Another One Bites the Dust: Alaska Airlines Is Pulling Out of Cuba

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Last fall, U.S. airlines were falling over themselves to add flights to Cuba, after the Obama administration loosened restrictions on travel to the Caribbean island nation.

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What a difference a year makes. During 2017, the stampede of airlines leaving Cuba has been almost as dramatic as the stampede of airlines competing for the right to fly to Havana a year earlier. Continuing this trend, in early 2018, Alaska Air (NYSE: ALK) will become the next airline to stop flying to Cuba.

The end of Alaska's Havana experiment

Alaska Airlines currently operates a single daily route to Cuba, connecting Los Angeles and Havana. On Tuesday, it announced that it will drop this route after Jan. 22. Customers who have booked tickets beyond then can be rebooked on a different airline, or they can request a refund.

In its official statement, Alaska Air blamed the route cancellation on a change in U.S. policy. The Trump administration recently eliminated one category of permitted travel to Cuba: individual "people-to-people" educational trips. (All U.S. visitors to Cuba will now have to travel as part of a group.) About 80% of customers on the Los Angeles-Havana route traveled under this exception, so the new rules were bound to eviscerate demand.

That said, Alaska representatives also acknowledged that the recent policy change wasn't the only reason for the carrier exiting the market. While there was solid demand over the summer, bookings had already tailed off for the fall season. As a result, Alaska Airlines had been thinking about dropping the route even before the new rules went into effect.

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The exodus from Cuba continues

Alaska's recent announcement makes it the fourth U.S. airline to stop flying to Cuba in the span of a year. This spring, ultra-low-cost carriers Spirit Airlines and Frontier Airlines and regional airline Silver Airways dropped all of their routes from South Florida to Cuba, as demand failed to live up to expectations. Most of the other airlines that started flying to Cuba last fall -- including American Airlines (NASDAQ: AAL), JetBlue Airways (NASDAQ: JBLU), and Southwest Airlines (NYSE: LUV) -- have cut capacity there as well.

Given that overall demand for travel to Cuba has fallen short of expectations, it's surprising that Alaska's route lasted as long as it did. Most of the Cuban-American population is concentrated in Florida. Furthermore, Havana is just a few hundred miles from Florida's major cities, whereas it's 2,300 miles from Los Angeles. That means Alaska had a dramatically higher breakeven fare for its route than the airlines flying between Florida and Cuba.

The squabble for routes to Havana continues

Considering how many airlines have given up on Cuba -- and how virtually all of the others have pared back capacity there over time -- you might assume that nobody would be interested in expanding there. Nevertheless, half a dozen airlines are still looking to add flights to Havana in order to grab a bigger slice of the 20 daily roundtrips that U.S. airlines are permitted to operate there.

As of September, American Airlines, JetBlue Airways, Southwest Airlines, Delta Air Lines, and United Continental were fighting over the three slots that opened up when Frontier and Spirit exited the market. Once again, the airlines have collectively requested significantly more flights than are available. In fact, JetBlue wants all three for itself!

Alaska Airlines' decision to drop its Havana route in January will create a fourth open slot for U.S. carriers looking to expand there. This will give the Department of Transportation a little more wiggle room in making its allocation decision.

Maximizing competition is likely to be the DOT's first priority, as was the case in 2016. This means that low-cost carriers JetBlue and Southwest are both likely to get additional frequencies, whereas American Airlines (which holds the most Havana slots today) will probably have to make do with what it already has. Lastly, Delta and United may get the remaining frequencies that are up for grabs, to prevent them from falling too far behind in Cuba.

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