The MacNeil/Lehrer Report; Air Ticket Deregulation

[Tease]

ROBERT MacNEIL [voice-over]: Lines to purchase airline tickets may become a thing of the past. Soon you may be buying them at banks, drugstores or ewalk vending machines.

[Titles]

MacNEIL: Good evening. It will be too late to help with the heavy holiday air travel, but tomorrow big changes take effect in the way airline tickets are sold. A new rule by the Civil Aeronautics Board will deregulate the sales of airline tickets which, until now, could only be sold by the airlines themselves or accredited travel agents. Starting tomorrow, airlines can contract with outside sales sources with computer access, like Ticketron, banks and department stores. Supporters of deregulation say this could mean lower fares as well as quicker and more convenient purchases. But critics, led by the travel agents, say a proliferation of sales sources will mean chaos, inefficiency and less security for the consumer. Despite strong objections by the travel agents, the new system was approved by a vote of four to one by the CAB last Friday. Tonight, will opening up ticket sales help or hurt airlines and their passengers? Jim?

JIM LEHRER: Robin, now there are only two sellers of airline tickets, the airlines themselves and the 20,000 accredited travel agents in the country. Some 65% of all domestic travel tickets are bought through the agents, 85% of the foreign; both percentages having jumped considerably since airline deregulation and its complexity of fares began in 1978. Agents get a 10% commission from the airlines for selling the tickets, and they get accredited for ticket sales from two airline trade organizations, one for domestic flights, another for foreign. The airlines have been able to collaborate in this joint accreditation process because the Civil Aeronautics Board exempted them from anti-trust laws that would otherwise prevent it. It's the removal of that exemption that is a major part of the new CAB decision. It does not require the airlines to license outlets other than travel agents to sell their tickets; it only makes it possible if they so wish. There is also a two-year phase-in of the new freedom: until 1985, only those accredited travel agents can still sell tickets that involve trips on more than one airline. Robin?

MacNEIL: First, an explanation of why the CAB thinks the new system is desirable. The chairman of the board is Dan McKinnon, who joins us from public television station KPBS in San Diego. Mr. McKinnon, why is this a good move?

DAN McKINNON: Well, Robin, this move was very carefully thought out and analyzed over a period of time. For the last three years the Civil Aeronautics Board has done a study. We've collected over 50,000 pages of facts and information, and it all tied into the deregulation act because in 1978 the airlines were deregulated. In other words, the airlines could operate in a way that was free of government regulation. And we said at that time the production of the product would be deregulated, and now, through the competitive marketing study, or this recent case we've just determined last week, we said there should be competition among the marketing of the tickets as well as the production of the airline seats.

MacNEIL: Who is it actually going to help, in your view?

Mr. McKINNON: Well, in our view it's one of those cases where the Congress said you can have competition and you should have it. And we studied the situation and we determined that it was anticompetitive to have all exclusive travel agents being the only ones to book airline tickets. And what this does is open it up to a better idea. It's not necessarily who it's going to help, but it allows competition and competition is what made America great. It's sort of like the light bulb. For example, when they first built the incandescent light bulb, if the law was passed that nobody could do anything to change any new developments, then you'd still have an incandescent light bulb. But because it was open to competition you came along with neon bulbs, and today you have saver bulbs that save a lot of light. And as a result, you have a better system of lighting. And the same thing can happen to the travel agency. You can have new ideas in the sale of airline tickets, and those tickets can't be sold unless the airlines approve of it.

MacNEIL: Do you actually expect that people will be able to buy tickets in places like drugstores, department stores and things like that?

Mr. McKINNON: Well, the real thing on that, Robin, is the fact no ticket will be sold by any other source unless the airlines authorize the sale of that ticket. All we did was open the door and say, hey, if the airline desires some other method of selling their tickets, they can do so. That's part of the free enterprise system, and it opens it up --

MacNEIL: So they will --

Mr. McKINNON: -- to competition.

MacNEIL: -- decide which sales points are appropriate?

