The Airline Industry of the 21st Century: Finally Approaching Contestable Markets?

When the U.S. airline industry was deregulated in 1978, one of the main arguments for doing so was the assumption that the airline industry – unlike, say, the railroad industry – was not a natural monopoly. Thus, the theory was that it was not possible for an airline to overcharge customers in a particular market, because the natural mobility of the airline industry – at 800 km/hr – would make sure that this could not be done. However, the history of the 1980s and 1990s showed that this “theory of contestable markets” did not work in real life – the airline industry was a lot more complicated than just moving planes between different markets. However, with the far more open distribution structures witnessed today, largely due to the Internet, an increasing tendency towards commoditization wthin the airline industry, and an increasing number of airlines adopting one-way based fare structures – a special focus for this paper – “the theory of contestable markets”, albeit with more than a 20-year delay, might be looking at a breakthrough.