Airline exchange could hike fares

Up to 85% US domestic travels may be controlled by the airlines once the mega exchange, Orbitz, goes through. That, according to a new report, makes the exchange a "market power ringmaster" that will stifle competition and innovation.

A study released Wednesday by an MIT (Massachusetts Institute of Technology) economics professor slams the consumer exchange proposed by the major airlines, arguing that it could result in $3.2 billion in higher airfares

The study, which was commissioned by the Interactive Travel Services Association (ITSA), claims the airline exchange, Orbitz, will act as a "market power ringmaster", allowing its airline owners to agree on anti-competitive provisions that they could not enforce individually. The result, said MIT economics professor Jerry Hausman, will be reduced price competition and innovation.

"Right now there's a lot of competition among online travel services, which is good for the consumer," Hausman said in a phone interview from Turkey. "My worry is the airlines are trying to seize control of the market and weaken the competition."

Would mega e-exchanges shuff out competition?YES

ITSA is an organization backed by most of the online travel services, such as Expedia, Travelocity, Travelscape.com, and Lowestfare.com - the same companies that are lobbying the government to ground Orbitz before its planned launch in June.

Stacey Spencer, a spokeswoman for Orbitz, said the study is obviously biased and will not halt Orbitz' plans. "This is a desperate plea by the competition to stop a new competitor from coming into the marketplace," she said. "It's a paper that's been produced to muddy the waters." In his study, Hausman argues that the five largest U.S. airlines backing the exchange (United, American, Delta, Northwest, and Continental) supply about 74 percent of all U.S. domestic travel. This figure could increase to 85 percent if proposed mergers are approved, giving them unprecedented powers to chill competition.

He noted that the Orbitz participating carrier agreement contains a "no advertising" policy, an exclusivity provision, and a "most-favored nation" clause. The combined effect of which will be to "effectively ensure that discount fares of new entrant airlines will become less visible to consumers. He added that Orbitz airline owners will become instantly aware of any secret price cutting off published fares, and only Orbitz and its airline owners will have access to Internet e-fares - deep discount tickets currently offered exclusively on an airline's Web site.

For its part, Orbitz argues that the exchange will serve as an antidote to the expensive booking fees that services like Travelocity and Expedia charge airlines. Those fees are currently about $4 per segment (or $8 for a round trip ticket). Spencer said Orbitz will charge one-third less on its booking fees, and will offer an unbiased display of fares. Airlines pay some of the online travel services a fee for better placement.

Orbitz is currently being reviewed by several government agencies, including the Department of Transportation. However, it is unlikely those reviews will be completed by the exchange's planned launch in June. Spencer said Orbitz is not precluded from launching while those reviews are being completed.

If the exchange is allowed to operate, controls must be put in place to ensure all online travel services have access to the same fares being displayed on Orbitz, said Jeffrey Goodell, vice president for government affairs for Travelocity.

"The issue is not about us competing," said Goodell. "We're not afraid of competition. It's about a group of sellers getting together and deciding where to sell their product.

"We simply want fair access to 'fare' information."