Mr. McKINNON: Right. We just said no longer will the travel agents have a monopoly on it. Now, this also opens the doors for travel agents, and if travel agents think they can develop better ways of selling tickets, they're free to do so as well.

MacNEIL: Who will set the commission that can be charged on the tickets? Is that up to the airlines to make their own deal?

Mr. McKINNON: Well, it sort of up to the airlines and the travel agents to work together. Part of this case was the fact that we allowed the commission of tickets to be floating. It used to be all wired in where it was 7%. We cut that part out of the case early, and now it's around 10%. And this will also provide a discipline, because if some -- the travel agents decide they only want to have higher commissions, then the airlines have the freedom to develop some other alternate source of marketing their tickets that would eliminate travel agents or put a pressure on them to sell tickts for less commission than what the 10% is -- or they may want 12%, and that may be too expensive for the airline. So it disciplines travel agents on what they can charge par ticket.

MacNEIL: In addition to disciplining them, do you think it's going to hurt the business, the travel agent's business?

Mr. McKINNON: You know, Robin, that's a very good question, and that question came up a variety of times in this case. And like anybody else, if you're good at what you do, if you provide a service, you're not going to have a problem. But if you don't provide a service to your clients, they may look for an alternate way to book an airline ticket. But I maintain those travel agents who do a good job, provide a good service to their customers, the customers have no reason to go anywhere else to buy a ticket.

MacNEIL: Well, thank you. Jim?

LEHRER: The travel agents of America are really upset over what Chairman McKinnon and the CAB have done. Here to explain why is Paul Ruden, special counsel for the American Society of Travel Agents, the trade association of some 10,000 of those agents. Mr. Ruden, Mr. McKinnon says the good travel agents have nothing at all to worry about. Is he wrong?

PAUL RUDEN: Well, he is essentially wrong. I don't want to get into a debate tonight with the Chairman, because the marketing case is still pending before the CAB and there may be further proceedings in it. But as a general matter the notion that the good businessman need have nothing to fear, the good marketer may have nothing to fear, fails to account for what we think are the inevitable consequences of what the board is doing.

HEHRER: Which are what?

Mr. RUDEN: Well, one of the fundamental elements of the decision was the removal of anti-trust immunity from the agreements that the airlines have, as you explained at the beginning of the show. If the immunity is in fact withdrawn, the carriers have indicated -- and we believe them -- that the programs will fail. The failure of that --

LEHRER: What programs will fail?

Mr. RUDEN: The program by which accreditation of travel agents takes place through the Air Traffic Conference for domestic agents, and the international for international agents. If the programs are discontinued or have to be replaced with some other independently produced program in an effort to assure that agents are qualified to sell tickets and to represent airlines as agents, the costs of operating in the business as agents, and the airlines' costs, are going to go up rather significantly. That's going to affect every agent -- good agent or not so good agent. So everyone's going to be affected by it, and ultimately, as the CAB said, those costs are paid by consumers.

LEHRER: What you're suggesting then, rather than the commissions going down as a result of this deregulation, you think the result could be that commissions will go up?

Mr. RUDEN: If all these legal developments eventually take place, I think that's a very real possibility. Some of the things that have been talked about in the short term, such as agents selling only the services of a single carrier, if you look at the economics of that, it suggests to me that that would require a higher commission rather than a lower commission because the fully accredited agent today sells the services of 125 or 150 airlines throughout the world.

LEHRER: Well, look, what's basically wrong with -- are you saying your travel agents just don't want to compete with anybody? You want to maintain the monopoly over airline ticket sales that Mr. McKinnon just mentioned?

Mr. RUDEN: Well, first of all, travel agents don't have a monopoly. There are in excess of 20,000, almost 21,000 agency locations in this country, and within the last year, for example, five new agents entered the business every day -- net -- after those who have departed or who might have failed for some reason. So there's no industry that knows competition the way agents do. They also compete in a sense with the airlines themselves, which are always available as an alternative way of buying a ticket if the consumer chooses to deal directly. And in addition there have been a number of innovations in recent years, such as contract bulk fares, which are not always sold through travel agents; there are charters; there are many disciplining factors at work in the marketplace. Travel agents know competition; they're pretty good at competition.

