Air Travel: Effectiveness of State Consumer Protection Efforts Varies

Published by the Government Accountability Office on 1990-08-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


              AIR TRAVEL
              Effectiveness of State
              Consumer Protection
              Efforts Varies


      RESTRICTED---Not to be
      General Accounting Once unless speclflcally
      approved by the Office of Congressional
“... -_ .__I.._..-. ..-_..^._.__
                             I ___.-_   -----

                   United States
GAO                General Accounting Office
                   Washington, D.C. 20848

                   Resources, Community, and
                   Economic Development Division

                   August 29,lQQO

                   The Honorable Dennis E. Eckart
                   Chairman, Subcommitteeon Antitrust,
                     Impact of Deregulation, and Privatization
                   Committee on Small Business
                   Houseof Representatives
                   Dear Mr. Chairman:
                   As requestedin your letter of April 6,1989, we surveyed the states’
                   efforts to protect consumersfrom unfair and deceptive trade practices
                   in the travel industry. As agreedwith your office, we (1) examined how
                   the states are organized to addressconsumerprotection problems, (2)
                   identified the most serious consumerprotection problems the states
                   have encounteredin the travel area, and (3) assessedto what extent the
                   effectiveness of state action in this area is limited by federal restrictions
                   on the states’ consumerprotection role.
                   We looked in detail at four states-California, New York, Ohio, and
                   Texas-chosen from those that are actively involved in travel consumer
                   protection. We also contacted six additional states that officials of state
                   and private organizations told us had been active on particular travel
                   consumerprotection issueswe identified. Appendix III contains further
                   details on our objectives, scope,and methodology.

                   The four states we visited have broad statutes prohibiting unfair and
Results in Brief   deceptive trade practices; three of these also have narrower statutes
                   prohibiting specific travel-related practices. These four states have gen-
                   erally assignedauthority over travel-related practices to consumerpro-
                   tection units in the state’s Office of the Attorney General,with
                   additional authority sometimesassignedto specializedconsumerprotec-
                   tion offices.
                   The officials we talked to in the four states cited several problems
                   facing travel consumers.First, financially distressedtour operators
                   have provided someconsumerswith servicesthat are less complete or
                   inferior to what the consumerwas promised-thus causing somecon-
                   sumers to incur substantial financial losses.Second,consumershave lost
                   millions of dollars to travel scams-fraudulent salesof travel services.
                   Third, airline advertising practices sometimesviolate state laws against
                   unfair and deceptive trade practices (for example, by advertising one-

                   Page 1                                GAO/RCJSD-90.136Travel Consumer Protection
                       way fares that are available only on a round-trip basis). And fourth,
                       passengerrights (e.g.,the right to compensationfor lost baggageor
                       denied boarding) are not always well specified.
                       The state agencieshave successfully respondedto someof these travel
                       consumerprotection problems. Their effectivenesshas varied,
                       depending in part on the adequacyof the states’ authority in each area.
                       States appear to have adequate authority to regulate tour operators,
                       becausemost tour operators do a substantial portion of their business
                       within the state in which they are located. In the caseof travel scams,
                       however, the states’ efforts have been less effective becausethe opera-
                       tors typically operate by mail or telephone acrossstate lines, thus
                       escapingthe jurisdiction of the states whose consumersare defrauded.
                       State efforts to regulate airline advertising practices similarly have been
                       largely ineffective becausestate airline advertising guidelines conflict
                       with US, Department of Transportation (D(R)policies. A federal court
                       of appeals has found state actions in regulating advertising practices to
                       be preempted by the Federal Aviation Act, as amendedby the Airline
                       Deregulation Act of 1978. Finally, in the area of rights for airline pas-
                       sengers,state consumerprotection officials say that airline passengers
                       are not adequately protected by existing rules, but they saw our as pri-
                       marily responsible for addressingthese issues.

                       All 60 states have enactedgeneral consumerprotection laws that pro-
States Use Various     hibit deceptive trade practices, and most prohibit unfair or unconscion-
Laws and Agencies to   able practices as well. Theselaws were mostly enactedduring the 1960s
Address Travel         and 1970sto supplement existing common-law prohibitions on unfair
                       and deceptive trade practices. They apply to all consumertransactions,
Consumer Protection    including the advertising and selling of travel services,
                       Three of the four states we visited, as well as five of the six other states
                       we contacted, also have specific travel-related laws to protect con-
                       sumers’ financial interests. Such laws apply to travel agents and agen-
                       cies, tour operators, and other travel promoters. They generally require
                       either licensing or registration of tour operators or travel agents.They
                       also generally provide somemeansfor protecting travelers’ advance
                       payments, either by requiring deposit of such payments in a trust
                       account or by requiring posting of bonds by the travel agent or tour
                       In the four states that we visited, these consumerprotection laws are
                       primarily enforced by state attorneys general. Casemediators in the

                       Page 2                                GAO/RCED-20426 Travel Consumer Pmtect~on

                         attorneys general offices receive complaints from consumersand
                         attempt to resolve problems between consumersand travel providers by
                         contacting the airline, travel agent, or other travel provider named in
                         the complaint to seekvoluntary remedies.If mediation is not successful,
                         officials evaluate casesto seeif further investigation and litigation are
                         warranted. The criteria for making such a determination generally
                         include the likely public impact, number of consumersaffected, number
                         of similar complaints, and practicality of investigation.
                         Two of the states we visited, California and New York, have also created
                         special consumerprotection offices responsiblefor someconsumerpro-
                         tection functions. These agenciesfocus their efforts on mediation, con-
                         sumer education, and legislation rather than enforcement. While the
                         California Department of ConsumerAffairs has authority to litigate
                         cases,it generally leavesthis function to the attorney general’s office.
                         Fourteen other states have similar offices.

