Last month I wrote how American Airlines had quietly changed its rules so that when they downgrade a passenger, such as from business class down to coach, they’ll only refund 40% of the fare for that flight.
- The Department of Transportation says they are supposed to give back the actual difference in what the tickets cost. DOT explains that an airline’s obligation is to “refund the difference between the original fare and the downgraded fare.”
- If a passenger buys a $10,000 business class ticket, instead of a $1,000 coach fare, American would refund only only $6,000 – and would keep $4,000 for themselves.
- That’s actually a huge incentive to overbook premium cabins and steal from passengers, if this were allowed to stand.
Ben Edelman and Mike Borsetti filed a formal complaint with the Department of Transportation, arguing (correctly) that American’s new 40% formula is inconsistent with regulations and is an ‘unfair and deceptive’ practice and asked the Department to order American to refund based on the actual fare available when the ticket was purchased.
American Airlines has filed its formal answer with the government, and boy it is a doozy. (HT: JonNYC)
- They say their policy is actually right, and that there’s a loophole that lets them do it
- But they’re going to change their policy anyway and process refunds against the average fare paid in the downgraded cabin (which is itself problematic)
American Airlines Tells DOT They Can Refund Customers Whatever They Wish
American says that a passenger can just reject the downgrade and not travel, and take a refund. That’s the right that they have. However, if the passenger elects to travel, the only relevant regulatory language promises an “appropriate refund” but doesn’t spell out how to calculate it.
Since that regulation doesn’t say what’s appropriate, American argues it can substitute their judgment and 40% is a “standardized proxy” because calculating an actual difference is complicated – prices change all the time, they have to allocate the fare across connecting flights, different fares have different restrictions, etc.
And since, they say, there’s a specific regulation talking about downgrade refunds the Department of Transportation can’t use their general authority to regulate unfair or deceptive practices to impose a particular formula.
In fact, American argues that since its policy is written into its Contract of Carriage, there’s nothing deceptive about it. And since customers have the choice to refuse travel and take a refund, there’s nothing unfair about it either.
They acknowledge that the Department of Transportation says clearly that they must “refund the difference between the original fare and the downgraded fare” but they argue that this is nonbinding guidance that doesn’t actually require them to do anything.
But American Is Going To Back Off This New Policy Anyway, Voluntarily
Even though American lays out a legal theory for why keeping customer money is within their rights, they promise to change their policy by the end of the month. The new refund calculation will be:
the passenger’s allocated premium-cabin fare for the affected segment, minus the average fare actually paid by passengers who purchased and flew in the lower cabin on that flight and segment.
They aren’t saying the old method was improper. They aren’t going to go back and adjust refunds for customers who were downgraded and shortchanged. And they ask the Department of Transportation to dismiss the case against them. However, the new methodology may still be problematic.
- How will they calculate this average? Will it include Basic Economy, fully refundable, corporate, consolidator and connecting fares mixed together?
- What happens to a flight that’s sold out up front, but mostly empty in back?
- How are surcharges handled, when those vary by destination?
- Are refunds going to be close to zero on routes with strong demand in coach but little premium demand?
- Will there be any way for passengers to audit this calculation?
American is not going to refund the difference between what a customer actually paid for their ticket and what they could have paid at the time of purchase and American literally records website sessions and has the ability to identify available fares and inventory at time of purchase.
American’s Legal Position Is Actually Wrong
There are 9 reasons that American’s Chief Legal Officer ought to be bringing in whatever lawyer is supervising outside counsel for a performance review. Either they don’t understand the area of law or they are being disingenuous with the Department. Both risks their credibility with DOT.
Although my Straussian read is that they’re acknowledging that their approach was indefensible, and they just need to throw enough legal spaghetti at the wall to muddy the waters to avoid fines for egregiously unfair and deceptive practices.
- American says that the Department of Trasportation hasn’t prescribed the specific algorithm that they have to use in calculating the refund due, but that doesn’t mean the airline gets to substitute any calculation they choose.
The preamble to the Department of Transportation’s final rule says the obligation of the airline is to refund “fare differences,” whether the downgrade resulted from oversales “or any other situation.” 40% is not a fare-difference calculation. Even if, as American implies, the Department drafted poorly and failed to implement what it intended, that doesn’t give the airline the license that they claim it does.
