The Incredible Ticket Machine; J.Ellig

THEFREEMAN IDEASON LIBERTY THE INCREDIBLE TICKET MACHINE by Jerry Ellig W ay back in high school, a far-from right-wing teacher made our class sit through a short film called "The Incredible Bread Machine." The story's protagonist invented a bread-baking machine so produc tive that it vastly reduced bread prices and promised to end world hunger. But instead of praising his achievement, the government pilloried him as a monopolist, claiming that he drove competitors out of business and charged monopoly prices. He could do both because his wondrous invention dramati cally slashed the cost of baking bread. Despite this boon to society, the movie implied that the inventor landed in the pokey for a Sherman Act violation. Even during the malaise years of the late 1970s, the movie sounded like a stretch of the libertarian imagination. Surely, if some one invented a technology that is superior, even politicians and regulators would have to recognize him as a benefactor and let him go about his business.

Recent events in the airline industry have shown otherwise. During the past 20 years, several airlines developed anew, comput erized technology to process reservations and issue tickets that is the equivalent of the "Incredible Bread Machine." Unfortu nately, the developers of airline computer ized reservation systems have fared little Dr. Ellig is Assistant Professor in the Program on Social and Organizational Learning at George Mason University, Fairfax, Virginia. better than the illfated inventor of the bread machine. What Is a Computerized Reservation System? The Airline Deregulation Act of 1978 freed airlines to enter new routes and charge whatever fares they could induce customers to pay. In this new, deregulated environ ment, an airline of any size has thousands of different route combinations, generating tens of thousands of different airline fares. Before the invention of computerized res ervation systems, a travel agent making a reservation had to look up flights in a book called the Official Airline Guide, then phone the different airlines to find out if they actu ally had seats available at a particular date and time. If the customer wanted a hotel room or rental car, the agent had to make another round of phone calls to find out what was available and make reservations.

Computerized reservation systems auto mated and streamlined this process, often permitting travel agents to consult with the customer, search for available seats, and book the reservation within minutes. When a customer phones, a travel agent begins searching for suitable flights on a computer screen. The screen is linked through phone lines to a mainframe computer owned by the company that operates the reservation sys tem. The mainframe contains information on millions of available airline flights and 231 232 THE FREEMAN • MAY 1994 fares. As soon as the customer and agent select a flight and agree on payment, the agent can print out the ticket. Similarly, a travel agent can access information on avail able hotel rooms and rental cars, making reservations within minutes. Computerized reservation systems slashed travel agent and airline costs while dramatically reducing the time it takes to make reservations. By 1981, use of these systems had become widespread, and a Harris survey in that year indicated that computerized reservation systems had in creased travel agents' productivity by an average of 41 percent. In fact, "One travel agent estimated that his employees could make a reservation using a computerized reservation system in one-third the time it would take to look up schedules in a book and make reservations over the tele phone.,,1 United Air Lines estimated that a reservation system's booking fee is less than half the cost of making a reservation through the airline's own reservation staff.2 Al though travel agents retain the option of returning to pre-computerized reservation system technology, 95 percent subscribe to at least one system. 3 Of course, if computer systems cut the time and effort needed to make reservations, they no doubt eliminated some jobs in the travel industry, and possibly in the airline industry's reservations departments as well.

In effect, these systems substitute human brain power and the sand in a microchip for the brute force labor previously required to process airline reservations. They provide a textbook example of what the economist Joseph Schumpeter called "creative de struction": the replacement of old technol ogies and ways of doing things with new arrangements that drastically reduce the amount of resources required to get the job done. In so doing, the new methods and technologies may cause some temporary dislocations, but they vastly increase our standard of living by enabling us to satisfy more human desires with fewer resources. Schumpeter argued that the process of cre ative destruction is in fact the driving force behind economic progress. 4 The Competition Issue In the case of computerized reservation systems, some critics saw a great deal of destruction and very little creativity. In stead, voices in both industry and govern ment perceived computerized reservation systems as a threat to competition in the airline industry.

There are currently four major comput erized reservation systems in the United States, but most travel agents subscribe to only one system. Typically, a travel agent signs a long-term contract with a comput erized reservation system provider, who then installs computer terminals and other equipment in the travel agent's offices. The contracts have included rollover provisions, so that when a system vendor adds equip ment or features, the contract is automati cally extended. Minimum-use provisions have required travel agents to book 50 percent of their flights on a given system, and liquidated-damages provisions have dis couraged travel agents from switching to a new computerized reservation system. There is also some evidence that this is a difficultindustry for new firms to enter. The computer systems and software needed for a reservation system may not have much resale value if their developer chooses to leave the industry. Analysts at the Depart ment of Transportation also found evidence of economies of scale, economies of scope, and learning-curve effects, which suggest that the first firms to enter this industry may enjoy a substantial advantage over new competitors. 5 The existence of long term contracts helps augment this advan tage.

Most of the policy controversy stems from the fact that all four major computer ized reservation systems are owned by air lines or groups of airlines. The two systems with the largest market shares are Sabre, owned by the parent company of American Airlines, and Apollo, developed by United Air Lines and now owned by a consortium of domestic and foreign airlines. To be listed on a system, an airline must sign a contract with the system vendor, and it then pays the THE INCREDIBLE TICKET MACHINE 233 vendor a booking fee every time one of its tickets is booked using that system. Critics charge that ownership of a reser vation system gives an airline an unfair advantage over competing airlines. Com puterized reservation system technology al lows the airline owning the system to list its own flights before those of other airlines, update information on its flights before updating the information of rivals, and in general manipulate the information pre sented to travel agents in ways that promote the owner's flights over those of rivals. In the absence of regulation, the system owner could also charge discriminatory booking fees, forcing other airlines to pay a higher price when customers choose them.

These types of complaints are common among companies in many types of busi nesses; the "have-nots" can always be counted on to complain about the' 'unfair" advantages possessed by the "haves." But the airline case is unusual, because many defenders of airline deregulation agree that computerized reservation systems pose a threat to competition. Most economists, for example, agree that airline deregulation has lowered prices and greatly enhanced the convenience of air travel. 6 Yet even the most authoritative study on the impact of airline deregulation warned that computer ized reservation systems might require reg ulation because they give the large, estab lished airlines that own them an advantage over new upstarts. 7 An entire mini-industry of scholarly articles focuses on ways of achieving the full benefits of airline dereg ulation through government intervention to eliminate remaining "market imperfec tions, " such as those created by reservation systems. 8 In response to both theoretical and prac tical concerns, the federal government has issued a number of regulations that govern the conduct of computerized reservation system vendors. "Display bias" is out lawed; vendors are prohibited from giving preferential treatment to any airline's flights in constructing video displays or operating the system. Contracts between vendors and travel agents are limited to five years. The government prohibits discriminatory book ing fees, tie-ins, and exclusive-use con tracts. Travel agents must also be permitted to use software that would allow them to access all computerized reservation sys tems from the equipment supplied by one system vendor.