Denied Boarding Compensation-Published in Federal Register

[Federal Register: April 18, 2008 (Volume 73, Number 76)]
[Rules and Regulations]
[Page 21026-21035]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18ap08-3]

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DEPARTMENT OF TRANSPORTATION

Office of the Secretary

14 CFR Part 250

[Docket No. DOT-OST-01-9325]
RIN No. 2105-AD63


Oversales and Denied Boarding Compensation

AGENCY: Office of the Secretary (OST), Department of Transportation
(DOT).

ACTION: Final rule.

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SUMMARY: The Department of Transportation (DOT or Department) is
amending its rules relating to oversales and denied boarding
compensation to increase the limits on the compensation paid to
``bumped'' passengers, to cover flights by certain U.S. and foreign air
carriers operated with aircraft seating 30 through 60 passengers, which
are currently exempt from the rule, and to make other changes. These
changes are intended to maintain consumer protection commensurate with
developments in the aviation industry. This action is taken on the
Department's initiative and in response to a petition from the Air
Transport Association.

DATES: This rule is effective May 19, 2008.

FOR FURTHER INFORMATION CONTACT: Tim Kelly, Aviation Consumer
Protection Division, Office of the General Counsel, Department of
Transportation, 1200 New Jersey Ave., SE., Washington, DC 20590, 202-
366-5952 (voice), 202-366-5944 (fax), tim.kelly@dot.gov (e-mail).

SUPPLEMENTARY INFORMATION:

Background

Part 250 establishes minimum standards for the treatment of airline
passengers holding confirmed reservations on certain U.S. and foreign
carriers who are involuntarily denied boarding (``bumped'') from
flights that are oversold. In most cases, bumped passengers are
entitled to compensation. Part 250 sets the minimum amount of
compensation that is required to be provided to passengers who are
bumped involuntarily. Until now the rule has not applied to flights
operated with aircraft with a design capacity of 60 or fewer passenger
seats.
In adopting the original rule in the 1960s, the Civil Aeronautics
Board (CAB), the Department's predecessor in aviation economic
regulation, recognized the inherent unfairness in carriers selling more
``confirmed'' reservations for a flight than they have seats.
Therefore, the CAB sought to reduce the number of passengers
involuntarily denied boarding to the smallest practicable number
without prohibiting deliberate overbooking or interfering unnecessarily
with the carriers' reservations practices. Air travelers receive some
benefit from controlled overbooking because it allows flexibility in
making and canceling reservations as well as buying and refunding
tickets. Overbooking makes possible a system of confirmed reservations
that can almost always be honored. It allows airlines to fill more
seats, reducing the pressure for higher fares, and makes it easier for
people to obtain reservations on the flights of their choice. On the
other hand, overbooking is the major cause of oversales, and the people
who are inconvenienced are not those who do not show up for their
flights, but passengers who have conformed to all carrier rules. The
current rule allocates the risk of being denied boarding among
travelers by requiring airlines to solicit volunteers and use a
boarding priority procedure that is not unjustly discriminatory.
In 1981, the CAB amended the oversales rule to exclude from the
rule all operations using aircraft with 60 or fewer passenger seats.
(ER-1237, 46 FR 42442, August 21, 1981.) At the time of that
proceeding, the impact of the rule on carriers operating small aircraft
was found to be significant. If a passenger was denied boarding on a
typical small-aircraft short-haul flight and subsequently missed a
connection to a long-haul flight, the short-haul carrier usually had to
compensate the passenger in an amount equal to twice the value of the
passenger's remaining ticket coupons to his or her destination, subject
to a maximum limitation. For example, if the short-haul fare was $50
and the connecting long-haul fare was $500, the first carrier often had
to pay the passenger denied boarding compensation in an amount far
greater than $50, depending on whether alternate transportation could
be arranged to arrive within a short time, despite the minimal fare
that the first carrier received for its flight. The problem was
exacerbated by the fact that most commuter airline flights at the time
were on small turboprop and piston engine aircraft which were affected
by weight limitations in high temperature/humidity conditions to a
greater extent than jets and, therefore, might require bumping even
when the carrier did not book beyond the seating capacity of the
aircraft.
Part 250 has tended to reduce passenger inconvenience and financial
loss occasioned by overbooking without imposing heavy burdens on the
airlines or significant costs on the traveling

