DOT Imposes Unsustainable Refund Obligations on Travel Advisors

By now every travel advisor is likely aware that the Department of Transportation (DOT) has adopted final rules governing refund obligations to passengers for failure to perform sold flights and for failure to deliver ancillary services for which travelers paid.

ASTA has, quite correctly in my view, objected to these rules insofar as they require travel advisors to refund money to travelers whose flights have been canceled by the airlines even if the advisor does not possess the traveler’s funds when the refund obligation comes due. ASTA has explained its concerns in detail during the extended comment periods leading to the final rules. After explaining the new rules, I will discuss why I believe ASTA was right and what should happen next.

New refund rules for non-performed flights/services
DOT’s new rules impose on the airline the obligation to make automatic refunds to travelers for the cost of flights that the airline does not perform, or which are significantly changed from the flight characteristics that existed at the time of initial sale. However, when a “ticket agent” (hereafter travel advisor) is the merchant of record, and the consumer makes her refund demand through the advisor, the airline that canceled or significantly changed the flight “must inform the [advisor] without delay whether the consumer is eligible for a refund” under the refund rules applicable to the airline. 

If the consumer is eligible for a refund, the advisor’s obligation to make the refund “starts when the ticket agent receives” the carrier’s notification. The advisor must make a “prompt refund” of the “airfare (including all government-imposed taxes and fees and all mandatory carrier-imposed charges).” The rules further require that the advisor make the refund in the “original form of payment” unless “the consumer agrees to receive the refund in another form of payment that is cash equivalent.”

A “prompt refund” is one that, for credit card purchases, is made within 7 business days of the advisor receiving information from a carrier of refund eligibility, and within 20 calendar days for cash, check, debit card, or other forms of purchases. This obligation to refund the consumer applies even if the advisor has not received the relevant funds from the carrier that did not perform or significantly changed the relevant flight(s).

The good, but quite limited, news is that the advisor may keep any service fee that was charged when issuing the original ticket to the extent that the service was “for more than processing payment for a flight that the consumer found.” DOT did not explain how that judgment is to be made. Moreover, the retained service fee must be imposed on a per-passenger basis and its existence, amount, and non-refundable nature, if that is the case, must be clearly and prominently disclosed to consumers at the time the consumer purchases the airfare. This seems to mean that the only way an advisor can retain a service fee is to discuss, at the time of travel purchase, the prospect that the airline might not operate the flight as sold or might change it in some way that the traveler finds unacceptable and thus demands a refund of the fare paid.

Further, advisors “may offer alternative transportation, travel credits, vouchers, or other compensation instead of refunds, but must first inform consumers that they are entitled to a refund if that is the case. [Advisors] must disclose any material restrictions, conditions, and limitations on travel credits, vouchers, or other compensation they offer.”

[Note: there are related rules dealing with travelers with disabilities and persons traveling with those disabled travelers. I am not going to address them here.]

DOT’s reasoning for the advisor refund obligation
So, how did DOT justify imposing a refund obligation on travel advisors whom it knows do not have any control whatsoever over the operation of the flights whose non-performance is the asserted basis for the new refund obligation? The refund obligation for non-performance existed before but, as we know from the pandemic period, airlines in many cases refused to provide those refunds and DOT did little or nothing to compel them. The imposition of a refund obligation on travel advisors in these circumstances is extremely difficult to understand.

DOT says there were many complaints against advisors during the pandemic. Those complaints are relevant, assertedly, because consumers could not determine who was responsible for processing refunds and who possessed the consumers’ money. Perhaps that was true in some cases, but in the circumstances of the pandemic, in which business offices were often closed and communications were disrupted or worse, and in which the government knew who possessed the money that was supposed to be refunded but did little or nothing to inform the public, travel advisors, struggling to survive, should not be blamed for confusion about where consumers’ money was being held.

In attempting to justify the imposition of the refund obligation on advisors even when they did not have the money, DOT noted that airlines supported that imposition, claiming:

they are incapable of issuing refunds for tickets purchased through ticket agents or other third parties because airlines may not have the passenger’s payment information and/or personal contact information and airlines often do not have full visibility of the prices paid by consumers, especially in situations where ticket agents purchase bulk fares from airlines to resell to consumers.

Does DOT believe the airlines didn’t know what prices consumers were paying for airline services booked primarily through Global Distribution Systems based on price information provided by the airlines themselves? The airlines who exert absolute control over the settlement mechanisms required of advisors by the Airlines Reporting Corporation and the Billing and Settlement Plan of IATA supported DOT’s intention to shift the refund obligation to advisors. 

Citing unspecified consumer complaints of having to “chase refunds” between airlines and advisors, a few others joined the effort to insulate the airlines from at least a major portion of their financial responsibility to consumers. The “chasing” that resulted from airlines’ refusal to refund known obligations was not considered significant.

It is perplexing that DOT thought the state of consumers’ knowledge of who had their money at any point in time was determinative of how to balance the refund obligations when airlines failed to perform their contracted flight and/or ancillary service duties.  Some consumers may have been troubled by the “chase”, but that phenomenon was, by all plausible accounts, a function not of travel advisors’ refusal to comply with their duty but was driven principally by airlines’ refusal to provide refunds involving tens of millions in refund obligations. Of course, travel advisors, whose business was reduced to zero overnight by the pandemic, were refusing to refund money they didn’t have and that they knew, and the government knew, the airlines were holding. 

