DOT’s Ancillary Fees Rulemaking – A Work of Staggering Complexity

In the name of making air travel easier to buy at prices the consumer can understand before hitting the “buy” button, DOT has resurrected and expanded a 2017 rulemaking to regulate the presentation of ancillary fees. It deserves some credit for addressing the issues raised by ancillary fees and the way consumers are informed about those fees. Whether DOT has chosen a viable solution that will truly increase clarity and understanding at the right time in the purchase process, however, presents a serious conundrum for both airlines and travel advisors.

Observers of the travel advisor industry, myself included, have long believed that marketplace complexity created commercial opportunities for advisors. We therefore generally argued that calls for fare simplification, for example, would work against the economic forces that sustained the need for professional advisors. Fare complexity, among other things, drove more consumers to seek help from advisors in navigating the morass of airline fares and rules.

Complexity, however, has its limits. Too many options can give rise to the Paradox of Choice, a phenomenon that can lead to choosing nothing rather than suffering the psychological burdens of selecting from an overwhelming array of rich options. It’s complicated, of course. You can read more about it in Wikipedia if so inclined.

This problem is complicated further if the choices are frequently changing in unpredictable ways. Uncertainty about what may happen next (a new bargain passed up, for example, by choosing too soon) can lead to decisional paralysis. Travel advisors have likely encountered consumers suffering from these decisional “crises,” among others. Ancillary fees are particularly fraught because most air travelers fly only once or twice a year. Their “going in” knowledge of how things work is limited and often just wrong.

The Department of Transportation is now focused on a related problem and believes it may have the answer(s). DOT is concerned that consumer welfare is reduced by the way in which fares and fare rules are presented, both online and in personal interactions. This happens because the typical presentation of information on ancillary fees means that the consumer may choose an airfare that, upon later realization, is higher than they wanted. When the additional fees for ancillary services, such as baggage, cancellations/changes, and adjacent seat assignments for families with small children, are presented later in the buying process, the “bargain” the consumer thought she was gaining is often undermined.

When I wrote articles about DOT’s prior rulemaking on fare refunds, I noted the complexity, among other problems, of the proposed approach to a solution. See, for example, New DOT Rulemaking Goes Off the Rails on Refunds.

The new rulemaking on ancillary fees revives proposals initiated by DOT five years ago. In 2017, DOT issued a Supplemental Notice of Proposed Rulemaking entitled, Transparency of Airline Ancillary Service Fees, in which,

the Department proposed to require fees for a first and second checked bag and a carry-on bag be disclosed at all points of sale wherever fare and schedule information is provided to consumers … [and] that carriers distribute useable, current, and accurate fee information to ticket agents that receive and distribute the carrier’s fare and schedule information, including Global Distribution Systems (GDS). The …  information provided by carriers [was to] be detailed enough to allow ticket agents to disclose fees as itinerary-specific or customer-specific (i.e., fees that are differentiated based on factors specific to the passenger or proposed itinerary) charges. However, the SNPRM did not propose to require that consumers be able to purchase these ancillary services through ticket agents (i.e., it did not propose transactability).  

That process was interrupted by the Trump administration’s intervention against what it regarded as an unnecessary regulatory intervention in the marketplace. The SNPRM was then withdrawn in December 2017.

The complexity of the new rulemaking dwarfs the complexities of the recent fare refunds proposal.  The primary motivating idea behind the ancillary fees proposal is that “consumers are unable to determine the true cost of air travel prior to ticket purchase” because “the existing regulation does not require that the full fare quoted include the many kinds of ancillary fees consumers may pay for optional services.” The freedom airlines enjoy to set fees has led to a market condition in which “fees for ancillary services often vary based on various factors such as the type of aircraft used, the flight on which a passenger is booked, or the time at which a passenger pays for the service or product.”

Because direct regulation of those fees would likely run afoul of the 1978 deregulation principle of leaving price decisions to the marketplace, the only tool DOT can use to help consumers is regulating the manner and timing in which fees are presented to the traveler during the search/booking process. Thus, DOT has decided “to protect consumers from hidden and deceptive fees and enable them to determine the true cost of travel in an effective and efficient manner when they price shop for air transportation.”