[[Page 21027]]

public. In focusing only on the treatment of passengers whose boarding
is involuntarily denied, we have avoided regulating carriers'
reservations practices. Overall, it appears that the rule has served a
useful purpose; however, in light of recommendations from various
sources, including Congress, the Department's Inspector General, and
major airlines themselves, we reviewed the rule and have decided to
revise certain aspects of the rule that we believe are outdated. In
view of the passage of time since the rule was last revised and changes
in commercial air travel over that time, we have decided to increase
the compensation maximums and extend the rule to cover a broader range
of aircraft. The Department is also making certain other changes of
lesser impact.

The Current Denied Boarding Compensation Rule

The purpose of the Department's denied boarding compensation rule
is to balance the rights of passengers holding reservations with the
desirability of allowing air carriers to minimize the adverse economic
effects of ``no-shows'' (passengers with reservations who cancel or
change their flights at the last minute, or who fail to appear and
provide no notice). The rule sets up a two-part system. The first
encourages passengers to voluntarily relinquish their confirmed
reservations in exchange for compensation agreed to between the
passenger and the airline. The second requires that, where there is an
insufficient number of volunteers, passengers who are bumped
involuntarily be given compensation in an amount specified in the rule.
In addition, the Department requires carriers to give passengers notice
of those procedures through signs and written notices provided with
tickets and at airports, and to report the number of passengers denied
boarding to the Department on a quarterly basis.
The Civil Aeronautics Board (CAB) first required payments to bumped
passengers over 46 years ago. In Order No. E-17914, dated January 8,
1962, the CAB conditioned its approval of ``no-show penalties'' for
confirmed passengers on a requirement that bumped passengers be
compensated. An oversales rule was adopted in 1967 as 14 CFR Part 250
(ER-503, 32 FR 11939, August 18, 1967) and revised substantially in
1978 and 1982 after comprehensive rulemaking proceedings (ER-1050, 43
FR 24277, June 5, 1978 and ER-1306, 47 FR 52980, November 24, 1982,
respectively). The key features of the current requirements are as
follows:
(1) In the event of an oversold flight, the airline must first seek
volunteers who are willing to relinquish their seats in return for
compensation of the airline's choosing.
(2) If there are not enough volunteers, the airline must use non-
discriminatory procedures (`boarding priorities') in deciding who is to
be bumped involuntarily.
(3) Most passengers who are involuntarily bumped are eligible for
denied boarding compensation, with the amount depending on the price of
each passenger's ticket and the length of his or her delay. If the
airline can arrange alternate transportation that is scheduled to
arrive at the passenger's destination within 1 hour of the planned
arrival time of the oversold flight, no compensation is required. If
the alternate transportation is scheduled to arrive between 1 and 2
hours after the planned arrival time of the oversold flight (between 1
and 4 hours on international flights), the compensation equals 100% of
the passenger's one-way fare to his or her next stopover or final
destination, with a $200 maximum. If the airline cannot meet the 2 (or
4) hour deadline, the compensation rate doubles to 200% of the
passenger's one-way fare, with a $400 maximum. This compensation is in
addition to the value of the passenger's ticket, which he or she can
use for alternate transportation or have refunded if not used.