                         State officials identified four major types of travel consumerproblems,
States Have Identified   Thesewere also the most frequently cited problems in news accountswe
Four Consumer Air        surveyed on travel consumerproblems and in our discussionswith
Travel Problems          national organizations concernedwith travel consumerproblems.
                         The first major problem involved tour operator insolvenciesthat may
                         causefinancial lossesto consumerswhen the tour operator goesbank-
                         rupt before delivering on travel paid for in advance.Consumersmust
                         often pay deposits in advanceto reserve spaceon a tour. If the tour
                         operator experiencesfinancial difficulties, consumersmay lose their
                         deposits, receive travel servicesinferior to those promised, or get
                         stranded outside the United States with tickets or reservations that are
                         no longer honored.
                         A secondmajor travel consumerproblem involves travel scamsin which
                         fraudulent operators trick consumersinto buying worthless travel club
                         membershipsor use the lure of free or low-priced travel servicesto
                         make unauthorized chargeson consumers’credit card accounts.These
                         operators typically basetheir operations in one state and target con-
                         sumers in other states using mail or telemarketing techniques.The Fed-
                         eral Trade Commission(FTC)estimated that travel scamsin 1987 cost
                         consumers“tens of millions of dollars.”
                         The third major travel consumerproblem is airline fare advertising
                         practices that, according to many state attorneys general, violate the

                         Page 3                               GAO/RCEDGO-136 Travel Consumer Protection

                        requirements of the states’ unfair and deceptive trade practices laws.
                        Someairlines advertise one-way fares that are available only on a
                        round-trip basis, or leave out surchargeswhich the traveler is required
                        to pay. While these conditions and surchargesare required to be dis-
                        closedin the fine print of the advertisement, most state attorneys gen-
                        eral believe consumersare deceivedby these practices.
                        The fourth major travel consumerproblem involves the lack of what are
                        generally referred to as “passengerrights.” While DOThas someregula-
                        tions in force which govern compensationfor lost baggageand denied
                        boarding, the states have received many complaints about airline poli-
                        cies concerninglost baggage;compensationfor passengerswho are
                        denied boarding (or “bumped”) on flights for which they have con-
                        firmed reservations; inadequate servicesprovided to passengerswhose
                        flights are cancelledor delayed; failure to disclosewhen tickets are
                        nonrefundable; and abrupt changesin the provisions of frequent flyer
                        State agencieslacked comprehensivedata on the volume or types of
                        travel complaints received. However, the limited data available and
                        state officials’ estimates suggestedthat most travel complaints con-
                        cerned air carrier practices rather than practices of bus lines, railroads,
                        or cruise ship lines.

                        The state agencieshave respondedto someof these air travel consumer
States’ Effectiveness   protection problems. Their effectivenesshas varied, depending in part
in Protecting           on the adequacy of the states’ authority in each area. For example,
ConsumersVaries         states appear to have adequate authority to regulate tour operators,
                        becausemost tour operators do a substantial portion of their business
                        within a single state. Several states have enactedlaws governing tour
                        operator activities. nor believesthat most tour operator problems result
                        from tour operator practices that violate federal law. Better coordina-
                        tion between state and federal officials, as recommendedin our report
                        last year on nor’s enforcement of its consumerprotection responsibili-
                        ties,’ could prevent someof these practices.
                        In the caseof travel scams,however, the states’ efforts have been less
                        effective becauseof limited jurisdictional boundaries. Scamoperators
                        frequently move from state to state and solicit customersin other states,

                        ‘Airline Competition: DUl”s Implementation of Airliie Regulatory Authority (GAO/RCED-89-93,
                        June 28,lBSB).

                        Page 4                                          GAO/WED-fJO-136 Travel Cmmmer Protection
.   E234633

    making prosecution difficult for state officials. Becausetravel scamsare
    usually an interstate problem, state officials saw the need for a more
    active federal role to addressthis problem. The proposedTelemarketing
    Fraud Prevention Act (H.R. 1364) would require a more active federal
    role by mandating rulemaking by the FTCto regulate the sale of goods
    and servicesby telephone. It would also allow officials of one state to
    file suit against telemarketers in other states in federal district courts.
    State efforts to regulate airline advertising practices similarly have been
    largely ineffective becausestate airline advertising guidelines conflict
    with DUI’policies, and becausea federal court has ruled that states are
    preempted from enforcing their laws in this area. Airline advertising
    practices are a problem that has surfaced prominently sincethe Civil
    Aeronautics Board ceasedoperations. Recentcontroversy over airline
    advertising has centered on whether federal statutes preempt the states
    from using their unfair and deceptive trade practice laws to regulate
    advertising. The governing decision on this issue currently is the recent
    decision by the Fifth Circuit Court of Appeals in TWA v. Mattox, 897
    F.2d 773 (6th Cir. 1990), which ruled that state regulation of airline
    price advertising was preempted by Section 1306 of the Federal Avia-
    tion Act, as amendedby the Airline Deregulation Act of 1978.
    Finally, in the area of rights for airline passengers,federal law explicitly
    reservesto the federal government the authority to regulate “rates,
    routes, or services” of air carriers. Although consumergroups and state
    consumerprotection officials have received numerous complaints about
    inconsistenciesin rights afforded airline passengers,and about passen-
    gers not always being adequately informed about their rights, they saw
    nor as primarily responsiblefor addressingthese issues.l

    In our report last year on nor’s enforcement of its consumerprotection
    responsibilities, we focusedprimarily on the adequacyof nur’s process
    for handling consumercomplaints. We did not independently assessthe
    significance of passengerrights problems or the adequacyof nor’s
    responseto those problems. We did find there was a general need for nor
    to draw on information from the states to help set priorities for
    rulemaking and enforcement at the federal level. As you know, we
    intend to follow up in the coming year on the extent of passengerrights
    problems and on nor’s implementation of our recommendationto coordi-
    nate its consumeraffairs functions with state offices.

