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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 12 minutes read

Balancing travelers’ right to refunds and airlines’ right to survival in the age of COVID-19

Ticket refunds, normally a very clear-cut area of regulation, have become a lightning rod issue for air carriers, consumers and regulators worldwide during the COVID-19 pandemic. 

In the US, typically the two-part analysis looks like this:

  1. Was a refund due to a consumer, i.e. did she buy a refundable ticket or did the airline cancel the flight?
  2. If yes, was the refund issued promptly under the US Department of Transportation's regulations, i.e. within seven days for credit card or 20 days for cash/check purchases?

Under normal circumstances, when a passenger buys a refundable ticket, he expects to be reimbursed if an airline cancels a flight. But what if there is a global pandemic causing massive cancellations of flights worldwide, necessitating hundreds of millions in ticket refunds all at the same time?

Should regulators allow carriers some leeway to issue vouchers for future travel once it is safe to fly? In some scenarios, carriers are going above and beyond to ensure consumers are able to utilize their tickets.

While carriers are not obligated to issue refunds to passengers who cancel their own flights, which many passengers were forced to do in response to international travel restrictions and closed borders, many carriers have been offering travel credits and vouchers to be used within a certain time frame — some even extending the time period to two years. Carriers also have been waiving change and cancellation fees.

But airlines' cash spending is outpacing revenues at unprecedented levels. And even with the expected government funding in the form of payroll grants under the Coronavirus Aid, Relief, and Economic Security, or CARES, Act, carriers still expect a massive decline in revenues.

Amid carrier pleas for relaxation of the refund requirements to alleviate the financial burden on airlines at a time when they are cash-strapped and on the verge of bankruptcy, the DOT issued additional guidance, in the form of an enforcement notice requiring carriers to adhere to the prompt refund requirement, despite the influx of requests.[1] According to the DOT, carriers must refund passengers promptly when their scheduled flights are cancelled or significantly delayed.

In this article, we will discuss current regulatory requirements for ticket refunds, what the US and other international regulators are doing globally in response to the COVID-19 pandemic, and the state of consumer class action lawsuits being filed against the airlines for their refund policies.

COVID-19: unprecedented issues for industry and regulators

The DOT may be taking a hard-line approach on ticket refunds, but no clear federal requirements existed to address the current situation facing the airlines with COVID-19-related refunds. Typically, airlines have refund policies in place that address what refunds they will issue, and when, as described in their contracts of carriage.

The DOT has asserted its regulatory authority to prevent unfair and deceptive practices by requiring prompt refunds. The only regulation that addresses refunds specifically is Title 14 Code of Federal Regulations Section 259.5. 

This regulation requires that carriers have a customer service plan affirming that they will provide prompt ticket refunds, as required by Title 14 CFR Section 374.3 (the DOT's regulation implementing Regulation Z, which requires that carriers comply with the Consumer Credit Protection Act and regulations), and Title 12 CFR Part 226.[2] Specifically, this means that the refund must be issued within seven days for credit card purchases, and within 20 days after receiving a complete refund request for cash/check purchases. 

While there is no precise statute or regulation that prescribes when passengers are entitled to refunds, or the form of refund, the DOT has issued informal guidance on its website, in past industry letters and in the recently-issued enforcement notice. The DOT's informal guidance to the industry, available on its website,[3] stated that passengers were entitled a refund when the airline was at fault for cancelled flights, schedule changes/significant delays and class of service changes.

When the airline was not at fault, the DOT said that passengers were only entitled to refunds when they had purchased nonrefundable tickets.[4] Interestingly, the DOT has since updated its website to remove all of the language related to fault.

Notably, the DOT has historically only enforced with respect to timely refunds, and has not addressed issues such as the underlying reasons for the refund — or whether a refund must be in the original form of payment, or could take another form, such as miles, in certain circumstances.

And in fact, the DOT has previously elected not to "adopt a strict standard of what constitutes a significant delay as such a delay is difficult to define" as it "depends on a wide variety of factors such as the length of the delay, length of the flight and the passenger's circumstances."[5] Instead, the DOT has stated that it will determine whether or not a failure to provide refunds in certain cases is an unfair and deceptive practice, based on the facts and circumstances of the delay.[6]

Following the rush of consumer refund requests in light of the unprecedented COVID-19 pandemic, carriers were left scrambling to interpret the DOT's requirements. Because the cancellations were not the fault of the airlines, were carriers required to provide refunds for nonrefundable tickets? If carriers reaccommodated passengers on a cancelled flight within a certain number of hours, would a refund be required? Would a carrier need to refund a passenger if he or she was not interested in traveling, or did not like the provided rerouting, and instead wanted a refund?

Given the rapid flurry of refund requests, and the lack of demand[7] for new itineraries, it is no surprise that many carriers concluded that cancellations due to massive worldwide travel restrictions were not their fault, and thus assumed flexibility in the issuance of refunds and travel credits.

