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  • Deregulation's Day In Court
    Posted by Andrew Compart 9:39 PM on Aug 05, 2011

    It has been 33 years since the U.S. Congress passed the Airline Deregulation Act, which unleashed free market forces for the U.S. airline industry and eventually inspired other countries to start doing the same. So it might seem odd that two U.S. low-cost carriers are in court, challenging the U.S. Transportation Department on exactly what “deregulation” means. 

    Other U.S. carriers, however, should thank Allegiant Air and Spirit Airlines for taking on the expensive, uphill battle to challenge some of the department’s new passenger rights rules in court on Deregulation Act grounds—a battle that Allegiant CEO Maurice Gallagher concedes that he expects to lose. (Southwest Airlines also is challenging one rule, but not as a Deregulation Act violation.) More clarity on the boundaries of the act is sorely needed, regardless of the outcome.

    This is not a situation in which lawmakers gave an act a name that is intentionally misleading (although doing so has become a congressional art form). But the “deregulation” was relative and left the door ajar for government intervention, even on service and pricing decisions that were most explicitly supposed to be freed from regulation. The question is: How wide is the opening?

    The department notes, correctly, that “Congress did not discontinue the government’s role and authority to protect consumers from unfair or deceptive practices.” The retort from Allegiant and Spirit is that the department has to clear a high bar before it can undermine the act’s mandate to encourage and maintain “an air transportation system relying on actual and potential competition to provide efficiency, innovation and low prices, and to decide on the variety and quality of, and determine prices for, transportation services.”

    One new rule the two low-cost carriers are challenging requires airlines to hold reservations at a quoted fare for 24 hr., or provide a refund without penalty if the purchase is canceled within 24 hr., if the booking is made one week or more before the flight. That essentially prohibits carriers from selling a totally nonrefundable ticket,  since 90% of tickets are sold more than seven days before a flight.

    Another rule being challenged prohibits post-purchase price increases. Spirit’s complaint is that the prohibition applies to ancillary service charges such as baggage fees, even if the consumer does not pay them at the time of the booking. Allegiant argues that the rule will prevent it from implementing an innovative pricing option it is considering: a discounted flexible-fare ticket, the price of which could decrease or increase (with a cap) depending on changes in the price of fuel.

    The department can reasonably argue that post-purchase fee increases are deceptive: Customers sometimes consider the entire price—inclusive of fees—in choosing among airlines. But it is less clear to me why Allegiant’s plan would be considered deceptive, given that consumers would have to understand and accept the risk before the purchase. The value of that pricing option would be best left to consumers, who would be free to shun it as too risky or too easy for the carrier to manipulate. Isn’t that what “deregulation” calls for?

    Now a judge will provide the answer.

    FARE OR FOUL

    U.S. airlines have every right to raise their fares in the absence of temporarily suspended federal taxes. It is not fair that politicians and some consumer advocates are attacking them for doing so while many taxes are suspended because of the congressional impasse on extending the FAA’s authorization.

    Most U.S. carriers raised their ticket prices by the amount of the absent taxes, keeping the total ticket price the same but boosting their revenue. For a business, that makes perfect sense: Why not maximize revenue and charge customers the amount they have already shown they are willing to pay?

    But U.S. airlines are kidding themselves if they truly believe this does not hurt their anti-tax argument on Capitol Hill, part of which has been that the numerous taxes on air travel reduce demand for tickets and make consumers pay more than they should. It is difficult to keep arguing that if, in the absence of those taxes, you keep the total price the same.

    Ironically, the carrier most prominent in not raising its fares is Spirit. Many politicians and consumer groups decry Spirit as anti-consumer because of its many fees, especially for carry-on bags. Spirit executives argue the carrier is actually pro-consumer because it lets travelers choose what they want to pay for beyond its low base fares. Still, going against the grain on the fare hikes—which has boosted sales—has helped Spirit make its pro-consumer case in a very direct way.

    Spirit should thank the other carriers for providing this opportunity.

    Tags: awcol, tw99, deregulation, Spirit, Allegiant, prices, fares, taxes

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