itself in some other way with Galileo, or turn to System One or Warldspan.

t Tab 10; Agreed Statement of Facts, Table 3A, E?chlbit A XVll. i Gemini's share of agency locations wu percent 1n November, 1992. Exhibit R DI, Tab 92.

J Margaret E. Guerin-Calvert, Competitive Analysis of the ~ee-Peguus Merser, March 2, 1989, p. D, Exhibit A XVII, Tab 13.

HtJllDLE November 5, 1993 '•' Incentive& of the Carrieza and CKSa in the Abaente of the Consent Ord1r

and CRS Kula

An examination of the Consent Order and each of the categories of the CRS rulet suggests that .Umination oE the rules would not substantially disadvantage Gemini's successor or Sabre vil-l·vis the other. Furthermore, the incentives of the carriers and the CRSa to engage In anticompetitive behavior 18 less likely today than it wu at the time of the original implcmentAtion of the rules.

The Consent Order and CRS Rules ineluded requirements on participation, regulations to reduce bw, restrictions against discrimination by vendors against participating carriers, travel agent contract terms, proh1~1tions on tying cf airline service or commissions to use of a particular CRS, and requirements on access to airline inlormatlon. ~ shown below, dissolution of Gemini, even without these rules, will not substantially reduce mmpctitio!\ between Sabre and the successor oE Gemini in the short run.

Ptirtici1'4ticm Rtquirements A primlll')' concern In estab11sh1ng the CRS rules and the Consent Order was that u a consequence of Ceminl'a larse market share and lts association with the two largest Canadian airlines, it would be difficult for another CRS to establish itself in Canada. To encourage future entry and competition from other CRS vendors, the Consent Order required that AC and CON participate fully ln all Canadian CR!s and that operational direct access links be provided on 1pedne.d, certain dates to all ass requesting such links. 'nle rules also tnduded requirements that AC and CDN pay fees for bookings made on other CRSs. The participation requirements and other rules were intended to open up Canadian CR5 markets to other CRS vendors.

Many of the purposes of the Consent Order have already been accomplished. These rules were established when Gemini had nearly 80

HUKDLB November 5, 1993 J'.lpJ

percent of travel agent locationat and wu owned by two arrlers that reprasented over 90 percent of the Canadian airline market.5 Pollowing implementation of the Consent Order and CRS Rules, Sabre has been able to inaease its shere from less tha.n 20 ~rcent of agency locaticma ln 1989 to over 40 percent by October, 1992.6 The shares of ApG and Sabre are sufficiently large that neither AC nor CON could prolitAbly rclusc to participate In either of these CRSs. Furthermore, the future market share of ApG was estimated to be at least 30 percent by both Dr. Duffy and Dr. Hausman. 11\ua rula requiring participation are less necessary than at a time when Sabre had a less significant penetration.

Displ•y of Infomudion Aliorithmic Bly It is unlikely that elimination of the CRS rules will result In a substantial lessening of mmpetition in airline markets through biases in the display of information in the near term. Jn order to inlroduce bias in Canadian CRSa, the vendors would hive to reprogram their algorithms. The

benefits from lnstitu1ing biased display algorithms would be short-lived if new ~ rula prohibiting diaplay biu were implament«i. Purthermore, any ,!. reprogramming to introduce bias would have to be limited to domestic: ' markets since there are anti·bias rules outside of Canada that prohibit CRSs ' fr~m display bias for flights to or from that country.7 Given that any bias is ' Hurdle Rebuttal Report, Table 4. Exhibit A XVIII, Tab 519. S Tretheway Statement, Gemini CRS Merger, March 1, .1989, p. 4, Exhibit A XVII, Tab 13.

6 Hurdle Rebuttal Report, Table -4. Exhibit A XVIII, Tab 519. . 1 For example, according to a 1990 U.S. Department of Transportation 1tudy, "Most parties believe that the 1ovemment'1 CRS rulu have eliminated carrier-specific display bias." S11u~rQtary1 Tu~ Force on Competition in the U.S. D~mestic AiJ'lina Industry, Airli111 Marktting

HURDLE November 5, 1993 Pap6

likely to apply only to domestic tta.v.el.111d given that new CRS rules could be implemented at any time, the cost of introducing bias into the system may outweigh the benefits, particularly if new anti·bias rules are expected imminently.

