Airline Industry

Airline Industry Overview

Background

At one time the airline industry resembled the utility industry to the extent that regulators

determined what firms could and could not do. In the 1970s, a time of runaway inflation, and

rising unemployment, many agreed that something had to change. In 1978 Congress passed the

Airline Deregulation Act, which facilitated the entry of new firms and freed them to charge

whatever fares they wanted and fly whatever routes they liked.3 Many new entrants materialized,

including new low fare airlines like Southwest, and cutthroat competition has been the rule since.

A decade after deregulation a wave of consolidation occurred. In the 1990s, a global

economic recession and surging energy prices attendant the Gulf War severely crippled airline

results. In the two years ended 1992, the U.S. airline industry lost approximately $6 billion.

Many carriers were dissolved. Venerable names such as Pan Am and Eastern disappeared, and

TWA and Continental filed for Chapter 11 bankruptcy protection. Consolidation continued

throughout the decade so that by the late 1990s the top six U.S. airlines accounted for threequarters

of all domestic air traffic.4 TWA has since been absorbed by American Airlines, further

concentrating the dominance of major carriers. The industry today is a loose oligopoly.

Post 9/11

Compounding