Are Mistake Fares Dying?

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Last week the U.S. Department of Transportation quietly issued a ruling on an issue that had vexed the chasers of mistake fares for the last several months. The practical result of the ruling is unlikely to satisfy those whose tickets were cancelled, with not much coming from the DOT beyond strong words and a watered down “settlement.”

But the broader question is, does this ruling point towards a future where the penalty for canceling a mistake fare ticket is not longer enough to dissuade airlines from doing it?

A little background.

In March of this year, for approximately 5 hours American Airlines mistakenly sold business class seats from Washington D.C. to China for roughly $450, well below the usual cost of $4,500 to $5,000. When the dust settled, American honored those who had ticketed at that price but unilaterally cancelled without notice any tickets that had been place on a 24 hour “hold.”

Airlines are required by DOT regulations to either offer a hold period or a 24-hour cancellation period for any ticket purchased at least 7 days before departure from a U.S. city. So after American cancelled the holds, more than 100 consumers filed complaints with the DOT alleging that American had acted improperly. Last week’s ruling covers those complaints, along with a dozen more filed directly with American.

At first glance the language of the DOT ruling sounds promising. It finds that “American Airlines engaged in an unfair and deceptive trade practice in violation of 49 U.S.C. § 41712 and 14 CFR § 259.5(b)(5) by cancelling 605 tickets before the expiration of the 24 hour hold period” and orders American to cease and desist from future similar violations.

However, instead of ordering American to reinstate the cancelled holds, the DOT order approves a settlement “in order to avoid litigation” between American and the DOT Enforcement Office to provide either a $0 economy class airfare to China (but without waiving the applicable taxes of approximately $450) or a $1,500 discount off the prevailing business class airfare.

An additional point not noted in the DOT ruling is that American will not award miles or elite qualification points to anyone flying these settlement airfares. This despite the fact that those who did ticket and fly their original China flights received both miles and elite points.

The cost to an airline.

Many have speculated about how much revenue an airline loses from a “mistake fare” and the DOT order sheds some interesting light on this question. The ruling notes that 1,634 tickets were either purchased or put on hold during the 5 hours this mistake fare was available. If the airfare for this routing was normally around $4,500, this means honoring all these tickets would have cost American about $6.5 million in lost revenue.

However, since a little more than half of the tickets were “holds” that were later cancelled by American, the lost revenue was only about $3 million. Obviously, American was willing to take the aggressive (and illegal) action to cancel the holds in order to minimize their losses as much as possible.

Of course, American will have some additional losses depending on how many customers take them up on their settlement tickets, but it is highly unlikely that a majority of “hold” consumers will exercise their right to those tickets. Even if they did, under either of those offers, the loss to American is much less per ticket since neither option is as lucrative as the original deal.

A bleak future for mistake fares?

There are 3 takeaways from this ruling. First and foremost, despite the DOT’s semi-strong language in this order, it is clear they are not willing to put American’s feet to the fire on the issue of holds. The settlement airfares are not nearly equivalent to the “hold” tickets that were cancelled by American, both on price and due to the fact that miles and status will not be earned.

By canceling the holds, American came out ahead, hence there is little reason to believe American won’t do the same thing again when faced with a similar situation in the future. The DOT showed their hand — they are simply not willing to commit significant resources to this issue.

The practical result? Do not trust American’s 24-hour hold.

Second, a full 25% of the DOT’s order is spent regurgitating American’s position (with absolutely zero comment or rebuttal from the DOT) that social media is responsible for consumers acting in “bad faith” when purchasing mistake fares. Social media may be responsible for mistake fares being publicized more quickly and broadly than before, or for making it clearer that a price is likely a mistake and not intentional, but that should not make American any less responsible for honoring those fares.

American and most other airlines have chosen to make their airfare pricing systems needlessly complicated, with airfares changing by the hour or even minute. Under such a system, mistakes will happen. This is not the fault of consumers. Nor is American suggesting that if they accidentally overprice a fare the customer should be able to unilaterally cancel the ticket (remember that American does not allow cancellations after purchase since they offer the 24-hour hold option).

Finally, in a footnote to this decision, the DOT notes that this past May a new enforcement policy was implemented in which the DOT will decline to force airlines to honor mistake fares if the airline can show that the fare was in fact a mistake and reimburses consumers for any actual out-of-pocket expenses incurred in relation to the purchased ticket. While this new rule is not yet final and the practical ramifications of it are not yet entirely clear, it is obvious the DOT Enforcement Office is favoring the airlines and not consumers when it comes to mistake fares. Buyer beware.

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