Monday, March 27, 2017

Putting Air Reductions in Context

A few words about markets, U.S. airlines, and that other travel ban (Cuba)

Analysis from Cuba Central

Today’s message, quite simply, is this: Recent headlines that read The Cuba travel bubble is popping and Now That Cuba Is Open, Americans Aren’t Going  got it wrong. So, we’ve written this essay to try and set the facts straight.

Travel from the U.S. to Cuba is going up, and it could be doing even better if policy makers would just legalize all forms of it, the way a majority of Americans want them to.

This is worth digging into. First, let’s start at a comfortable cruising altitude of 30,000 feet before diving into the weeds.

As Cuba Journal reminded us recently, “Cuba is the only country in the world where Americans face travel restrictions.” You can even visit North Korea as a tourist without asking permission from President Trump or Supreme Leader Kim Jong Un, although it’s a risky place for U.S. travelers. Meanwhile, travel to Cuba for tourist activities remains prohibited by U.S. law.

President Obama took significant steps to reduce U.S. restrictions on non-tourist travel to Cuba – ending limits on travel by Cuban Americans with family on the island, restoring people-to-people visits and, critically, using diplomacy with Cuba’s government to restart regularly scheduled commercial flights to the island by U.S. carriers in the middle of 2016.

As Brookings reported late last year, the relative trickle of 91,000 visitors to Cuba in 2014 rose to 161,000 visits in 2015, and to a veritable flood of over 280,000 visits in 2016, according to this recent estimate.

Before the recent changes, charter carriers remained stalwart for decades serving the Cuban market under onerous travel rules that restricted flights and kept prices high. When restrictions were loosened, traditional economic forces went to work. “As generations of U.S.- or U.K.-trained economists would predict,” a U.S.-trained economist told us, “prices fell and the total number of seats sold went up.”

Bloomberg, normally fact-based, got it wrong when it reported in February, “still, there are few Yankees heading to Havana.” On the contrary, U.S. demand is both strong and rising rapidly now, and the trend points the same way. As Travel Pulse reports, travel agents are seeing “an explosion of Cuba bookings” going forward. They say, “Nearly 22 percent of its leisure-focused travel agents have already booked clients for Cuba travel in 2017 while more than 59 percent said clients are interested in going this year.”

In fact, many of the carriers awarded routes to Cuba are doing well – this comes not from promotional materials but filings by American Airlines, Southwest, and Delta with the Securities and Exchange Commission.

Southwest, for example, lists its 44th consecutive year of profitability and its decision to launch “service to Cuba with daily flights to Varadero, followed by service to Havana, our 100th city served, and Santa Clara” in its 2016 list of a dozen notable accomplishments.

By the same token, some U.S. airlines are dropping flights, as NBC News reported in its refreshingly informed piece. Silver Airways is dropping out the market entirely on April 22, explaining that “other airlines continue to serve this market with too many flights and oversized aircraft.” Frontier Airlines is terminating its Miami-Havana flight on June 4, saying “costs in Havana to turn an aircraft significantly exceeded our initial assumptions.”

While claiming the mantle of “Economics 101,” Fabiola Sanchez, in her Miami Herald column, was actually practicing Cold War Ideology 1.0. “Blame over the lack of greater demand sits squarely with the paranoid and repressive Cuban state,” she writes, “which fails to modernize politically and economically, no matter how much this country and the rest of the world opens up to them.”

What is so important about travel to Cuba is that it allows Americans to visit the island, speak directly to Cubans, and learn from them how they view their lives, their opportunities and, yes, their government.  The portrait they paint can be both inspiring and worrisome in the same conversation. What is consistent is that Cubans don’t tell visitors from the States to go home, but to come back.

The adjustment taking place in the Cuban market is not about politics, but economics and regulation. One of the things that Bloomberg got right is that our airlines, “with no idea about demand, were overly ambitious when they jousted for the limited routes allowed by U.S. regulators. With a mandate for only 110 daily U.S. flights – 20 into Havana, the most popular destination – the carriers tumbled over each other last year to get a piece of the pie, leaving the island oversubscribed.”

It isn’t a surprise that Silver and Frontier are folding their tents, or that carriers like JetBlue have cut back. In a globalized economy, and with a new, emerging market, this happens all the time. Our friend the economist observes: “Airlines spend millions on programs to strategically and tactically game prices and routes, and flights to Cuba are now part of that game. Entrants will come and go, seasonal variations may increase, demand will be sensitive to US economic trends. All of this is normal. Year over year, the market continues to grow. That is the fundamental fact to date.”

The market is going to continue to adjust, and Cuba’s government and its tourism industry will have to be part of that adjustment if it wants first-time travelers to return, rather than losing them to equally warm and less expensive destinations in the Caribbean.

But, the airlines need to step up as well. They’re running this advertisement in Washington, appealing to President Trump to protect American jobs and to enforce the so-called “Open Skies” Agreement which, they say, benefits U.S. airlines, workers, and passengers.

If they want to continue doing business in Cuba, their voices need to be heard – loudly, urgently, presently – to stop the administration or Congress from rolling back our hard won rights to visit Cuba now, and urge the end of the unconstitutional ban on tourist travel as soon as possible.

Cuba isn’t North Korea, and America needs to act like America and demonstrate it knows the difference.

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