    Page 5                                GAO/RCEIWO-136 Travel Conmmer Protection
                  5234833                                                                                   I

                  DOTprovided official oral commentson a draft of this report, nor stated
Agency Comments   that we had not taken into account its view that tour operators are regu-
                  lated under federal law. We have added a reference to nor’s views in the
                  letter and a more extensive discussionof nor’s views on this matter in
                  appendix II, where we also cite several federal court casesthat support
                  its view. We also point out that the state officials we talked to are una-
                  ware of nor’s interpretation of federal law. Better coordination between
                  state and federal officials, in our view, could result in better protection
                  of consumers.
                  DU’I’also believesthat the question of whether states are preempted from
                  regulating airline advertising practices has been settled by the recent
                  decision of the Fifth Circuit Court of Appeals, which held that states are
                  preempted.2We have reviewed the recent court decisionson this matter
                  and agreethat the Fifth Circuit decision is currently the governing deci-
                  sion on this issue. However, becausethe Fifth Circuit decision is
                  expected to be appealedto the U.S. SupremeCourt, the ultimate resolu-
                  tion of this issue is uncertain. bar also suggestedseveral technical
                  changeswhich we incorporated as appropriate.

                  Additional information on the four major types of travel consumer
                  problems we examined and on how states are addressingthese problems
                  can be found in appendixesI and II. As agreedwith your office, unless
                  you publicly announceits contents earlier, we plan no further distribu-
                  tion of this report until 30 days from the date of this letter. At that time,
                  we will send copiesto interested parties and make copiesavailable to
                  others upon request. If you have any questions about this report, I can
                  be reached at (202) 276-1000.Major contributors to this report are listed
                  in appendix V.
                  Sincerely yours,

                  Kenneth M. Mead
                  Director, Transportation Issues

                  2Trans World Airlines et al. v. Mattox, 89’7F.2d 773 (6th Cir. 1990).

                  Page 6                                             GAO/RCEDDO-136 Travel Consumer Protection

    Page 7   GAO/RCED-90-136 Travel Consumer Protection

Letter                                                                                                   1

Appendix I                                                                                          10
States Have Identified   Tour Operator Bankruptcies May CauseFinancial Losses                       10
                               to Consumers
Four Consumer Air        Travel ScamsCost ConsumersMillions of Dollars                              11
Travel Problems          Most States Believe Airline Advertising Practices Are                      11
                               Unfair and Deceptive
                         Airline Practices Leave PassengerRights Ill-Defined                        12

Appendix II                                                                                         16
States’ Effectiveness    Tour Operators Are Subject to Both State and Federal
in Protecting            States Want More Help From Federal Authorities in                          17
ConsumersVaries              Prosecuting Travel Scams
                         State Laws and Federal Enforcement Practice on Airline                     19
                             Advertising Are in Conflict
                         States Generally Lack Authority to Address Passenger                       20
                             Rights Problems

Appendix III                                                                                        22
Objectives, Scope,and
Appendix IV                                                                                         23
State Travel Laws for
Tour Operators
Appendix V                                                                                          24
Major Contributors to
This Report

                         Page 8                             GAO/RCED-90-130 Travel Consumer Protection
CAB      Civil Aeronautics Board
Dm       U.S. Department of Transportation
FTC      Federal Trade Commission
GAO      GeneralAccounting Office
IAPA     International Airline PassengersAssociation
NAAG     National Association of Attorneys General

Page B                            GAO/RtXD-fMM36 Travel Consumer Protection
StatesHave Identified Four ConsumerAir                                                                ’
Travel Problems

                        State officials identified four major types of air travel consumer
                        problems. These problems are
                    l   tour operator insolvencies;
                    l   travel scams;
                    l   airline fare advertising practices; and
                    l   the lack of well-defined “passengerrights.”

Tour Operator           Tour operators buy blocks of airline seatsand hotel rooms at wholesale
                        prices, assemblethese componentsinto a tour package,and retail the
Bankruptcies May        packageto individual travelers and travel groups. Problemsoccur
CauseFinancial Losses   becausetour operators often sell the spacebefore they buy it. If they
                        encounter unanticipated financial difficulties, the operators may not be
to Consumers            able to securethe transportation or accommodationsthey have prom-
                        ised. When this happens,consumersmay lose their money or receive
                        travel servicesinferior to those promised.
                        Tour package salesare a big business.In 1988 U.S. consumerspur-
                        chased$ I .6 billion in tour packagesfrom firms primarily engagedin
                        arranging passengertransportation- a 14 percent increaseover 1987.It
                        is also largely a local business-tour operators sell a substantial portion
                        of their tour packagesto travelers located in the samestate as the tour
                        operator. Unfortunately, tour operator bankruptcies have causedcon-
                        sumers to lose deposits of up to $10,000 and left consumersstranded
                        outside the United States with tickets or reservations that were not
                        For example, in May 1987 Houston consumersencounteredproblems
                        with a tour operator who sold travel certificates. The tour operator
                        begandefaulting on obligations to a travel agencythat provided the air
                        and land travel packagesto be used by the certificate holders, Unable to
                        provide travel and accommodationsfor many certificate holders, the
                        tour operator offered hundreds of consumersa full refund or the oppor-
                        tunity to rescheduletheir travel arrangements.Somewho rescheduled
                        had trips cancelleda secondtime. Although most consumersrequested
                        refunds in full, none of the estimated 300 consumersseekingrefunds
                        have been successfulin obtaining their money.

