Improvements Needed in DOT’s Processfor Identifying Unfair or Deceptive Practices in Airline Frequent Flyer Programs

Office of Inspector General

Audit Report

IMPROVEMENTS NEEDED IN DOT’S PROCESS

FOR IDENTIFYING UNFAIR OR DECEPTIVE

PRACTICES IN AIRLINE FREQUENT FLYER

PROGRAMS

Office of the Secretary of Transportation

Report Number: AV-2016-068

Date Issued: June 16, 2016

Memorandum

U.S. Department of

Transportation

Office of the Secretary

of Transportation

Office of Inspector General

Subject:

Improvements Needed in DOT’s Process

for Identifying Unfair or Deceptive

Practices in Airline Frequent Flyer Programs

Office of the Secretary of Transportation

Report No. AV-2016-068

Date:

June 16, 2016

From:

Charles A. Ward

Assistant Inspector General

for Aviation Audits

Reply to

Attn. of:

JA-10

To:

General Counsel

For more than 30 years, airlines have offered frequent flyer programs to encourage

travel on their respective airlines and secure customer loyalty. An estimated

630 million members are currently enrolled in various frequent flyer programs

worldwide, with over 300 million members enrolled in U.S. air carrier programs.

In a July 2014 letter and subsequent conversation with our office, Representative

Alan Grayson expressed multiple concerns with airlines’ frequent flyer programs,

such as changes to frequent flyer programs with little to no notice, the devaluation

of frequent flyer awards and benefits over time, and the availability of award seats.

The Department of Transportation (DOT) requires that airlines

disclose their

frequent flyer program rules in their customer service plans. Moreover, DOT has

authority to investigate unfair and deceptive practices and unfair methods of

competition in air transportation,

including consumer complaints regarding the

rights of passengers who hold frequent flyer miles.

Accordingly, we initiated this

audit to review: (1) DOT’s oversight of air carriers’ compliance with frequent

flyer program disclosure requirements, (2) DOT’s process for reviewing passenger

complaints regarding unfair and deceptive practices, and (3) airlines’ practices

regarding the availability of award seats and valuation of frequent flyer miles.

Certificated or commuter air carriers and foreign air carriers that operate scheduled passenger service or public charter

service to and from the U.S. using aircraft originally designed to have a passenger capacity of 60 or more seats.

49 U.S.C. § 41712.

Section 408 of the FAA Modernization and Reform Act of 2012 (The Act) (codified at 49 U.S.C. § 42302 (note)).

To conduct our work, we met with DOT and airline officials and reviewed their

processes for reviewing and resolving consumer frequent flyer complaints. We

conducted our work in accordance with generally accepted Government auditing

standards. Exhibit A details our scope and methodology, and exhibit B lists

organizations we visited or contacted.

RESULTS IN BRIEF

DOT conducts oversight of air carriers’ frequent flyer program disclosures as part

of its compliance inspection process. DOT reviews the customer service plans

periodically during its overall onsite air carrier inspections. All three airlines we

reviewed had disclosed their rules in their plans as required by DOT.

DOT’s reviews of passenger complaints related to frequent flyer terms and

conditions, however, have not proven sufficient in determining whether airlines

have engaged in unfair and deceptive practices. From 2012 through 2014,

consumers filed 76 frequent flyer complaints with the Department against U.S. air

carriers, and DOT analysts chose not to forward any of these complaints to DOT

attorneys for further review. Yet, our review of 36 of these complaints showed that

4 (11 percent)

warranted additional review. For example, a consumer complained

that a carrier announced its intent to impose a fee for using miles to upgrade only

2 weeks before the change took effect. Although DOT considers a change to terms

and conditions without reasonable notice to be an example of an unfair or

deceptive practice, DOT took no further action on this complaint and forwarded it

directly to the airline to resolve with the consumer. DOT officials acknowledged

the need for analysts to receive additional training to ensure they track and pursue

complaints on practices that are potentially unfair or deceptive.

