The aim of this paper is to present William Baumol, John Panzar, and Robert Willig‘s Theory of Contestable Markets and to explain its application to the American aviation market. Free entry, costless exit, and free access to technology are the core requirements for a contestable market. Potential competition ensures efficient market solutions through unforeseen hit-and-run entry. However, the concept is not uncontroversial. In the 1970s, the air transportation market was regarded as a prime example of a contestable market. The Airline Deregulation Act of 1978 was an endeavour of historic proportions. Market access was opened up to new entrants because of undesirable developments under the outdated regulatory system. Ultimately, it must be noted that travellers in particular have benefited from deregulation, but the market itself is not free of barriers. The most significant barriers are sunk (advertising) costs, slot controls at certain airports, computer reservation systems, commissions for travel agencies, frequent flyer programs, and long-term, exclusive contracts for the use of gates. Nevertheless, potential competition can still play a role, as Morrison and Winston (1987) and others found out. Regulators should focus primarily on supporting both forces potential competition from companies that are not currently on the market, and actual competition between companies. The key to better judgement for policy makers is to understand the power and limitations of market forces, i.e., when does it produce effective outcomes and where are its limits?