                        Page 10                              GAO/RCEDf%l36   Travel Consumer Protection
                       Appendix I
                       States Have Identified Four Consumer Air
                       Travel Problems

                       Travel scamsare fraudulent schemesin which consumersare typically
Travel ScamsCost       enticed, by mail or over the telephone,to buy a “bargain” vacation
ConsumersMillions of   package.The offer may involve buying a membership in a travel club
Dollars                that allegedly entitles the member to free or greatly discounted travel,
                       but that turns out to require substantial further payments not disclosed
                       in the original offer. Alternatively, the offer may claim that the scam
                       target has won the right to free or low-cost travel, but that the “winner”
                       must disclosea credit card number to verify eligibility. The scamoper-
                       ator subsequently usesthe credit card number to bill the consumerfor
                       expensivevacations without the consumer’sknowledge or consent.Sim-
                       ilar scamshave been set up offering oil and gas rights, gem stones,and
                       rare coins. In the four states we visited, state officials told us that travel
                       scamswere particularly commonbetween 1986 and 1988.Someofficials
                       believe scam operators have now either moved on to other states or
                       other types of scams.
                       Scamoperators typically set up a telephone bank in one state and make
                       calls to consumersin other states, using carefully written telemarketing
                       scripts; they have no intention of delivering the goodsor servicesthey
                       promise. At July 1987 congressionalhearings, the Director of Consumer
                       Protection for the Federal Trade Commission(FTC)estimated that over
                       the past several years the Commissionhad stopped over $600 million in
                       telemarketing scams.He estimated that in 1987 alone, travel-related
                       fraud cost consumers“tens of millions of dollars.“1

                       Prior to 1986 the Civil Aeronautics Board (CAB) adopted rules governing
Most States Believe    airline advertising practices. The CABrules required, for example, that
Airline Advertising    fare advertising show the round-trip fare for fares available only on a
Practices Are Unfair   round-trip basis, and that required fees and chargesbe included in the
                       fare.” Since 1986, when nor was given the consumerprotection functions
and Deceptive          of the expiring CAB, nor has sought to enhancethe operation of the
                       market by encouragingaggressiveair fare advertising. Beginning in

                       ‘The information on estimated losses presented during these hearings was the most recently available
                       information on travel scams.
                       ‘U.S. Department of Transportation (Dar) regulations (14 CFR 399.34) state that “the Board [now
                       Department of Transportation] considers any advertising or solicitation by a direct air carrier, indi-
                       rect air carrier, or an agent of either, for passenger air transportation, a tour,...or a tour compo-
                       nent...that states a price for such ah- transportation, tour, or tour component to be an unfair or
                       deceptive trade practice, unless the price stated is the entire price to be paid by the customer to the
                       air carrier, or agent, for such air transportation, tour, or tour component.”

                       Page 11                                              GAO/RCED-SO-136 Travel Consumer Protection
                     Appendix I
                     States Have Identhd   Four C!onsumer Air
                     Travel Problems

                     1986 IXX respondedto inquiries from airlines and other interested par-
                     ties by sending letters stating that it had reinterpreted the CAB regula-
                     tions on fare advertising (which uur was now responsiblefor enforcing).
                     Even though half of a round-trip fare was lessthan an actual one-way
                     fare, DOTwould henceforth permit half of a round-trip fare to be adver-
                     tised as a one-way fare as long as the advertisement clearly stated that a
                     round-trip purchase was required. In 1986 and 1988 DCX also issued
                     exemption orders permitting airlines to advertise prices that did not
                     include government-approvedchargesand fees. The fare could be
                     “unbundled,” with the chargesand fees listed separately in a footnote.
                     These chargesinclude immigration fees, security surcharges,and inter-
                     national departure taxes assessedon each passenger.
                     The states beganto experience a dramatic increasein consumercom-
                     plaints involving unfair and deceptive advertising practices by the air-
                     lines about a year and a half after CABceasedoperations. In 1987
                     attorneys general of a majority of the states voted, under the auspicesof
                     the National Association of Attorneys General,in favor of airline adver-
                     tising guidelines stating that these revisions of the CABrules allow air-
                     lines to publish advertisementsthat are false and misleading and
                     deceiveconsumersabout the true price of air travel.

                     Consumercomplaints received by DCKincreasedsharply between 1986
Airline Practices    and 1987, rising from about 8,800 to nearly 41,000. However, since 1987
Leave Passenger      complaints have recededto about the samelevel recorded in 1986. State
Rights Ill-Defined   officials told us consumersfrequently complain about airline service
                     problems, such as lost or damagedbaggage.Travel consumergroup rep-
                     resentatives told us that passengersreceive inadequate information
                     about compensationfor voluntary denied boarding and servicesavail-
                     able from airlines when flights are delayed or cancelled.
                     Although JXVregulations set liability limits for compensationon lost
                     baggage,the regulations do not specify how the value of the luggage’s
                     contents will be verified. An official with the International Airline Pas-
                     sengersAssociation @PA) told us that airline policies on documenting
                     proof of loss vary. Someairlines require original purchase receipts, can-
                     celled checks,or other documentation for high-value items, while others
                     do not. He indicated consumersare not aware of these differences.
                     When airline passengersare denied boarding becausea flight has been
                     oversold, uor regulations guarantee them certain rights. When a flight is
                     oversold, air carriers must request volunteers willing to give up their

                     Page 12                                    GAO/RCED90-126 Travel Consumer Protection

