How Are The U.S. Carriers Taking Advantage Of The Restoration Of Diplomatic Ties Between U.S. And Mexico/Cuba?

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Having restored diplomatic relationships, the U.S. and Cuba have finally removed the ban on travel to the island. This move is expected to have significance not just for the U.S. and Cuban political relationship, but also for the U.S. air carriers who can now operate flights to the island, after a ban of more than 50 years. Further, a similar agreement, Open Skies, was signed with Mexico to allow unlimited number of flights to and from that country. The step is expected to boost the number of travelers visiting the country significantly by making the booking process much easier and cheaper.

Historically, Mexico and Cuba have been favorites with the U.S. citizens. The presence of an island like Havana in Cuba and beaches and art scenes in Mexico, make it a popular tourist destination. The end of restrictions on the number of flights in a week to Mexico specifically is likely to bolster the country’s GDP, 7% of which comes from tourism. On the other hand, data from the Department of Commerce indicates that the United States saw more than 18 million tourists from Mexico in 2015, who spent a total of about $19 billion while visiting. Similarly, Cuba received 3.52 million visitors in 2015, up 17.4% from 2014. Of this, American visits rose 77% to 161,000, excluding the hundreds of Cuban-Americans. We can expect this relationship to be mutually beneficial for the countries involved, driving growth in sectors other than aviation.

The U.S. government has given approval to a number of domestically-based commercial carriers to fly to and from Cuba and Mexico (although Mexico City is still out of bounds). Two of the first airlines to get the nod to fly to Cuba were JetBlue and American Airlines. Increased number of flights to Mexico are expected to slash the air fares for passengers, which get inflated due to the number of taxes levied by the governments of the two countries.

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The airlines are hard at work, getting their personnel “Cuba-Mexico ready.” Shipping computers, signage and other equipment, and training Cubans on the check-in process are some of the steps the airlines have had to take to fly commercial flights to Cuba.
JetBlue
  • Cuba: With a flight schedule to Santa Clara from Fort Lauderdale-Hollywood International Airport on 31st August. JetBlue is the first U.S. airline to fly a commercial plane to Cuba in 50 years.
  • Mexico: JetBlue currently flies to Cancun and Mexico City from several U.S. locations.
American
  • Cuba: American will follow JetBlue’s footsteps, with a flight lined up from Miami International Airport on 7th September to Santa Clara. Further, the carrier has gotten approval from the Cuban government to land and take off from five airports, namely, Holguín, Santa Clara, Varadero, Camagüey, and Cienfuegos. In all, American will be offering 56 weekly flights to Cuba.
  • Mexico: American Airlines will also provide flights from LosAngeles to Cancun and Puerto Vallarta, and from Miami to Merida, beginning 4th November.
JetBlue and American Airlines are very keen on operating flights to Havana, a favorite with tourists. The approval from the U.S. Department of Transportation and Cuba’s Civil Aviation Institute is expected towards the end of the year.
Delta
  • Mexico: It will start daily nonstop flights between New York and Cancun, and between Los Angeles and Los Cabos. It will also run Saturday flights between Kansas City and Cancun. It will start operations on 17th December.

Southwest

  • Mexico: It will start flying daily from Los Angeles to Cancun, Los Cabos and Puerto Vallarta, beginning 4th December. If it gets approval from the Mexican government, Southwest also plans to fly from Oakland, Calif., to Los Cabos and Puerto Vallarta, starting in February.

Currently, Southwest is charging the lowest airfares for its flights to Mexico. This has led to competitive pressure on other airlines which are providing flights to similar routes. Consequently, what the industry is calling a “Southwest effect” is causing an across the board decline in air fares.

United has not joined the other carriers in announcing the launch of new flights to Mexico and Cuba. The strategy is to wait and watch how travelers react to the opening up of borders.

While it is clear that opening up of the borders is going to be a positive for both passengers and airlines, by lowering airfares and increasing air traffic, it still remains to be seen how much benefit the U.S. carriers can expect, quantitatively, given the competitive pressure and volatile oil prices. It is expected that huge demand for these routes is going to drive revenue upwards for all airlines, even as competition from the Mexican and Cuban counterparts erodes some of this profit.

Have more questions about JetBlue Corporation (NYSE:JBLU)? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for JetBlue Corporation

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