Under a new U.S.-Cuba aviation treaty that went into effect two years ago, U.S. airlines are permitted to operate up to 20 daily roundtrip flights to Havana, the island nation's capital and largest city. This set off a vicious fight among airlines eager to secure as big a share of these 20 daily flights as possible.

However, flying to Havana hasn't been nearly as lucrative as airlines had originally expected. Of the eight airlines that were initially granted the right to fly to Havana, three have already pulled out of the market entirely. Additionally, Delta Air Lines (NYSE:DAL) recently slashed its New York-Havana route from daily service to one roundtrip flight per week (on Saturdays).

This has created room for the Department of Transportation to grant new Havana flying rights. On Friday, it announced its tentative decision for allocating additional flight frequencies among American Airlines (NASDAQ:AAL), Delta, JetBlue Airways (NASDAQ:JBLU), Southwest Airlines (NYSE:LUV), and United Continental (NASDAQ:UAL).

A rendering of an American Airlines plane

American Airlines is one of several carriers planning to expand in Havana. Image source: American Airlines.

A delayed decision

The most recent cycle of applications for additional flights to Havana began about a year ago, after Frontier Airlines and Spirit Airlines decided to terminate all of their Cuba flights due to poor profitability. However, the timeline for a decision has been delayed due to shifting facts on the ground.

Only in early June did the DOT receive official confirmation that the two ultra low-cost carriers were giving up their rights to fly to Havana. It took until late August for the DOT to decide that it needed to go through a new route allocation proceeding, rather than making a decision based on the evidence gathered in 2016 for the original allocation.

Before that decision-making process was completed, Alaska Air announced that it would end its Havana flights due to regulatory changes. Shortly thereafter, Delta decided to scale back service on its New York-Havana route. Each time, the DOT decided to go back to square one.

Sticking to the formula

Not surprisingly, the DOT's tentative decision -- which will likely be finalized later this month -- took a "something for everybody" approach to allocating flight frequencies. (The one exception was FedEx, which was shut out again in favor of passenger airlines.)

American Airlines, which already operates four daily roundtrips between Miami and Havana, will be allowed to add a fifth daily flight. American had asked to expand to six daily flights, with even more flights on weekends. However, the government would prefer a more balanced allocation of slots in order to maximize competition.

JetBlue, the No. 2 carrier in the U.S.-Cuba market, is also getting one extra daily roundtrip to Havana. It will be allowed to add a third flight to its Fort Lauderdale-Havana schedule from Sunday-Friday, in addition to beginning weekly service between Boston and Havana on Saturdays. The DOT rejected JetBlue's requests to add a second daily New York-Havana flight, along with new daily Newark-Havana and Tampa-Havana flights.

Finally, Delta Air Lines, Southwest Airlines, and United Continental were each granted their relatively modest flight allocation requests. Delta will be allowed to add a second daily flight on its Miami-Havana route. Southwest will be permitted to expand to three daily flights between Fort Lauderdale and Havana. Finally, United will be able to offer daily Houston-Havana flights, instead of Saturday-only service in that market.

Will these changes create a healthier supply demand balance?

South Florida is set to receive nearly 80% of the extra flights allocated under this temporary decision. The Miami and Fort Lauderdale markets benefit from far more "visiting friends and relatives" demand than other parts of the country. That's particularly important after the U.S. government tightened the regulations on permitted travel to Cuba.

With five carriers flying to Havana (instead of eight) and more service concentrated in South Florida, airlines are likely to have more success in Cuba than they initially did.

That said, for nearly a year, several Havana flight frequencies have lain dormant, making the remaining flights more profitable. As a result, airlines serving Havana -- particularly market-leader American Airlines -- may face some fare pressure after the new flights begin. Bookings should be solid for the summer peak season, but there could be another reckoning later this year if there isn't enough demand to support all of the extra flights during the low season.

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