        Appendix I
        Statee Have 1dentUle.d Four Consumer Air
        Travel Problems

        seatsto take a later flight (in return for somecompensationfrom the
        airline). If an insufficient number of passengersvolunteer, then the car-
        rier may deny boarding to the remaining passengers.For involuntary
        denied boarding, the carrier is required to pay cash compensationof up
        to $400, or offer an equivalent value of free or reduced rate air trans-
        portation. In the latter instance, passengersmust be informed in writing
        of the amount of cash that would ot@erwisehave been offered. They
        must also be given a written explanation of the terms, conditions, and
        limitations of any compensationthat is given them.
        Volunteers for denied boarding may also be offered compensationfor
        voluntarily relinquishing their confirmed seat; however, the compensa-
        tion is any amount the airline offers that the passengerwillingly
        accepts.Although DOTregulations allow the airlines to offer free air
        transportation as an incentive for passengersto voluntarily relinquish
        seatson an oversold flight, several observers,including an assistant
        attorney general in the New York Attorney General’sOffice, the
        Director of Consumerand Industry Affairs for WA, and the National
        Association of Attorneys General,contend that this practice is not
        entirely fair to consumers.They point out that, although vouchers for
        free air travel may seemvery attractive to consumers,they sometimes
        carry serious restrictions on their use, such as limitations on the number
        of seatsthat are available for free use and blackout periods when no
        free seatsare available. DUI’regulations do not require the airline to dis-
        closethese restrictions; however, m has stated in a 1987 letter to the
        airline industry that it expects airlines to discloserestrictions on volun-
        tary denied boarding compensation“before the passengersurrenders a
        seat or declines a check” [emphasisin original].
        Other “passengerrights” are not federally protected at all. For example,
        consumersgenerally are not aware of how airline policies differ on ser-
        vices provided when their flights are delayed or diverted. These range
        from no servicesat all to various combinations of hotel accommodations,
        meals, and telephone privileges. Someairlines provide servicesonly
        under certain circumstances-for example, if the passengerinvolved is
        flying first class.
        Consumershave also complained that they were not informed that cer-
        tain tickets were nonrefundable. While uor regulations require that the
        nonrefundable nature of the ticket be disclosedon the ticket itself, they
        do not require that nonrefundability be disclosedwhen the ticket is pur-
        chased(for example, if it is purchased by telephone). However, MJToffi-
        cials told us that they would regard failure to disclosenonrefundability

        Page 18                                    GAO/RCED-90-136 Travel Consumer Protection
Appendix I
States Have Identified Four Cmsumer Air
Travel Problem

at the time of sale to be an unfair and deceptive trade practice, even
though it is not specifically prohibited by DOT’S

Another area of complaint is frequent flyer programs. Complaints have
centered on changesin program rules without adequatenotification to
membersand limitations on the number of frequent flyer seatsavailable
to memberswhen they redeemprogram certificates.
Finally, during the past decadedozensof airlines have ceasedoperations
or filed for bankruptcy, costing consumersmillions of dollars in lost air
fares. Thesebankruptcy losseshave continued despite efforts by nor
and state agenciesto inform consumersof their rights and of possible
ways to mitigate damages.

Page 14                                   GAO/RCED-90-136 Travel Consumer ProtectIon
Appendix II

States’ Efftiveness in Protecting

                        While states have been active in protecting travelers, their ability to
                        addressspecific problems varies. States appear to have adequate
                        authority to regulate tour operators, but problems have arisen in pro-
                        tecting consumersagainst travel scamsand in addressingairline adver-
                        tising practices. States generally believe they lack authority to deal with
                        “passengerrights” issues.

                        operator problems. Of the 10 states we reviewed, 8 have laws regulating
Subject to Both State   tour operators. With one exception these laws require the licensing or
and Federal Law         registration of tour operators, the posting of bonds or the placing of con-
                        sumers’ deposits in a trust account, or a combination of these require-
                        ments.*Sincemost tour operators do a substantial portion of their
                        businesswith customerswithin the states in which they operate, states
                        generally believe they have adequate authority to resolve consumer
                        State officials commonly regard tour operators, unlike charter opera-
                        tors, as not being regulated by the federal government2 DOT,however,
                        believesthat tour operators are regulated under federal law, and that
                        the problems that consumerstypically have with tour operators (e.g.,
                        passengersnot receiving airline tickets becauseof tour operator
                        defaults) would not occur if tour operators complied with federal law.
                        WT takes the position that any retailer of air transportation, including
                        tour operators, falls within the scopeof Section 401 of the Federal Avia-
                        tion Act. Section 401 requires, in effect, that any operation that “holds
                        itself out ‘as ready and willing to undertake for hire the transportation
                        of passengersor property from place to place”’ have a nur air carrier
                        certificate.3 nor believesthat a tour operator, as a retailer of airline ser-
                        vices, is “holding itself out” as a sourceof such services.As a result, D(JT
                        takes the position that any retailer of air transportation must be either a
                        uur-certificated air carrier, a travel agent authorized by such an air car-
                         rier to sell air transportation on its behalf, a m-regulated public charter
                         operator exempted from section 40 1 by D&S public charter regulations

                        *Appendix IV shows key components of each of the eight states’ laws governing tour operator&

                        %hart.er operators charter all or part of the use of aircraft that are not flying on a regular schedule,
                        while tour operatore may buy space on regularly scheduled flighta. Charter operators are covered by
                        federal regulations that require them to protect consumers’ paymenta for travel services by obtaining
                        a bond and by depositing funds in an escrow account.
                             ager 1000 v. CAB, 489 F.2d 700 (7th Cu. 1973), cert. denied, 416 U.S. 082 (10741,citing &
                              Hacienda, Inc. v. CAB, 298 F.2d 434 (0th Cir. 1962).