Arcllitectural Bias Technological changes have affected the competitive effects of rules concemh\g architectural bias. Direct lm!.U is no longer an issue since both AC and CON have direct links with both Sabre and ApG.• AC also hu "look and book" links with World.span, System One, Apollo, and Galileo.9 To remove those linb would require additional expenditures, and lt is unlikely that either AC or CDN would choose to do that, both becauae of the expense and because of the beneftts eac:h obtains from having direct l1n1cs to CRSs that are UJed by a large number of travel agents.

In the absence of rules on equal functionality, m.,.ket forces may enoourage airlines and CRSs to 1mpleinent seam.less links to their intemal reservation systems. In the t1 .S., DOT has decided not to require equal functionality, because • ... the vendors have been moving toward providing more equal functionality without being required to do so. That movement toward equal functionality eliminates much of the need for a rule mandating

PrtJctic~s: Tn11el Agencies, Frequ~nt Flyar P1ogr11m1, and Camputtr R.aemztian SystemJ, Pebruuy, 1990 at 46. I! a Canadian CRS chooses to bias the display of international carriers, then the U.S. CRS rules concerning biu do not apply to carrier owners oE that CRS, subject to certain notice requirements. Fedmil Rlgist,,, Vol. !r7, no. 184, p. 438.17. I Rules requiring dirett llnlc.t were intended to· reduce architeetural bias favoring carriers that were ownera of CRSs. Today there are new links, called seamleas connectivity, that reduce architectural bias even further. The Consent Order also required partidpatiOl'\ in those new links, called "look and book" links, subject tD various restrictfoN.

' Discovery of Mr. Burden, Oc:t:ober 28, 1993, p. 38.

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Pap7

ntfical ~hanges in CRS operations in order to reduce architectural bw.-10 Worldspan has implemented 1 seamless link with Delta for PARS •ubsaiOerl, and Delta implemented a ahnilar link with Apollo last April and 18 phasing in a aeamless link on Sabre. ll Purthermor@, not all alrlin11 require

the same amount of functionality. Southweat Airlines in the U.S., for example, does not require mphfstieated CIS servica.

. Plnally, to the extent that a CRS did decide to bias its system,. the effect would be primarily an consumer welfare fn the lorm of wasted resources due to misleadlng information. The effect on competition ln CRS markets would b@ largely olfset by rec:iprocal 'biu cm the part of competitors. This ts particularly true since ApG and Sabre are ucll of mnaiderable size, u are AC and CON. Table 1 shows the moat recent available data on Af:1 and CDN'a airline operations. Thus, if botn Sabre and Gemini'• succ:cuor decided to increase biu, the effect would be to a large degree offsettine. maldn1 it it ( hiih!y unlikely that a CRS cowd eliminate its rival by biasing its eyatem. Contracts with Participating Qmier1 Th• Nlea concerning contracts among vendon and partidpaUng carriers include requirements conceming nondlaaimination among partidpating carriers, rules on tying, and rules reqUiring vendors to allow any carrier to partidpate If It is willing to pay the fees. These rules were designed to emu.re that carriers that owned CRSs could not increase CRS fees or deny access tn the system in order to raise their competitors' coats.

Flnt of all, AC and CON are of comparable size, and any attempt to disadvantage one by the other 11 likely to result In retaliation thus making discrimination and other acts less likely in the flnt place. With respect to

10 U.S. Department of Transportation, Computer Reservations System Regulations, Final Rule, Ftdertd Rtgista, Sf!pt1mber 22, 1992, p. 43810. 11 Trtmtl Wttkly, October 18, 1993, p. 9.

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participating carriers other than AC er CDN, there are cu.rrently no significant independent airlines operating scheduled service in Canada today.

Any effecta that the lade of CRS rules might have are relatively small in comparison to other entry barriers.12 To the extent c:anim do overcome these other barriers, entry by charter or niche carriers is possible without a CRS.

Furthermore, if de-hosting is not allowed, and if CDN fails or merges with AC, this elimination of an actual competitor would result in a greater lessening of competition than would any increase in entry barriers caused by removal of CRS rules.

In addition, dissolution of Ctmini elimlnatee one of the c:cmcems at the time of the formation of Gemini-that the merger would enhance the

( likelihood oE collusion between the two airliZ\e owners. Ms. Guerin-Calvert \ siated: The Gemini merger increases the chances that Air Canada and CA.IL could exchange data on market share, prices, and price dwlges through the CRS.12 Separation of CON'• and AC's hosting systems from a sh\gle CRS will alleviate these concerns about possible collmion, and could thus enhanc:e competition between the two carriers.24

11 See, e.g., Tretheway Statement: Gemini CRS Meraer, pp. 30-31, March 1, 1989. Exhibit A XVll. Tab 13, listing entry barriers into scheduled Canadian airline markets other than baniars related to CRSs. 13 Report of Margaret Guerin-Calvert, March 2, 1989, p. 37, Exhibit A XVII, Tab 13.