Award seats were available for the vast majority of flights we reviewed. For

example, we examined the availability of seats for two airlines using frequent flyer

miles for 660 roundtrip flights on 11 dates. Of those, 99 percent of the flights had

award seats available for the dates selected, with 63 percent available at the

carriers’ lowest award levels. Also, we determined the average number of frequent

flyer miles redeemed for an award seat increased during our review period for one

airline but decreased slightly for the second airline. However, we were not able to

determine how many miles were redeemed at different award levels, since airlines

do not publicly disclose this information. In addition, although air carriers disclose

that award seats may not be available for all flights, they do not fully inform

consumers that limitations are decided using complex computer modeling to

forecast demand for each flight. According to the airlines, there is similarity

between the retail-price model for a ticket and the award model. For example, as a

Percentage is not weighted.

flight nears capacity, the ticket price will rise, and the number of miles required to

obtain an award seat will also rise.

We are making recommendations for DOT to improve its process for reviewing

consumer complaints for unfair and deceptive practices. We also encourage air

carriers to be more transparent with award-seat availability and redemption

information.

BACKGROUND

DOT has authority under Title 49, United States Code, Section 41712 to

investigate and prohibit unfair and deceptive practices and unfair methods of

competition in air transportation, including consumer complaints regarding the

rights of passengers who have frequent flyer miles. The Department’s Office of

Aviation Enforcement and Proceedings (OAEP), a division within the Office of

the General Counsel, enforces DOT’s air travel consumer protection rules.

DOT analysts review the complaints, including frequent flyer complaints, and

determine if they pertain to a regulated area. DOT sends all consumer complaints

it receives to the airline and asks it to reply to the consumer. If the complaint

pertains to a regulated area, the analyst asks the airline to send DOT a copy of its

reply. Any complaint the analyst believes is a potentially unfair or deceptive

practice should be referred to Department’s attorneys along with the airline’s

response. Air carriers are required to send an acknowledgement to the consumer

within 30 days and a substantive response within 60 days. DOT may ask airlines

to provide follow-up information if the complaint involves a regulated area; if the

complaint does not pertain to a regulated area, the case is closed after the

complaint is sent to the airline.

DOT CONDUCTS OVERSIGHT OF AIR CARRIERS’ FREQUENT

FLYER PROGRAM DISCLOSURES

DOT conducts oversight of air carriers’ frequent flyer program disclosures as part

of its compliance inspections. These onsite inspections of air carriers focus on the

carriers’ compliance with consumer protection areas, which include the carriers’

customer service plans.

DOT conducts five or six of these onsite inspections

annually. We reviewed customer service plans for Virgin America, Delta Air

Lines, and American Airlines and found all in compliance with requirements to

disclose frequent flyer rules in their customer service plans. The Department

conducted its most recent onsite inspections of Virgin America, Delta Air Lines,

and American Airlines in July 2011, March 2012, and April 2012, respectively

Certain U.S. and foreign air carriers are required to adopt customer service plans that address 12 service areas,

including disclosing frequent flyers rules.

and found no evidence of violations regarding the carriers’ frequent flyer

programs. In addition to reviewing air carriers’ compliance with the disclosure

regulations, DOT selects a sample of complaints that were submitted directly to air

carriers, and looks into a frequent flyer matter if a frequent flyer complaint is

selected in the sample.

DOT’S REVIEW PROCESS FOR FREQUENT FLYER

COMPLAINTS DID NOT EFFECTIVELY IDENTIFY POTENTIALLY

UNFAIR OR DECEPTIVE PRACTICES

DOT has not actively pursued its authority to investigate complaints regarding the

rights of passengers who hold frequent flyer miles and to investigate and prohibit

unfair and deceptive practices. Although consumers filed 76 frequent flyer

complaints with DOT related to frequent flyer terms and conditions against U.S.

air carriers for calendar years 2012 through 2014, DOT analysts did not forward

any complaints to its attorneys to investigate for potential violations of unfair or

deceptive practices. Instead, DOT sent the complaints to the air carriers to resolve

without any additional research to determine whether the air carriers were

involved in unfair or deceptive practices. In addition, the analysts sent letters to

the complainants which that stated that the complaint did not fall under

Department rules.

