7 - Regulation and deregulation

Summary

A short history of liberalization of international markets

To understand international aviation, it is important to realize that for many governments (and indeed for some citizens) an airline based in the country is more than just a firm. It is an embodiment of a country's prestige and a source of pride. While many governments no longer view their airlines as national symbols akin to their flag (there is a reason why national airlines have traditionally been called “flag carriers” in the industry jargon); for many countries this is still effectively the case. And what do you do with a national symbol? You take pride in it, and you protect it.

The fact of the matter is that the airline industry, the very purpose of which is to facilitate international business, connect people, and make the world a more accessible and more open place, has itself been, and to a substantial degree still remains, subject to some of the most bizarre restrictions to competition ever invented. It is true that regulation, protectionism, restriction of foreign firms’ access, price controls, and other restrictions to free trade have not been confined to the airline markets. And furthermore, until the late-1970s government intervention was the name of the game in many industries, both domestic and international. Many key companies in different industries were regulated monopolies, some government-owned, their market position protected by law – one need only think about AT&T in the US and the railways in Britain. In the 1960s and 1970s, the list of such protected monopolies was rather long.

To understand the regulatory environment in the airline industry, especially on international markets, we have to go back to the 1920s. The Kelly Air Mail Act of 1925 was the first piece of regulation in the then nascent airline industry. The idea behind the Act was to protect the infant industry by awarding private airlines government contracts to deliver mail at regulated rates. The Civil Aeronautics Act of 1938 effectively established regulation on the US domestic inter-state airline markets – this regulation, with a number of changes, was in place for the next 40 years, until the Airline Deregulation Act of 1978.