U.S. Department Of Transportation Sets Airline Customer Service Standards With Stringent New Rules On U.S. And Foreign Carriers

Acting under its statutory authority to prevent "unfair and deceptive practices" by airlines and travel agents, the U.S. Department of Transportation ("DOT") has adopted sweeping new rules on customer service and extended several existing ones to foreign air carriers, over their objection. The broad rulemaking governs everything from how long airlines must let a passenger hold a discounted seat without paying for the reservation to where they must display ancillary fees on their web sites. While the Department elected not to adopt a few proposals that the industry had vociferously fought—such as one that would have opened the floodgates to plaintiffs' litigation by turning each customer service plan into a binding contract—these various rules will nevertheless have a significant impact on both domestic and international airline operations. The final rule, which was published on April 25, 2011, as 76 Fed. Reg. 23110, is essentially a compilation of at least 11 separate regulations, all establishing new customer service obligations for airlines. Several of the newly enacted rules, specifically those related to tarmac delay contingency plans, expand existing regulations that only just went into effect on April 29, 2010.1 The new rule expands the 2010 tarmac delay contingency plan requirements by including international flights operated by both U.S. and foreign carriers and widening the number of airports where these airlines must have a contingency plan in place. Under the regulation, all carriers serving the U.S. must develop customer service plans as well as tarmac delay plans, post these plans on their web sites, report tarmac delay data to DOT, incorporate government taxes/fees into essentially all price quotes, warn customers of baggage and service fees up front, and update passengers continually of any delay longer than 30 minutes regardless of the source (i.e., including delays created by FAA's air traffic control system). In addition, the regulations specify the procedures by which an airline must respond to customer complaints, drastically raise the amounts of compensation that must be offered to passengers when denied boarding due to oversales, and prohibit carriers from determining the forum for dispute resolution as part of the contract of carriage. This rulemaking represents perhaps the most expansive regulation of airline "routes, rates and services" since those aspects of the business were ostensibly deregulated in 1978. The regulation is far reaching both in terms of the number of foreign and domestic airlines that it now encompasses (all airlines operating any aircraft with a passenger capacity of 30 or more to and from the U.S.) and in the precision with which the regulations detail how airlines must now interact with their customers. The rules contain highly prescriptive standards for customer service that are uncommon (if not unheard of) in deregulated industries, and they prohibit, as "unfair and deceptive," several marketing practices that are used by well-known retailers online. Interested parties have 60 days from the publication of the rule to appeal by filing a petition for review with the U.S. Court of Appeals for the D.C. Circuit.

A Far-Reaching Regulation that Attacks Product Unbundling

Many retail web sites—offering products and services ranging from car rentals to laptop computers to holiday gift baskets—drive consumers to buy a multitude of related services or products during the purchase process. This is one of the oldest selling techniques on the books—unbundling the basic product, and then "selling up." Often these add-ons, such as product insurance, equipment upgrades, or faster shipping, are preselected by the retailer in the checkout process, and a consumer who really wants to buy only the no-frills product at the absolutely lowest price must uncheck a box to "opt out" of ancillary services before completing the purchase. While this process is common on the Web, DOT has now specifically banned it from air transportation sales as "an unfair and deceptive practice in violation of 49 U.S.C. 41712."2 Under the new regulation, airlines may not preselect any sort of upgrade for customers, whether it be for more legroom, additional frequent flyer miles, checked bags, travel insurance, or otherwise. Instead, the consumer must affirmatively "opt in" before putting any of these add-ons in the virtual "shopping cart." DOT's new rules also require that all ancillary fees to consumers be grouped together and highlighted on a centralized web page—linked to the carrier's homepage—so that the consumer can comparison shop among airlines even before beginning the reservation process. "The reason for this requirement is that the Department considers it too difficult currently for consumers to effectively comparison shop and determine the total cost for travel, including ancillary fees for optional services.... The Department considers it to be unfair and deceptive to charge an ancillary fee to a consumer, when that consumer had no simple, practical, and reasonable way of knowing about the fee prior to purchasing the ticket."3 DOT does not explain why the disclosure of these fees on the check-out page—before the actual purchase transaction occurs—would be inadequate to prevent fraud or deception. The Department then acknowledges that it could not go further: "With regard to commenters who wanted the Department to mandate certain ancillary items that must be free, the law does not provide us the authority to do so."4 For many airlines, ancillary fees now represent the difference between profit and loss. According to press reports, ancillary fees now account for five percent of all airline revenues and for some "no-frills" carriers, like Spirit Airlines, as much as 27 percent.5 DOT's evident policy goal of impeding the sale of ancillary services and slowing down the airlines' unbundling strategy may thus have undesirable consequences for the industry's "bottom line."

Eliminating Nonrefundable Fares

In another illustration of their extensive reach, the new rules require airlines to allow consumers to hold a reservation at a quoted fare for 24 hours without a fee or obligation to purchase, as long as the first segment of the itinerary is at least a week away. This essentially eliminates nonrefundable tickets from the marketplace for the most heavily discounted seats (which normally have restrictions requiring they be purchased at least a week in advance); all such tickets are now refundable at least for a day. Some airlines already offer a 24-hour cancellation window voluntarily as part of their customer service plans (for tickets purchased through travel agents), but to impose this as a federal requirement on every airline serving the U.S. would...