Additionally, while DOT officials told us they consider an air carrier’s change to

the terms and conditions of its frequent flyer program without reasonable notice to

be an unfair or deceptive practice, they rarely investigate whether this practice

occurs. According to DOT officials, few complaints reach the threshold of an

unfair or deceptive practice.

Yet, our review of 36 of the 76 frequent flyer complaints determined that 4

(11 percent) were potentially unfair or deceptive regarding changes to terms and

conditions without reasonable notice and warranted additional review. For

example, a consumer complained that a carrier announced its intent to impose a

fee for using miles to upgrade a class of service only 2 weeks before

implementation of the change. The change was announced on April 8, 2014, and

implemented on April 23, 2014. DOT took no further action and forwarded the

complaint directly to the airline to resolve with the consumer. However, there was

no indication that the analyst determined whether or not the air carrier provided

reasonable notice to consumers.

Based on our follow-up review with the air carriers, we concluded that this

complaint was the only one of the four that was still potentially unfair or

deceptive. However, DOT did not follow up with the airlines for any of the four

complaints to determine if the changes were made with reasonable notice.

DOT officials said they currently consider two factors in determining whether

notice is reasonable: (1) how significant the change is, and (2) whether notice was

given far enough in advance to allow the consumer to benefit from the program

prior to the change. However, without any specific guidance on what constitutes

“reasonable,” DOT analysts use their judgment to determine whether to initiate an

investigation or leave it to the airline to resolve. DOT officials acknowledged the

need for analysts to receive additional training to ensure they track and pursue

complaints that are potentially unfair or deceptive.

Air carriers have great latitude with their programs because the terms and

conditions state that frequent flyer miles are the property of the airlines, not the

consumer. They reserve the right to change their frequent flyer rules, regulations,

and travel awards and benefits at any time with or without notice. DOT is

considering developing a rule requiring air carriers to provide reasonable notice of

changes to their frequent flyer programs; however, DOT officials have not

determined if and when the rule will be required. Regardless, even in the absence

of a specific regulation for reasonable notice, DOT can take enforcement action

under the unfair or deceptive practice statute.

AIR CARRIERS PROVIDE LIMITED INFORMATION ON HOW

AWARD SEAT AVAILABILITY IS DETERMINED

For the vast majority of flights we reviewed, seats were available for purchase

with frequent flyer miles. In March 2015, we conducted a review to determine the

availability of award seats, in real time, at various redemption levels. We searched

the Web sites of both American Airlines and Delta Air Lines to determine if award

seats were available in 60 of their domestic markets (30 for each airline).

For

660 roundtrip flights and 11 dates selected,

we found:

• 99 percent of flights had award seats available at least at one redemption level;

• 63 percent of flights had award seats available at the lowest redemption levels

(20,000 or 25,000 miles for a roundtrip); and

• 13 percent of flights had award seats available at the lowest redemption level

during the holiday week, a period of high demand.

We attempted to obtain historical data on award redemptions at various award

levels, but found that airlines either do not track—or do not publicly share—

Virgin America was not included in the review of seat availability because, unlike American and Delta, there is a

direct correlation between the cost of a ticket and the number of miles needed to redeem an award.

We randomly selected 10 departure dates in 2015 and set the return date for 7 days later. The 11th date (December 20,

2015, departure and December 27, 2015, return) was selected because it is a high-travel-demand holiday week.

Percentages are not weighted.

detailed historical information about how many award miles customers redeem at

different redemption levels. Using available information for calendar years 2010

through 2013, such as airlines’ annual reports and other data,

we were able to

determine that the average number of frequent flyer miles used to redeem an

award increased for Delta Air Lines and decreased slightly for American Airlines.

The average miles used to redeem an award on Delta increased from 22,000 to

24,636, while on American the average miles used decreased slightly from 22,987

to 22,782. However, information regarding redemption levels for specific routes or

destinations was not publicly available.

Airlines also do not fully disclose how they determine availability of frequent flyer

award seats. For example, American Airlines’ customer service plan indicates that

awards at the lowest redemption level are subject to capacity controls, but it does

not describe how the airline makes these determinations. Specifically, airlines

determine availability for award seats based on actual demand and a complex

model that forecasts demand.