- In fact, the Department of Transportation specifically considered a percentage approach in its rulemaking. An airline proposed an percentage refund and DOT specifically rejected this in favor of fare differences and drew a contrast with EU 30% – 75% refund percentage requirements. That strongly suggests an airline arbitrarily choosing its own percentage is not consistent with DOT rules.
- American also tries to get too clever in its legal argument, and winds up undermining its own position. They pull one sentence from §250.6(c) which requires an “appropriate refund” when an oversold passenger accepts a lower cabin to defend its downgrade refund policy for every situation that causes a downgrade. But American also says that other passenger protections in that section don’t apply because Part 250 applies only to oversales.
- When Part 250 would impose additional duties on American, it is limited to oversales.
- When one provision in Part 250 helps American defend its 40% policy, that provision governs every downgrade.
- When Part 250 would impose additional duties on American, it is limited to oversales.
- They also argue that §250.6(c) is the “specific regulation” governing downgrades and therefore blocks DOT from applying its broader unfair and deceptive practices power in this case. For a downgrade caused by an aircraft swap or a broken seat, §250.6(c) does not actually apply and it therefore can’t serve as the “specific regulation” that shields American from DOT’s broader authority. American cannot say Part 250 is too narrow to protect passengers but broad enough to protect American.
As it happens, the Department of Transportation has ruled on this before. They’ve even ruled on this when Mike Borsetti was the complainant before. In Borsetti v. British Airways, DOT held that Part 250 did not apply where every confirmed passenger traveled and there was no involuntary denial of boarding.
- I’m not sure I’ve ever seen an airline take such an aggressive position as to claim that disclosure of a rule in its Contract of Carriage means that a policy can’t be deceptive. If publication in the Contract of Carriage automatically immunized an airline, they could contract around any DOT regulations they wish. Disclosure does not make an otherwise unlawful term lawful.
- In any case, American didn’t actually provide the notice the regulation requires. Section 253.7 says a carrier may not impose a term restricting refunds unless passengers receive conspicuous written notice of its salient features “on or with the ticket.”
Here, the notice occurred on American’s website, inside its collapsed Contract of Carriage language. The 40% limitation did not appear conspicuously on the e-ticket receipt. Under §253.4, an inadequately noticed incorporated term cannot bind a passenger.
- The idea that a passenger’s right to cancel makes the policy fair, since they have a choice, is completely unreasonable. A passenger learning at the airport that first or business class is unavailable doesn’t have a real choice to cancel prepaid hotels, cruises, and onward travel arrangements.
- American offers no support for their 40% rule. There’s no data to support any claim of reasonableness for fare differences between its cabins, and they admit that actual differences may be greater or less. It’s illogical to think that the same percentage would apply to downgrades from first-to-business, business-to-premium-economy and business-to-coach or domestic first to coach.
- They say they were doing 40% because it’s just too burdensome to calculate a specific difference in fare. But they also say that going forward they are going to… calculate a specific difference in fare. So not only isn’t the claim they’re making in one part of their brief to DOT true, they’re admitting it in another part of the very same brief.
The Department Of Transportation Should Not Dismiss This Complaint
American’s position is that they were acting legally (that’s clearly wrong) but that they’re going to stop it, so the Department of Transportation doesn’t need to take action.
However, American has been keeping customer money when they downgrade passengers for the past four months and they aren’t going back to refund any of it. So the Department of Transportation still needs to act.
Potentially reducing future harm doesn’t address the real passengers who have been disadvantaged by this policy to date. At most correcting the problem for the future ought to mitigate penalties. It doesn’t absolve them of the obligation to correct the wrongs already done.
You know… call me a pinko, but… sensible regulations could stop corporations from doing this.
20 years later, I’m still mad from spending an extra $300/ticket for 5 tickets from AA for early-AM tickets over the later-in-the-day tickets because the passengers NEEDED the early flight only to have AA cancel that flight due to lack of other PAX and just keep the money despite PAX now flying on the later, much cheaper flights.
I called and asked for a refund of the difference and was told to pound sand and haven’t booked and now only book AA when no other option will work (and never for myself.)
In this day and age, it is trivial for a refund system to look back at the prices available at time of purchase, match the restrictions on the ticket, and issue the appropriate refund. That might still suck for the passenger (the business fare may have had less restrictions built into the fare price that the passenger never would have paid for on an economy ticket) but that’s at least defensible.
This should be illegal. The difference should be the difference between first and coach on the day you booked your flight. That being said, downgrades are very rare and if you willing to take alternative routing can be avoided although getting AA to reimburse additional travel expenses will probably be a no go.
