GAO AIR TRAVEL Effectiveness of State Consumer Protection Efforts Varies 142342 RESTRICTED---Not to be General Accounting Once unless speclflcally approved by the Office of Congressional Belatious. “... -_ .__I.._..-. ..-_..^._.__ I ___.-_ ----- . United States GAO General Accounting Office Washington, D.C. 20848 Resources, Community, and Economic Development Division B-234833 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, Problems 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 operator. 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 R-234333 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 B-234333 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 plans. 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 Y Page 7 GAO/RCED-90-136 Travel Consumer Protection Contents 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 Law 16 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 Methodology 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 Abbreviations 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 honored. 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 rules, 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 ConsumersVaries 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 problems. 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 I Apllendixn 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 passenger. 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 fruitful. 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 organizations. 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 CkbneumersVariee 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 transportation. 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 airlines. 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 Trust 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 Illinois_____~.----- -..-.-- _... ~ 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 Economic 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 Counsel (941207) Page 24 GAO/RCED-Wl36 Travel Consumer Protection -..-. _-__-_-.. --__----_..____ -.--_.-__--__.- ..-^... ......I.__I_..__..._ _-----_-...-__--.- 1r.S. (;c~rrc*rel Acc*ouut,iug Ol’f”lc*c~ J’. 0. hx ~iOl5 (;;lit.tlc~rst,urg, MI) 20877 Ord(~rs may also t)cb placed by dliug (202) 275424 I.
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)