Podcast: U.S. DOT’s Wrong-Headed Proposal To Regulate Airline Ancillary Fees

ATW editor-in-chief Karen Walker and IATA VP North America Doug Lavin discuss changes that could make buying an air ticket more complicated and more expensive.

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Rush Transcript:

Karen Walker:

Hello, everyone. And thank you for joining us for Window Seat, our Aviation Week air transport podcast. I'm Air Transport World and Aviation Week Network, Air Transport Editor-in-Chief, Karen Walker. So welcome on board.

This week I'm delighted to be joined by Doug Lavin, who is Vice President member and external relations North America at the International Air Transport Association or IATA, which represents some 300 airlines around the world. Doug, thank you so much for joining me today.

Doug Lavin:

Appreciate the opportunity to be here, Karen.

Karen Walker:

Thanks, Doug. Great to see you. I invited Doug to Window Seat so that we could talk about a proposed new set of rules by the US Department of Transportation that would affect how airlines and ticket agents apply so-called ancillary service fees.

For context, ancillary fees have become a significant part of how almost all airlines generate revenue. They are the optional fees you pay on top of the basic ticket price, which gets you to your destination for things like a pre-selected seat location, a seat with extra legroom, meals and beverages, a check bag or priority boarding, very obviously from airline to airline. Ancillary fees in the air transport business really started with the low-cost carriers like Ryanair in Ireland and Spirit in the US, which offered passengers the cheapest ticket along with optional fees for the add-ons that people wanted. Over recent years, ancillary fees have become far more mainstream across the entire industry, including major airlines, and the amount of revenue collected through ancillaries has grown both as a number and as a percentage of overall revenue.

Last year, airlines worldwide brought in some $103 billion through ancillaries, and they can account for some 20% of a traditional airline’s revenue and as much as 50% of an ultra-low-cost airline’s income. The USDOT proposed rulemaking is called enhancing transparency of airline ancillary service fees, and it would affect US airlines and foreign carriers that serve the US as well as ticket agents. It would require them to clearly disclose fees for passenger specific or itinerary specific fees for adjacent seating, and it would require airlines to provide ticket agents with usable current and accurate information for almost all ancillary fees including for bags. IATA has submitted comments to DOT about this proposal and you drafted those comments. So let's just start with the top line on the surface being transparent about these fees doesn't seem wrong, so why does IATA think they're misguided?

Doug Lavin:

Karen, the proposed regulation is misguided because it's in a sense a solution in search of a problem. Today, passengers know what fees they're going to incur before they purchase the ticket, and in fact, I did a informal survey and tried it myself, and not only do they know the fees before they purchase the ticket, but they know them within a few clicks of selecting their itinerary. In this case, DOT is going above and beyond any expectation of second-guessing airline practices and are calling for a fundamental change in the way airlines distribute tickets. And this will have a significant harm to consumers on a number of fronts, and most importantly, it can't be done. It can't be done with certainly within the six-month timeframe that DOT is proposing for implementation.

Karen Walker:

So it sounds like what you're saying is that this isn't unprecedented in this type of regulation. The rule making would do more harm than good sort of unintended consequences. Can you just go into a little bit more detail about what would happen if this proposal was enacted as they are proposing, and where it would affect both how airlines operate and what they can do. But perhaps even more importantly, how it might affect consumers in a not good way?

Doug Lavin:

The rule proposals that with on three core ancillaries, what they consider core ancillaries baggage change in cancellation fees, and family seating for children under 13 that the airlines and the ticket agents present complete information on those fees on the first search page. So as you know, when you do a search on Travelocity or airline.com, you'll get 50 to 100 different itineraries that you can look through and decide which one you want to use. In this case, they are proposing that the airlines and the agents provide all of the information in terms of potential fees or exact fees in the case of a specific passenger on the first search page. That's an incredible calculation for airlines to do as you can imagine. But more importantly, it will overwhelm passengers in terms of the information. If you look at an OTA, what they normally present is fair and availability because that's what passengers are most interested in.