If an airline forecasts that demand for a flight will

be high,

such as during peak travel times, award seats at the lowest redemption

level may not be available. Therefore, even though a customer can book seats

11 months prior to his or her travel date, if the airline projects demand will be high

for that flight, the customer may be unable to obtain a seat at the lowest award

redemption level. According to the airlines, the retail-price model for a ticket and

the award model are similar. As a flight nears capacity, the ticket price will

increase, as will the number of miles required to obtain an award seat. Both

American and Delta offer award seats at the highest redemption level if a seat is

available, but neither guarantees a minimum number of seats at the lowest

redemption level on any flight.

In two prior audits,

we reported that carriers provided limited information on

frequent flyer award redemptions and the information provided was of marginal

value to consumers. We recommended that air carriers provide the public with a

more comprehensive report of frequent flyer redemption information, such as the

percentage of successful redemptions and frequent flyer seats made available in

the top origin and destination markets. The airlines opposed this recommendation.

In a follow-up review, we recommended that DOT examine, through rulemaking,

the need to standardize the reporting of frequent flyer redemptions to provide more

meaningful comparison of program benefits. DOT responded that OAEP and the

10-K Annual Reports Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 and award redemption

data provided by American Airlines Legal and Government Affairs Managing Director.

American and Delta use an “algorithm” that forecasts demand for each flight.

Some events that result in a forecast for high demand are major holidays, Super Bowl locations, and historical data.

Airline Customer Service Commitment (OIG Report No. AV-2001-020), February 12, 2001; and Follow-up Review:

Performance of U.S. Airlines in Implementing Selected Provisions of the Airline Customer Service Commitment (OIG

Report No. AV-2007-012), November 21, 2006. OIG reports are available through our Web site at

http://www.oig.dot.gov/

Assistant Secretary for Aviation and International Affairs would discuss whether

there was a demonstrated cause to proceed with a rulemaking. This

recommendation was closed, and no further actions were taken.

Ultimately, since there are no specific requirements in these areas, airlines are free

to use their own discretion and business principles to decide how to disclose

information regarding their award-travel algorithms and redemption history to

consumers.

CONCLUSION

Airlines’ frequent flyer programs are widely popular and warrant oversight given

the hundreds of millions of consumers who participate. Although DOT has limited

regulations regarding these programs, the Department has sufficient authority to

investigate and prohibit unfair or deceptive practices and protect the rights of

passengers who hold frequent flyer miles. We recognize that airlines have wide

latitude with the terms and conditions of their frequent flyer programs. However,

the Department is missing opportunities to strengthen oversight and be more

proactive in determining whether airlines have engaged in unfair or deceptive

practices. Improved oversight through training and rulemaking will provide

consumers with better protection of their frequent flyer programs.

RECOMMENDATIONS

To strengthen oversight of airlines’ frequent flyer programs, we recommend that

DOT:

1. Provide training to DOT analysts on what constitutes unfair or deceptive

practices.

2. Define what constitutes reasonable notice for consumers regarding changes to

frequent flyer programs’ terms and conditions, and require airlines to provide

such notice.

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL

RESPONSE

We provided a draft of this report to DOT on March 21, 2016, and received its

response on April 20, 2016, which is included in its entirety as an appendix. Our

initial draft contained three recommendations, including a two-part

recommendation, denoted as 3(a) and 3(b). In its response, DOT concurred with

the first two recommendations and 3(a), but did not concur with 3(b). We have

modified our recommendations in this final report, as detailed below.

Specifically, DOT concurred with recommendation 1, as written, and plans to

complete actions to implement the recommendation by June 30, 2016. We

consider this recommendation resolved but open pending DOT’s implementation

of training for its analysts on what constitutes unfair or deceptive practices.

DOT also concurred with our draft recommendations 2 and 3(a) regarding

defining what constitutes reasonable notice to consumers about changes to

frequent flyer programs’ terms and conditions. Since the corrective actions needed

were substantially similar, these recommendations are now combined under our

final recommendation 2. The Department plans to address this recommendation

through rulemaking by December 31, 2018. Hence, we consider this

recommendation resolved but open pending completion of the rulemaking.

