ABSTRACT
Air transportation from the 1970s has proved to be a highly adaptive industry once freed from a labyrinth of economic regulations that had encumbered most markets since the initiation of commercial airline services. Prior to 1977, when the first major “deregulation” of air transportation occurred in the domestic US air cargo market, an extensive system of economic regulations, largely on a bilateral basis, saw governments negotiate international air-fares and award market access rights. In the larger domestic markets, such as within the United States, fares and service providers were institutionally determined by the national government. This command and control approach to the sector had stymied the development of efficient airline networks. It had resulted in artificially high fares and widespread static and dynamic X-inefficiency in the supply of services. The regulations had also almost universally limited the development of the most economically efficient networks; essentially each service, whether within a domestic market or internationally, was treated as a peculiar product and regulated in isolation. The particulars of network economics were lacking within the policy-making frameworks and synergies between services and routes were given little attention in fare setting and licensing decisions. Despite this, there were extensive hub-and-spoke networks in existence, although restricted in their form, and certainly not optimal in their nature.1 In particular, hub-and-spoke operations2 had developed in international air transportation as a result the bilateral air service agreement system that emerged after the Chicago Convention,3 but they were limited in the sense that the flag carriers at major “gateway” airports could never exceed 50 percent of the capacity. The constraint was that, with some notable exceptions, most countries limited their international services to a monopoly “flag carrier,” with the national airline services being matched by those of the carrier of the partner country. Bilateral agreements invariably divided traffic equally, or in some agreed proportion, between the local flag carrier and the foreign flag carrier.