                        Psge 16                                             GAO/lUTED-90-136 Travel Consumer Protection

Staten’ Eff~dvenem      in Protecting
Consumers Varies

(14 C.F.R.,Part 380), or a contract bulk fare operator operating under
contract to a nor-certificated air carrier under authority of CABorders
80-11-24(Nov. 6, 1980) and 81-7-109(July 21, 1981).
Several federal court casessupport nor’s view that tour operators fall
within the scopeof Section 401 of the Federal Aviation Act. These cases
state that travel agents,tour operators, and nominal “social clubs”
which publicly sell tours are “indirect air carriers” for the purposesof
section 401.4Any entities that
“hold out to the public” that they engagein air transportation, by selling flightsto
the general public, by furnishing flights otherwise unserviced by regularly sched-
uled airlines, or by soliciting “members of the general public to purchase tickets on
the flights it arranges,”

qualify as air carriers under section 401, according to these cases6

By nor’s interpretation of the requirements of section 401, a tour oper-
ator must have a direct relationship, as agent or contractor, with an air-
line. According to DCYI’,by this standard most of the tour operators that
are the subject of consumercomplaints are operating illegally, because
in general these tour operators do not have such direct contractual rela-
tions with airlines. They are buying seatsfrom travel agents,charter
operators, or other tour operators. It is the lack of this direct contractual
relationship with an airline that results in consumerproblems, because
when the tour operator goesinto default, there is no one to back up its
promise of airline services,and the passengermay lose any money paid
in advance for airline tickets. The laws and regulations under which
agents and contractors of airlines operate provide protection for the
passengerin the event that such an agent or contractor defaults. In the
caseof a travel agent or contract bulk fare operator, the airline is obli-
gated to provide the transportation which the agent or contractor has
sold, even if the airline has not been paid. In the caseof a charter oper-
ator, the nor-required escrow account provides someprotection for the
However, the uur rules protect travellers only from losing their airline
tickets. There is no protection for the passengerfrom losing hotel space

4Arldn v. Tram International Airlines, Inc., 668 FSupp. 11 (E.D.N.Y. 1982). See also CAB v. Carefree
   ave , nc.,        2d 376 (2d Cir. 19-d     Monarch Travel Services v. ACCI, 466 F.2d 662 (Qth
cir.), cert. denied, 410 U.S.967,93S.Ct.1444, 3 6 L. .
6w,     668 F.Supp. at 13 (citations omitted).

Page 16                                           GAO/WED-9@136 Travel Conmmer Protection
                        Appendix II
                        States’ Effectivenees in Protecting
                        Consumers Varies

                        and tickets for sightseeingtours, admissionsto museums,etc. (“ground
                        packages”), that tour operators also sell.
                        nor staff complained to us that state officials rarely report to them tour
                        operators who are operating illegally, while the representativesof state
                        attorneys general told us that they were completely unaware that nor
                        interpreted section 401 as applying to tour operators. In our recent
                        report, Airline Competition: DOT’S   Implementation of Airline Regulatory
                        Authority (GAO/RCED-89-93, June 28,1989), we recommendedthat nor better
                        coordinate its consumeraffairs functions with state offices. We believe
                        that this is a good example of a casewhere such coordination would be

                        In addition to general consumerprotection laws and laws applying
States Want More Help   broadly to anyone who sells travel services,4 of the 10 states we con-
From Federal            tacted have introduced telemarketing legislation to prevent scams.In
Authorities in          Texas and New York the legislation has not beenpassed.However, Ten-
                        nesseeand Washington enactedtelemarketing legislation in 1989 that
Prosecuting Travel      coverstravel service sales.Tennessee’slaw becameeffective in June
scams                   1989, and Washington’slaw becameeffective in January 1990. These
                        laws include provisions requiring that telemarketers register and that
                        telephone scripts be reviewed in advancewith state authorities.
                        The four states we visited have attempted to halt travel scamoperations
                        primarily through litigation. California and Ohio have filed several suits
                        under their general consumerprotection laws and specific travel-related
                        laws. Texas has brought several suits against scamoperators under its
                        general consumerprotection law. New York officials told us that they
                        have mediated travel scam casesbut that they have not recently filed
                        any lawsuits against travel promoters. Tennessee’snew telemarketing
                        law has beenthe basis for several lawsuits since July 1989.
                        Texas has been the most active of the four states we visited in travel
                        scamlitigation. According to an assistant attorney general,the state has
                        filed approximately 10 to 12 lawsuits against travel telemarketers oper-
                        ating in Houston since 1986.In one case,the state charged a travel
                        telemarketer with using deceptive languagein salespresentations,
                        failing to discloserestrictions on travel services,misusing consumer
                        credit card numbers, and failing to disclosefull information about trip
                        itineraries. The firm was enjoined from engagingin any business
                        activity in or from the state of Texas and ordered to deposit $25,000 in
                        an account for consumerrefunds.

                        Page 17                               GAO/WED-90-136 Travel Ckmmmer Protection
Appendix II
Stated Effectivenew   in Protmting
Consnmera Varies

The federal government has attempted to halt travel scamsby adopting
a combination of approaches,including investigations, litigation, infor-
mation sharing, and legislation. The FTChas prosecutedfraudulent
travel telemarketers under Sections6 and 13 of the Federal Trade Com-
mission Act. In addition, the Postal Inspection Service has conducted
mail fraud investigations of travel scamsunder Title 18 of the United
States Code,Section 1341.
The FTC and the states cooperatedin 1987 in setting up the
Telemarketing Complaint System data baseto help the nation’s law
enforcement agenciescollect and share information on firms suspected
of telemarketing fraud. The system is designedto help participating
organizations identify and prosecute fraudulent telemarketers. Partici-
pating organizations include 26 states, 3 federal agencies,and 4 private
Although the states we visited have had somesuccessin prosecuting
travel scamsoperating in their states, most state officials contacted
during these visits told us federal agenciesneed to take a more active
enforcement role if travel scamsare to be eliminated. According to state
officials in New York, Ohio, and Texas, scamscan be most effectively
prosecuted at the federal level becausescamoperators and targeted con-
sumers are usually in different states, which createsjurisdictional
enforcement problems for the states. The attorney general in the state
whose consumersare being targeted has no authority to prosecutethe
fraudulent telemarketers operating out of other states. The Assistant
Attorney General in Houston, Texas, pointed out that state actions are
applicable only in caseswhere illegal action is directly related to opera-
tions within the state, or to protect consumerswho reside in the state.
On the other hand, federal enforcement actions, such as FTCinjunctions,
are enforceable in US. federal courts in any state. Also, the states have
difficulty in obtaining restitution for consumers,whereas the FTChas
the authority to freeze a firm’s assets.
One approach to strengthening state authority and encouraginga more
active federal enforcement role is embodiedin the proposed
Telemarketing Fraud Prevention Act of 1989 (H.R. 1364). This legisla-
tion would allow states to bring civil actions against fraudulent
telemarketers in the U.S. district courts in the states where the
telemarketers are located. Injunctions obtained as a result of the actions
would be enforceable in any federal court. The bill would also mandate a
more active FTCrole, requiring the FTCto establish rules setting time
limits on the delivery of goodsand servicesmarketed by telephone and

