Will New Cuba Travel Policy Hurt U.S. Airlines?

On Jun 16, President Trump announced some changes to current U.S. policy on Cuba, which were put into action by his predecessor Barack Obama. The new policy is in line with Trump’s promise during the campaigning phase. In fact, Trump had reportedly tweeted in November last year that he might terminate the deal, inked by Obama, in the event of Cuba not doing enough for its people.

Even though, he did not scrap the entire deal, the President announced certain changes in inline with his “America First” principle. Moving ahead, the new administration aims to restrict the flow of US money flowing into the oppressive Cuban military regime. Also, the new policy is dedicated to betterment of the Cuban people by pressurizing the island’s government to broaden the private sector and reduce the military’s interference in every profitable unit of the country.

In fact, to keep the Cuban military at bay, the President’s policy aims to do away with travel directed toward benefitting the military, intelligence or security services of the island nation. Under the new restrictions, travel to Cuba on an individual basis would not be allowed. Even though individual travel has been banned, group travel is allowed.

A Brief Flashback

In 2014, President Obama had called for the restoration of diplomatic ties with Cuba after more than 50 years. As part of that process, travel restrictions were eased. Subsequently, many U.S. airlines started operating commercial scheduled flights to Cuba.

In Jun 2016, the U.S. Department of Transportation authorized six U.S.-based carriers to operate scheduled flights to nine second-tier Cuban cities. The first scheduled commercial flight to Cuba from the U.S. was operated by JetBlue Airways (NASDAQ:JBLU) .

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Notably, the approval to fly to Havana came two months later in August. The Havana routes were highly in demand among the US carriers as they collectively applied for the approval to operate nearly 60 flights to Havana on a daily basis. The erstwhile agreement with Obama allowed for only 20 daily roundtrip flights between the nations.

Would Individual Travel Ban Hurt Airlines?

Currently, the likes of American Airlines Group (NASDAQ:AAL) , United Continental Holdings (NYSE:UAL) , Delta Air Lines (NYSE:DAL) , JetBlue Airways, Southwest Airlines (NYSE:LUV) and Alaska Air Group (NYSE:ALK) operate scheduled commercial flights to Cuba. But following the revised order on Cuba, the carriers have adopted a wait and watch policy regarding their operations to the nation.

Airline heavyweights like Delta Air Lines and American Airlines have reportedly said that while their existing operations to the nation would continue, they would abide by any changes that might take place following the announcement of the new policy.

We note that the travel demand to Cuba had fallen short of expectations. Consequently, the likes of American Airlines trimmed their services to the nation. Lower-than-expected demand also caused the likes of Spirit Airlines (NASDAQ:SAVE) and Frontier Airlines to terminate flights to the nation. Despite this factor, the new policy to ban individual travel is likely to hurt the top line of the US carriers operating in the country to some extent.

In fact, a recent Reuters report had suggested that cruise operators and airlines in the US could lose approximately $712 million in revenues on an annual basis, if Obama’s policy was entirely reversed. While the entire policy has not been consigned to flames by the new US government, the prohibition on individual travel to the country might still shrink the revenues of carriers (through lower travel demand) operating in Cuba, a popular tourist destination.

However, only time will tell the extent to which revenues are actually hurt. Consequently, we expect investor focus to remain on the issue, going forward.

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