ANALYSIS: Who Will Win In Initial US-Cuba Flight Allocations?

The United States and Cuba will sign tomorrow in Havana a bilateral agreement that will permit US airlines to operate up to 110 flights per day between the two nations.
Beginning Monday, US airlines will have 15 days to submit applications to the Department of Transportation (DOT) for the routes they would like to fly. The deal does not cover flights from Cuba to the United States (which are likely to be governed by a separate add-on to the agreement) and includes authorities for up to 20 daily flights to Havana, Cuba’s capital, and 10 daily flights to nine other Cuban airports. While the deal must still be approved by Cuba’s government, it represents a concrete step towards the opening of Cuban skies to American carriers and travelers.

What cities should get the allocations to Havana?

The big prize at stake of course, is the 20 daily flight authorities to Havana, Cuba’s capital and largest city. And as with most DOT route authority allocations, there is likely a pretty wide divergence between what routes/airlines should be awarded, and what routes/airlines will actually be. To get a sense of this, assume that the DOT was exclusively maximizing for consumer interest. If this were indeed the DOT’s goal, then an easy way to accomplish this would be to distribute the route authorities based on which cities generated the most origin and destination (O&D) traffic to Havana, while splitting those authorities amongst just enough airlines to ensure some competition.

The O&D traffic that will fly to and from Havana is different than that from Cuba’s remaining airports. Resort towns like Varadero or Camaguey are likely to converge on travel patterns that resemble those of other Caribbean resort destinations like Punta Cana, but traffic to Havana will also be driven by whatever nascent business ties form with the thawing of relations between the US and Cuba, as well as visiting family and relatives (VFR) traffic from the 1.8 million strong Cuban American population. The following chart summarizes a few statistics for said Cuban American population, including stats for certain metro areas and states.

As the chart clearly indicates, the lion’s share of US-Havana authorities should be focused on Florida, specifically on the Miami-Fort Lauderdale-Palm Beach (South Florida) metropolis, with a secondary allocation focused on New York City and a couple of flights to the rest of the country to provide the remainder of the country access. So in an ideal world, the allocations would look something like:

American – 7x daily MiamiDelta – 1x daily Atlanta, 1x daily New York JFKJetBlue – 3x daily Fort Lauderdale, 2x daily TampaSouthwest 1x daily Orlando, 1x daily Fort LauderdaleSpirit – 1x daily Fort LauderdaleUnited – 2x daily Newark, 1x daily Houston

This kind of distribution would allow for the route authorities to roughly match actual traffic patterns, with Houston (and to a lesser degree Atlanta) providing connectivity for the Western US, and Newark and New York JFK providing connectivity for the Eastern seaboard (and to a lesser degree for the Midwest). There would be enough diversity of carriers to provide credible competition, including low cost carriers (LCCs) and even ultra-low cost carriers (ULCCs), and American’s Miami hub would provide broad based access to Cuba as well.

How the allocations are likely to be distributed?

In reality, politics are going to dictate that the allocations be spread in a less optimal and more haphazard manner. In particular, there’s little chance of the DOT actually giving American 35% of the overall frequencies despite the consumer benefits for O&D and connectivity that would arise. Moreover, pretty much every major US airline except Hawaiian and Virgin America says that they want to bid for service to Cuba, and so in the end, the final allocations may look something like this:

Alaska – 1x daily Los AngelesAmerican – 3x daily Miami, 1x daily New York JFKDelta – 1x daily Atlanta, 1x daily New York JFK, 1x daily MiamiJetBlue – 2x daily Fort Lauderdale, 1x daily TampaSouthwest – 1x daily Orlando, 1x daily Chicago Midway, 1x daily Baltimore-WashingtonSpirit – 2x daily Fort Lauderdale, 1x daily Dallas Fort WorthUnited – 2x daily Newark, 1x daily Houston

This type of allocation, spreading the wealth amongst stakeholders (i.e. airlines) and across a variety of geographies, is the perfect political outcome for the DOT. But it is also sub optimal for the actual consumers of flights to Havana, who are heavily concentrated in Miami.

The market outside of Havana is limited

While we do know that nine airports outside of Havana will be opened to service, no details have yet emerged on exactly which nine airports will gain service. Based on our research, there are fourteen possible options for these nine airports.

