HG Wells is responsible for the state of the world's airline industry according to Hugh Welburn an

HG Wells is responsible for the state of the world's airline industry, according to Hugh Welburn, an economic adviser to Virgin. In his book, The Shape of Things to Come, Wells predicted both the Second World War and a subsequent government run by aviators. The first prediction came true, and the unprecedented power unleashed by the Luftwaffe, RAF and USAF made the second a threat to consider. At the 1944 Chicago Convention, where the allies created a new order for the skies, America's free-market principles were overruled by demands for a heavily regulated civil aviation industry. The preamble of the convention's communique made it clear that the delegates saw passenger planes as potential bombers.

Ironically, only a few years later, their designs diverged so radically that the threat evaporated.But the legacy of Wells lives on today in the bilateral agreements that rule who flies where, and the hefty subsidies some countries give to their flag carriers. The results are higher fares for passengers, and bitter recriminations over deals such as the one between British Airways and American Airlines last week.The deal will see a joint management team co-ordinating the airlines' passenger and cargo activity between Europe and America. Flight codes will be shared, so passengers buying BA tickets could find themselves on an American plane There will be profit sharing but no exchange of equity The reach of the deal is astounding. In the words of Virgin Atlantic boss, Richard Branson: "In no other industry in the capitalist world would the creation of such a monopolistic alliance be tolerated. The two governments will have presided over the creation of the Aeroflot of the capitalist West." Virgin plans an ad campaign next week featuring extracts from evidence in US courts about American's anti-competitive activity.Mr Branson has an obvious interest in opposing the move, but there is truth behind his alarm. The not-quite-merger - to take effect next spring - will see BA/American carrying some 70 per cent of the passengers flying between Heathrow and Kennedy Airport, more than 60 per cent of the traffic between the US and Britain, and over a quarter of the total flights across the North Atlantic.

Despite rapid growth in Far Eastern markets, this remains the busiest and, arguably, the most important international air corridor.Yet neither the Office of Fair Trading nor the Monopolies and Mergers Commission has the automatic power to investigate it. When BA was privatised, the MMC was barred from probing into anything other than mergers and acquisitions worth more than 300m ecus (pounds 370m). The OFT has to determine that there has been a merger before it can take any other action. Only the US Department of Justice and the EU Commission stand firmly in the way, and the carriers have asked the former for immunity from prosecution under America's anti-trust laws.The traffic-sharing deal illustrates not only the past of the industry, but the present state of the companies involved and the future of international air travel.