Budget Airline Attacks New Regulations

Thursday, February 2nd, 2012 at 9:19 pm, by Andrew Bruns

In late January a series of new regulations from the Department of Transportation came into effect impacting how airlines market and sell airfare.  While the regulations also require airlines to allow passengers to cancel reservations within 24 hours without a fee and to notify passengers of any cancellation or delay within 30 minutes of the adjustment, the most controversial change is the rule regarding “Full Fair Advertising” (14 CFR § 399.84).

Impetus Behind § 399.84

The rule, as amended effective January 26, 2012, states that any advertisement by an airline or travel aggregator is considered a deceptive practice “unless the price stated is the entire price to be paid by the customer.”  Section 399.84 is aimed at preventing airlines and travel aggregators (e.g., Orbitz and Travelocity) from deceptively advertising “teaser fares” for a fraction of the actual cost of the ticket.  For example, in the past some sites advertised flights to Europe for $150 only to later subtly reveal several hundred dollars in taxes and fees as part of the full price.  As a result, while such low fares were effective at drawing in Internet traffic, the actual flights advertised were not especially good deals.  As one consumer advocate put it, “There’s no such thing as a ticket to Europe for $150 total.”

Spirit’s Campaign Against the Regulation

The day § 399.84 went into effect, Spirit Airlines, an American “ultra low cost carrier” that offers flights domestically and to numerous South American countries, sent an e-mail to customers “warning” them that “new government regulations require us to HIDE taxes in your fares” (emphasis in original).  The e-mail goes on to describe the new rules as “not consumer-friendly or in your best interest” and calls for customers to contact their representatives in congress and lobby for a “better form of transparency.”  Spirit also suggests that sinister motivations are behind the new regulation: “If the government can hide taxes in your airfares, then they can carry out their hidden agenda and quietly increase their taxes. (Yes, such talks are already underway.)”  In addition to its message to customers, Spirit has also taken legal action against the regulations.  Late last year, prior to the effective date of the new fare rules, Spirit, joined by Southwest Airlines and Allegiant Airlines, asked the U.S. Court of Appeals for the District of Columbia to block the regulation as a violation of commercial free speech.  A decision is still pending.

Not surprisingly, Democratic officials were quick to speak out in defense of the Obama Administration and against the Spirit e-mail.  Senator Barbara Boxer issued a press release and wrote a letter to Spirit’s CEO, describing the company’s email as “deceptive” and “misleading” and asking Spirit to send a follow-up message to its customers.  Boxer claimed that the new regulation actually requires the transparency that Spirit advocated in its letter.

Analysis of Spirit’s Claims Shows Them to be Unfounded

The language of the regulations, numerous consent orders from the Department of Transportation (DOT), and a cursory survey of airline websites after the regulations went into effect substantiate Boxer’s position.

The Regulation Itself

While the regulation requires airlines to disclose the “entire price to be paid by the customer,” they do not prevent airlines from identifying what portion of the ticket represents taxes versus the fare.  In fact, the regulation specifically allows for such clarification: “Although separate charges included within the total price (e.g., taxes or a fuel surcharge) may be stated in fine print or through links or ‘pop ups’ on websites, fares that exclude any required charges may not be displayed in advertising or solicitations.”

DOT Consent Orders

Recent consent orders from the Department confirm that airlines can itemize their fares under current enforcement of the § 399.84.  For example, a recent order regarding advertising by AirTran Airlines clarifies that the Department “allow[s] taxes and fees collected by carriers, . . . such as passenger facility charges and departure taxes, to be stated separately from base fares in advertisements so long as such taxes and fees are levied by a government entity.”

Airline Practice Post-§ 399.84

Searches for fares on airline websites now in compliance with § 399.84 further underscore the inaccuracy of Spirit’s claims.  For instance, fare searches on Alaska Airlines now show the full fare for each flight, while holding the mouse over the fare triggers an internal pop-up window that shows the fare before taxes and fees.  Aggregators have also changed their practices in the wake of the new regulation.  For example, Orbitz advertises fares by breaking out taxes from the base fare.

While Spirit’s claims are without veracity, it is not surprising that it opposes § 399.84.  Spirit’s “ultra low cost carrier” business model depends heavily on charging customers separate fees for even the most basic of amenities.  For instance, Spirit passengers are charged $5.00 for each ticket printed at the terminal, at least $20 for any checked bag, and up to $50 for selecting a seat of their choice.  In addition to these “upgrades,” Spirit charges customers a “Passenger Usage Fee” of up to $16.99 for each ticket purchased online.  The fee is technically optional, as customers can avoid the fee by buying tickets at an airport, but Spirit portrays it as a mandatory tax or fee like customs fees or the September 11 tax.  As a result, a flight from LaGuardia to O’Hare advertised as $38 roundtrip actually costs the customer over $98.  Under the new rule, Spirit will have to include the passenger usage fee in the advertised base fare, making its flights no longer appear to be “ultra low cost.”  Only two airlines other than Spirit charge a “passenger usage fee” for online airfare purchases.  Not surprisingly, the other two are Allegiant and Southwest, the carriers joining Spirit in an attempt to block § 399.84.

Conclusion

While Spirit Airlines suggests that § 399.84 is a clandestine, insidious plot by the Obama Administration to increase tax revenues, there is little to support the airline’s claims.  In reality, the new regulation, its enforcement, and the response of Spirit’s competitors indicate that § 399.84 actually promotes transparency in airfare advertising while protecting customers from the predatory practices of certain carriers and travel aggregators.