Page 18                              GAO/RCEIMO-13tl Travel Chwumer Protection
                      Appendix II
                      Stated Effectivenees in Protecting

                      allowing consumersa specified period within which to cancel an order
                      made by telephone. This legislation would resolve most of the concerns
                      that the states have about limited state jurisdiction.

State Laws and        Most states believe that ~01”srevisions of CAB’Sairline advertising rules
                      conflict with the states’ interpretations of their unfair and deceptive
Federal Enforcement   trade practice statutes. The states generally interpret their statutes as
Practice on Airline   prohibiting the airlines from advertising half of a round-trip fare as a
                      one-way fare when the true cost of a one-way fare is substantially more.
Advertising Are in    State officials believe that such advertisementsare false and misleading
Conflict              and deceiveconsumersabout the true price of air travel. After the
                      states experienceda dramatic increasein consumercomplaints
                      involving unfair and deceptive advertising practices by the airline
                      industry, the state attorneys general, through their professional organi-
                      zation, the National Association of Attorneys General(NAAG), developed
                      guidelines for airlines to follow in advertising travel. The purpose of the
                      guidelines was to clarify for the airline industry what the states consid-
                      ered prohibited conduct under their laws.
                      A number of states have sued the airlines over airline advertising prac-
                      tices that in their view violate states’ consumerprotection laws. The air-
                      lines’ defensein each of these caseshas beenthat federal law preempts
                      such suits. Section 106 of the Federal Aviation Act of 1968 (49 U.S.C.,
                      App. Section 1306) states that
                      No state shall enact or enforce any law, rule, regulation, standard, or other provi-
                      sion having the force and effect of law relating to rates, routes or services of any
                      carrier having authority under Subchapter IV of this chapter to provide air

                      According to the airlines, the states, by bringing suits against them on
                      the basis of their advertising statutes, are attempting to regulate airline
                      rates, routes, or services.
                      The states, on the other hand, argue that airlines can set or develop
                      rates, routes, or servicesas they seefit, but they must publish or broad-
                      cast this information within a given state in a manner consistent with
                      that state’s laws. The states point to another section of the Federal Avi-
                      ation Act (49 USC. Section 1606) which states “Nothing in this chapter
                      shall in any way abridge or alter the remediesnow existing at common
                      law or by statute, but the provisions of this chapter are in addition to
                      such remedies,” as preserving state remediesin this area.

                      Page 19                                     GAO/lKXIHW-196 Travel Ckmsumer Protection
                        Appendix Jl                                                                           1/
                        Stated Efktlveness     in Pro-
                        tlkulBnInere varies

                        In 1988,27 states sued nor over its 1988 airline advertising exemption
                        orders becausethe orders conflicted with the states’ unfair and decep-
                        tive trade practices laws. Without resolving the substantive issues,the
                        U.S. Court of Appeals for the District of Columbia Circuit ruled in favor
                        of the states, finding that nur had not complied with the notice-and-com-
                        ment requirements of the Administrative ProceduresAct, and rescinded
                        the two orders.
                        Following the court’s rescissionof the two airline advertising orders, DOT
                        in July 1989 published proposed rules in the Federal Registerto codify
                        its price-advertising policy regarding one-way fares. Like the rescinded
                        orders, the proposed rules would allow advertisers to list government-
                        approved fees and chargesseparately from fares in advertisements.As
                        of June 1990 the rules had not been adopted and DOTofficials said they
                        could not estimate when they would be.

                        The United States Court of Appeals for the Fifth Circuit, the highest
                        court to rule on the matter, recently held that states are preempted from
                        enforcing airline advertising laws.6The Fifth Circuit decision held that
                        “state laws proscribing deceptive advertising are preempted by federal
                        law when the state attempts to enforce such laws against the adver-
                        tising of fares by interstate and international airlines.” The court said
                        that airline fare advertising “relates to” rates within the meaning of sec-
                        tion 1306(a)(l) and thus any state regulation is expressly preempted.
                        The court dismissedthe states’ argument that section 1606 preserved
                        state remediesin the price advertising area, stating that “Section 1606
                        doesnot preserve state law remedieswhen there is expresspreemption
                        under Section 1306.” The court affirmed the lower court’s preliminary
                        injunction, which enjoins the Attorney General of Texas and 33 other
                        states’ attorneys general from bringing any other similar suits against
                        the plaintiff airlines.

                        State officials we visited do not generally view solutions to passenger
States Generally Lack   rights complaints as within their jurisdiction. They believe that these
Authority to Address    airline practices fall within the “rates, routes or services” whose regula-
PassengerRights         tion is reserved to the federal government. With a few exceptions,they
                        said passengerrights complaints were referred to the airlines or nur. In
Problems                the four states we visited, officials in the offices of attorneys general
                        and other consumerprotection offices received complaints about lost
        *               luggageand other airline servicesand generally referred them to the
                        6Tmns World Airlines et al. v. Mattox, 897 F.2d 773 (6th Cir. 1990).