Discussion

On July 10, 2007, the Department published an Advance Notice of
Proposed Rulemaking (ANPRM) seeking comment on several issues
associated with the oversales rule; see 72 FR 37491. We received over
1,280 comments in response to the ANPRM. About 20 of the comments were
from organizations, with the rest from individuals. Most of the
comments from the organizations, including those from air carriers and
organizations representing air carriers, expressed the opinion that the
rule serves a useful purpose and had benefited the industry and the
public. Many of the individual comments did not express an opinion on
the specific issues discussed in the ANPRM but rather urged that
overbooking be banned, described their own negative air travel
experiences, or commented on other issues (e.g., flight delays).
On November 20, 2007, the Department published a Notice of Proposed
Rulemaking (72 FR 65237) in which we proposed several specific changes
to the Oversales rule. We did not propose to ban overbooking as many
individual commenters urged. As indicated in the ``Background'' section
above, air travelers receive some benefit from controlled overbooking.
We are not aware of levels of consumer harm that require such a
sweeping solution at this time, and we believe that the additional
oversale protections that we are adopting here will address the
principal issues related to this regulation that require action by the
Department.
The issues that were presented in the NPRM and a summary of the
comments appear below.

The Maximum Amount of Denied Boarding Compensation

It has been 25 years since the rule was last revised, and the
existing $200 and $400 limits on the amount of required denied boarding
compensation for passengers involuntarily denied boarding have not been
raised since 1978. The Department has received recommendations from
various sources that it reexamine its oversales rule and, in
particular, the maximum amounts of compensation set forth in the rule.
In this regard, in a sense-of-the-Senate amendment to the Department of
Transportation and Related Agencies Appropriations Act of 2000, Public
Law 106-69, the Senate noted its sense that the Department should amend
its denied boarding rule to double the applicable compensation amounts.
Legislation has also been introduced in Congress to require the
Department to review the rule's maximum amounts of compensation. (See
S. 319, reported in the Senate April 26, 2001.) In addition, in his
February 12, 2000, Final Report on Airline Customer Service
Commitments, the Department's Inspector General (IG) recommended, among
other things, that the airlines petition the Department to increase the
amount of denied boarding compensation payable to involuntarily bumped
passengers. In response thereto, and citing the length of time since
the maximum amounts of denied boarding compensation were last revised,
the Air Transport Association (the trade association of the larger U.S.
airlines) filed a petition with the Department on April 3, 2001,
requesting that a rulemaking be instituted to examine those amounts.\1\
(Docket DOT-OST-

[[Page 21028]]

2001-9325.) More recently, the IG on November 20, 2006, issued his
``Report on the Follow-up Review Performed of U.S. Airlines in
Implementing Selected Provisions of the Airline Customer Service
Commitment'' in which he recommended that we determine whether the
maximum denied boarding compensation (DBC) amount needs to be increased
and whether the oversales rule needs to be extended to cover smaller
aircraft.
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\1\ It is important to note that the maximum involuntary denied
boarding amounts set forth in Part 250 are amounts below which
carriers cannot set their maximum compensation. Airlines have been
and continue to be free, as a competitive tool, to voluntarily set
their maximum compensation levels at amounts greater than that
provided in the Department's rule. With the exception of JetBlue
Airways, whose recently changed policy is described below, we are
not aware of any carrier that has elected to do so.
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The CAB's decision in 1978 to double the maximum amount of denied
boarding compensation to $400 was based on its determination that the
previous maximum was inadequate to redress the inconvenience to bumped
passengers and that the increase would provide a greater incentive to
carriers to reduce the number of persons involuntarily bumped from
their flights. Following promulgation of the amendment to the rule in
1978 requiring the solicitation of volunteers and doubling the
compensation maximum, the overall industry rate of involuntary denied
boardings per 10,000 enplanements in fact declined for many years.
Until 2007, the rate for the past decade has been slightly below the
level of involuntary bumping reported 10 years ago. In this regard,
55,828 passengers were involuntarily bumped from their flights in 2006
on the 19 largest U.S. airlines (carriers whose denied boarding rate is
tracked in the Department's monthly Air Travel Consumer Report \2\).
Additional passengers were bumped by other airlines, whose denied
boarding rate is not tracked in this report but whose bumped passengers
are subject to the compensation rates in the DOT rule. The annual rate
of involuntary denied boardings per 10,000 enplanements for the
carriers tracked in the report has increased in each of the past three
years and in 2007 was at the highest level in the past ten years.
Involuntary denied boarding rates from the Air Travel Consumer Report
for that period appear below:
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\2\ This report tracks the denied boarding rate of air carriers
that each account for at least 1% of domestic scheduled-service
passenger revenues for the previous year. Consequently, the list of
carriers whose performance is tracked in this report can change from
year to year.