LEHRER: Well, then what's the problem?

Mr. RUDEN: The problem is -- I don't have but a few minutes to explain this, but the accreditation system has been developed over a 40-year period. It permits a new entrant to the business to become a representative as an agent for 125 airlines around the world by dealing with one entity -- the Air Traffic Conference, in the case of domestic sales. That system has evolved over a long period of time. I don't believe that the industry has been doing it all wrong up to this time. And the purpose of that system, the real essential purpose, was to make it easy for people to buy airplane tickets.

LEHRER: Well, what's to prevent the airlines from continuing to do that if they want to? All this does, as I understand it, as the Chairman sats, they can do something else if they want to, but they don't have to do it.

Mr. RUDEN: In the short term -- in the short term that may be correct. They have that option. When the anti-trust immunity is gone I suggest they will not have the option. There's going to have to be found another way. I think it's highly likely that other way is going to be more costly, and it's going to result in a lot of confusion for consumers. If you end up in a situation, for example, where there are agents -- people who call themselves agents -- selling tickets which are not universally acceptable -- your ticket today is interchangeable among any of the airlines that a travel agent represents. And you know that. You ought to know it; it is a fact. And in the system, or this non-system that the decision is likely to inspire, that won't be the case. Every piece of confusion that you add to an already confusing situation is going to raise everyone's costs. It's going to confuse consumers, and they're going to have to pay, we think, a fairly heavy price for it with no corresponding benefit that has yet been identified.

LEHRER: Thank you.Robin?

MacNEIL: One of the first new airline ticket sellers is likely to be Ticketron, a nationwide outlet at present for tickets for theater, sporting events, lotteries, rock concerts and the like. The president of Ticketron is William Schmitt. Mr. Schmitt, how soon can Ticktron start selling airline tickets?

WILLIAM SCHMITT: I think once we have inventory we can begin selling tomorrow.

MacNEIL: Inventory means have the tickets in your hands?

Mr. SCHMITT: Have the tickets, yes.

MacNEIL: Have any airlines promised you their business so far?

Mr. SCHMITT: No, we haven't. They have not been in a position to promise us tickets yet. As a result of this order we will start talking to each of them in the next couple of weeks.

MacNEIL: You've just heard what Mr. Ruden said about the possibility of confusion, non-compatible tickets, and all sorts of other things. What do you see as the advantage to consumers of being able to buy their tickets through you?

Mr. SCHMITT: First, I don't think all tickets will be bought through us. I think we will sell the O.D. tickets, the origination-destination tickets, only, and that's all we ever applied to sell for these hearings.

MacNEIL: That's a flight on one airline from one place to another?

Mr. SCHMITT: Right. We feel that the market we would serve would be the New York to Miami traveler, the New York to Puerto Rico traveler, the New York to L.A.; the Chicago to these markets, the L.A. to other markets like that -- the high density markets.

MacNEIL: Why would it be any advantage to buy from you rather than just going and buying -- there are so many travel agents around the country.

Mr. SCHMITT: Well, I think ease of purchase -- we're located in 800 outlets throughout the country where people come to buy their tickets every day. They know us. We have a very loyal young group, audience, clientele, and they have come to Ticketrom simply because we've had tickets. I think we can do it for somewhat less money than the travel agent now charges.

MacNEIL: You mean you'd charge a smaller commission than 10%?

Mr. SCHMITT: Yes, I do.

MacNEIL: Do you have any idea what it would be?

Mr. SCHMITT: We represented through these hearings that we would do it, at the most, half of what the travel agent now charges -- 5%.

MacNEIL: And would the consumer feel the benefit of that? I mean, would he get -- if the airline ticket costs $100 and you take only 5%, does he get it cheaper?

Mr. SCHMITT: I think that depends on the deal we can work with each airline. We would like to be able to pass it on to the purchaser of that ticket, but there will be a 5% savings; eventually that will reach the consumer one way or another.

