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Airlines Keep Gouging Passengers. Regulate Them.

Airlines Keep Gouging Passengers. Regulate Them.

Sunday, 4 September, 2022 - 04:30

US-based airlines canceled more than 100,000 flights between January and July, surpassing the number of cancellations that took place during the same period in pre-Covid 2019. The impact on passengers is significant. Not only must they find alternative transportation; they must also obtain a refund for their advance purchases.


That's harder than it should be. In fact, difficulty obtaining a refund has been far and away the top consumer complaint to the Department of Transportation since the beginning of the pandemic, though flight problems (collectively, flight cancellations, delays and misconnections) passed it in June, as the chart below indicates. Policy makers in the US are looking at ways to address these problems with regulations requiring speedier refunds by airlines.


Such issues are not unique to the US, of course. In Germany, some lawmakers think a radical approach is in order. They want to abolish advance purchase fares entirely , and replace them with tickets that are charged to passengers only at flight check-in.


The proposal, which originated in the state of Lower Saxony and which has German federal government support, is generating discussion across the travel industry. Airlines better take notice: The days when they could easily refuse or delay a cash refund may be coming to an end.


After US airlines were deregulated in 1978, competition drove fares lower, but also reduced amenities and left airlines desperate to generate extra revenue. In time, they developed complicated, dynamic pricing mechanisms that benefited both the airlines and passengers. Consumers willing to purchase tickets a few months in advance would likely get a better deal, for example, while business travelers — often traveling at the last minute — paid more.


Dynamic pricing didn't just boost the number of people who traveled. It also provided the airlines with valuable, real-time information on future demand, allowing them to make the most efficient decisions about deploying aircraft.


So far, so good. But thanks to the requirement that passengers pay for fares at booking, the airlines are rewarded with — effectively — interest-free loans for collecting that information. And, thanks to restrictive ticketing policies, the airlines almost never had to repay those loans in cash if the itinerary was canceled.


Those restrictions are a profit center. In 2019, US carriers earned a whopping $2.8 billion from reservation cancellation or change fees. The pandemic forced them to retroactively loosen some of their ticketing rules, but not all of them. In 2020, US airlines still managed to pull in $898 million in reservation cancellation and change fees.


But even passengers promised refunds can attest to how difficult it's often been to receive actual payment. Many airlines “refunded” fares with flight vouchers poisoned with expiration dates. Others simply dragged out the process of repaying passengers.


In both cases, regulators have noticed. Late last year the US Department of Transportation reached a settlement with Air Canada for “extreme delays in providing refunds,” and — as of July — it had an additional 10 ongoing airline investigations related to refunds.


But neither the end of Covid travel restrictions, nor increased regulatory interest, has improved matters for passengers or spurred the airlines to do better. During the first half of 2022, 24% of all flights were delayed, and 3.2% were canceled (up from 1.58% during the same period in 2021), logjams that added to the refund mess.


It doesn't have to be this way.


In 1997, Deutsche Lufthansa AG, quietly introduced Pay As You Fly fares for Siemens AG, one of its largest corporate customers. The business passengers don’t pay for the tickets until they pick up their boarding passes. Among other advantages, the fares saved Siemens $500,000 during the first two years of the program.


In 1999, Siemens travelers were using PAYF for nearly every flight they took in Germany . It proved so popular that the airline expanded it to other high-volume corporate customers. This year, under pressure from business groups that lobbied for reform to refund policies , Lufthansa expanded the program to all business customers, regardless of volume.


For now, Lufthansa opposes expanding its pay-as-you-fly policy beyond corporate and business customers, and opposes regulation that would force it to do otherwise. Among other reasons, the airline fears that losing advance payments will make it more difficult to project future passenger demand. (This summer's travel gridlock across Europe suggests they weren't doing well under the current model.)


But at least some German lawmakers aren't buying it. After all, if Siemens is entitled to a pay-as-you-fly fare, why shouldn't a German tourist have access to the same convenience? Lower Saxony's call to abolish advance purchases is, in part, a call for equal treatment, and Germany's Federal Ministry for the Environment and Consumer Protection has welcomed the proposal .


US airlines should pay careful attention to the pressure building in Germany. Congress and the Joe Biden administration are unlikely to require that airlines change their fare structure, and they shouldn't. Deregulation continues to benefit consumers. But even as US regulators remain committed to deregulated skies, they are increasingly skeptical of an industry whose profit margins are built — in part — on making refunds onerous.


In early August, the Department of Transportation proposed a new rule that would, among other provisions, require airlines to provide refunds if a domestic flight is delayed by three hours or more.


The regulation should be adopted. Meanwhile, this week the department is launching an interactive dashboard that helps passengers navigate refund and other customer-service commitments made by individual US airlines.


Those airlines should be embarrassed that such tools must exist at all. If they hope to avoid more regulation, they should be working to ensure that their passengers are spending more time gazing at airport flight monitors, not the fine print.


Bloomberg


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