DOT did not concur with our draft recommendation 3(b). Specifically, we

recommended that DOT require air carriers to be more transparent about the

availability of frequent flyer award redemptions. DOT stated, however, that it did

not see a connection to our report’s findings. We disagree since our report noted

that information on frequent flyer award-redemption levels for specific routes or

destinations was not publicly available. We also reported that the process airlines

use to determine award-seat availability is unclear to consumers—a concern that

prompted our recommendation. In its response, DOT stated that it is not confident

that the airlines’ complex processes for determining award-seat availability could

be effectively summarized for consumers. We recognize there are complexities

that would hinder the feasibility of implementing the recommendation. Therefore,

we have removed recommendation 3(b) from this final report. Nevertheless,

absent a firm requirement, we encourage airlines to provide consumers with more

transparency on frequent flyer seat availability when feasible.

We appreciate the courtesies and cooperation of the Department of Transportation

and airlines during this audit. If you have any questions concerning this report,

please call me at (202) 366-0500.

cc: DOT Audit Liaison, M-1

Exhibit A. Scope and Methodology

EXHIBIT A. SCOPE AND METHODOLOGY

We conducted this audit from September 2014 through March 2016 in accordance

with generally accepted Government auditing standards. Those standards require

that we plan and perform the audit to obtain sufficient, appropriate evidence to

provide a reasonable basis for our findings and conclusions based on our audit

objectives. We believe that the evidence obtained provides a reasonable basis for

our findings and conclusions based on our audit objectives.

A congressional request from Representative Alan Grayson expressed multiple

concerns with airlines’ frequent flyer programs. Accordingly, our audit objectives

were to assess: (1) DOT’s oversight of air carriers’ compliance with frequent flyer

program disclosure requirements, (2) DOT’s process for reviewing passenger

complaints regarding unfair and deceptive practices, and (3) airlines’ practices

regarding the availability of award seats and valuation of frequent flyer miles.

To evaluate DOT’s oversight of air carriers’ compliance with frequent flyer

program disclosure requirements, we visited and interviewed DOT’s Office of

Aviation Enforcement and Proceedings (OAEP), selected air carriers and industry

stakeholders, and analyzed relevant Federal regulations. See exhibit B for a list of

organizations visited or contacted.

To determine DOT’s process for reviewing passenger complaints regarding unfair

and deceptive practices, we interviewed OAEP officials about the process for

reviewing complaints regarding the rights of passengers who hold frequent flyer

miles. We obtained 76 complaints regarding frequent flyer terms and conditions

received by the OAEP from January 1, 2012, through September 24, 2014. We

then visited the headquarters of three air carriers: American Airlines, Delta Air

Lines, and Virgin America

and reviewed actions they took to resolve 36

of the

76 complaints received by DOT and forwarded to the carriers to resolve. We

analyzed these complaints to identify any potentially unfair or deceptive practices;

whether the air carriers provided reasonable notice for changes to their frequent

flyer rules; and what actions DOT took to resolve the complaints. Based on the

review of complaints at these airlines, we determined the information was

sufficient to address our objectives and ended the audit at survey. Therefore, we

did not visit or select any additional airlines to review.

To assess airlines’ practices regarding the availability of award seats and valuation

of frequent flyer miles, we selected 11 dates

and randomly selected 30 routes

Due to the small number of complaints for the non-major carriers, we selected two major and one non-major air

carrier because they represented a cross-section of the total complaints received by DOT.

The 36 complaints include all of the complaints received by DOT for the 3 airlines we visited.

We randomly selected 10 departure dates in 2015 and set the return date for 7 days later. The 11th date (December

20, 2015, departure and December 27, 2015, return) was selected because it is a high travel demand holiday week.

Exhibit A. Scope and Methodology

from each of American’s and Delta’s top 300 markets from Origin-Destination

information from the Bureau of Transportation Statistics. In real time, we looked

at these flights and determined the number of flights with available award seats

and how many flights had seats available at the airlines’ lowest redemption levels.

We did not include Virgin America in this assessment because, unlike Delta and

American, there is a direct correlation between the cost of an airline ticket and the

number of miles needed to redeem an award.