MacNEIL: What protection can you offer the consumer against things like overbooking and all that kind of thing?

Mr. SCHMITT: I think we'd offer the same protection that's offered today. It would be in the arrangements we'd have with that airline. Those tickets would either be guaranteed, or there would be that possibility of overbooking. But it would be the same as it is today. There is no protection as such against overbooking.

MacNEIL: You tried this once before with World Airways, and then you stopped. What happened there? Incidentally, explain to us, how could World Airways do this before this new rule came into effect?

Mr. SCHMITT: At the time, World was not part of the Air Traffic Conference. They were an independent, and they had a route coast to coast. It was an experiment for us, an experiment for them; and in two and a half weeks we did sell 117,000 tickets so that --

MacNEIL: You brought them a lot of business.

Mr. SCHMITT: People did come to us. Subsequently there was a DC-10 closedown of World, and there was a long strike. And we just never came back. We felt at that time these hearings were about to be joined. We felt that was the route for us to take.

MacNEIL: Is it also true, as I suggested, that some travel agents brought pressure on World Airways not to do business with you?

Mr. SCHMITT: I couldn't answer that.

MacNEIL: I see. You don't know whether that's true?

Mr. SCHMITT: I don't know whether it's true. I have my own feelings about it, but --

MacNEIL: What are your own feelings about it?

Mr. SCHMITT: Yes, I believe there was pressure bought -- brought.

MacNEIL: What, to discourage World Airways from going outside the travel business?

Mr. SCHMITT: Yes, and World at the time, you have to remember, wanted to join the big group of airlines, and the way to go at that time was through the Air Traffic Conference, I think, and that implied the use of travel agents.

MacNEIL: Well, thank you. Jim?

LEHRER: Chairman McKinnon, do you have anything to add to what happened on the World Airways thing vis-a-vis Ticketron?

Mr. McKINNON: Well, the only thing I could say on that, Jim, would be that our decision does allow the airlines some freedom to pick whoever they want to sell their tickets, and so if the travel agents decided individually -- not collusively, but individually, but as a group -- to book around an airline, this -- our decision would allow them the freedom to find some alternate source to sell their tickets. So the airline is not totally dependent on travel agents to sell their ticket if for some reason the travel agents sour on a particular airline.

LEHRER: Does the CAB have any evidence that travel agents have ever done that -- boycotted -- well, there was some suggestion of travel agents doing that to Braniff, for instance, when the word got out that Braniff was having its financial problems.Has CAB looked into that?

Mr. McKINNON: Well, I think one of your previous guests, Howard Putnam, who's the president of Braniff, has made rather dramatic statements that that in fact did happen. Now, it didn't cause Braniff to go under, but it certainly accelerated their demise towards the end.

LEHRER: Let's ask Mr. Ruden about this. Mr. Ruden -- yes, excuse me.

Mr. McKINNON: Well, I just might add one additional thing to that, Jim. In Mr. Ruden's comments a moment ago, I don't think anybody has to worry about the financial aspects of this because the airlines are not going to allow anybody to sell their tickets if they aren't guaranteed positively they're going to get their money for the sale of those tickets.

LEHRER: Well, first, Mr. Ruden, on this question about World Airways and Braniff and the power that the travel agents have to exert pressure on airlines. Are you going to use it in this new situation?

Mr. RUDEN: I'm not sure I understand what you mean by that.

LEHRER: Well, let's say ABC Airlines is interested in taking up the freedom of this new rule, and decides to go talk to Mr. Schmitt at Ticketron. Would travel agents decide to write tickets around ABC Airlines to encourage them not to make a deal with Ticketron?

Mr. RUDEN: I think not. The realities of working in this marketplace are such that if you wish to stay in business as an agent, most all of whom are very small businesses, you must keep your client happy. You've got to keep your principal happy, too, your airline. But you have to satisfy your client, and I don't know anyone -- I can't imagine anyone who would tolerate an agent saying, "You can't fly on this carrier though the service and the price is the best value for you because I am mad at them today." The travel agent's lifeblood is his repeat business. It's the same in all business, and I just don't think that's a realistic possibility.

