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The air war goes to Washington

Antonella Pianalto explains what's behind her campaign to convince the government to cancel a cartel clause in Orbitz's deal with airlines that she says gives the online travel

Antonella Pianalto is on a crusade over the price of an airline ticket.

Pianalto, executive director of the Washington-based trade group Interactive Travel Services Association, wants the government to investigate an agreement by more than 40 member airlines to sell their least expensive airplane tickets through Orbitz. If Orbitz can continue to structure its contracts in the same way, Pianalto says, it will kill competition in the online travel niche and jack up the cost of travel for consumers.

Although she generally bristles at government intervention in private industry, Pianalto says the Department of Justice should require Orbitz to abolish its so-called most-favored nation status.

Pianalto spoke with CNET News.com about the ins and outs of airfare regulation, the future of mom-and-pop online travel agents and the challenge presented by Orbitz.

Q: The Department of Transportation concluded two weeks ago that Orbitz has helped competition but could later "harm" competition in the airline industry. What did you think of the report?
A: I can't say we were pleased, but I can't say we were disappointed. Overall, I think the report was inconclusive. If anything, we were pleased that the DOT pointed out it still has concerns about the most-favored nations clauses--the cartel clauses. Obviously, we would have liked for them to address it, rather than say they're in a holding pattern and are waiting for the Department of Justice to finish their investigation.

The DOJ report is expected by the end of the year. How do you think the DOJ will handle Orbitz?
We have no clue--really. The DOJ keeps everything very close to the vest. But one positive we can say about the DOJ is that they are not only looking closely at Orbitz but at similar joint ventures in movies, music, currency exchanges, and other supplier-owned joint ventures. They see this trend as a concern, and we obviously agree.

Companies should not be able to do online what they are prohibited from doing offline--that's exactly what the airlines are doing with Orbitz.
Why is the MFN clause, which you call the "cartel clause," the heart of your disgruntlement over Orbitz?
Orbitz would like to say that we advocate that Orbitz shouldn't exist, and ITSA hasn't done that...ITSA is willing to compete on the issues that Orbitz says are its strengths--technology, cost and bias. But we need fair access to fares and information. That's not possible with the cartel clause that Orbitz has in its agreement with the airlines.

Orbitz executives say that Expedia or any competitor is free to try to negotiate with the airlines to forge similar deals on Web fares. If so, what are they complaining about?
It's totally false. They (Travelocity and Expedia) have made overtures to the airlines to match those Web fares and have not been given access or the range of inventory. Yeah, in practice there's nothing stopping Expedia from negotiating a deal. And they have been getting some deals. But they are limited and usually short-term deals. They are not the comprehensive, full-package, long-range, 10-year agreements that Orbitz has. None of the independents has been given anything like that.
One thing I found interesting in the DOT report is that it says Orbitz considers the MFN clause at the heart of its business plan. When you read the business plan at first, that wasn't what Orbitz was focused on. It said it had better technology and would therefore find better fares. Over the course of a year of operations, that's been disproved. When Orbitz comes up with a better fare than competitors, 60 to 80 percent of the time it's because they have access to a fare that competitors don't have.

Only 2 to 5 percent of all airline tickets sold are Web fares. Why is ITSA making such a big deal of Orbitz's access to these fares?
The whole notion of Web fares has evolved because of Orbitz. It used to be they were e-fares and they were mainly for last-minute travel. Now you can get Web fares for trips three months out.
Those Web fares are critical to online travel agencies...Somewhere between 60 and 80 percent of what Orbitz sells on any given day are Web fares. But the issue isn't the percentage. It's the access to fares that's the issue. When people purchase travel online, their No. 1 reason is price. If the independents don't have access to the lowest price, they are clearly at a disadvantage.

If the lowest fare wins the consumer, why not let Orbitz stick to selling low-margin commodities and let the other companies sell more lucrative package deals?
Airline tickets are the milk for the grocery store. If the grocery store doesn't have milk, customers aren't going to come in and buy thousands of other products it has to offer. Same thing for online travel. If a site doesn't have access to low fares, customers won't come to them. The No. 1 reason people go to these sites is for airfare.

So you want the federal government to intervene and force Orbitz to change its contracts with airlines? Isn't this antithetical to the airline deregulation of the past two decades--and doesn't it go against the hands-off philosophy of so many small businesses and dot-coms?
We're not advocating a lot of regulation by any means. But companies should not be able to do online what they are prohibited from doing offline--that's exactly what the airlines are doing with Orbitz. They aren't able to do through CRSes (computerized reservation systems) and other offline distribution agreements what they're doing on Orbitz. That would be collusion.

Orbitz executives say they're actually increasing competitive pressure on the CRSes. How would you characterize it?
Orbitz is arguing that it's the savior of the poor airlines held hostage by the CRSes. But who founded and started the CRSes? The airlines. Who owns WorldSpan, which powers Orbitz? Three of the Orbitz owners--Northwest, Delta and American. Up until two years ago, American owned Sabre. The whole notion that the airlines had to create an entity like Orbitz to combat these CRSes is just ridiculous. The CRS rules put in place in the late '80s and early '90s by the DOT were because the airlines owned the CRSes.

I think they're trying to come up with a justification for what they're doing through Orbitz. This is an argument that does somewhat resonate. DOT has had a problem with and concerns with the CRSes all along, and they continue to watch the CRSes--but in my mind, (DOT is) forgetting that the CRSes were and in some cases still are the airlines.

What Orbitz is already starting to do is eliminate competition in the airline distribution.
Let's say you make no headway with striking down the MFN clause. What's the bottom line for the consumer?
Increased prices in airline tickets. What Orbitz is already starting to do is eliminate competition in the airline distribution...Yes, Travelocity and Expedia continue to do well. Even the DOT report talks about the large customer base and hits--but those are misleading. You have to look at who's selling airline tickets and where the growth is. Orbitz is No. 3 when it comes to customers and hits, but when you look at the ratio of booking, Orbitz's numbers are skyrocketing and the competition's are decreasing. It's particularly critical for some of these smaller online travel sites...like OneTravel and CheapTickets and Trip.com.

Does that mean that other independent sites will wither if Orbitz maintains its MFN status?
Travelocity and Expedia will continue to work with the smaller airlines and still try to come up with the lower fares...But where the independents will try to go is package deals. That's where the focus has been because they can't compete with the airline ticket sales.

And what about the mom-and-pop online travel sites?
They're having a hard time competing right now. What the smaller travel agents do is charge the customer for their service--they have to get revenue somewhere to succeed. They feel if they don't have access to the lowest prices, what do they have to offer the customer?

In your best case scenario, what happens to Orbitz?
Our pie-in-the-sky dream is to eliminate the MFN clause so we can compete fairly. We can compete on cost, bias, on whatever issue Orbitz says, but let it be fair competition. Let's just compete evenly.