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 the problems described above, the airline industry has operated under
extraordinary strain since the terrorist attacks. Demand and fares plummeted, and massive
layoffs ensued, as the industry suffered its worst year ever. UAL (United parent), US Airways,
and AMR (American parent) reported losses for 2001 of $2.1 billion, $2 billion, and $1.7 billion,
respectiv ...