Cayo Largo del Sur – a small coral island in Southwestern Cuba, which sees service from Canadian LCCs Air Canada Rouge, Air Transat, and Sunwing to Montreal and Toronto, and nonstop service to Milan Malpensa via Meridiana and Blue Panorama.Cienfuegos – a city of roughly 160,000 people in Southern Cuba sees service from Sunwing to Montreal and Toronto, and Cubana. It also has charter service to Miami from a series of airlinesGuantanamo – yes that Guantanamo. In addition to the US naval base, GuaHntanamo is actually a city of more than 200,000 people with service from Cubana and a charter to Fort Lauderdale operated by IBC Airways.Nueva Gerona – a city of 60,000 people that is the capital of island province Isla de la Juventud in southwestern Cuba and that currently has service on Cubana to Havana.Santa Clara – the fifth largest Cuban city with a population of just under 250,000, Santa Clara’s airport has scheduled service from nine different airlines, and charter service from an additional six, including four US carriers (American, Eastern, JetBlue, and Sun Country) serving Miami and Tampa. In addition to the standard diet of Canadian LCCs, Santa Clara also has service from more exotic options such as Copa Airlines to Panama City, and LOT Polish Airlines to Warsaw.Santiago de Cuba – Cuba’s second largest city with a population of 510,000, Santiago is nestled near Cuba’s southeastern tip , and actually has less diversity of air service than the more popular tourist destination of Santa Clara. Cubana is the dominant player here, and the Canadian presence is muted (with only Sunwing Airlines around) while there are more inter-Caribbean flights on offer. American also operates charters to Miami.Varadero – Cuba’s most important tourist port and the primary resort zone of Cuba, Varadero is the second busiest airport in the country and a secondary hub for Cubana. In all, nineteen airlines serve the airport, with ten of them offering nonstop service to Europe.Moa – a small town of 70,000 people in eastern Cuba with service from CubanaManzanillo – a town of 130,000 people in Southern Cuba with service from Sunwing and Cubana.Las Tunas – a city of 170,000 people in Central Cuba with service from Cubana to Havana.Holguin – another key tourist destination and city of 350,000 people with service from fifteen airlines, including five flying to Europe and charters from American to Miami and Tampa and from Eastern to Miami. Holguin will also gain service from Copa Airlines to Panama City this year.Camaguey – the airport serves both Cuba’s fourth largest city (population 320,000) and nearby resort areas, and has service from seven airlines, including Songbird Airlines and American to Miami.Bayamo – a city of 222,000 in southern Cuba that has service from Aero Caribbean to HavanaBaracoa – a city of 82,000 with service from Aero Caribbean and prop operator Aerogaviota to Havana.

Amongst the 14, Varadero, Santiago, Camaguey, Santa Clara,  Holguin, and Cienfuegos are no brainers. After that, things become less clear. Is the deal oriented towards large population (and thus VFR) centers, or towards tourist destinations. If it’s the former, the breakdown probably skews towards Bayamo, Manzanillo, and Guantanamo as the final three. Conversely, if the focus is more on tourist destinations, Manzanilo, Nuevo Gerona, and Cayo Largo del Sur are a more likely portfolio.

But regardless of the nine destinations, the likely service pattern is clear. American is going to offer service from Miami to most, if not all of the nine cities, with multiple daily flights to Santiago, Holguin, Camaguey, and Varadero. JetBlue will likely do the same with at least 3-4 weekly service from Fort Lauderdale. Beyond these two South Florida hubbed carriers, the likely breakdown is much less clear. Someone will probably operate service to Tampa, but it could be an oddball like Silver Airways with its fleet of Saab 340 turboprops. And the open question is how quickly US-Cuba tourism will develop.

I am actually more bullish than most on the development of this demand. Once the US-Cuba thawing was announced, there was an immediate rush by several people to proclaim that American tourists wouldn’t be able to flood Cuba because the infrastructure (hotels/resorts) simply wasn’t there to support them. Implicit in this was the idea that the more than a million Canadian and European tourists would take up all the hotel rooms/resorts/restaurants and crowd out the Americans.

But this thesis ignores that fact that once US travelers’ entry into Cuba is feasible without insane hassle, they will almost assuredly buy up some portion of the hotel rooms/restaurants/space in these Cuban resorts and towns, indeed crowding out a subset of Canadian and European tourists. To what degree this occurs will determine just how much non-Miami service there is to secondary Cuban destinations, but it is not hard to envision sub-daily frequency from Varadero or Camaguey to major towns throughout the Eastern seaboard, including Boston, Philadelphia, New York, and Washington D.C. In the long run, non-Havana Cuban service will probably resemble that of any Caribbean resort destination.

How do the existing charter carriers get affected?

The collateral damage in the opening up of Cuban airspace to scheduled US airlines is almost undoubtedly the current charter airlines that serve the US-Cuba market with scheduled charter services. Together, the nine charter companies currently offering service source flights from seven airlines and collectively offer more than 100 flights per week between the US and Cuba during peak periods. As expected, the majority of flights (over 80%) are centered on Miami in the US and Havana (75%) in Cuba.

So what will be the effect on charter providers like Cuba Travel Services, Xael, or Marazul once Cuban skies open up? The short answer is that their focus will probably have to shift from VFR traffic to Havana to more vacation oriented flights to resort towns. As seen in most markets, VFR and business traffic tend to strongly prefer scheduled passenger service, while vacationers are more open to charter flights. So the business ties and relationships that these carriers have built up in Cuba will have to be redistributed to new destinations. But the opening of scheduled service is far from a death knell.

(Culled from airwaysnews.com)