The game takes place in the Crimson Skies universe, set in an alternate history of the 1930s. In this fictional setting, increasing sectionalism within the United States of America has caused the country to splinter into numerous sovereignties. These nation-states are in a constant state of war with one another, and thus an interstate highway system never developed. This in turn caused the primary means of transportation to shift from the car and train to the plane and zeppelin; consequently came the formation of air pirate gangs who plunder aerial commerce over North America.[17]

As a result of the events surrounding the world of Crimson Skies, advancements in technology within the game universe proceeded at a faster rate than actually occurred in the same era. Certain designs and technologies were created specifically for the game, some beyond the scope of actual 1930s technology, examples of which include remote-controlled rocket launchers, magnetic rockets, weather control devices, and a Tesla coil-like weapon. The games aircraft were designed to be true to the era yet unique, with some models inspired from actual period aircraft or from the experimental designs of the Luftwaffe. Art director Robert Olson has stated that his team faced challenges in developing content that fit the time setting and was also both fantastical and believable, particularly in the design of the games bosses.

The game takes place in four regions set in North and South America. Sea Haven is an island in the Nation of Hollywood; it is a refuge for various pirate groups, but the Hollywood militia attempts to uproot the raiders. Arixo is a desert nation-state, formed from the remnants of Arizona and New Mexico. Due to its vast, desolate, and lawless expanses, Arixo has become a haven for bandit activity. . The Navajo Nation is an isolationist and militant haven for the Navajo Native American tribes that encompasses territory from the former states of Arizona, New Mexico, Utah, and Colorado. Chicago remains an industrial city, while the Lost City is a complex of ancient ruins located deep in South America. In designing many of these environments, developers used inspiration from real-world locales, but reworked them to incorporate flight spaces accordingly with the Crimson Skies universe. For example, Chicago was significantly redesigned for High Road to Revenge with the addition of avenues for aerial commerce among its skyscrapers and landing areas within the buildings themselves.