As if flying weren’t expensive enough, American Airlines’ recent policy change might feel like adding fuel to the fire for certain passengers.
Earlier this year, the major U.S. air carrier joined other airlines in raising baggage fees by roughly $10 due to skyrocketing fuel prices. But why raise bag fees instead of base ticket fares amid a fuel crisis?
Airlines intentionally chose to raise baggage fees because of a tax exemption. Under U.S. tax law, airlines must pay a 7.5% federal excise tax on domestic ticket fares. However, ancillary charges like baggage fees are legally exempt from this tax, according to the federal Government Accountability Office (GAO).
This allows airlines to keep 100% of those luggage profits to offset their overhead.
The carrier recently disclosed the sheer scale of skyrocketing fuel prices in a Form 8-K filing with the Securities and Exchange Commission (SEC), noting that the midpoint of its full-year guidance is “expected to be approximately flat to 2025, despite a greater than $4 billion increase in expense related to higher prices for jet fuel.“
To further combat those soaring fuel costs, which spiked past $4.80 a gallon in early April according to the Argus U.S. Jet Fuel Index, American Airlines leadership implemented a deliberate strategy to reduce overall flying capacity.
Beyond cutting several long-haul Middle Eastern routes, the carrier quietly began trimming marginal flying by pulling back on its total volume of flights out of its Chicago hub.
While macroeconomic pressures like jet fuel pricing explain higher baggage fees, consumer advocates argue that fuel overhead cannot justify a policy that allows the airline to retain the majority of a displaced traveler’s premium fare.
American Airlines policy says downgraded first-class flyers only get 40% refund
About three months ago, American Airlines updated its international tariff rules and contract of carriage regarding cabin downgrades. The updated policy indicates that when the carrier downgrades a first-class passenger to coach, they’ll refund only 40% of the ticket price.
“Downgrades to a lower cabin — refunds are issued at 40% of the ticketed fare on the affected segment,” reads American Airlines’ official page on Conditions of Carriage.
Since premium tickets often cost significantly more than 40% above coach tickets, this flat-rate policy means passengers may get back much less money than the actual price difference between the two cabins, writes View From the Wing’s Gary Leff, a recognized expert in miles, points, and business travel.
What exactly does American Airlines’ 40% refund mean?
Under the flat 40% rule, the actual price difference between what you paid for luxury and what you received in economy is completely ignored.
Take a standard domestic flight. If a passenger buys a $1,050 business class cross-country ticket and is involuntarily downgraded to a coach cabin where a seat goes for $200, the 40% calculation yields a refund of just $420, Leff pointed out in a March post.
Instead of receiving the standard $850 refund expected under traditional calculation metrics, the passenger receives $430 less than the difference between the business-class and economy fares.
On high-revenue international routes, the financial hit becomes substantially larger. According to industry data from Simple Flying, a close-in or peak summer one-way ticket for a premium flagship business class seat on American Airlines can easily cost more than $8,000.
Meanwhile, a standard one-way economy ticket on the exact same route can sit around $800 on American Airlines’ booking tracker.
Using the fare-difference approach advocated by the complainants, a passenger on that route would receive a $7,200 refund. Under the revised 40% flat-rate metric, however, that compensation falls to $3,200.
Consequently, the airline retains $4,000 of the original premium fare, substantially exceeding the market rate for a standard economy seat on the exact same flight.
This policy update sparked a recent complaint with the Department of Transportation.
DOT formal complaint against 40% seat downgrade refund
Following the policy refund update, a formal complaint was filed with the Department of Transportation (DOT) by Benjamin Edelman and Mike Borsetti.
The complaint argues that the 40% calculation is untethered to the reality of airfare pricing and asks the DOT to order American Airlines to instead refund the true difference between the premium fare paid and the economy fare available at the time of purchase.
“40% is not a reasonable estimate of the difference in price between AA’s coach and business cabins. AA’s business class cabin prices are routinely several times that amount,” reads the complaint.