LEHRER: What about the World Airways and the Braniff situation, from the travel agent's point of view? Did it happen?

Mr. RUDEN: Did travel agents boycott World Airways? No.Not to my knowledge. There's no evidence of it. No one's ever produced any evidence of it, and I dare say they don't have any evidence of it.

LEHRER: Did travel agents write around Braniff?

Mr. RUDEN: I would not be surprised if that occurred in some cases. I also know of some cases to the contrary, where travel agents were actually trying to induce people as much as possible to go on Braniff. But let us suppose that they did, that they did write away from Braniff in the closing days. You have to ask the question, why would they do that? In that kind of situation, what was the agent's interest? And I suggest that the agent's interest was that he held the public's money, and there is no distribution system that public policy ought to promote into existence that would behave any differently. A travel agent is going to advise his consumers, his clients, when he has the possibility before him of giving that client's money to an airline that may not be around in a week to perform the transportation. The articles in the newspapers, articles on television, the talk shows, the Braniff situation was very widely known, and travel agents would not responsibly do that unless the consumer said, "I don't care. I'm willing to take the chance." It also ought to be noted here, I think, that travel agents have gone quite far in other areas to try to eliminate situations which would induce people to wish to stay away from a carrier that's in financial trouble. The best example being the default protection plan which the CAB recently approved with our support.

LEHRER: All right, thank you. Robin?

MacNEIL: Now for a look at how this will affect the overall helath of the airline industry. Michael Armellino is an industry analyst for the Wall Street firm of Goldman Sachs. Mr. Armellino, do the airlines support the CAB decision, as far as you know?

MICHAEL ARMELLINO: If you're asking me if they have supported it publicly, I think there's very little evidence of that. I think there's probably an explanation for that, too. The agent, other than the airline, is the only person that can market the ticket, and I would think an airline would be reluctant under those circumstances to support the deregulation.

MacNEIL: Is that going to continue, or now that it's official and everything, are they going to start coming out?

Mr. ARMELLINO: Well, the fact that it's official doesn't change the fact that the airlines' distribution system is still linked very closely with the travel agent. I would be very surprised if any airline took a very high profile in the very short term on distributing tickets in other ways. I think it will evolve over time. I'd be very surprised to see the first person tie the bell around the cat's neck very quickly.

MacNEIL: I see. So you think nobody's going to rush to do this, or rush to do it publicly?

Mr. ARMELLINO: I think publicly --

MacNEIL: And if they don't do it publicly, who will know that the --

Mr. ARMELLINO: Well, I think they've got to negotiate, for example, whether it be with Ticketron or someone else, there would have to be a negotiation, and I think those negotiations will go on. And I'd be surprised if some of those negotiations haven't already gone on. But I think the airlines will be reluctant, and I think for very good reason, to go public with that until they're sure they have something in hand that's viable.

MacNEIL: I see. Is it likely that this could attract the new smaller airlines that emerged from deregulation rather than the big established airlines in order -- with the idea in their mind, perhaps, that this would be a way to increase ticket sales?

Mr. ARMELLINO: Well, for example, I guess the number that is commonly used for the percentage of airline tickets that are sold through agents is something like 60% or higher. I believe for Southwest Airlines -- which is not quite a new entrant, but it's been in business a little over 12 years now, and by most standards it's fairly new -- or People Express, their penetration, I believe, is somewhere around 20 or 25 percent. So in fact they are not booking nearly as large a percentage of air seats through agents as the conventional carriers.

MacNEIL: So they'd have less to lose and this new arrangement would be more attractive to them?

Mr. ARMELLINO: That's right. I think they might have more options, and I think there's in a sense a disincentive for a travel agent to sell a ticket on People Express, because they are a discounter. And since the ticket price -- I'm sorry, the agent commission, is based on a percentage of ticket price, there is less incentive for the agent to sell on that kind of an airline.

