The aerospace sector, primarily including companies operating airlines as well as aircraft manufacturers, is heavily regulated in the United States and in other nations. Airlines have security concerns, potential safety issues with aircraft and ongoing issues related to international aviation regulations. Aerospace manufacturers often produce aircraft for both government and private clients. Government projects are often very sensitive and require different treatment than projects for commercial airlines. American deregulation of the airline industry occurred in 1978 and somewhat reduced government restrictions. Since deregulation, government regulation of U.S. airlines has refocused on safety and efficiency interests. The Department of Transportation no longer controls ticket prices and services. Now, airlines may freely fly at any price on any domestic route they choose. This freedom increased the popularity of air travel with consumers and boosted profitability for airlines and aerospace manufacturers.

Airline deregulation resulted in dramatically reduced prices for U.S. flights and increased air traffic. Between 1975 and 2000, the number of air passengers in the United States increased from 200 million a year to nearly 700 million, according to the Federal Reserve Bank of San Francisco. Consumers have more routes available at a fraction of the cost of flights before deregulation. By 2000, average ticket costs fell to less than half of 1975 prices. While many regulations were completely relaxed, some aspects of air travel are still tightly regulated. For example, state and local governments control access to gates and runways, and often do not use a formal bidding process for access. Aircraft are thoroughly inspected for safety and restricted from flying if necessary. Some airports are restricted more than others, and federal regulations designed to minimize air traffic are common.

International flights are more heavily regulated than domestic flights. Some nations have open sky agreements with the United States, allowing any airline between the two countries to freely fly. Many countries operate monopolies with local or regional major airlines given preferred standing or exclusive territories, and foreign airlines are forbidden from the market. These foreign restrictions force many U.S. and foreign airlines to negotiate partnerships allowing for full coverage of a route through restricted markets.

Aircraft manufacturers are closely linked to the defense industry and often obtain government contracts. The U.S. government is a significant buyer of aerospace technologies and has tremendous influence on the research and development direction of aircraft and defense companies. Government regulation can change the course of research and impact key suppliers the aerospace industry relies on for product manufacturing. Industry investors must stay knowledgeable about the impact of the U.S. government, often the industry's biggest client. Competition for government contracts is strong, and funding is vulnerable to changes in defense spending. Strong demand from commercial airlines and other business customers may help offset losses during years of decreased defense spending, but the sector remains sensitive to government demand for aerospace products.

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