When commercial airline transportation is established, charter airlines - who have dominated the market since the end of the 1970s -will lose business while travelers will see a reduction in air fares

As shown in Figure 1, the number of charter flights to the island has grown steadily , rising by 135.62% between 2010 and 2015, from 1,996 flights in 2010 to 4,794 in 2015.

Figure 1. Charter flights from Miami and Tampa grew by 135.6% since 2010.

Another factor boosting the number of charter flights is the relaxation of requirements on the travel of American citizens to Cuba under academic and cultural exchange programs generally known as people-to-people travel.  At present, such people-to-people travel is authorized for 12 categories of travelers.  To accomodate the growth in demand for travel to Cuba in 2010-2013, numerous agencies organizing charter travel services and selling charter travel tickets sprung up in the U.S. Between 2011 and 2013, the number of agencies organizing charter flights to Cuba grew by 158.33%, while the number of agencies selling charter travel tickets rose by 382.35%, as can be seen from Figure 2 .

Figure 2.Agencies and ticket sales had a healthy growth in 2011-2013.

The average price of airline tickets to Cuba has risen in response to the strong demand for travel. In 2012, the average price was $419 dollars per ticket, while it was $486 in 2015, 16% higher . Figure 3.

Figure 3.The average price of airline tickets rose by 16% since 2012.

The estimated value of airline ticket sales to Cuba in 2012 was $177.6 million dollars, compared to $348.48 million dollars in 2015, an increase of 96.16%. See Figure 4.

Figure 4.The value of sales of airline tickets to Cuba almost doubled since 2012

In 2015, the market for charter flights to Cuba was dominated by the airline World Atlantic, which flew 1,142 flights, followed by mega-company American Airlines with 977 flights. See Figure 5.

 Figure 5.The top five airlines conducted 78% of the charter flights.

Commercial Air Travel

In the context of the thaw in U.S.-Cuba relations, the two countries reached an understanding that will open the way for the resumption of commercial flights . This development raises several questions for the owners and clients of travel agencies: Will prices of airline tickets fall in the future? Will it be possible to buy tickets online? Will charter flights disappear altogether? Will the small agencies that until now enjoyed a monopoly over charter flights survive? Which airlines will participate in the commercial air flight market? The monopoly held by charter flights is very likely to disappear in the near future, bringing about a radically different scenario in which there will be some competition.  It is conceivable that large U.S.

commercial airlines such as American Airlines, Delta and Jet Blue could break into the Cuban market, introducing flights priced at between $150 and $250 dollars to more than 9 destinations in the island.  This would mean prices between 48.55 % and 69.13% lower than the the average price for charter flights from the U.S. to Cuba in 2015. That is, at the lower prices, it would be possible for two travelers to fly to the island for the price one traveling on a charter flight in 2015.

In Figure 6 we project the number of flights to Cuba for the next four years based on the historical record of charter flights from 2011 to 2015 and the increasing demand of air passenger transportation from the U.S. over this period. According to the projections, the number of commercial flights from the U.S. could reach 3,192 or 67.89% of the projected number of flights in 2017 , compared to 1,850 charter flights or 21.11%. See Figure 6.

In the short term, American Airlines will probably lead commercial flights to Cuba with a projected 3,976 flights or 68.84% of the market in 2018, followed

by Jet Blue with 18.21%  and  Delta with 12.95%. See Figure 7. In the mid term, Cubana de Aviación might also enter the market, with an estimated 8.08% of  commercial flights in 2019, compared to 60.19% for American Airlines, and participation by other airlines as shown in Figure 8.

In analyzing the drastic changes that the  Cuban passenger air travel market will undergo in the next few years as a result of the resumption of commercial flights, the convenience for buyers of being able to purchase their tickets online is another advantage this mode of making travel arrangements will have compared to charter flights. In addition, the probability of flight delays will be drastically reduced in the case of commercial flights. Initially , the two modalities -- commercial flights and charter flights -will coexist, but over time charter flights will disappear . By 2019, THCG projects that commercial flights will hold 98.57% of the market, while charter flights will hold a small share of 1.43%. See Figure 8. 

Impact on Tourism At present, U.S. flights bound for Cuba originate mainly from the Miami and Tampa Airports, with some flights also departing from New York, Orlando, New Orleans and Los Angeles.  With the resumption of commercial air travel, the number of U.S. cities originating air travel to Cuba is likely to rise.  In the island, the charter flights from the U.S. currently land at six destinations: La Habana, Villa Clara, Cienfuegos, Camagüey , Holguín and Santiago de Cuba. The reestablishment of commercial air travel could increase the number of destination airports in Cuba to 10, with attractive locations such as Varadero, Cayo Coco, Baracoa  and  Cayo Largo high on the list of potential destinations.  See Map 1.

The measures implemented by the Obama Administration that have facilitated travel to Cuba have been partly responsible for the sharp increase in Cuban tourism, which exceeded 3.5 million tourists in 2015  and may reach 4 million tourists in 2016. Not only has the United States become the second largest emitter of tourists to Cuba, but travelers from the United States have contributed to pushing the island's tourism infrastructure to its limit. The impact has been felt on the lodging sector as well as on logistics, transportation, and supply and distribution of food and other inputs that are essential to meet the needs of the hundreds of thousands of visitors arriving in the island each year . These projected increases in air travel undoubtedly will present challenges for Cuba's tourism infrastructure, which already reached its tourism lodging limit in December 2015.

Cuba's investment efforts have not kept pace with the demand for construction of hotels and maintenance of tourism facilities. In particular , some 4- and 5-star hotel properties have high shares of rooms that are out of service because of maintenance issues. Other issues of concern are the low passsenger capacity of airports and lack of options to transport tourists to the island .  Cuba requires substantial infrastructure investments to be able to meet the large growth in demand for tourism services expected in the next few years . In the next 10 to 15 years, Cuba could become the most attractive and important tourism destination in the Caribbean. 

In the April issue of THCG Business Review we will analyze investment opportunities in Cuba's tourism infrastructure, particularly in the strategic Port of La Habana, where a megaproject valued at $30 billion dollars is planned.

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This article is courtesy of THCG BUSINESS REPORT

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