History and Formation of Alliances Before 1978, the airline industry was significantly different than its operations today. The industry was heavily regulated. Routes and rates were fixed. The atmosphere made it difficult for competitors to enter the market. During the time period before 1978, departure frequency and name recognition were the main competitive drivers. Currently, the differentiation between airlines circulates around price and destination. The industry was at maturation with little growth or competitive stimulation.
In 1978, the US government passed the Airline Deregulation Act of 1978. In the same year, the United States concluded liberal bilateral agreements with Singapore, South Korea, and the Philippines. Many changes occurred as the industry was amongst a free market. Many nations followed in the privatization movement including Canada, Europe, Australia, Japan, Brazil and India. Privatization allowed airlines to work independently. In result, competition changed greatly. The number of US domestic airlines immediately escalated from 36 to 123.
These new smaller airlines entered the markets selling tickets 30-40% lower than the established pre-regulation airlines. Profit margins for the airlines slimmed creating new financial planning. The airlines that once focused on image differentiation now became more concerned with pricing and route selection. These transformations shook the foundations of many large airlines such as Northwest and Continental.
In order to retaliate, the more mature airlines developed competitive strategies. These companies began establishing their hubs, frequent flyer programs, and computerized reservation systems. The additions of the hubs allowed the airlines to reduce the number of flights by providing mass appeal to popular destinations. This helped in cost reduction for the major airlines. By 1986, the airline numbers dwindled to the most of the original airlines and had a record-breaking year of $1.6 billion in profits.
In the late 80's and early 90's, the remaining airlines, such as...