Who Will Win In Initial US-Cuba Flight Allocations?

ANALYSIS: Who Will Win In Initial US-Cuba Flight Allocations?
by Vinay Bhaskara / Published February 15, 2016

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.

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 Miami
- Delta – 1x daily Atlanta, 1x daily New York JFK
- JetBlue – 3x daily Fort Lauderdale, 2x daily Tampa
- Southwest 1x daily Orlando, 1x daily Fort Lauderdale
- Spirit – 1x daily Fort Lauderdale
-
United – 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 Angeles
- American – 3x daily Miami, 1x daily New York JFK
- Delta – 1x daily Atlanta, 1x daily New York JFK, 1x daily Miami
- JetBlue – 2x daily Fort Lauderdale, 1x daily Tampa
- Southwest – 1x daily Orlando, 1x daily Chicago Midway, 1x
daily Baltimore-Washington
- Spirit – 2x daily Fort Lauderdale, 1x daily Dallas Fort Worth
- United – 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 airlines
- Guantanamo – 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
Cubana
- Manzanillo – 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 Havana
- Baracoa – 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.

Vinay Bhaskara covers finance, operations and regulatory matters
surrounding the U.S. and international airline industry. Bhaskara has
been quoted in the Washington Post, Wall Street Journal and South China
Morning Post, The LA Times, and his work has appeared in Forbes,
Business Insider and Skift. You can contact him at
vinay.bhaskara@airwaysnews.com.

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