If, as the airlines allege and DOT appears to believe, consolidated and bulk fares present special problems in providing timely refunds, those fares, which almost certainly represent a small portion of the total, can and should be addressed separately and specifically. They are insufficient justification for shifting airline financial responsibilities to travel advisors.

Astonishingly, DOT would state that advisors should be responsible for refunding money they don’t possess because “airlines, who are not directly responsible for refunds” might not return the funds to advisors promptly and that this failure of duty to consumers should instead be visited on advisors who, per airline/ARC/IATA command, promptly report and pay over to airlines the proceeds of sales every week. Equally astonishing is this: 

The Department has considered the ACPAC’s recommendation that there be an affirmative obligation on airlines to return consumer funds to [travel advisors] within seven days of receiving a refund request from a [travel advisor] when the airlines are not the merchants of record for the ticket sales. While the Department agrees that airlines should return consumer funds to [travel advisors] promptly in these situations, it is not persuaded that DOT intervention into airlines’ and [travel advisors’] business and contractual arrangements is necessary at this time.

DOT’s reticence ignores the fact that the business and contractual arrangements between advisors and airlines are driven almost entirely by collective agreements of the airlines executed through the Airlines Reporting Corporation and the International Air Transport Association.

If there is any good news in this, DOT did ultimately recognize that:

before issuing the refund, the ticket agent may need further information to verify whether a refund is due under the Department’s regulations. The NPRM states that in most situations involving cancellations or significant changes, there would be sufficient information (e.g., airlines’ publications on cancellations or flight itinerary change notifications sent to consumers) to confirm refund eligibility without contacting airlines; however, after reviewing comments, we realize that even in those situations, ticket agents may need airlines’ confirmation that the affected consumers did not accept alternative transportation or other compensation instead of refunds. Comments submitted by ticket agents also state that airline ticket settlement systems often incorporate a process under which airlines need to issue refund authorization codes to prevent duplicate refunds and fraud. 

Thus, DOT concludes: “We require airlines to determine whether consumers are eligible for refunds and if so, inform ticket agents of the refund eligibility without delay upon receiving the refund request from the ticket agent.” 

On the other hand: 

The Department’s Office of Aviation Consumer Protection will determine the timeliness of airlines’ response based on the totality of the circumstances, including how quickly the airline took steps upon receiving the ticket agent’s refund request to determine refund eligibility and whether the airline informed the ticket agent of the refund eligibility as soon as it has confirmed it. The Department expects airlines and ticket agents to work together to develop and enhance channels of communication to ensure that information regarding passengers’ refund requests and eligibility is transmitted in an effective, accurate, and efficient manner.

How all this will work in practice, under the rubric of action “without delay,” remains to be seen. Stating that it will be an unfair practice for airlines to “fail to timely confirm refund eligibility and communicate that eligibility to ticket agents” is all well and good, but bringing a recalcitrant airline to task under the unfair practice statute is a lengthy and often fraught process that will be of little solace to travel advisors or their clients who have experienced canceled/changed flights or other service failures and want their money back.

DOT’s reasoning is fundamentally flawed
The Agent Reporting Agreement (ARA) and the Airlines Reporting Corporation (ARC) processes create a principal-agency relationship between each ARC airline and each accredited agent/travel advisor. Advisors sell almost all airline services in the capacity of agent for the airline. The terms of that relationship are dictated by the ARA which is collectively imposed on advisors by ARC. While relations between advisors and ARC have dramatically improved in recent years, the ultimate reality of joint airline control of the relationship cannot be denied.

The refund debt in consideration in this rulemaking is the debt of the airline for failure to deliver promised & paid-for services, either for the flight itself and/or in the ancillary services that have emerged in recent years and for which substantial payments are often required. 

Requiring advisors to pay the debts of airlines is per se arbitrary & capricious. No specific evidence was adduced to prove that agents were responsible for the alleged back-and-forth about refunds during and after the pandemic when DOT allowed airlines to withhold refunds in tens of millions of dollars that were owed to consumers for airline non-performance. Indeed, a rule requiring advisors to pay an airline’s debt when the airline is holding the money represents a “taking” of the advisor’s property that is of questionable constitutionality. I understand that DOT has called upon the airlines to step up and wants all affected parties to cooperate, but wishing doesn’t make it so. 

And, as is well known, travel advisors, like consumers themselves, are constrained from self-help by two overriding factors. One is that the Federal Aviation Act provisions establishing what are unfair/deceptive practices do not support private rights of action. If airlines do not follow through to ensure that advisors are not prejudiced by communication delays for whatever reason, only DOT, after lengthy due process-based steps conducted in large part in private, can seek resolution. The other is that the doctrine of federal preemption of state law, incorporated in the Federal Aviation Act, prevents advisors and consumers from most forms of legal action in relation to airlines.

In these circumstances, the decision to require travel advisors to make refunds to consumers for airline non-performance when the airlines, or their representatives at ARC and/or IATA, are holding the relevant funds is unjustifiable. DOT should rescind the portion of the final regulation that purports to make advisors liable for airline debts and return to the planning table to find a more realistic and fair process for protecting consumers from airline non-performance.