June 27, 2002 5:05 PM PDT

Agency: Orbitz could harm competition

While Orbitz has helped competition in the travel marketplace, the company could later "harm" competition in the airline industry, according to a federal review Thursday.

"To date, Orbitz has had some pro-competitive effects in the marketplace and has brought some benefits to consumers," read a report issued by the Department of Transportation. "Orbitz could, however, evolve in ways that could harm airline competition, and the potential for concern still exists."

The report does not come to any definitive conclusions or recommend any action on Orbitz, a Chicago-based company formed by five major airlines.

The review into whether Orbitz violated antitrust laws was given to the department's inspector general this week. The inspector general now has three months to issue recommendations to Congress.

DOT spokesman Bill Mosely said department officials are waiting for the Department of Justice to conclude a separate probe on antitrust issues regarding Orbitz before it issues any recommendations.

"They wanted to wait to avoid any contradictions between the two reviews," Mosely said.

Orbitz Chief Executive Jeff Katz said he was "pleased" with the announcement.

"After once again fully reviewing Orbitz's business practices, the Department of Transportation has again found no evidence of any anti-competitive effect and, in fact, has found that Orbitz has benefited consumers and promoted competition in the travel marketplace," Katz said.

Since before Orbitz launched last summer, competitors accused the owners of creating the company to wrest control of airfare distribution. United Airlines, American Airlines, Delta Air Lines, Northwest Airlines and Continental Airlines invested $145 million to found Orbitz in 2000--at the time a venture known as "T2" and rumored to stand for "Travelocity Terminator."

At the heart of competitors' concerns is the "most favored nation" agreement between Orbitz and the air carriers, which guarantees Orbitz access to the airlines' lowest fares.

"By its very existence as part of a new and integrated business model, the Orbitz (most-favored nation agreement) has clearly affected the marketplace," says the report. "The challenge for the DOT is to definitely determine its effect on the marketplace in light of antitrust laws."

The report added: "Government intervention in the marketplace should be designed to correct a failure of market forces, not to replace or pre-empt them in ways that could potentially stifle innovation."

No other online travel site has such an agreement with the airline industry, and critics argue that it gives Orbitz an unfair advantage.

"The DOT interim report confirms that Orbitz represents a continuing threat to competition and consumers," said Expedia spokeswoman Suzi LeVine.

Orbitz and its airline owners are pitted against the top two online travel sites--Expedia and Travelocity--and the companies that distribute airline tickets, such as Sabre, Galileo and Worldspan. The two sides have waged a brutal political battle, with each enlisting the help of Washington allies, and issuing reports and press releases buttressing their respective positions.

This week, Orbitz circulated letters of support from Dick Armey, House majority leader, that were sent to U.S. Attorney General John Ashcroft and the Secretary of Transportation Norman Mineta. Earlier this month, libertarian think-tank the Cato Institute issued a flattering white paper on Orbitz.

In April, a letter critical of Orbitz was sent to Justice officials by Bob Goodlatte, R-Va., and Rick Boucher, D-Va., and signed by 22 other members of Congress from both parties, including eight who serve on the Judiciary Committee.

This is the second time Orbitz has come under government scrutiny since its founding in 2000. The U.S. Department of Transportation, Inspector General Ken Meade and the Senate Commerce Committee determined last year that Orbitz did not violate antitrust regulations at the time, allowing the company to proceed with business plans.

Orbitz filed for an initial public offering in May.

 

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