But in this case, you'd have to provide everything, all the information on these fees on those three core ancillaries. So we believe very clearly, and I think evidence will prove this very quickly if they enact us, is it will overwhelm the passenger with information. It will make searches incredibly more difficult. And in fact, one of the proposals in the rule is when you call up a ticket agent, he or she needs to read those things for every itinerary presented. It will result in higher costs for airlines and will likely result in less choice for consumers because certainly airlines and more likely ticket agents will reduce the number of itineraries presented because of the cost associated with doing all those calculations and presenting that. And then finally, it will change the forward path, the modernization of airline distribution. Airlines are trying at this point to get to the point where you can say, "Hey, Siri, book me a flight to Las Vegas." And they won't be able to do so if this comes in place because you'd have to listen to a half hour of every itinerary and every bit of information.

Karen Walker:

So one thing that occurs to me, as you said that more and more people have got the airline app on their phone, on the mobile phone and they're using that to buy their tickets. Is it possible even to put all that information on a phone, let alone on a laptop?

Doug Lavin:

It's not possible. And in fact, my phone was sitting next to me now and I asked for, "Hey, Siri, he booked me a ticket to Las Vegas." And it started the process. So that's exciting that we can even do those things now. But no, it won't be possible on a phone where 44% of tickets are now booked on mobile devices. So too little real estate for too much information.

Karen Walker:

The proposal by DOT talks about unfair and deceptive practice. Obviously, no business should be operating unfairly and in a deceptive way, but do airlines actually operate in an unfair and deceptive way? It doesn't seem like to me like they do.

Doug Lavin:

No, I mean, we certainly don't believe so. After deregulation, DOT was limited to regulating airlines on two fronts. One is safety, and two is on unfair and deceptive practices, and it really started with the Obama administration and now in the Biden administration to expand the idea of what is an unfair and deceptive practice. In this case, what they're arguing is if a person starts a search on a website and goes through the search process, selects an itinerary, and then decides to purchase the ticket. By the time they've ready to purchase the ticket and see the fees associated with that, they're sucked into that website and therefore it's unfair and deceptive. It's what they call drip pricing, and it's just unfair for passengers to have to start the search over again and look at another website.

And frankly, DOT is also what they would really like to do is mandate comparison shopping, but they don't have any authority to do so to require comparison shopping for airlines. And so what they're doing instead is saying it's unfair and deceptive for this poor person to spend 30 seconds more to find out that there's actually a baggage fee.

Karen Walker:

Got you. So the relationship with the travel agents and ticket agents are still very important to a lot of people and use to purchase tickets. How do the airlines ensure that what they're doing, the steps they're taking on their own sites, when people book directly are also being applied by the agents they use?

Doug Lavin:

Well, they don't have that much ability. What the DOT regulation would propose is that agents and airlines both have to present all this information on the first search page, and more importantly, they want to have it to be passenger specific. So if Karen Walker identifies herself on Travelocity as a frequent fire from United, Travelocity should present to you that you get a free seat because you're a frequent fire. That sounds well and good, but technically it's essentially, it's a huge challenge because airline websites and travel agent websites for the most part are not connected. So the travel agent just doesn't have this information. Now, fortunately, IATA has developed what's called new distribution capability, which allows for that link between airlines and travel agent websites. The problem is that NDC right now covers 7% of transactions in the United States, and DOT is proposing that within six months, that's going to be 100% because either you use NDC, or you use so-called direct connect between an airline and a travel agency website.

And again, I'm not even sure what they're trying to solve here because if you, Karen Walker wears a frequent fire in United Airlines, you would know you're getting a free seat. So we don't need DOT to mandate that you know this. And then for the passengers that are not frequent flyer members, they would get the base fee anyway, which is already on the airline website. And in fact, under baggage, it's mandated to be on the airline website that there's a link to the baggage fees that would be applied to the people who are essentially not frequent fires. So the bottom line is, again, a solution in search of a problem.

Karen Walker:

So listening to you just there, it seems to me the issue isn't really transparency. This is what DOT seems to be, that's their angle. Airlines and ticket agents need to be more transparent. It does seem to me that particularly frequent flyers, but in fact, anybody really these days who flies knows about ancillary fees and they do come up as you make your sort of selection, things will be popping up telling you what the option you are looking at includes or doesn't include. But we also know, let's be frank, that ancillary fees tend to be something that people moan about, complain about. They nickel and dime as these airlines can't even get a bottle of water anymore. And so it's the crux of this that people are complaining because they don't like ancillary fees, but it isn't really about the fact that they don't know that they're there and don't see what they've got to pay extra for.

