Frontier Airlines must pay nearly $5.4 million to the Transportation Security Administration after it improperly held onto security-related fees paid by certain customers, the federal appeals court in Denver ruled on Monday.

The TSA argued that federal law and regulations permit refunds of a ticket-based security fee to be paid to only two recipients: the TSA or the passenger who bought the ticket. By retaining the fee when a passenger cancels their ticket and never uses their travel credit, Frontier was giving itself a financial windfall.

By 2-1, a three-judge panel of the U.S. Court of Appeals for the 10th Circuit agreed with the government.

“Congress tasked Frontier with collecting the fee under the auspices of the federal government for a purpose designated by it (civil aviation security services) and provided various safeguards to ensure that the fees are not subverted,” wrote Senior Judge Paul J. Kelly Jr. in the April 20 opinion. Even if a passenger does not end up traveling, “Frontier cannot keep the fees for itself.”

Judge Timothy M. Tymkovich dissented, believing the TSA is only entitled to collect the fee when a passenger uses the agency’s services by traveling.

“Because Congress did not authorize this collection, TSA has no legal right to the fees disputed here,” he wrote.

Through the Aviation and Transportation Security Act of 2001, Congress established the “September 11th security fee.” The amount is $5.60 for a one-way trip and no more than $11.20 for a round-trip. The fee is imposed “on passengers” and supports TSA salaries, benefits, capital improvements, training, and other costs.

The law requires airlines to collect the fee and send the amount to the government each month.

In 2020, the TSA notified Frontier that an audit found the Denver-based airline owed nearly $5.4 million, stemming from how it handled cancellations. When a passenger cancels their ticket, Frontier either refunds the amount or issues a credit to the customer and then applies a cancellation fee. After 90 days, the “credit shell” expires.

Instead of refunding the security fee to the passenger or to the TSA once the credit shell expired, Frontier kept it. Frontier disputed that it owed the government any money, arguing that TSA could not impose a fee on anyone who did not ultimately fly. Further, Frontier contended that it refunded the fee to customers as a credit shell.

“Frontier’s contrary interpretation of the statutory and regulatory language is artificial, as it emphasizes one consideration (i.e., whether the passenger has actually traveled) over unambiguous and consistent textual indications that air carriers must collect all Fees based on air transportation when it is purchased,” responded Assistant Administrator and Chief Financial Officer Holly C. Mehringer in upholding the TSA’s financial assessment. “Frontier’s creation of an expiring credit shell is not a refund of the Fee to the passenger.”

During oral arguments to the 10th Circuit panel in January, Frontier maintained that it need not transmit a fee from passengers who never use the TSA’s security services due to a ticket cancellation.

“What is the rationale for Frontier not to refund the entire ticket price when the flight is canceled?” asked Judge Harris L Hartz. “You don’t take the trip. Why doesn’t Frontier, as a matter of course, refund the entire amount?”

“It’s just a business decision,” responded attorney Adam P. Feinberg.

Ultimately, the panel rejected Frontier’s view that only traveling passengers are subject to the fee. Kelly noted that the law’s structure means airlines will inevitably pass on fees to the TSA after a ticket purchase, but before some passengers’ scheduled travel dates.

“The sort of services funded by the fee include personnel costs, such as salaries, training costs, costs of background investigations of TSA employees and other personnel, and the costs of deploying federal law enforcement to airports,” wrote Kelly for himself and Hartz. “These are not the sort of costs that are specific to any one traveler.”

Tymkovich acknowledged in dissent that the law was unclear whether it intended the fee to cover security services for individual passengers or for the traveling population as a whole. But he believed it was logical for the fee to offset the costs associated with an individual passenger, meaning the TSA was not entitled to collect the fee from someone who did not end up flying.

“The plain meaning of ‘passengers,'” he wrote, “shows that TSA is authorized to impose the fee only on persons who physically travel in airplanes.”

Hartz wrote separately to say that the law “could have been clearer.” Although he believed cancellations mean the security fee is no longer justified, nothing “permits an airline to give itself credit for a fee collected from a customer in that circumstance.”

The case is Frontier Airlines, Inc. v. Department of Homeland Security.