On Virgin America, awards can be redeemed for 50 points per dollar. For example, a customer would need to

redeem 20,000 points for a $400 flight (50 points x $400 = 20,000).

Exhibit B. Organizations Visited or Contacted

EXHIBIT B. ORGANIZATIONS VISITED OR CONTACTED

DEPARTMENT OF TRANSPORTATION

Office of the Secretary of Transportation/Office of Aviation Enforcement and

Proceedings

Bureau of Transportation Statistics

STAKEHOLDERS

Advisory Committee for Aviation Consumer Protection

Airlines for America

AIRLINES

American Airlines

Delta Air Lines

Virgin America

Exhibit C. Major Contributors to This Report

EXHIBIT C. MAJOR CONTRIBUTORS TO THIS REPORT

Name Title

Scott Macey Program Director

Barry DeWeese Program Director

Terri Ahuruonye Project Manager

Judy Nadel Senior Auditor

Joyce Koivunen Senior Auditor

Susan Crook Senior Analyst

Audre Azuolas Writer-Editor

Seth Kaufman Senior Counsel

Petra Swartzlander Senior Statistician

Jerrod Sharpe Senior Economist

APPENDIX. AGENCY COMMENTS 13

Appendix. Agency Comments

MEMORANDUM

DATE: April 20, 2016

SUBJECT: INFORMATION: Management Response –

Office of Inspector General (OIG) Draft Report

on Oversight of Frequent Flyer Programs

FROM: Kathryn B. Thomson

General Counsel

TO: Charles A. Ward

Assistant Inspector General

for Aviation Audits

The Department is committed to ensuring that airlines treat consumers fairly when they

participate in frequent flyer programs. We require that airlines make available a reasonable

number of seats for award tickets and that consumers have access to frequent flyer program

information on airline websites. We appreciate the OIG's efforts in preparing the subject report,

which found that airlines are complying with these requirements.

Over the last twenty years, consumer complaints regarding award ticket availability have made

up less than half of one percent of the total number of air travel consumer complaints filed with

the Department. We have periodically heard concerns expressed in the media and elsewhere that

award tickets were not available in sufficient quantities. Our experience did not validate these

concerns. Similarly, the OIG found that frequent flyer award seats are widely available.

Specifically, 99 percent of the 660 roundtrip flights the OIG examined had award tickets

available for the dates selected and 63 percent had award seats available at the carrier’s lowest

award level. We also note that the OIG found that all three airlines it examined were complying

with the Department’s rule directing airlines to disclose their frequent flyer rules in their

customer service plans and post these plans on their websites in an easily accessible manner.

Based on our review of the draft report, we are in general agreement with the OIG’s

recommendations for strengthening the Department’s oversight of frequent flyer programs.

Specifically, we concur with Recommendation 1, as written, and plan to complete actions to

implement the recommendation by June 30, 2016.

Appendix. Agency Comments

We also concur with Recommendations 2 and 3(a) regarding defining what constitutes

reasonable notice to consumers regarding changes to frequent flyer programs’ terms and

conditions. The Department currently requires that airlines provide reasonable notice to

significant changes to frequent flyer programs but has not defined reasonable notice. While we

concur with Recommendations 2 and 3(a), we suggest the OIG combine these two

recommendations into a single recommendation since the two recommendations are substantially

similar. The Department will address the single recommendation through rulemaking by

December 31, 2018.

We do not concur with Recommendation 3(b) that the Department require air carriers to provide

more transparency about the availability of frequent flyer award redemptions. We do not see a

connection between this recommendation and the findings in the report. In addition, to

determine the availability of award tickets, carriers use complex algorithms that weigh numerous

dynamic variables, and we are not confident that these processes could be summarized for

effective use by consumers. As a result, we request that the OIG remove Recommendation 3(b)

from the Final Report.

We appreciate this opportunity to offer additional perspective on the OIG draft report. Please

contact Blane A. Workie, Assistant General Counsel, Office of Aviation Enforcement and

Proceedings, at (202) 366-9345 with any questions or if the OIG would like to obtain additional

details about these comments.