Last month, the United States and Cuba signed an agreement allowing scheduled flights between the two countries to resume. U.S.-based airlines will be allowed to operate 20 daily scheduled flights to Havana, plus 10 daily scheduled flights to each of nine other international airports in Cuba.
Airlines had to file their route requests last week. Unsurprisingly, there wasn't much competition for the rights to fly to Cuba's secondary airports. However, airlines proposed more than twice as many flights to Havana as the U.S. government is allowed to allocate.
In fact, two airlines -- American Airlines (NASDAQ:AAL) and JetBlue Airways (NASDAQ:JBLU) -- together requested more than 100% of the available frequencies to Havana. American and JetBlue want to capitalize on their leading positions in the Caribbean to achieve similar dominance in Cuba. However, the Department of Transportation isn't likely to play along.
American Airlines wants more than 12 daily flights
In its application to fly to Cuba, American Airlines requested authority to operate 12 daily flights to Havana, plus another two weekly flights. The breakdown is 10 daily flights to Miami, daily flights to both Charlotte and Dallas/Fort Worth, and weekly flights to both Chicago and Los Angeles. All of the flights would be operated with mainline aircraft.
In its supporting documents, American Airlines notes that nearly half of the Cuban-American population lives in Miami-Dade County and that Miami is the main gateway for companies doing business in Cuba. Since the U.S. still doesn't allow travel to Cuba for tourism purposes, the Miami area represents a large proportion of U.S.-Cuba travel demand.
American is the dominant airline in Miami. Thus, it argues that it should get a disproportionate number of the available slots. "... [A]ny decision that simply distributes frequencies to various U.S. carriers at other gateways without regard for the far greater demand generated by the Cuban-American community in Miami will fail to 'maximize public benefits' and would defeat the U.S. Government's objectives for this proceeding," the company claims.
JetBlue also wants 12 daily flights to Havana
JetBlue Airways also requested authority to operate 12 daily roundtrip flights to Havana. As the No. 2 airline in the Caribbean, the No. 2 airline in South Florida, and one of the largest airlines in New York (which also has a sizable Cuban-American population), JetBlue is well-positioned to serve Cuba successfully.
JetBlue wants to fly four times a day to Havana from its South Florida base in Fort Lauderdale. It also hopes to operate two daily roundtrips from Orlando, two daily roundtrips from Tampa, three daily roundtrips from New York -- two from JFK Airport and one from Newark -- and one daily roundtrip from Boston.
JetBlue stated in its filing that the legacy carriers have a history of managing capacity to drive up fares. By contrast, it pointed to its own track record of stimulating demand by reducing fares and then adding capacity in line with market growth.
JetBlue thus argues that consumers would be better off if more routes to Havana are allocated to smaller, growth-oriented low-cost carriers like itself. In essence, it wants the DOT to penalize the legacy carriers for their history of charging high fares and providing subpar service.
The government wants to maximize competition
As the DOT decides how to allocate the 20 daily flights to Havana that are available, one thing is certain: American Airlines and JetBlue Airways won't get what they are seeking.
Both companies have powerful arguments supporting their applications. Frequent Miami-Havana flights on American Airlines would satisfy the robust local demand while also providing ample connection opportunities across the U.S. JetBlue would also meet demand in several of the top markets for approved travel to Cuba and would likely offer lower fares than American.
Nevertheless, the government doesn't want to establish an oligopoly for Havana flights. Roughly a dozen airlines applied for rights to fly to Havana, creating the prospect of vigorous competition. The DOT will probably give most of those airlines at least one daily flight to Havana, in order to maximize competition and (hopefully) keep fares low.
Check back later this week, when I'll break down the other major airlines' Havana flight requests and how the DOT may choose to allocate the 20 available daily flight frequencies.
Adam Levine-Weinberg owns shares of JetBlue Airways and is long January 2017 $17 calls on JetBlue Airways and long January 2017 $30 calls on American Airlines Group. The Motley Fool is long January 2017 $35 calls on American Airlines Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.