In early April, however, the DOT issued the enforcement notice, reminding the industry that carriers must provide prompt refunds when flights are cancelled, regardless of the reason, and even when the tickets are nonrefundable. While recognizing that "the COVID-19 public health emergency has had an unprecedented impact on air travel," the enforcement notice nonetheless states that "airlines' obligation to refund passengers for cancelled or significantly delayed flights remains unchanged."[8]

The enforcement notice requires carriers that have already issued vouchers in lieu of refunds to come into compliance by informing consumers that they have an option to request a refund, updating policies to comply with the DOT guidance, and training employees as to the requirements. 

In support of this new guidance, the DOT cites a 1996 industry letter that advised carriers that:

[Applying the] nonrefundability/penalty provisions in situations in which the change of flight time or travel date has been necessitated by carrier action or "an act of god", e.g., where the carrier cancels a flight for weather or mechanical reasons ... is grossly unfair and it violates 49 U.S.C. 41712, as would any contract of carriage or tariff provision mandating such a result.

The 1996 letter also put carriers on notice that the DOT "will aggressively pursue any cases of this type that come to our attention."

While the DOT's enforcement notice purports to "remind" carriers of the requirements, the requirements are not so clear-cut, as evidenced by the industry's varying interpretations. As a result, the enforcement notice came as a surprise to many in the industry, particularly given that the document — effectively a guidance document — does not follow the required process under the DOT's own rules.

In 2018, the DOT issued an internal memo[9] that was subsequently codified in a regulation,[10] governing the review and clearance process for guidance documents. Generally, prior to the DOT's revision of its processes, guidance could be issued, changed or removed without notice-and-comment rulemaking.

Under the new process, if a guidance document purports to "recommend specific conduct that stretches beyond what is required by existing law," then the DOT must include language that the contents of the guidance document do not have the force and effect of law, and are not meant to bind the public in any way. However, the recent enforcement notice not only lacked such language, but also included a threat of enforcement action for noncompliance.

DOT appears to be largely ignoring this regulation by improperly using guidance documents to create the basis for an enforcement action.[11]

A mixed approach from global regulators

Around the world, regulators are facing the same issue, and have taken a variety of approaches, including issuing interpretive guidelines to carriers to clarify requirements in an unprecedented time.

While some jurisdictions, like Australia, have taken a hard-line stance similar to the US DOT, other jurisdictions have relaxed or are considering relaxing refund requirements, to allow for vouchers for future travel in lieu of immediate monetary refunds.

The European Commission has issued guidelines regarding passenger rights in the context of COVID-19,[12] although individual countries are taking matters into their own hands. Under the commission's guidelines, passengers must be given the option of a refund, a rebooking or a voucher or credit if a flight is cancelled due to COVID-19. Despite the EU regulations, Germany suspended requirements for airlines to refund customers for cancelled flights.[13] The Dutch are following a similar course, and will not enforce infringements of the EU regulations so long as customers receive vouchers for cancelled flights and are permitted to use the voucher within a reasonable period of time.[14]

Denmark has taken a different approach, providing direct subsidies for refunds to passengers impacted by the COVID-19 crisis through a €200m state loan approved by the European Commission.[15]

Australia and Canada have also issued exemptions to airlines, in an effort to strike a balance between passenger rights and airlines' financial sustainability. In Australia, carriers are not required to provide a monetary refund so long as a credit notice or voucher is available with a generous expiration date. For refundable tickets, airlines must still provide a refund — as is the case in the US.

Similarly, in Canada, airlines may offer vouchers or credits instead of refunds, so long as the voucher or credits are available for a reasonable period of time.[16]

Private refund claims prompted by COVID-19 cancellations

While the disruptions caused by COVID-19 are unprecedented, private claims against airlines are nothing new.

As a matter of federal law, the DOT's rules and regulations do not create a private right of action. The Airline Deregulation Act, or ADA, further preempts almost all state law claims related to air carrier "routes, prices, or services."[17]

Broad federal preemption and the absence of a federal private right of action means that refund claimants are limited to state law not preempted by the ADA. In three separate cases over the past 30 years, the US Supreme Court has addressed ADA preemption of state law claims related to air carrier routes, prices or services. 

In Morales v. Trans World Airlines, the court found that the ADA preempts the use of state consumer protection laws to regulate airline advertising.[18] Shortly thereafter, in American Airlines Inc. v. Wolens, the court clarified that the ADA also preempts application of state consumer protection rules to private air carrier contracts, such as loyalty programs.

Importantly for refund claims, however, the court in Wolens construed the ADA not to preempt breach of contract claims regarding "self-imposed undertakings."[19] In Northwest Inc. v. Ginsberg, the court clarified, however, that the ADA does preempt nonwaivable state common law rules — such as a duty of good faith and fair dealing — which might otherwise enlarge the scope of the parties' self-imposed undertakings.[20]

Broad ADA preemption narrows the scope of cognizable private refund claims. State consumer protection and other state statutory claims are preempted under Morales and Wolens. Breach of contract claims, while not barred, are limited to voluntary self-imposed undertakings under Wolens and Ginsberg. For refund claims, the express terms of the contract of carriage will likely apply, and are not likely to be expanded by state law rules like a duty of good faith and fair dealing.

