Airlines Are Fleeing Cuba Again

Airlines Are Fleeing Cuba Again
American Airlines has already reduced its capacity in Cuba and JetBlue
Airways is set to do so in early May. This week, Silver Airways and
Frontier Airlines said they will exit the Cuban market entirely.
Adam Levine-Weinberg (TMFGemHunter) Mar 15, 2017 at 11:20 AM

Just six months ago, a slew of U.S. airlines were eager to begin new
routes to Cuba, after then-President Barack Obama eased restrictions on
U.S.-Cuba travel. American Airlines (NASDAQ:AAL), JetBlue Airways
(NASDAQ:JBLU), Southwest Airlines (NYSE:LUV), Delta Air Lines
(NYSE:DAL), and Spirit Airlines (NASDAQ:SAVE) highlighted the list of
carriers that began scheduled service to Cuba in late 2016.

However, it didn't take long for airlines to start to sour on Cuba.
While it may become an attractive growth market in the long run, supply
has dramatically outstripped demand for the past few months. Responding
to this capacity imbalance, two smaller airlines -- Frontier Airlines
and Silver Airways -- recently announced that they will pull out of Cuba
altogether.

Airlines have had a tough time in Cuba
Havana, Cuba's capital and largest city, lies just 100 miles from Key
West, FL. In theory, that proximity to the U.S. could make Cuba a huge
Caribbean tourist destination one day.

However, for now, U.S. government regulations restrict travel to Cuba.
Importantly, pure tourism is not allowed, although it's not hard to
qualify for one of the 12 categories of permissible travel. Furthermore,
Cuba doesn't have the tourist infrastructure necessary to support a huge
increase in visitor arrivals.

As a result, airlines have started to realize that they need to scale
back their ambitious plans for Cuba, at least in the short run. Last
month, American Airlines dropped one of two daily flights in each of
three secondary Cuban cities. It also intends to switch from mainline to
regional aircraft on some routes. JetBlue hasn't eliminated any flights,
but it will switch to smaller aircraft on all of its routes to Cuba in
early May.

Throwing in the towel
If American Airlines and JetBlue Airways -- the top two airlines in
South Florida -- are having trouble making money in Cuba, everyone else
is probably in worse shape.

That's especially true for Silver Airways. Its fleet of 34-seat
turboprops make it the highest-cost airline in the market. Given that
Silver Airways had to deal with competition from American, JetBlue,
and/or Southwest on most of its routes, it clearly faced an uphill battle.

Silver Airways started with 36 weekly flights spread across Cuba's nine
secondary international airports. Late last year, it decided to slash
its capacity in Cuba by 25%. And on Monday, it announced that it will
drop all of its routes to Cuba by late April.

Meanwhile, ultra-low cost carrier Frontier Airlines operates just one
daily flight to Cuba, connecting Miami and Havana. The company is
positioning itself for an IPO later this year, so its management is
especially unwilling to operate money-losing routes. As a result,
Frontier will discontinue the Miami-Havana route in early June. There
are plenty of other places where it can profitably deploy that capacity,
especially during the peak summer travel season.

Good news for other airlines serving Cuba
As various airlines reduce their capacity to Cuba or exit the market
entirely, it should help those that remain to improve their profitability.

For example, Silver Airways competes directly with JetBlue and Southwest
on a number of routes from Fort Lauderdale to secondary cities in Cuba.
It also competes indirectly with American Airlines, which serves many of
the same cities from nearby Miami International Airport. Those three
larger carriers should be able to carve up most of the traffic Silver
Airways has been carrying.

Similarly, Frontier's decision to drop the Miami-Havana route should
help Spirit Airlines, the only other ultra-low cost carrier flying to
Cuba. Spirit plans to continue operating its two daily flights between
Fort Lauderdale and Havana for the foreseeable future. American,
JetBlue, Southwest, and Delta are also positioned to benefit from a more
rational competitive environment. All five fly to Havana from South Florida.

It may still take a long time for Cuba flights to start producing
significant profits for U.S. airlines. However, the more that airlines
pull back on capacity in Cuba, the faster this march to profitability
will occur.

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Adam Levine-Weinberg owns shares of Delta Air Lines, JetBlue Airways,
and Spirit Airlines and is long January 2019 $10 calls on JetBlue
Airways. The Motley Fool recommends JetBlue Airways and Spirit Airlines.
The Motley Fool has a disclosure policy.

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