------------------------------------------------------------------------
Invol. DB's
Year per 10,000
passengers
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1997.................................................... 1.06
1998.................................................... 0.87
1999.................................................... 0.88
2000.................................................... 1.04
2001.................................................... 0.82
2002.................................................... 0.72
2003.................................................... 0.86
2004.................................................... 0.86
2005.................................................... 0.89
2006.................................................... 1.01
2007.................................................... 1.12
------------------------------------------------------------------------

Likely contributing to this upward trend is the fact that flights
are fuller: from 1978 to 2006 the system-wide load factor (percentage
of seats filled) for U.S. airlines increased from 61.5% to 79.2%, with
most of this increase taking place since 1994. The most-recently
reported monthly load factors have been in the mid-80% range.
With respect to the denied boarding compensation limits, inflation
has eroded the value of the $200 and $400 limits that were established
in 1978. Using the Consumer Price Index for All Urban Consumers (CPI-U,
the basis for the inflation adjustor in the Department's domestic
baggage liability rule, 14 CFR 254.6), $400 in 1978 was worth $128 at
the time of the NPRM ($125 today). See the Bureau of Labor Statistics
Inflation Calculator at http://www.bls.gov/cpi/home.htm. Stated another
way, in order to have the same purchasing power today as in 1978, $400
would have needed to be $1,248 as of the time of the NPRM ($1,272
today).
At the same time, however, air fares have not risen to the same
extent as the CPI-U. While historical comparisons of air fares are
problematic, one frequently-used index for changes in air fares is
passenger yield. Yield is passenger revenue divided by revenue
passenger miles--the revenue collected by airlines for carrying one
passenger for one mile. According to the Air Transport Association,
system-wide nominal yield (i.e., not adjusted for inflation) for all
reporting U.S. air carriers was 8.29 cents per revenue passenger mile
in 1978 and 12.69 cents per revenue passenger mile in 2006 (latest
available data)--an increase of 53.1% from the 1978 figure.
Applying the CPI-U calculation to the current $200 and $400 DBC
limits that were established in 1978 would have produced updated limits
of $624 and $1,248, respectively, at the time of the NPRM. However, the
NPRM noted that applying the 53.1% increase in passenger yield through
2006 to the current $200 and $400 limits would have produced updated
limits of $306 and $612. It is important to note that the $200 and $400
figures in Part 250 are merely limits on the amount of denied boarding
compensation required under the rule; the compensation rate is 100% or
200% of the passenger's fare (depending on how long he or she was
delayed by the bumping). In the ANPRM, the Department requested comment
on whether the maximums in the rule should be increased so that that a
higher percentage of denied boarding compensation payments are not
``capped'' by the limits.
In the ANPRM the Department sought comment on five options with
respect to the monetary limits on denied boarding compensation--
increasing the limits based on the CPI-U or on the increase in fare
yields, doubling the current limits, eliminating the limits (i.e., so
there would be no cap on denied boarding compensation payments), or
making no change to the current limits. In the NPRM the Department
proposed to amend the oversales rule to double the limits on
involuntary denied boarding compensation from $200 to $400 for
passengers who are rerouted within two hours (four hours
internationally) and from $400 to $800 for passengers who are not
rerouted within these timeframes. As many commenters to the ANPRM
pointed out, there is a significant air-fare component to the denied
boarding compensation formula (100%/200% of the bumped passenger's
fare), and air fares have risen less than the CPI. As indicated above,
system-wide nominal yield (not adjusted for inflation) for all
reporting U.S. air carriers, which is a frequently used index for
changes in air fares, was 8.29 cents per revenue passenger mile in 1978
and 12.69 cents per revenue passenger mile in 2006, an increase of
53.1%. Nonetheless, we did not propose the ``fares/yield'' option from
the ANPRM as the sole method for updating the compensation caps.
Denied boarding compensation is intended in part to compensate for
the passenger's inconvenience, lost time, and lost opportunities. The
value of these considerations is linked to general inflation as well as
to the cost of air fares. Therefore, the arguments of the carrier
organizations about the decline in real (i.e., inflation-adjusted) air
fares during that period are somewhat off the mark, because consumers
live with some of the consequences of denied boarding in today's
dollars, not 1978 dollars. As we indicated in the ANPRM, 30 years of
inflation have taken their toll on the value of the existing limits. As
noted above, $400 in 1978 was worth $128 at the time of the NPRM, based
on the change in the CPI-U. Therefore, we proposed to base part of an
increase in the compensation caps on the CPI-U.
By doubling the existing limits we would blend these two
approaches. The limits proposed in the NPRM fall between the higher
figures that would be produced by the CPI option and the