Recognizing the limitations of state law, some private claimants have seized on the DOT's recent enforcement notice to argue that express contractual reservations in an air carrier's contract of carriage, such as a force majeure provision, are void or unenforceable to the extent they conflict with governmental rules and regulations. Such claims raise two primary problems under the Supreme Court's ADA precedents.

First, contractual enforcement of such claims requires what amounts to a declaratory judgment of federal law. Second, and relatedly, any determination of federal law used to invalidate or decline to enforce the express terms of a private contract converts a breach of contract claim regarding private parties' self-imposed undertakings into a right of action to enforce federal transportation laws.

Nothing in the Supreme Court's Wolens or Ginsberg decisions suggest that preservation of private breach of contract claims was intended to provide plaintiffs a right to enforce federal law. Federal courts have not shied away from sustaining the ADA's broad preemptive force. Refund claims may be another chapter in the long-running drama to draw the boundaries of ADA preemption.

The public's interest in the airlines' survival

While the US government provided airlines critical funding in the CARES Act to aid them in weathering the COVID-19 storm, it did not provide airlines a blank check. The act requires a host of commitments from the airlines, including payroll guarantees through September, and a commitment to continue to provide minimum service to destinations the carriers served prior to March.

In addition, the US Department of the Treasury decision to convert 30 percent of the aid from grants to loans requires that carriers are able to pay the money back, potentially with securities that could be converted to stock in the airlines. Nonetheless, even if the Treasury Department had provided the industry with a true grant, the funding likely would fall short.

What will happen to the airlines and their employees after federal money runs out remains unclear. With respect to refunds, what is clear today is that many airlines are paying out more in refunds for cancelled flights than they are receiving in new bookings, and will fly largely empty planes to satisfy the DOT's public interest service commitments.

The world will need the aviation industry to ramp up quickly once the threat of the pandemic passes. Analysts are forecasting that the aviation industry's recovery is likely to be slow, potentially taking many years.[21] Accordingly, the DOT must do all that it can to assist a quick ramp-up.

Consumers' short-term demand for ticket refunds may well impact airlines' ability to meet consumers' needs when travel demand returns. Given the grim financial outlook for the aviation industry, it is perhaps more important now than ever for governments to remain engaged with airlines, to consider ways to protect the public while fostering the competitive viability of air carriers.

Thoughtful policy guidance issued consistent with established rules and procedures will benefit both carriers and the flying public — allowing airlines to help restart the global economy when the public is ready to fly again.


[1] See Enforcement Notice Regarding Refunds by Carriers Given the Unprecedented Impact of the COVID-19 Public Health Emergency on Air Travel, US Department of Transport (April 3, 2020).

[2] 14 C.F.R. § 259.5(b)(5).

[3] See Refunds, US Department of Transport.

[4] As above

[5] Enhancing Airline Passenger Protections, 76 Fed. Reg. 23,110, at 23,129 (April 25, 2011).

[6] As above

[7] According to the Transportation Security Administration (TSA), passenger throughput year on year is down 96 percent. See TSA Checkpoint Travel Numbers for 2020 and 2019.

[8] See note 1.

[9] See Stephen G. Bradbury, General Counsel, Review and Clearance of Guidance Documents, US Department of Transportation (PDF).

[10] See 49 C.F.R. pt. 5, subpt. C.

[11] Although guidance typically is not subject to judicial review, if an agency uses guidance as a substitute for rulemaking and uses its enforcement authority to effectively convert the guidance into a binding legal rule, the agency action may be ripe for judicial review. See, for example, Gen. Elec. Co. v. EPA, 290 F.3d 377 (D.C. Cir. 2002); see also U.S. Air Tour Ass’n v. FAA, 298 F.3d 997 (D.C. Cir. 2002).

[12] See Commission Notice, Interpretative Guidelines on EU passenger rights regulations in the context of the developing situation with Covid-19 (March 18, 2020, PDF).

[13] See Ian Taylor, Germany sanctions airline refund vouchers, TravelWeekly (April 9 2020).

[14] Id.

[15] See European Commission press release IP/20/576, State aid: Commission approves €200 million Danish loan in support of the Travel Guarantee Fund for travel cancellations due to coronavirus outbreak (April 3, 2020).

[16] Although the Canadian Transportation Agency has stated that it would review actions based on the merits, it has suggested that 24 months would be viewed as reasonable in “most cases.” See Statement on Vouchers, Canadian Transportation Agency (March 25, 2020).

[17] 49 U.S.C. § 41713(b)(1).

[18] Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992).

[19] Am. Airlines, Inc. v. Wolens, 513 U.S. 219 (1995).

[20] Northwest, Inc. v. Ginsberg, 572 U.S. 273 (2014).

[21] See Evan Hoopfer, American downgraded as industry recovery will be 'multi-year affair,' analysts say, Dallas Business Journal (April 6, 2020).


covid-19, americas, transportation regulations, transportation regulation, united states