And that is where the question arises whether the proposed solution is worse than the problem.

The new rule would cover “bag fees for a first and second checked bag and a carry-on bag, family seating fees for a young child traveling with an adult, as well as change and cancellation fees and policies.” The basic rule would be that airlines and travel advisors “whenever fare and schedule information is provided to a consumer in response to a passenger-specific or anonymous itinerary search on a website marketed to U.S. consumers where air transportation is advertised or sold. This includes, but is not limited to, the first place a fare is stated in search results.” But that’s not all.

Adjacent family seating must be transactable. That is, the consumer must be able to save the seat or lock in the price for adjacent seating at the time of ticket purchase, an opportunity they do not now have and that would not apply to all other seat assignment fees. But that’s not all.

The fees must be expressed as passenger-specific information if a consumer conducts a passenger-specific itinerary search, meaning a “search that takes into account a characteristic of the passenger that may impact ancillary service fees to be charged (e.g., military status, frequent flyer status, method of payment, etc.)” Moreover, the disclosure rules apply to both airline/travel advisor websites and mobile apps. And that’s not all.

The fee information would also have to be provided for “each itinerary for which a fare is quoted to a consumer during an in-person or telephone inquiry.” Airlines are required to provide ticket agents information in a form and manner that is “usable, accurate, and accessible in real-time.” Recall now that, in a manner reminiscent of the fare refunds proposal, the obligation to provide transactability of family seating arrangements falls equally on airlines and travel advisors.

DOT’s proposed rules would not apply to the Global Distribution Systems. DOT’s rationale for this exclusion is that “GDSs arrange for air transportation but do not sell or display a carrier’s fare to consumers.” That may be technically true but since DOT acknowledges that advisors get almost all their fare and booking capabilities through GDSs, this crucial link in the distribution process to negotiation among the parties (the proposed implementation period is only six months!) seems destined to create unnecessary trouble. DOT states expectations that airlines will proceed “in good faith” while also saying decisions on methods and channels of distribution are “left to the discretion of the carrier.” What could go wrong?

I understand DOT’s reluctance to force airlines to provide information to GDSs, a position it has maintained for many years. But it’s unlikely this rule’s proposed intrusion into the relations between the central parties in the distribution chain likely cannot succeed with half measures. You may recall that DOT put great effort into persuading the D.C. Circuit Court of Appeals that GDSs are “ticket agents” under the Federal Aviation Act. Sabre v DOT, 429 F.3d 1113 (D.C. Cir. 2005). Now DOT says GDSs are only “ticket agents” for some purposes but not others. Maybe that makes sense, but this question seems to be a central problem in the proposed scheme.

The scope of these comments on the NPRM must necessarily be limited. But I do want to emphasize a few of the seemingly unavoidable and unworkable complexities in the proposal. One example is:

The proposal to disclose baggage fees does not apply to air-tour packages advertised or sold online by ticket agents if the air transportation component is not finalized and the carrier providing air transportation is not known at the time of booking. However, ticket agents in such situations would need to disclose that additional airline fees for baggage may apply and that those fees may be reduced or waived based on the passenger's frequent flyer status, method of payment, or other consumer characteristics. When the identity of the carrier providing the air transportation becomes known, the ticket agent would need to provide the specific baggage fee information for the carrier to not only prospective customers, but also those who purchased the air-tour package before the identity of the carrier became known.

DOT also proposes to allow consumers to opt-out of seeing the fee details covered by the rule.

Finally, it is hard to imagine what the rules will do to oral communications between travel advisors and consumers, most of which these days are on the phone or in email exchanges. The proposed rules require disclosure of the various fee options “to be made at the time that the schedule information is being provided to the consumer during the “information” and “decision-making” portion of the conversation.”

DOT readily admits that “it is not possible to quantify at this time whether the proposed rule yields benefits that exceed costs.” While the agency has invited comments on all the details of these complex proposals, influencing the outcome will not be helped by generalized objections. Advisors who intend to comment should try to be very specific about their concerns and address the costs and other issues as precisely as possible. The good news, perhaps, is that no system of rules involving this much technical and economic complexity can likely be adopted and implemented for a very long time. It is nevertheless critical to inform the government about all the practical and economic implications of these massively complex proposals.