[[Page 21029]]

lower numbers that would result from the ``fares/yield'' option. We
sought comment on this proposal, including any comments and
justifications that were not already provided in response to the ANPRM
about alternative amounts or methodologies.
It is important to note that this proposal concerning limits on
compensation for involuntary denied boardings would not necessarily
require carriers to offer more compensation to the great majority of
passengers affected by overbooking because most such situations are
handled through volunteers who agree to give up their seat in exchange
for mutually-agreed compensation, typically at the departure gate. Nor
would it affect the significant proportion of involuntarily bumped
passengers--possibly the majority--with fares low enough that the
formula for involuntary denied boarding compensation would not exceed
the current limits. Finally, even with respect to involuntarily bumped
passengers whose denied boarding compensation might increase with
higher maximums, many such passengers accept a voucher for future
travel on that airline (often in a face amount greater than the legally
required denied boarding compensation) in lieu of a check. Carriers
make such offers because vouchers do not entail the same cost as cash
compensation given rates of non-use and inventory-management
restrictions.
Comments
Our proposal to double the denied boarding compensation limits was
endorsed by the American Society of Travel Agents (ASTA), the Airports
Council International--North America (ACI-NA), the Aviation Consumer
Action Project (ACAP), the Coalition for an Airline Passenger Bill of
Rights (CAPBOR), Jet Airways (India), and all of the individuals who
commented on this issue. ACAP also endorsed a minimum DBC amount of
$100. ASTA remarked that the reasoning in the Regulatory Evaluation is
sound and suggested that for lengthy delays (e.g., next day), DBC
should be higher, e.g. perhaps based on the CPI concept. ACI-NA
asserted that incentives against unreasonable overbooking levels must
remain effective because current high load factors make rerouting more
difficult. The National Business Travel Association (NBTA) favored an
increase in DBC limits but believed that the Department's proposal did
not go far enough--the Association noted that business travelers often
pay high fares and book peak flights that it contended are more likely
to be oversold and consequently favored limits of $400/$800 (the NPRM
proposal) or half of that passenger's fare, whichever is higher. The
Air Transport Association stated that it did not oppose the basic
elements of the NPRM but had objections to certain proposals (see
below) that were not related to the adjustment of the compensation
limits.
The proposal to double the limits was opposed by most other
organizations that commented on this issue. (No individual commenters
opposed the proposal, although one felt that the limits should be
removed altogether and several said that overbooking should be banned.)
The Air Carrier Association of America (ACAA) stated that the increased
limits are unfair to smaller carriers that have fewer rerouting options
that would permit them to limit DBC to the 100% rate. ACAA said that
the limits should be increased no more than 25%, although it gave no
basis for this figure. The Regional Airline Association (RAA) said that
involuntary denied boardings are rare and the current system is
working, but if the limits are increased the adjustment should be based
on historical increases in fares/yield rather than $400/$800. The
National Air Carrier Association said that the limits should be
increased only for carriers that consistently bump a high number of
passengers. Delta Air Lines stated that there is no justification for
an increase in the limits, but echoed RAA's contention (as did China
Eastern Airlines) that any increase that does take place should be
based on increases in fares rather than the $400/$800 proposal.
Philippine Airlines wanted an increase of no more than 10%.
Response to Comments
After careful consideration of all of the comments, we have decided
to double the current DBC limits as proposed. The limits have not been
adjusted in nearly 30 years, and the purchasing power of the limits has
eroded. Air fares have increased by more than 50% in that time, and
thus a higher percentage of bumped passengers is undoubtedly having
their DBC capped at a figure lower than the 100% or 200% DBC rate. The
Department has been urged to reexamine the limits by the Senate, the
Department's Inspector General, and the airlines themselves (see ATA's
petition for rulemaking in this proceeding). As ACI-NA noted in its
comments, unrealistic deterrents in the rule could produce more
oversales--and indeed the rate of involuntary denied boardings has
increased 30% in the past three years. Carriers whose schedules make it
difficult to reroute passengers in time to limit DBC to the 100% rate
are nonetheless in control of their overbooking rates and of the
attractiveness of the compensation that they offer to prospective
volunteers. With respect to the comments that urge us to base the
increase in the limits solely on the increase in fares/yields, as noted
above, denied boarding compensation is intended in part to compensate
for the passenger's inconvenience, lost time, and lost opportunities,
and the value of these considerations is linked to general inflation as
well as to the cost of air fares.

