Will Restoration Of US-Cuba Ties Benefit Airline Stocks?

On Wednesday, President Obama called for the restoration of diplomatic ties with Cuba after more than 50 years. The decision was arrived at following 18 months of “secret” talks between the two countries.

A Look Back

Diplomatic ties between the two countries were severed by the U.S. in 1961 after Fidel Castro (The current President Raul Castro's brother) overthrew the Cuban government to set up a socialist state and in the process started to establish strong relations with the erstwhile Soviet Union.

The unsuccessful Bay of Pigs invasion to overthrow Fidel Castro followed. The Cuban Missile crisis came after, when the U.S. became aware that the Soviet Union was building a missile base on the island and almost led to nuclear warfare between.

Economic and political ties between the U.S. and Cuba worsened further. The issue of Cuban refugees posed another challenge to the U.S. and a number of laws were passed between the mid 60s and mid 90s to tackle the problem. The presence of spies from both countries made the matter worse.

In 2013, President Obama and Raul Castro (who took over as President from the ill Fidel Castro in 2008) greeted each other warmly raising hopes for easing of tensions between the two nations.

Subsequently, negotiations authorized by the U.S. President took place in the Vatican and Canada. Pope Francis played an important role in the restoration of ties between the two countries that lie separated by only 90 miles of water. The talks culminated earlier in the week when President Obama and the Cuban President Raul Castro agreed to mend damaged ties through a telephonic conversation.

Plans to ease relationships between the two countries were announced by the respective Presidents through simultaneous speeches that were broadcasted live in the respective countries. The leaders agreed to open embassies in each other's countries apart from easing restrictions aimed at increasing the flow of people and capital between the long-time foes.

Travel Restrictions Eased

We note that Cuba was a favorite tourist spot for Americans prior to the embargo. The short distance, a one-hour flight from Miami, made matters easier. President Obama's announcement on easing travel restrictions will no doubt result in increased travel to Cuba from the U.S. According to the Department of commerce, approximately 124,000 U.S. citizens flew to Cuba last year and the number is likely to increase further.

However, U.S. citizens will be able to travel to Cuba only for family visits and business purposes, research and humanitarian work. Tourism related travel to the island would need approval from the Congress.

The Republican Win – A Major Obstacle?

Despite President Obama's declaration to restore normal ties with Cuba, lawmakers in the U.S. are not likely to revoke the Cuba embargo in the near future. This is because of the negative reaction of the Republicans to Obama's move.

The Republican victory during the midterm elections earlier resulted in them securing a majority in both chambers of Congress for the first time since 2006. Following their resounding win, Republicans will control both the chambers from early next year. Consequently, the restrictions on vacation travel are unlikely to be lifted anytime soon.

Impact on Airline Stocks

Many U.S.-based carriers currently offer charter service to Cuba. American Airlines, the wholly owned subsidiary of American Airlines Group AAL, flies extensively to Latin America from Miami Airport. The carrier has been flying to Cuba for many years. The easing of the travel restrictions should augment the top line of this Zacks Rank #1 (Strong Buy) stock further.

Delta Air Lines, Inc DAL., also sporting a Zacks Rank #1, has operated more than 240 charter flights between October 2011 and December 2012 according to a report appearing in the associated press. However, the carrier has no plans to fly to Cuba currently. However, according to the report, it is not averse to flying to the island in the event of a suitable opportunity arising. We believe that will arise once restrictions regarding vacation travel are lifted.

Chicago-based United Airlines, the wholly owned subsidiary of United Continental Holdings UAL, has issued a statement in favor of Obama's declaration. The company is again looking forward to the lifting of tourist travel restrictions. The stock carries a Zacks Rank #3 (Hold). JetBlue Airways JBLU, another Zacks Rank #3 stock, also offers charter service to Cuba.

Although positive on President Obama's announcement that travel restrictions to Cuba will be eased, we believe airline stocks will be truly benefited only when the travel restrictions are fully lifted.