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NerdWallet: Should U.S. airlines pay passengers for delays like the EU?

By SALLY FRENCH, NerdWallet

Published: March 29, 2023, 7:46am

Southwest Airlines spent the early part of 2023 trying to make good after a historic meltdown resulted in more than 16,700 canceled flights during the 2022 holidays. The airline reimbursed passengers for the cost of alternative travel arrangements and sent many travelers additional loyalty points.

Southwest wasn’t legally required to. The U.S. has no federal laws mandating that airlines compensate passengers for delays . Airlines are only obligated to offer refund s if they cancel a flight and the passenger decides not to travel.

That’s hardly the case in Europe. An EU regulation, commonly referred to as EU261 , requires airlines to compensate travelers for cancellations, denied boarding or delays of two or more hours. It went into effect in 2005 and applies to most flights operated by airlines based in the 27 EU countries, plus Iceland, Norway and Switzerland.

As long as the flight wasn’t disrupted due to an “extraordinary circumstance” such as weather , passengers are entitled to compensation from 250 euros (about $260) to 600 euros (about $630), depending on the length of flight and delay. Some passengers are also entitled to free meals and accommodations.

HAS EU261 ACTUALLY REDUCED DELAYS?

Given the financial pressure to pay out passengers, it might seem airlines are incentivized to stay on schedule, but some studies show that it might not help with being on time at all. Even when it does, there might only be marginal improvements. A 2018 study from the European University Institute concluded flights regulated by EU261 are 5% more likely to arrive on time, resulting in an average arrival delay reduction per flight of just 3.9 minutes.

NEW PROBLEMS INTRODUCED BY EU261

Experts say EU261 has spawned new challenges. For one thing, the definition of “extraordinary circumstances” for delays (upon which airlines don’t have to pay out) remains unclear. After all, the point at which a storm morphs beyond manageable is debatable. The government also never established a consistent process to file claims, and many airlines make it difficult to do so.

For airlines, there are also the added administrative costs of processing claims, as well as potentially more idle aircraft and schedule padding to help prevent delays. Some experts worry that financial pressure might compel staff to rush through or ignore potential issues, presenting unnecessary safety and technical risks.

WHO LOSES AND WINS UNDER POLICIES LIKE EU261?

LOSERS: AIRLINES (ESPECIALLY SMALL, REGIONAL ONES)

Some experts suggest that regulations especially hurt small airlines that can’t afford to have spare aircraft on standby or software to handle the compensation claims. The fixed payout amounts to passengers can have an outsized impact on shorter routes or budget airfares.

“Compensating 250 euros on a flight that costs 50 euros is clearly absurd,” said former Flybe CEO Christine Ourmières-Widener in a testimonial generated for a 2019 report published by the European Regions Airline Association. Flybe is a now-defunct British regional airline.

MOSTLY WINNERS: PASSENGERS

Delays can cost passengers via time, inconvenience and stress, and sometimes literal expenses like food and lodging. Government laws mandating compensation can alleviate that burden if passengers are willing to put in the time to file the paperwork.

Raj Mahal , founder of PlanMoreTrips, an app that helps travelers find cheap airfares, was flying home to Barcelona after spending the 2022 winter holidays in Portugal. His TAP Air Portugal flight was delayed by three hours, which the airline blamed on weather (though Mahal says other flights were departing).

Mahal filed a claim through TAP’s Self Service feature, but the airline initially offered him just half of what he felt he was entitled to. It wasn’t until after he fired off an angry tweet (which the airline responded to) that he felt he received fair compensation.

The rate of passengers claiming compensation has increased, suggesting more people are getting money for their inconvenience. In 2018, 38% of eligible passengers claimed compensation, up from just 8% in 2011, according to a 2021 European Commission study.

WINNERS: THIRD-PARTY CLAIMS AGENCIES

That uptick in passengers claiming compensation is in part due to the proliferat ion of claims agencies, such as AirHelp. These third-party claims agencies help passengers navigate the claims process, but often take a cut of compensation. For example, AirHelp typically takes a 35% cut of the traveler’s compensation.

While companies such as AirHelp credibly threaten to sue airlines who don’t comply and help customers navigate the claims process, they also charge a fee to distressed passengers — in turn profiting off EU261.

SHOULD THE U.S. ADOPT SIMILAR REGULATIONS?

If the goal is financial incentives to increase on-time flights, U.S. airlines may already have that. Even without government-required compensation, delays cost airlines $8.3 billion in increased expenses, including crew, fuel and maintenance in 2019, according to the FAA Office of Aviation Policy and Plans.

Ten major U.S . airlines have also made customer service commitments for flights canceled or delayed by three hours or more. That includes rebooking passengers and offering meal vouchers. Most promise hotel accommodations, too. However, none are required to do so by law.

Southwest reported a revenue loss of $410 million during the 2022 fourth quarter, attributed to the December 2022 disruptions, which was just part of their $800 million overall loss. Factoring in the first quarter of 2023, the meltdown cost Southwest more than $1 billion after accounting for lost revenue and passenger reimbursements.

“Southwest is being punished for this,” Robert Poole, director of transportation policy for the Reason Foundation, a nonpartisan think tank, says. “Anybody caught up in the 2022 snafu won’t want to take a chance on this airline again. Southwest lost business and market value. That’s more powerful than anything Congress can do.”

Meanwhile, Mahal has successfully received compensation for shorter disruptions, such as a two-hour delay on an American Airlines flight last month between Austin and Albuquerque.

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He emailed American and — within 48 hours — the airline deposited 5,000 miles (worth about $75) into his AAdvantage account.

Even still, Mahal, who is American but lives in Spain, says he prefers the EU’s clear passenger protections.

“The current U.S. system is extremely broken and a joke,” he says. “There needs to be some basic passenger protection laws because the status quo isn’t working.”

The Flight Compensation Regulation of the European Union has aided passengers in receiving more consistent compensation for delays. However, despite calls from advocates for the idea to be implemented in the United States, the regulation does not appear to be making waves.

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