Doug Lavin:

Yes, in the DOT proposal, they pointed out that they get a number of complaints about ancillary fees, but they honestly state that they can't tell if that's because of transparency or because they actually don't like to pay fees. I mean, the bottom line here is DOT does not like ancillary fees. And DOT is again trying to expand what was a very limited standard on unfair and deceptive. In fact, the Trump administration severely limited that to what it was meant to be from the original Federal Trade Commission standard. And this administration has decided to go ahead and expand that again. Some people don't like paying fees, but if you explain to them that as a result of this freedom for passengers to make a decision that airfares have gone down, include the ancillary. So if you explain to the passengers, they understood that they get a lower overall price because of this, because it gives people the freedom to choose what they want to buy or not buy, they would understand it more. But unfortunately, DOT doesn't seem to understand that.

Karen Walker:

So this is something that I've sort of often said myself is that I almost never check a bag, so therefore I don't want that wrapped into the baseline because ultimately what would happen is ticket prices would go up, is my assumption. But if they just assume that everybody's checking a bag and nobody's going to be charged for that as an ancillary fee. So I feel like, well, I'm not adding that cost and weight and service to what I need, so I don't want to be included in that. And what you were saying earlier, nearly always I'm flying alone, and I don't want to be drowned in information about family seat booking, et cetera, et cetera, that would appear to come with this rule. So this is where this rule making would go, correct?

Doug Lavin:

Correct. They're thinking about whether a passenger can opt out of some information. So for example, on family seating in particular, but frankly based on the interactions I've had with DOT, they're somewhat skeptical about that because they want passengers to get full information and they don't care whether you want it or not. They feel they need to push that to you.

Karen Walker:

And another bugbear that I've had often when it comes to ancillaries, I know DOT is obviously it's looking at transportation. But if you look at the wider sphere of the travel sector, people going somewhere, they're usually often going to hotels, they go to stadiums for concerts, et cetera. Those places have always essentially had ancillary fees. You'd purchase a room, but it doesn't come with free water and all these things that people sort of just think must happen if you're with an airline. You get resort fees, you get parking fees at these places. Why is it that people can't see the difference there?

Doug Lavin:

I think people complain about those fees across the board, but if you go to DOT and say, why are we being singled out? They say, we don't have jurisdiction over hotels or stadiums, so we're only focused on your unfair and deceptive practices.

Karen Walker:

So they pass the buck.

Doug Lavin:

Exactly.

Karen Walker:

What about fees for when you change your schedule or need to cancel a flight? You have the option at the beginning to buy a ticket that allows you completely to change and cancel a ticket, but it's a lot more expensive. But again, people don't like cancellation fees, but they tend to want a much better price ticket for that option. So does this proposal apply to this at all to the change fees?

Doug Lavin:

It would apply to change in cancellation fees. Again, more on information. It's not prohibiting change in cancellation fees, but our point in our comments are, for the most part, during COVID, most US carriers got rid of change in cancellation fees. Same thing true with international carriers and as you pointed out that if you want to avoid, want to have total flexibility, there's a price to pay for that. And that's a fully refundable fare, but airlines accommodate passengers. Now, one of the things DOT is proposing is thinking about is that if you decide to cancel your flight and then six months later decide and you get a credit for that, the airline will give you a credit for the amount of money is associated with that flight.

DOT is considering proposing that six months later, if you decide to buy another ticket, they have to honor the price of the original ticket, which I can't imagine any other industry being subject to something like that, as opposed to just giving them a credit and also that they would like to be able to transfer those credits to other family members or to friends. So again, no other industry is subject to this kind of requirement by DOT.

Karen Walker:

Yes, you get the people who say, well, it's a seat, it's the same seat, but of course it isn't. Depends on all sorts of things. The value of that seat, you said you might have bought that original ticket in an off-peak time and then suddenly won't apply that ticket to a Thanksgiving or Christmas holiday. It's not the same thing because you've got a lot more demand for that ticket.

Doug Lavin:

Exactly.

Karen Walker:

Yeah. And that's what doesn't seem get through to the system. So talking of that understanding, has there been much outreach by DOT as they formed this proposal? Has there been much talking to associations like IATA and airlines? It seems to me looking at this that they haven't done that. Am I wrong there?