The Small-Aircraft Exclusion

The oversales rule originally issued by the CAB did not contain an
exclusion for small aircraft. In 1981 that agency amended Part 250 to
exclude operations with aircraft seating 60 or fewer passengers. The
CAB determined that without this exclusion the denied boarding rule
imposed a proportionately greater financial and operational burden on
these small-aircraft operators than on carriers operating larger
aircraft. In addition, because of the lower revenues generated by these
small aircraft, the financial burden of denied boarding compensation
placed certificated carriers operating aircraft with 60 or fewer seats
at a competitive disadvantage relative to commuter carriers (non-
certificated) operating similar equipment and on similar routes which
were not subject to Part 250. The number of flights that was excluded
by the amendment was small and most such flights were operated by small
carriers that operated small aircraft exclusively. Thus, Part 250
currently applies to certificated U.S. carriers and foreign carriers
holding a permit, or exemption authority, issued by the Department,
only with respect to operations performed with aircraft seating more
than 60 passengers.
The majority of the aircraft operated by the regional airline
industry have 60 or fewer seats and thus are exempt from the denied
boarding rule. However, this sector has experienced tremendous growth.
According to the Regional Airline Association \3\, passenger
enplanements on regional carriers have increased more than 100% since
1995, and regional airlines now carry one out of every five domestic
air travelers in the United States. RAA states that revenue passenger
miles on regional carriers have increased 40-fold since 1978 and
increased 17 percent from 2004 to 2005 alone. As noted in the NPRM,
regional jets have fueled much

[[Page 21030]]

of the recent growth. According to RAA, from 1989 to 2004 the number of
turbofan aircraft (regional jets) in the regional-airline fleet
increased from 54 to 1,628 and regional jets now make up 59% of the
regional-carrier fleet. Although many regional jets have more than 60
passenger seats and thus are subject to Part 250, the ubiquitous 50-
seat and smaller regional jet models have driven much of the growth of
the regional-carrier sector. Moreover, most regional jets are operated
by regional carriers affiliated with a major carrier via a code-share
agreement, a fee-for-service arrangement, and/or an equity stake in the
regional carrier. RAA asserts that 99% of regional airline passengers
traveled on code-sharing regional airlines in 2005.
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\3\ See http://www.raa.org.
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DOT statistics also demonstrate the growth in traffic on flights
operated by aircraft with 31 through 60 seats. From the fourth quarter
(4Q) of 2002 (earliest available consistent data) to 4Q2006, the number
of flights using aircraft with 31 through 60 seats increased by 13.5%
while the number of flights using aircraft with more than 60 seats rose
only 3.4%. The number of passengers carried on flights using aircraft
with 31 through 60 seats increased by 34.9% from 4Q 2002 through 4Q
2006, while the number of passengers carried on flights using aircraft
with more than 60 seats rose by only 12.1% during that period.\4\
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\4\ DOT Form 41, schedule T-100.
----------------------------