Key allegations in the DOT complaint:
- The math is unfair to consumers: “AA’s policy effectively compels downgraded passengers to pay thousands of dollars more than the market price for coach travel.”
- The policy is intentionally hidden and deceptive: The complainants point out that everyday consumers have no way of knowing this rule exists because American Airlines’ website actively hides the text from standard browser search functions.
- It is an illegal attempt to bypass federal law: Recently, the DOT enacted strict new refund rules (14 CFR Part 260) to protect consumers. Under these rules, when a passenger’s flight is significantly changed by the carrier, the carrier must provide a prompt refund — namely, the full value of the service paid for but not delivered. The rule also defines “consumer is downgraded to a lower class of service” as a significant change.
- Hidden “priority lists” for bumping passengers: The complaint further argues that while DOT requires specific procedures and disclosures for flight oversales, “AA does not publish or disclose its priority rules for involuntary downgrades.” Edelman and Borsetti argue that this lack of transparency to downgrade priority is “both unfair and deceptive under 49 U.S.C. § 41712,” as a passenger wishing to challenge a downgrade as improper doesn’t have all the information necessary to do so.
Why is American Airlines downgrading so many premium passengers?
Over the years, American Airlines has faced complaints about aging premium cabins and broken infrastructure across its fleet. A 2024 report by Simple Flying highlighted instances of aircraft flying for weeks with non-functional premium seats taken entirely out of service, forcing the carrier to slap “do not occupy” signs upfront and displace booked passengers.
According to JetsetterGuide, American Airlines has been rushing to crowd more seats onto its planes to make more money, but it isn’t giving maintenance crews enough time to actually fix broken parts between flights.
In an April 29 post on View From the Wing, Leff highlighted that “American Airlines seems to have more issues with broken seats than other airlines. United and Delta cabins are sometimes in disrepair, but American planes seem to fly with seats taken out of service more than other carriers.”
The travel expert noted seeing firsthand flights operating for days and weeks without fixing the problem.
Chief Customer Officer Heather Garboden admitted the challenges during American’s quarterly internal “State of the Airline” employee meeting held in April and reviewed by View From The Wing.
“I see this myself when I fly, is that we have too many broken seats. We have too many IFE systems that do not work. We have duct tape where we should not have duct tape,” Garboden said.
The CCO further shared that this is about to change, as the company created “a team within Tech Ops whose sole focus will be making sure our aircraft interiors look the way they should for our customers.”
Garboden highlighted that significant improvements in America Airlines’ aircraft interiors should be seen by the end of the summer.
What might be next for American Airlines (complainants’ formal demands)
In the complaint, Edelman and Borsetti issued several formal demands, starting first with asking the DOT to exercise its authority under 49 USC 41504(c) 14 CFR § 221.2(a)(2) to reject AA’s tariff and CoC modifications.
Other demands include:
- An investigation of American Airlines for having engaged in the unfair or deceptive practices mentioned in the complaint.
- Ordering American to refund the true difference between the premium fare paid and the lowest coach price on the day of purchase.
- Warning premium ticket buyers at checkout that they could be downgraded and telling them exactly how much money they’ll get back.
- Giving back-pay refunds to any past passengers who were already short-changed by the 40% rule.
- Publishing clear rules on how the airline chooses who gets bumped to coach, and forcing them to ask for volunteers first.
- Turning over all past customer complaints about downgrade refunds directly to the DOT.
- Imposing official financial penalties and fines on American Airlines.
Source: Official Complaint with the Department of Transportation
Leff noted that travelers interested in this policy change can submit a comment on this issue to the DOT to consider, suggesting that even though large airlines usually have the upper hand, public opinion is the ultimate equalizer that could spark meaningful change.
“When the agency knows that consumers care about an issue, that can balance any go along, get along with the industry (regulatory capture) that may otherwise exist,” Leff wrote.