H . Air Canada has, in fact, taken advantage of the data available throuah Gemini to monitor CDN'.s pricing strategy. An internal memorandum stat.ea:

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Finally, unlike bias which ts sometimes a!ffiailt to. deted or prove, any dlscrimlnation in booking fees, tymg of services, or refusals to allow partidpation would be evident to the affected airline, so that remedies through existing antitrust lawsU or through new ngulatiom could be Eorthcoming ii slsni.ficant abuses in booldnc fees occurred.

Contr4cts With Swbscrtbns The CRS rules also apply to contracts with 1ubscribers. The rules establish maximum contract lengths, multiple use, rollover and liquidated damages provisiona that were hUtlally designed to make It easier for CRS mtry and npanafon. Thi CRS markets in Canada are no longer dominated by a Gemini joint venture that included bath major carriers In Canada ..T hus, the need for amtrac:t regulations ii substantially diminfshed. Furthermore, in

( order to be willing to sign onto a longer contract, that mntract m1.11t be attractive to travel agents. Thus, there will remain competition among CRS8 at the time of contract renewal, with or without these rules. Nevertheless, elimination of nlles on maximum contract lengths could lead to longer contram and make switching among CRS vendors somewhat las llkely b\ the long· nm. Long run effects can be resolved thfough future regulatory chanpa.

The CRS rules also contain prohlbilion• cm tying, which were · particularly important when both airlines representin1 the vut majority of Canada's domestic alr transportation were owners of Gemini. If travel agents '

Although we would not want to admit it publicly, Air Canada obtains some commerdal advantage by its Gemini co-ownership with P'W A. For example, we are able to determine when PW A ii getting ready for a Hal 1ale by monitoring the number of data input transactions on Gemlni. One c:oWd expect that PW A gains similar advantage. Bxhibit xn, Tab 344, p. 3. 15 The Competition Act prohlbita tied 11lling arrangementl and other exduslonary practices when the effect ii a 1ignillc&l'lt lessening of competition.

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a>Wd obtain ..discount tickets, comm.isSion bonuses, or other benefits only by using Gemini, then they would choose C.mini, and other CRSs would be at an almost insurmountable d!sadvantage.16 With the cll55olution of Gemini today, that would no longer be the cue. In the extreme, if AC tied Its tervices to the u.. of its chORn CRS and CDN dld the same for Sabre, then both CRSe would be at a similar compedtlve advantage since both would b9 tlad to airlines with similar amounts of airline aales to use for any leverage. (See Table 1)

Accn1 to Airline Inform4tion, S~ct Enhanctmntts, tind Tlc'keting The CRS Rules also require· that carrier owners of CRSs not be allowed to withhold lnformi.tion from . e ther CRSs in Canada, withhold service . enha.ncmnents,. or prevent the wuin1 of tickets. M noted above under the analysis of the consent Order, the size of the 1hara of ApC and Sabre mab it unlikely that either AC or CON wculd restrict its sales through the other system. To the extent the carrier owners are able to prevent entry by a third CRS by ratridll'lg airline information or other services.In the long run, new CRS regulations may be NCeSSary.

m. Implementation of New CRS 1.ules If elimination of the CRS rules due to dissolution of Gemini lead! to I consumer deception or other practices that reduce social welfare, CRS rules could be implemented in Canada through regulation. CRS Rules are already in pla~ ln the U.S., In EW'Ope, and in Australia.

Transport Canada i11ued a draft policy statement outlining the principles to be applied to CRS rules In April of 1991.11 Further action was

16 The Reasons for the 1989 Consent Order, Exhi'blt A XVII, Tab 12, p. 33, note that Sabre would be at a disadvantage vts-l·vts Gemini, since it could not offer ties of the kind which Air Canada and Canadian, the owning carriers of Gemini, could offer. 11 Tra'f1d Wukly, April 15, 1991, p • .U. - ·- ..... -· - -·- ..

HURDLE November 5, 1993 Pagett delayed, pending implementation of new rules in the United State1. Furthermore, there wu no pressing need to implement rules, u long u the Consent Order and rules were in operation. Since i11ue1 of rules in the United Statet have already been resolved, and llnce Traiuport Canada hu already drafted proposed rules and heard comments from the parties on the Nies, it is more likely that new Nies can be implemented quickly.