One reason the upgrade fee might be the better way to go. You either get refunded or a flight credit.
@1990: Apparently you didn’t read the article. Sensible regulation exists and AA is just ignoring it.
Sensible regulations are completely ineffective at stopping corporations from doing this as corporations bet enforcement will never really happen given we rarely have 8 years of an administration that actually wants to do sensible enforcement and corporations can usually run out the clock on a 4-year administration…. and even if you get 8 years of a willing administration, you still might not have a Congress that appropriates enough money to our enforcement agencies to actually do sensible enforcement.
To keep corporations accountable, you need class action lawsuits that can’t be prevented by binding arbitration agreements / class action waivers forced onto the consumer with contracts of adhesion.
Don’t ever buy American Airline first class. Problem solved.
Well then, if even George is sort-a on the side of consumers, that’s a sign!
@Christopher J Raehl — Wait, you actually ‘read’? Holy shiii.. wow. WOW. This changes things.
@George:
It *IS* illegal! AA is just doing it anyway, because they think there’s a good change they’ll get away with it, and if not, they’ll be no worse off than if they hadn’t tried.
@1990: Forgot to mention, class action lawsuits with treble damages, to prevent the above rolling of the dice.
@Christopher J Raehl — Ok. I’ll stop mocking everyone. Yes, nice to see Gary (and the peanut gallery) finally seem to care about corporations ripping us off and getting away with it, usually. Welcome to the party, friends.
Thanks for keeping us posted on this.
Please send your analysis to AA.
Can you also send it to DoT
It’s also a huge incentive to just stick with cheap tickets.
AKA “bait and switch”
Maybe the FTC should hold a remedial class on this for the FTA?
It seems like there is nothing left of the legacy American Airlines, and that AA has adopted the culture of their Bank Account, America West and US Airways. What a shame as the AA of today, sucks, and AA has no remorse about imposing ill-will on its CUSTOMERS, NOT passengers, but CUSTOMERS.
American Airlines needs to STOP acting like greedy corporate A-Holes. AA recently pulled this scam on comedian Jim Breuer. I’m glad he went public about it.
This is another example of the airline industry needing to be told by regulators about how to behave properly. This is especially disappointing to me because AA is my primary airline. Going forward, I won’t be buying any AA First class tickets until my trust in AA is restored.
This is so not in good faith “ but they argue that this is nonbinding guidance that doesn’t actually require them to do anything.” It is the same as getting an outside judge who finds in your favor and then being told it was not binding arbitration! Unfortunately too often the leverage offered by the court of public opinion, shaming, is the only solution that works.
Another reason I never fly AA unless there is no other viable choice.
AA’s position makes little sense, and ought to result in an order to show cause for why they should not be fined for submitting such a patently nonsensical argument. Then told to make them whole and submit a new policy to Transportation within the month, highlight this new policy within the Contract of Carriage for the next year, and submit any further changes for the next five years to Transportation for approval before implementing.
The bullshit has to stop.
I always read the “Contract of Carriage” to know what my rights are before I fly. Said no one. Ever.
Well said, Gary. In terms of a remedy, I would hope that the DOT would consider an optional remedy of screen prints and other evidence that indicates what the cost of the downgraded ticket was on the date that the customer booked the higher fare. Almost always this will be a lower fare than the “average fare” (which is averaging not just all the fares but also the dates on which all of the other fares were purchased). This could be spelled out as optional, but once customers were clear about the option, I would think that most would gather this information just in case.
@David S — You mock, but, even if you did read every word, how are you, as an individual passenger, gonna realistically ‘negotiate’ with the billion-dollar corporation, when that ‘contract of carriage’ is an adhesion contract (take it or leave it)?
No, the solution here is sensible regulations and rigorous enforcement of those rules, including penalties, to prevent such abuses by corporations against consumers.
It seems we’re reliving the bad parts of the railroad era of the late 19th and early 20th centuries, where railroad barons consolidated the market and mistreated consumers and labor, alike. Might wanna brush up on those history books for what comes next…
They’ve gotta scrape together the $30 million for Isom somewhere…
I was hoping American would improve enough to make a switch from Delta viable. Not with this kind of assholery!
Christopher J Raehl has it right. We have regs. Airlines and others ignore them. Enforcement is key. Customers need a private right of action and we need to eliminate the airline’s immunity from State Consumer Protection laws.
As airlines monetize premium cabins, it’s in their best interest to make the product marketable.
