Airlines Will Have to Share the Wealth in Cuba

By Markets Fool.com

American Airlines will be able to offer the most flights from the U.S. to Havana. Image source: American Airlines.

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Last month, the U.S. government awarded the first set of route authorities allowing airlines to fly to Cuba. That decision covered all of Cuba except for Havana. Since there was relatively limited interest in flying to secondary Cuban cities, airlines basically got whatever they wanted.

By contrast, airlines requested nearly three times as many flights to Havana as the 20 daily routes that the Department of Transportation is allowed to allocate. As a result, the U.S. government is making airlines share the wealth when it comes to serving Cuba's capital and largest city.

Airlines aimed high

With only 20 daily routes to Havana up for grabs, some airlines tried to stake out huge positions there. Most notably, American Airlines asked to operate 10 daily round-trips between Miami and Havana, as well as daily flights from Charlotte and Dallas-Fort Worth and weekly flights from Chicago and Los Angeles.

JetBlue Airways also had a big ask. It requested route authorities for 12 daily flights to Havana, spread across six U.S. gateway airports. JetBlue argued that the DOT should give most or all of the flights to low-cost carriers like itself, while shutting out legacy carriers like American Airlines that have historically charged higher fares.

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JetBlue wanted more than half of the available Havana route authorities. Image source: JetBlue Airways.

Even Southwest Airlines , which has a much smaller footprint in Latin America and the Caribbean, aimed high. Southwest requested authority to operate nine daily round-trips to Havana, including six daily round-trips from Fort Lauderdale. Clearly, airlines see substantial potential in this market and want to maximize their share of the available route authorities.

These airlines will have to share

Not surprisingly, regulators at the Department of Transportation were hardly eager to give any airline a dominant position in Havana. As expected, the U.S. government decided to promote competition by spreading the available route authorities among numerous airlines and cities.

On Thursday, the government revealed its tentative flight allocation. American Airlines and JetBlue did receive the most Havana route authorities, but far less than they requested. American will be able to fly four times daily from Miami and once daily from Charlotte. JetBlue will get to fly twice daily from Fort Lauderdale (except for Saturday, when it will have one flight) and once daily from New York and Orlando.

Looking further down the list, Southwest Airlines was awarded two daily flights from Fort Lauderdale and one from Tampa. Delta Air Lines was also awarded three daily flights: one each from Atlanta, Miami, and New York. Spirit Airlines will get to fly twice a day from Fort Lauderdale. Rounding out the list, Frontier Airlines got a daily flight from Miami,Alaska Air got one from Los Angeles, and United Continental was awarded a daily flight from Newark plus a Saturday-only flight between Houston and Havana.

Southwest Airlines will be able to continue its Caribbean expansion in Havana. Image source: The Motley Fool.

Making sense of the DOT's decision

Geographically speaking, South Florida -- including both Miami and Fort Lauderdale -- will get nearly 60% of the available Havana frequencies. This makes sense, because a disproportionate number of Cuban-Americans live in the Miami area.

Of the remaining frequencies, the majority will serve the other four largest Cuban-American population centers in the U.S.: New York, Tampa, Los Angeles, and Orlando. The daily flights to Atlanta and Charlotte (and the weekly flight to Houston) are designed to funnel travel demand from the rest of the U.S. through some of the largest airline hubs in the country.

Beyond ensuring that areas with high demand for travel to Cuba (particularly South Florida) will get ample service, the DOT also worked to maximize competition. It's no accident that the frequencies from South Florida to Havana were split among six airlines, or that three airlines were awarded one flight each from the New York area.

Given the lack of operating history -- there have been no scheduled flights between the U.S. and Cuba in over half a century -- some of the DOT's route allocations may prove to be foolish in hindsight. However, the initial route awards do a good job of promoting competition and fairness as airlines try to capitalize on a once-in-a-generation opportunity in Havana.

The article Airlines Will Have to Share the Wealth in Cuba originally appeared on Fool.com.

Adam Levine-Weinberg owns shares of Alaska Air Group, JetBlue Airways, Spirit Airlines, and United Continental Holdings and is long January 2017 $17 calls on JetBlue Airways, long January 2017 $40 calls on Delta Air Lines, long January 2017 $30 calls on American Airlines Group, and long December 2016 $30 calls on Spirit Airlines. The Motley Fool recommends Spirit Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.