The airline industry is keenly watching how the Transportation Department handles one of the tough assignments it inherited when the Civil Aeronautics Board went out of business Jan. 1: deciding which airline should get an international route.

This is one of aviation's oldest issues, one that did not go away with airline deregulation.

In the domestic business, an airline can fly anywhere it wants without government approval. Internationally, however, the government still must choose among carriers for specific routes.

Presidents have intervened in favor of one carrier or another in the past, and Congress has attempted several times to write legislation "insulating" route selection from political considerations.

One of the better ribald songs written within DOT over the past year, and performed at its Christmas party, was called "Insulation Blues."

The case everyone is watching -- a decision is expected within a week -- is the route between Miami and London, served by Air Florida until it went bankrupt.

Eastern Air Lines and World Airways applied for the route and an administrative law judge found in favor of World.

The question now is how much of an arm's-length relationship will be maintained by the political officers of the department, from Secretary Elizabeth Hanford Dole on down.

If World wins, it would be a big victory for the low-fare airline, which operates daily flights to the West Coast and London, among other destinations, from Baltimore-Washington International Airport. It would be a big loss for Eastern, which would like the potentially lucrative Miami-London route to offset some of its domestic financial problems. CHANGEOVER TIME . . .

There have been few changes at DOT's subcabinet level since the November elections, and most of those slots are filled now or will be filled soon, once the inexorable clearance process ends.

Bob Davis, Dole's chief of staff, left shortly after New Year's and was replaced this week by Wayne Vance, formerly with the Justice Department.

Mari Maseng, assistant secretary for public affairs, is leaving this week and is expected to be replaced by Jennifer Hillings, now the public affairs officer for the Interior Department's Los Angeles office. She is the daughter of former repre- sentative Patrick J. Hillings (R-Calif.), now a Los Angeles attorney.

WHERE THERE'S SMOKE . . . Secretary Dole has given approval to another of the airline fire safety regulations that the department's Federal Aviation Administration has been studying and restudying for years.

The rule would require smoke detectors in the lavatories of large airliners, automatic fire extinguishers in lavatory trash receptacles, and more hand-held fire extinguishers in the cabins.

What finally propelled this old idea into a final rule was the Air Canada fire in June 1983 that killed 23 people who were unable to escape after the plane made an emergency landing in Cincinnati.

That plane had an automatic fire extinguisher in the trash receptacle that expended itself, but to no avail. The fire, apparently electrical in origin, was larger than the extinguisher could handle.