AA headquarters in PHX just might have portraits of Frank Lorenzo and Carl Ichan for inspiration.
@jack the ladd — Preach! (Though, realistically, the feds likely have to do this. For more of a comparison to the ‘off-the-rails’ railroad era I was referring to above, see the Granger Laws, state laws that attempted to regulate the excesses of that era, which were struck down on the grounds that states could not regulate interstate commerce.)
@ 1990 — This was happens under fascism.
@Gene — If you’re serious, and not merely piling-on to my earlier ‘pinko’ joke-comment, even for me, calling this literal ‘fascism’ is bit of a stretch. I’d say, it’s more what happens under an oligarchic society where those with wealth and power act abusively (often with impunity)… like, at least the airline isn’t scapegoating a vulnerable group of people, say, with racial or ethnic undertones, to obtain and maintain power (that’d be more technically ‘fascistic’) …but, use whatever term(s) you wish. Ultimately, I see the AA’s actions here more as a failure of market regulation and a result of concentrated corporate influence, rather than a political movement designed to dismantle democratic institutions or enforce nationalistic control. *clicks heels, puts finger under nose, does a flamboyant “Roman” salute, rolls eyes, and blows a raspberry*
“It’s too difficult?” I call BS. I used to calculate that all the time as an airline supervisor and I had to use a paper notepad. Now, they have sophisticated computers that could do it in a split second. Who do they think they’re kidding?
Ii was wondering if customers who miss a connecting business class flight can opt to just wait for the next flight with positive space instead of the next available flight in coach?
IME if you are downgraded AA will be willing to work with you to get reaccommodated into first, however, if you’re in a time sensitive situation that may not work. Additionally, you would be out pocket any additional travel related expenses.
These are rare situations as AA generally won’t over sell the premium cabin and will first downgrade anyone on a complimentary upgrade before a paid first passenger. Some bean counter from one of those schools that never shut up about DEI has determined that a class action suit would be unlikely because it’s pretty rare.
But this policy sucks even if the occurrence is rare and AA will try to reaccommodate you if you have flexibility in travel.
@George Romey — Dude, blaming it on DEI is such a tired trope and a cop out. Are you gonna claim TDS next? C’mon. I expect better from Mr. Wawa.
@ 1990 — Yes, I meant racism. Not joking.
@ 1990 — Auto correct! Yes, I meant fascism.
What a company technically can do, what they legally can do, and what they actually do represent a trio of choices they can make. Their ultimate decision will vividly reflect their ethos and customer focus – or lack thereof. At that point a customer gets to choose whether they will subsidize inappropriate business practices or not. In other words, do I take my next flight to Europe on AA or do I choose KLM, United, Air France, etc.
@Gene — Bah! On the -isms, as they say, ‘por que no los dos’… *sigh*
@DFWSteve — If you prefer food and wine, AF; reliability and Delft Blue Houses, KL. EU261 applies. Skip the others!
Well, then there’s another reason after being a Customer for AA for over 25 years to “fly” the coop and take my business elsewhere.
Sick of hearing and dealing with all this C%$#.
Flying used to be fun and take me to see my family overseas, but now they only provide bus service.
What’s next bring a sleeping bag???
Dirty planes, tossed and torn luggage, crappy service from various personnel, fees for this that and they other and much more.
Does the passenger also have the option to not cancel but wait for another flight that has a seat available in the class of service the ticket is for?
It’s these shenanigans that keep me away from booking American airlines and likely many others who have seen how American Airlines does business. No wonder they trail United, Delta, etc.
I’m done with AA even though I live in one of their hub cities. I have been Platinum Pro for years and always buy first class tickets for domestic and business class for international. I don’t want to deal with this kind of hassle. I’m not going to spend endless hours on the phone trying to get what is legally owed to me.
Put me in charge of AA, the first thing I do is ask who thinks this was a good policy. Raise your hand, get fired. In the West Wing, they tested new PR hires by putting something wrong in remarks the President was to issue. They wanted to see if they had the guts to point out the problem. Maybe that’s what happened here, but the underling didn’t catch it.
@ Gary — Can I buy coach and then buy an upgrade for 40% of the fare difference?
@Gene — Exactly. If airlines can do this to passengers, the reciprocal should count. Instead, the bait-and-switch will continue, ‘until morale improves…’
I’m just gonna move up to first glass because “I choose to travel”. Until airlines are fined for this behavior they have no incentive to change.