US gets tough on airline refund rules, proposes $25 million fine for Air Canada

Things just got heated between the U.S. government and Air Canada.

On Tuesday, the U.S. Department of Transportation (DOT) filed a motion to fine Air Canada for the no-refund policy it enacted due to the pandemic. The proposed penalty of $25.55 million comes after the Montreal-based carrier denied refunds for over a year for flights that were canceled by the airline.

The Department of Transportation has a policy that states that any flight to, from or within the U.S. that was canceled or significantly delayed is eligible for a refund — regardless of the reason. For much of the pandemic, however, Air Canada didn't play by those rules.

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For flights after March 19, 2020, the airline stopped issuing refunds for canceled tickets on transborder flights. Air Canada instead offered future-use vouchers with strict expiration policies and other additional restrictions.

At the height of the pandemic, Air Canada wasn't alone in denying refunds. Other carriers also did too, so much so that the DOT received an "unprecedented" number of complaints from travelers — nearly 10,000 each month at the outset of the pandemic. That led to the Department issuing two enforcement notices to airlines, one in April and another in May 2020.

Though most other airlines started heeding the DOT's order to provide timely refunds for canceled flights, those notices went unanswered by Air Canada. The carrier kept to its punitive no-refund policy, citing that "our position is consistent with U.S. law having examined this question in depth"

Unsurprisingly, this resistance to provide refunds led to a further spike in complaints.

Air Canada told the DOT that it has received over 15,000 refund-related complaints, and 5,110 refund requests, involving flights to or from the U.S. that were canceled by Air Canada between March 13, 2020, and Nov. 13, 2020. Additionally, the DOT has received almost 90 formal complaints and over 6,000 informal complaints regarding Air Canada’s refund policy to date.

The carrier finally relented on April 13, when it unveiled an overhauled refund policy. All non-refundable flights purchased before April 13, 2021, for travel on or after Feb. 1, 2020, that were canceled — for any reason — are now eligible for a refund.

Why the change of heart?

Well, the airline secured a significant financial package from the Canadian government that includes up to approximately $1.4 billion CAD ($1.1 billion) earmarked for traveler refunds. In addition to committing to the revised refund policy, Air Canada also agreed to resume flights to many regional destinations that were suspended due to the pandemic, maintain employment at levels no lower than those on April 1, 2021, along with other concessions.

Related: You are entitled to a refund for your canceled flight

Though Air Canada finally relented, the carrier is now facing a massive fine for its protracted handling of the situation. The DOT is estimating that the penalty for each violation is $5,000. Based on the 5,110 outstanding refund requests that Air Canada had received by November 2020, the fine totals more than $25 million.

While this customer-first approach will likely feel like a win to those who struggled to get refunds from Air Canada, it's also a display of force by the DOT.

Going forward, airlines will likely second guess implementing a policy that violates any of the terms of flying to the U.S.