Doug Lavin:

I mean, DOT, first of all, the regulatory process of course gives us the opportunity to offer comments now, which we have had on the rule. What DOT did this time was establish something called the Aviation Consumer Protection Advisory Committee, and they offered the opportunity for IATA and Airlines for America and others to testify before that committee. Unfortunately, the committee had four members, three of which had no experience in airline distribution. And when DOT asks them to, whether they would like to endorse or not endorse the DOT proposals, they endorse those proposals. And DOT has suggested that they'll give a lot of weight to those decisions by this committee. This is an incredibly complex area. Again, the connection between airlines and agents, all the different technology involved is complex.

What DOT should have done and what they did before on the disability side is have what's called a negotiated rulemaking where they put everybody in a room, airlines, agents, GDSs to technology, but all the other technology providers. And we work through the issues in a rational way to come up with a regulation that makes sense here. They're asking for things that again, are literally not possible, particularly within six months, but our estimation, it would take three years to change the airline distribution system to accommodate this at an extremely high cost and for no value to the consumers.

Karen Walker:

So is this indicative of a shift in government thinking and policy when it comes to airline regulation? I do get the feeling that having been fairly hands off under the previous and administration, we're going back to thinking that airlines will do better if they've got more government oversight.

Doug Lavin:

Yes. I mean, as you know, Karen, the Airline Deregulation Act was enacted with the expectation that the free market will do a better job to protect consumers and give them better services than government intervention. Beginning in the Obama administration, the Obama administration decided to second guess that and issued a major passenger rights rule. The Trump administration stopped some of these things, including I must say that this is not the first go round on the ancillary issue. This is the fifth time that the DOT has attempted to do something on ancillaries. This administration has decided to go and pursue what they've always wanted to do, which is essentially try to put ancillary out of business. And for example, they're saying here, if you don't do these things, you can't charge for these ancillaries. So they're trying to accomplish very limited, unfair and deceptive practices standard something that they don't have the jurisdiction to do. And by the way, hot news is President Biden today will announce that he is not going to wait for this regulation. He's asking Congress for a new law to require airlines to provide seats for children under 13 for free.

Karen Walker:

There we go. So let's be clear here. DOT can't actually ban ancillaries, correct?

Doug Lavin:

Correct, correct.

Karen Walker:

But what we're talking about here is the sort of a way to make them almost impossible to implement.

Doug Lavin:

Yes, that's correct. Either impossible to implement or so costly that airlines will decide it's not worth it. And there's legislation being introduced on the Hill that says the airline has to prove that ancillaries are cost related, exact cost related to the fee that's being charged. Again, second guessing airlines. Airlines do a good job of meeting the needs of their customers, and if they don't, there's a lot of choice to try another airline. And the US government in this case is deciding that we know better, and we know how to run an airline, which we find hard to believe.

Karen Walker:

So it's a sort of a crowd pleaser in terms of how it's presented, but as you've made clear today, it's way more complicated and could actually end up with people being delivered what they don't expect.

Doug Lavin:

Correct.

Karen Walker:

So yeah. So what happens next then, Doug? Where does this go?

Doug Lavin:

Well, unfortunately, we've all submitted our comments. DOT will mull over those comments and issue a final rule under the legal process. We have the ability to challenge it in federal court. We are challenging. There's a procedure whereby they have to prove that it's an unfair and deceptive, or they can offer us a hearing to argue that it's not unfair and deceptive. We're pursuing that path, but we think it's basically going to be a rubber stamp against this, and they'll be able to continue with this rule. And we do have the option to appeal to the federal courts if we find that it's unreasonable. But the federal courts give great deference to the administration. So is frankly, we're just unfortunately going to be likely stuck with whatever DOT comes out with.

Karen Walker:

Doesn't sound good to me. Doug, thank you very much for your time today. This has been a great conversation and you've provided a good insight, I think, to the story behind this story. Thank you also to our producer Michael Johnson, and of course, a big thank you to our listeners. Make sure you don't miss us each week by subscribing to the Window Seat podcast on Apple Podcasts or wherever you listen. Until next week, this is Karen Walker, disembarking from Window Seat.