Refund regulations finalized late last month by the DOT have drawn the ire of airlines and the praise of consumer groups.
They also drew a rebuke from ASTA, which supports the overall sweep of the changes but is deeply concerned about a provision that leaves agencies on the hook for paying refunds if they are the merchant of record, even when the airline is in possession of those funds.
The new refund rules will take effect in late October.
In some respects, the changes aren't major. Airlines are already required to provide refunds to passengers upon request for flights that are canceled or "significantly delayed."
But the new regulations will require airlines to proactively notify flyers that they are entitled to a refund before offering flight credits or a rescheduled itinerary. In addition, the DOT rules says that refunds must be issued by default if a customer does not respond to airline communications, though language in the FAA reauthorization bill that is expected to receive floor votes in the House and Senate this week would still require flyers to request a refund -- leaving the fate of that provision in the air.
Refund payments will be due within seven days for tickets purchased with a credit card.
The more forceful notification rules could be a paradigm shift for consumers and airlines alike, said John Grant, a senior analyst for the aviation data company OAG and formerly a commercial director for KLM in the U.K.
Under current regulations, U.S. airlines have often issued credits as a default in cases of cancellations to flyers who were unaware of their rights.
Grant said that during the years he worked at an airline, his team estimated that about 3% to 5% of annual revenue was held as flight credits that never got used. Even with credits that are eventually used, airlines are able to burnish cash flow and earn interest during the period between issuance and redemption, he said.
Bill McGee, a consumer advocate who is the senior fellow for aviation and travel at the American Economic Liberties Project, called the DOT's new rule a "watershed moment for passenger protection in the airline industry."
"For years, domestic and foreign airlines both large and small have made it as hard as possible to give passengers well-deserved refunds," he said.
Meanwhile, the refund rule elicited unusually blunt criticism from the Airlines for America (A4A) trade group.
"Unnecessary regulatory rules issued without collaboration will lead to three things: confusion for consumers, reduction in choice and a decline in competition, which historically drives up prices," A4A said. "Very simply put, a one-size-fits-all approach is anticompetitive and anticonsumer."
The trade group said the refund rules, coupled with newly issued DOT rules designed to enhance the transparency of ancillary fees, will harm carriers' ability to compete via differing service models.
Though the notification requirement will likely be the most impactful part of the enhanced refund rule, another important provision is that the DOT has now specifically defined a "significant delay" to mean three hours or more for domestic flights and six hours or more for international service.
At present, the contracts of carriage of most large U.S. carriers are vague about what they consider to be a significant delay.
Mario Matulich, president of Customer Management Practice, an events company that has relationships with United and Alaska and also has a research and advisory arm focused on studying the end-to-end customer experience, said he expects the new refund requirements to ultimately benefit not just consumers but airlines' bottom line.
"We know from all of our research that companies that take short-term losses for customer experience enhancements make money in the long run," Matulich said.
He said that a practice such as not being transparent to customers about their right to a refund ultimately harms the airline by dragging down customer satisfaction.
Matulich also said the new refund rules won't dull competition between carriers but instead will move the goal posts in terms of how they compete.
"The airlines that can make the process automated and self-serving and easy will have an opportunity to compete and win market share," he said.
Speed of refund processing will offer another competitive battleground.
A bad rule for travel advisors
ASTA, meanwhile, is speaking out about the refund rule's merchant-of-record provision.
Peter Lobasso, the Society's general counsel, said that ASTA estimates that 5% to 8% of all intermediated air ticket purchases are made by a ticket agent acting as a merchant of record. Such transactions are most common in group travel bookings, meaning that a single cancellation could potentially leave an agency on the hook for dozens of refunds.
Such a situation could put a small agency out of business, Lobasso added.
An antidote, though, could be coming from Congress. As soon as this week, both chambers are expected to vote on an FAA reauthorization package that would mandate the DOT to issue regulations within one year requiring airlines to promptly transfer funds to ticket agents in such cases.
However, the DOT has typically taken substantially longer than the time period mandated by Congress to implement new regulations.