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New consumer rules will likely cost airlines USD3 billion

Only a week after the US Department of Transportation convened its Future of Aviation Advisory Committee, designed to help the airline industry, the DoT issued proposed new consumer regulations that could cost the industry USD3 billion in lost reservation and baggage fees and higher compensation for denied boarding. The proposed rules, issued yesterday included the expected increase in per-passenger compensation for involuntarily bumped passengers from USD400 to USD650 and would adjust the amounts for inflation every two years.

The move will no doubt be popular with passengers as the notice of proposed rule making (NPRM) addresses some of their biggest gripes. The NPRM proposes allowing them to make and cancel reservations within 24 hours without penalty which would cost the industry USD2.371 billion annually, according to DoT’s Bureau of Transportation Statistics which totalled the fees, one of the industry’s most lucrative, for 2009.

Reservation Change Fee collections (USD, mill):  4Q2009

It was only last week that Transportation Secretary Ray LaHood charged the Future of Aviation Advisory Committee with “ensuring that the US aviation industry remains vital, competitive, sustainable and safe” and one can bet that for airlines, these new rules were not on that agenda. Apparently the department did not get the industry’s message: do no more harm.

The committee is focusing on five areas: ensuring aviation safety; ensuring a world-class aviation workforce; balancing the industry’s competitiveness and viability; securing stable funding for aviation systems; and addressing environmental challenges and solutions.  The committee plans to meet five times over the coming year, during which it will develop recommendations to the secretary.

The NPRM also requires full and prominently displayed disclosure of baggage fees. The new rules go further however, requiring refunds and expense reimbursement when bags are not delivered on time. The industry collected USD2.723 billion in baggage fees in 2009. In the first quarter, airlines had a mishandled baggage rate of baggage rate of 4.10, down from the 4.39 rate for first quarter of 2009.

Baggage Fee collections (USD, mill): 4Q2009

Bumped passengers would get USD650 if the carrier arranges substitute transportation scheduled to arrive at the passenger’s destination one to two hours after the original scheduled arrival for domestic flights, or one to four hours for international flights. The last time the denied boarding compensation (DBC) was changed was two years ago and only doubled the compensation. This time the department has linked the proposed compensation to the actual CPI increase since 1978. Any later than two hours from the original arrival time, passengers would be due USD1,300 if the substitute transportation is scheduled to arrive more than two hours later for domestic flights, or more than four hours later for international flights.  The new rates would be adjusted for inflation every two years.

Sophisticated computer programs have dropped the number of involuntarily denied boarding passengers from 20 per every 10,000 passengers to 13 in 2009, when 762,422 passengers were bumped from domestic flights but only 69,234 were forced to give up their seats. The rest volunteered. The first quarter bumping rate was 1.73 per 10,000 passengers for the quarter, up from the 1.35 rate for the first quarter of 2009

Denied boarding compensation would be expanded to frequent flyer award tickets, so-called zero fare tickets, calculating the DBC is the lowest cash, cheque or credit card payment charged for a comparable class of ticket on the same flight. It requires the carrier to offer cash/cheque DBC if the carrier verbally offers a travel voucher as DBC to passengers who are involuntarily bumped. It requires that a carrier inform passengers solicited to volunteer for denied boarding about its principal boarding priority rules applicable to the specific flight and all material restrictions on the use of transportation vouchers in lieu of cash. 

Mr LaHood said the NPRM builds on his earlier actions to prevent passengers from being subjected to long tarmac delays and fines against AirTran and Delta for violating rules mandating airline price advertisements disclose the full price consumers must pay for air transportation.  AirTran was fined $20,000 and Delta $40,000. The proposed rules also build on the fair pricing advertising and prohibit price increases after a ticket is purchased. Finally, the new rules require timely notification of flight status changes.

The department wants to enforce the full-fare advertising rule that states the full per-passenger price with ancillary fees and government taxes. Currently carriers can exclude government taxes and fees. It also imposes stringent notice requirements in connection with the advertisement of “each-way” fares available for purchase only on a roundtrip basis. It would also require both US and foreign carriers to disclose all optional services that have fees to consumers through a prominent link on their homepage that leads directly to a listing of those fees.

“Airline passengers have rights and should be able to expect fair and reasonable treatment when they fly,” Mr LaHood said.  “With this rulemaking, we’re proposing to strengthen the consumer protections enacted last month and raise the bar for airlines when it comes to treating passengers fairly.”

In response the Air Transport Association issued a single-paragraph statement. “The ATA member airlines’ shared goal is to provide a safe, efficient, reliable and economically viable air transportation system consistent with the expectations of their customers, employees and shareholders,” said ATA President and CEO James May. “Today’s DoT notice of proposed rulemaking will be evaluated against that standard, with a focus on minimizing potential passenger inconvenience.”    

The proposed rule also extends to foreign airlines and charter flights operating to and from the US, the requirement imposed in April with the effectiveness of the tarmac rule that mandates airlines adopt contingency plans for tarmac delays and publish those plans on their websites. It would also have them adopt contingency plans for small and non-hub airports that were not included in the December rulemaking. Data collection on tarmac delays would also be expanded beyond just US reporting carriers but to their public charter and international flights as well as foreign and charter airlines.

The Department also proposed a number of measures to make it easier for consumers to know how much they will have to pay for air transportation. Carriers would be required to provide special notice any time baggage fees are increased and to notify passengers buying tickets whether they must pay to check up to two bags. It also asked for comment on several alternatives under consideration to provide greater access to air transportation to persons with severe peanut allergies.

The department is also soliciting comments on whether to ban in-flight peanut snacks owing to peanut allergies. This would also apply to foreign carriers and be covered under the DoT’s disability rules. Other options including a ban on flights where a passenger alerts the airline of their peanut allergy, requiring a peanut-free buffer zone around the passenger or continuing with current airline practices that include peanut snacks.

Passengers would also be allowed to sue an airline wherever it does business based on where the passenger lives or bought the ticket rather than a particular venue.