Late last year, U.S. airlines launched scheduled service to Cuba with great fanfare. But in the first half of 2017, one airline after another has cut flights to this new market. Frontier Airlines, Silver Airways, and Spirit Airlines have pulled out of Cuba entirely. Meanwhile, American Airlines (NASDAQ: AAL) and JetBlue Airways (NASDAQ: JBLU) have implemented significant capacity cuts in Cuba.
On Wednesday morning, Southwest Airlines (NYSE: LUV) became the latest airline to announce cutbacks in Cuba. Its pending capacity reductions will allow American Airlines and JetBlue to consolidate their dominance on routes to Cuba's secondary cities.
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More flight cuts ahead
Today, Southwest Airlines operates five daily flights to Cuba. It flies twice a day between Fort Lauderdale and Havana and once a day between Tampa and Havana. Southwest also has daily flights from Fort Lauderdale to Santa Clara and Varadero. Southwest Airlines will terminate the latter two routes after Labor Day.
This move isn't very surprising. Havana is Cuba's capital, largest city, and its economic and cultural center. As a result, the vast majority of travelers from the U.S. to Cuba want to go to Havana, particularly because U.S. regulations still prohibit pure tourism in Cuba. Demand for travel to Cuba's secondary cities has underperformed airlines' relatively modest expectations.
Year to date, regional airline Silver Airways has dropped all of its flights to nine secondary airports in Cuba. American Airlines dropped three daily flights to secondary cities. Furthermore, American and JetBlue both switched to using smaller jets in the 76-100 seat range for most of their routes to Cuba's secondary cities.
Unlike American and JetBlue, Southwest Airlines doesn't have the option of "downgauging" to smaller planes. By the beginning of October, all of its planes will have either 143 seats or 175 seats. That's larger than what would be ideal for serving Cuba's smaller markets.
Additionally, Southwest has a smaller presence in South Florida than American Airlines and JetBlue. American operates a big hub in Miami with about 350 daily departures. JetBlue is a distant No. 2 in the region. It operates about 100 daily departures from Fort Lauderdale, although it plans to reach 140 daily departures within a few years.
By contrast, Southwest has just 63 daily departures from Fort Lauderdale today. This means it doesn't generate as much connecting traffic in Fort Lauderdale to support routes with less demand. As a result, its routes to Santa Clara and Varadero were not viable.
American and JetBlue will benefit
American Airlines will be the biggest beneficiary of Southwest's exit from the Santa Clara and Varadero markets. Today, it flies to both cities once a day from Miami, having cut back from twice-daily service in early 2017. Going forward, it will be the only airline flying from the U.S. to Varadero, which should give it considerable pricing power as long as the monopoly lasts.
JetBlue will also benefit from facing less competition for its Fort Lauderdale-Santa Clara flights. It will now share the market for flights to Santa Clara with American Airlines.
Even with Southwest Airlines' cutbacks, there is still no guarantee that other carriers' routes to Cuban secondary cities will become profitable. The Trump administration plans to implement tighter restrictions on travel to Cuba, which could lead to even lower travel demand. Nevertheless, Southwest's exit from the Santa Clara and Varadero markets should lead to better results for American Airlines and JetBlue Airways than would have been the case otherwise.
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Adam Levine-Weinberg owns shares of 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.