Airlines' Orbitz faces rough regulatory ride

WASHINGTON -- When Congress held hearings last month on the proposed mergers of United Air Lines Inc. with US Airways Group Inc. and American Airlines Inc. with Trans World Airlines Inc., competitors had nothing good to say.

"These megamergers are bad for customers, they're bad for communities, and they're bad for their employees," said Continental Airlines Inc. Chairman Gordon Bethune, whose testimony was echoed by his counterpart at Delta Air Lines Inc. But industry leaders are all for consolidation of a different sort: They want regulators to give the nod to Orbitz, the online travel site owned by Continental, Delta, American, United and Northwest Airlines Inc.

Orbitz has certainly provoked plenty of attention. The Justice and Transportation departments and a passel of state attorneys general are closely examining the venture, which was established by the airlines to compete with online travel leaders Expedia Inc. in Bellevue, Wash., and Travelocity.com Inc. in Fort Worth, Texas. The worry is that Orbitz's owners, which already dominate domestic air travel, would exploit the site to monopolize the online booking business and that competition will suffer if the number of major carriers drops from eight to six.

As a result, Orbitz likely will encounter increasing turbulence as its planned June launch nears. The site started beta testing last month.

"The mergers would clearly make the market more concentrated. That potentially gives Orbitz more market power and a greater ability to impact competition," said Stephen Houck, a former New York state antitrust official. That "may be a reason for the government to delay its review until it finds out what happens with the pending mergers."

Complicating matters is the industry's spotty record on pricing. Since the early 1980s, the Justice Department has initiated several antitrust investigations, including a 1990 probe into whether the major airlines exploited a fare database to collude on prices. Even now, the department has a predatory-pricing lawsuit pending against American over the company's alleged efforts to drive low-cost competitors out of Dallas-Fort Worth International Airport. "It would be foolish for us to ignore our past experience," said Sen. John McCain (R-Ariz.) at a hearing on Orbitz last summer. "We need to look at the down-the-road market power of a site that may be the only outlet for the best deals that the airlines have to offer" (see story).

Orbitz's opponents have wasted no time exploiting the anxiety caused by the recent merger moves. American Society of Travel Agents executive Paul Ruden denounced Orbitz as "a cartel of the airlines that means to do damage to the competition." He said he fears the prospect of five of the world's largest airlines sharing information on routes and pricing.

Travelocity executive Bruce Charendoff argues that Orbitz "creates an antitrust problem of the highest magnitude." And Consumers Union officials have warned the Justice Department that Orbitz could result in "reduced competition in the already less-than-competitive air-passenger service industry."

Orbitz CEO Jeffrey Katz dismissed such fears, calling his opponents' lobbying campaign "a Washington food fight." If there's an online cartel at work, Katz said, it's led by Travelocity, owned by Fort Worth, Texas-based Sabre Inc., and Microsoft Corp.'s Expedia. "There's a rather thinly veiled web of protectionism in the online travel sector," Katz said.

But Orbitz executives are facing bigger problems. In a Jan. 4 letter to the Transportation Department, attorneys general from 20 states and Puerto Rico wrote that they had "serious antitrust concerns" about Orbitz and were conducting their own review of the company. Last week, Arkansas joined that effort. Federal regulators declined to comment on their ongoing inquiries.

Legal experts say the Bush administration's incoming antitrust chief, Charles James, is likely to go a little easier on Orbitz and the airlines than his predecessor, Joel Klein. But they note that James, who is expected to recuse himself from the United-US Airways review because he represented a businessman with a stake in the outcome, will closely scrutinize Orbitz and the American-TWA merger.

Orbitz has given James plenty to consider. The company includes a clause in its contracts requiring member airlines to grant Orbitz their lowest published fares. In return, Orbitz gives its members a 30% discount on booking fees. The discount on the typical $10 to $16 charge is a powerful incentive for the airlines to spurn Travelocity and Expedia.

The Orbitz contract allows the airlines to offer their cheapest prices elsewhere, but any fares an airline chooses to post on Travelocity or Expedia also must be offered on Orbitz. The company's competitors fear that Orbitz's member airlines would choose to make their lowest fares available only on their own sites and through Orbitz. Furthermore, one way for member airlines to satisfy a requirement to provide marketing for Orbitz is to offer select fares exclusively on its site.

For the time being, the industry is waiting to see what conditions, if any, regulators will impose on Orbitz and its parent airlines.

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