                        Page 20                                           GAOjRCED-@O-136Travel Consumer Protection
    .       -
                Appendix II
                Statea’ Effectivenem in Pro-
                Camnners Varies

                airline or JNXfor resolution. In those caseswhere states tried to resolve
                these types of complaints, for example, by contacting the airlines, they
                believed their successwas limited by their lack of authority over the
                Onearea where states have tried to be active is in requiring disclosure
                of airline policies. In December1987 NAAG adopted a guideline on the
                disclosure of restrictions in compensationfor passengersvoluntarily
                denied boarding on overbookedflights. This guideline calls for full dis-
                closure by the airlines of all restrictions on offers for future air travel
                before consumersvolunteer to give up their seats.NAAG believesthat it
                is unfair and deceptiveto promise free air travel without disclosing the
                restrictions on the travel offered. Like NAAG’S advertising guidelines,
                this guideline is intended to clarify what the states consider prohibited
                conduct under their laws. Sincefederal regulations require passengers
                involuntarily denied boarding to receive a full explanation of any
                restrictions on the free air travel provided as compensation,the NAAG
                guideline would make the policy on voluntary denied boarding more
                consistent with the policies on involuntarily denied boardings. We did
                not determine the effectivenessof this guideline.

                Page 2 1                              GAO/RCEIMO-126 Travel Consumer Protection
Appendix III                                                                             ‘!Y
Objectives,Scope,and Methodology

               At the request of the Chairman, Subcommitteeon Antitrust, Impact of
               Deregulation, and Privatization, HouseCommittee on Small Business,we
               assessedstate efforts to protect consumersfrom unfair and deceptive
               travel industry practices. As agreedwith the Subcommitteeoffice, we
               focusedon the air travel industry. Our objectives were to (1) examine
               how the states are organized to addressconsumerprotection problems,
               (2) identify the most serious consumerprotection problems the states
               have encounteredin the air travel area, and (3) assesshow the effec-
               tiveness of state action in this area is limited by federal restrictions on
               the states’ consumerprotection role.
               To addressthese issues,we visited the states of California, New York,
               Ohio, and Texas. We selectedthese four states becausethey are large
               and becauseeach had enacted a travel-related consumerprotection law.
               We also contacted consumerprotection agenciesin the states of Florida,
               Hawaii, Illinois, Rhode Island, Tennessee,and Washingtonbecauseoffi-
               cials of state and private organizations indicated these six states were
               also active in the area of travel-related consumerprotection. In addition
               to state agencies,we contacted several private organizations that are
               concernedwith the provision of transportation servicesto consumers-
               the American Society of Travel Agents, ConsumerReports Travel
               Letter, the International Airline PassengerAssociation, and the National
               Association of ConsumerAgency Administrators.

               We reviewed federal and state laws and regulations applicable to air
               travel-related consumerprotection as well as other laws used to protect
               consumersfrom unfair and deceptive trade practices. We also reviewed
               the limited amount of data state agencieshad developedon their con-
               sumer protection efforts to find out where the most serious problems
               were. Finally, we conducted a literature search to identify potential
               travel issuesand to identify which states were active in protecting con-
               sumers from travel-related problems.
               Our audit work was carried out between February and November 1989
               in accordancewith generally acceptedgovernment auditing standards.

               Page 22                              GAO/RCED-90-126 Travel Consumer Protection

Appenh            IV

St&teTravel Laws for Tour Operators

                                                                              Payment protection for consumers
                          Requirements to       accounr
stats                  License     Register     (percent)               Bond                                           Other
Gfornia                            X                     90    OR       Equal to amount of contract
~---_                                                                   with carrier
Florida                X                                                $lO,OOO-$25.000
Hawaii                 X                                                                                              Travel Agency Recovery
                                                                                                                      Fund: funding from travel
                                                                                                                      agency/license fees; $8,000
                                                                                                                      per consumer
-..-.--                     _...
                              ~                          90
New York
Ohio                               X                                    $20,000 intrastate: $50,000           OR      Statement from licensed
                                                                        interstate 81international                    financial institution
                                                                                                                        uaranteeing performance
                                                                                                                      P$50,000 +)
Rhode Island           x-          -                                    $10.000
Washington             -                                 90    OR       $50,000 + or 10 percent of 2          OR       Maintain written agreement
                                                                        months revenue                                 with carriers
                                              Note: Although each law uses a different term to describe to whom it applies, the definitions of travel
                                              promoter, tour operator, and travel consultant are synonymous. All refer to an individual who sells or
                                              arranges for the sale of air, sea, or land transportation separately or in conjunction with other travel
                                              services. Although the Hawaii and Rhode island laws specify travel agents, state officials told us these
                                              laws could also be applied to tour operators.
                                              BAtrust account is an account in which a percentage of the consumer’s payment for travel services is
                                              deposited to ensure that, in the event of cancellation of the tour for any reason, the consumer is repaid
                                              the amount deposited. The percentage shown represents the percent of the consumer’s payment for
                                              travel services that tour operators must deposit.

                                              Page 23                                              CiAO/BCEDW-126 ‘bavel Cmuumer Protection
Appendix V

Major Contributors to This Report

                        James D. Noel, Assistant Director
Resources,              Francis P. Mulvey, Assistant Director
Community, and          John V. Wells, Assignment Manager
Development Division,
Washington, D.C.

                        Larry A. Calhoun, Issue Area Manager
San Francisco           Julian M. Fogle, Evaluator-in-Charge
Regional Office         Mary K. Colgrove-Stone,Site Senior
                        Daniel F. Alspaugh, Staff Evaluator

                        David K. Hooper, Attorney
Office of the General

(941207)                Page 24                             GAO/RCED-Wl36   Travel Consumer Protection
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