MacNEIL: What is your feeling and the feeling on Wall Street, if you can represent it, about what the bottom-line affect on the airline industry is going to be of this over the two years?

Mr. ARMELLINO: Well, I don't think I'd like to speak for everyone, but on my own account, I guess I would say that it, on balance, has to be positive. You mentioned before -- the question came up before about the effect or the possible effect of the agent pressure on the demise of Braniff, for example, or putting pressure on Pan Am, for example, which has been very visible. Not very long ago, Frontier Airlines, a regional carrier, a very healthy airline -- there wasn't any question about their viability at all -- made some effort to reduce commission rates. That effort was aborted very quickly. I believe it was only a matter of weeks; it may have been a little longer than that, but not much. And I think the reason for that was they were losing business. United Airlines tried a bit of a different strategy -- oh, I guess it's a couple of years ago now -- whereby the commission would be based on the sale of the ticket, not on the ticket price, but on the notion that each ticket costs about the same to process, so why should it be based on a percentage of the ticket price? That aborted fairly quickly, and neither of these airlines were in any financial trouble. I guess I'm convinced that there was some indication that maybe the pressure from the agents had something to do with changing that around. So I believe that bringing increasing competition into the marketplace -- I believe Chairman McKinnon mentioned this -- would at least provide a discipline. If the agent, it seems to me, is providing a good service and at a reasonable price, and an efficient service -- and, by the way, I think in most cases it's fair to say that they do. For example, I would guess that the average employee at an agency makes a good deal less than his counterpart at an airline. So the agent's performing that in general at a pretty efficient price. But I think it would bring a discipline to the marketplace so the airlines would have an option. On balance, then, I would say my perception certainly would be positive.

MacNEIL: Mr. McKinnon, do you agree with Mr. Armellino that it's -- there's not going to be a stampede by the airlines to use this new freedom for the reason he discussed?

Mr. McKINNON: Robin, I think you're right, and I think he analyzed it very carefully and correctly.

MacNEIL: Do you -- I'm sorry. Go ahead.

Mr. McKINNON: I think what we've really done -- when you have an unknown, a lot of people are frightened of the unknown. They're afraid of what the unknown holds. And in this case all we've done is make it available to have competition in this industry and say, "Hey, if somebody's got a better idea, you're free to develop that idea," and I really don't believe Mr. Ruden over with the ASTRA would want to say that, "Gee, we want to withhold better ideas from coming down the line to serving the American public."

MacNEIL: Mr. Ruden, if these two gentlemen are right, does the travel industry have much to fear -- that the airlines are going to be pretty slow to offend your clients, and will want to be very sure about new systems before they move?

Mr. RUDEN: Well, I would hope they would be very slow to move and be very sure about what they're doing, because the risks of interfering with the orderly marketing of air transportation as it exists today are quite high. I hear all of these stories about fear of agents and boycotts and the like, and I really don't think it's appropriate at this point to go into a great many details, but these matters were, by and large, addressed in the marketing case. We did an unrebutted analysis that showed conclusively that the United Airlines plan to change the basis of paying travel agents did not result in a boycott. As far as the Frontier effort to cut commissions, that failed because the other carriers -- at least a great many of them, the majority -- elected not to go along. The whole matter was over with in a few weeks. I doubt seriously that Frontier would have even known what was happening to its sales picture in the period of time of -- I can see why everyone is induced to suggest the travel agents, with 60% of the sales, exert this undue influence, but the fact of the matter is that the industry acquires that market share because consumers have no other place to turn where they can get comprehensive service and information about fares and flights in the deregulated marketplace that the government has produced.

MacNEIL: Well, I'm sorry to interrupt you, but that is the end of our time. So, Mr. McKinnon, in San Diego, thank you for joining us; Mr. Ruden, in Washington; Mr. Schmitt, Mr. Armellino, in New York. Good night, Jim.

LEHRER: Good night, Robin.

MacNEIL: That's all for tonight. We will be back tomorrow night. I'm Robert MacNeil. Good night.