The Competition for Cuba: A U.S. Airline Failure?

(Photo: American Airlines)

Following the Cuban government’s and DOT’s reinstatement of a commercial flight agreement to Cuba in 2016, U.S. airlines’ immediately applied to fill the 110 flights a day limit. The agreement allowed for 20 daily scheduled flights to Cuba’s capital Havana, and the remaining to other cities in Cuba. The first scheduled Cuba flight, jetBlue 387, landed in Santa Clara from Fort Lauderdale on August 31st, 2016, making history as the first commercial flight to Cuba in more than half a century and signaling the start of the U.S. airline race to Cuba.

Come late 2016, and much of the excitement of scheduled Cuba flights has worn off. Airlines have quietly pointed out their lack of profit in the new routes. In December 2016, American Airlines expressed its doubts over its profitability on its Cuba flights. Don Casey, a senior vice president of revenue management stated his concerns regarding restrictions on the routes, “I think everyone is struggling a little bit in terms of selling in Cuba, Theres a lot of restrictions that are still in place that has made it difficult to sell.” Casey’s statement followed American Airlines’ announcement to drop half of its daily flights between Miami and Holguin, Santa Clara, and Varadero. American’s surprising reduction in Cuba flights incited a chain of similar bad news from other airlines.

Silver Airways, a low-cost airline operating out of Fort Lauderdale, also announced its plans to reduce service in December. It announced that it would reduce daily frequencies to 6 cities in Cuba. Silver Airways spokeswoman Misty Pinson told the South Florida Sun-Sentinel, “But we remain optimistic about the future growth potential in Cuba and believe that our 34-seat aircraft is the right size aircraft for this market.” However, as fate would have it, in March of this year, Silver announced that it would cease all operations to Cuba by April 22nd.

Frontier Airlines, an ultra low cost carrier based in Denver, also called it quits in March of this year, citing higher than anticipated operating costs. Frontier announced that all of its Havana flights would end after June 4th.

In February of this year, jetBlue Airways announced cutbacks in its Cuba service. Rather than taking away frequencies or destinations, jetBlue stated that the only reduction would be in the size of planes operating to Cuba. jetBlue plans to replace its 150 seat A320s with 100 seat E190s on its Fort Lauderdale to Camaguey, Holguin and Santa Clara routes and replace its 200 seat A321s with 150 seat A320s on its Fort Lauderdale, New York, and Orlando to Havana routes.

(Photo: BusinessWire)

Spirit is the latest airline to admit its shortcomings in profits. This week, Spirit Airlines announced its plans to end all of its Fort Lauderdale to Havana flights -Spirit’s only Cuba route. Spirit’s President and CEO Bob Fornaro said in a statement that, “We really wanted Fort Lauderdale to Havana to work, especially being South Florida’s hometown airline… and the ultra-low cost leader to the Caribbean, but the costs of serving Havana continue to outweigh the demand for service..due to overcapacity and the additional costs associated with flying to Cuba, we don’t find it sustainable to continue this service while maintaining our commitment to pass along ultra-low fares to our customers.”  Fornaro noted that Spirit would gradually reduce its service before pulling out of Cuba on May 31st, 2017. Spirit plans to refund and rebook affected passengers.

Cuba’s weak market should not come as a surprise to airlines. Cuba’s was simply unprepared for the amount of visitors the U.S. airlines planned to bring. Its shortcomings are evident in its lack of hotels and unorganized dual currency system. Combined with political uncertainty surrounding the U.S.’s new presidency, Cuba’s growth in tourism and its appeal to U.S. citizens remains unpredictable.

Overcapacity by airlines is also to blame. Silver Airways spokeswoman Misty Pinson said in a statement to Today in the Sky. “While the actual total number of passengers currently traveling to and from Cuba on all carriers combined is in line with what Silver originally projected, other airlines continue to serve this market with too many flights and oversized aircraft, which has led to an increase in capacity of approximately 300% between the U.S. and Cuba.” Pinson added that, “In addition to overcapacity, distribution through online travel agencies and codeshare agreements have been unavailable since airlines began servicing Cuba last fall, Now, six months later, this issue is still not fully resolved, resulting in depressed demand.” When Cuba alerted that it would re-allow U.S. scheduled flights, many airlines jumped in to bid for routes without any data or models to judge demand of such routes. Along with strict regulations making the route unique, many airlines were optimistic but uncertain entering the market.

(Photo: American Airlines)

A few airlines hope to see past Cuba’s initial disappointment. American Airlines intends to remain in the Cuba market despite huge capacity cuts, including a 40% reduction in seats in some of their Cuban destinations. Southwest CEO Garry Kelly reported to investors in January that a call on Cuba’s success or failure was too early to make. He hinted that performance was lacking, but attributed it to the weak demand common during the winter season. Kelly expressed his optimism for success in the future, stating, “They (performance) are nowhere near where we want them to be eventually. But I, at this point, don’t have any reason to believe we can’t get there.”

In the U.S. airline industry, the competition in Cuba is indicative of the dominance of major airlines. The unique route and startup challenges faced in Cuba have shown to be too large of a burden for many smaller low cost airlines to afford (This same pattern explains why present-day startup airlines are destined to fail and why smaller airlines find difficulty in sustaining small markets) -which leads me to suggest that Cuba will eventually be only serviced by the major carriers. While these major airlines could eventually pull profits out of Cuba, it is questionable if their success would really be emblematic of the success of the U.S. tourist market in Cuba.