From Knowledge @ Wharton University of Pennsylvania

When Fidel Castro took power in Cuba in 1959, dozens of flights connected the airports of Miami and Havana on a daily basis, and the luxury hotels and glittery nightclubs of the Cuban capital were as common a destination for middle-class Americans as the casinos of Las Vegas are today. The U.S. embargo on trade with Cuba, imposed in 1960, put an abrupt end to all that, creating an anomaly that has long defied geography, technology and globalization: Even as American travelers have grown increasingly familiar with distant locations in Europe, China, India and elsewhere, they have been legally banned from visiting the largest island in the Caribbean, a mere 90 miles from Key West, Florida.

That is about to change. In December, the Obama administration relaxed those travel restrictions, signaling the beginning of the end of the travel ban — and, quite possibly, the re-emergence of a major market for American air carriers, hotel chains, rental car firms and the like. What impact will these changes in U.S. regulations have on short- and longer-term U.S. travel to Cuba? And what further changes will have to be made before Cuba re-emerges as the largest U.S. travel destination in the Caribbean?

The good news for U.S. travelers is that the new regulations allow Americans to visit the island for any of a dozen specific reasons, including family visits, education and religion, without first obtaining a special license from the U.S. government, as was previously required. Travelers may now import up to $400 worth of goods per person from Cuba on their return to the United States, including $100 worth of cigars and rum. U.S. citizens can now use U.S. credit and debit cards, and U.S. financial firms can now open accounts at Cuban banks and enroll merchants there. As of March 1, MasterCard begin to do so in Cuba.

The bad news is that it is still illegal for a U.S. citizen to visit Cuba with no other goal in mind but to enjoy a week of sun and surf.

A Unique Combination

To fully relax the U.S. travel ban will require the repeal by Congress of the Helms-Burton Act of 1996, which extended the territorial application of the initial embargo to apply to foreign companies trading with Cuba, and penalized foreign companies that allegedly “trafficked” in property formerly owned by American citizens but confiscated by Cuba.

Assuming that Congress does eventually repeal Helms-Burton, does Cuba really have the potential to re-assert itself as a major tourist destination for Americans?

“It is not easy to do business in a country that is in transition.”–Hugo Cancio

Stephen Kobrin, a Wharton emeritus management professor, notes that Cuba benefits from a unique combination of advantages: It is both geographically close to the U.S., yet exotic because of the history of its relationship with the United States. While it’s only a one-hour flight from Miami International Airport, Cuba is considered “fascinating … forbidden fruit” because of its long isolation from the currents of globalization, which has left many of its landscapes suspended in time. Over the past several decades, Cuba has developed a significant appeal for budget-minded European and Canadian travelers attracted by this spirit of “adventure tourism.” Such travelers are willing to accept relatively spartan facilities well below the standards demanded by middle-tier and upscale American travelers.

“If and when Cuba opens up [completely to the United States],” Kobrin asks, “will they have the infrastructure to handle” the coming surge of travelers who demand more luxurious amenities Twitter ?

Tomas Bilbao, executive director of the nonprofit Cuba Study Group, which manages such initiatives as the Cuba Study Group Microfinance Fund, the Cuban Enterprise Fund, and the Cuba IT and Social Media Initiative, argues that Cuban tourism should benefit not just from its proximity to the United States, but “its cultural affinity” to the U.S. Hispanic community, and from nostalgia about the good old days when flying off to Cuba for a brief vacation was commonplace.

Apart from Havana, with its penchant for 1950s-era American cars, Cuba is an island of natural beauty, endowed with “some nice beaches” and a significant natural diversity, says Bilbao, whose organization is based in Washington, D.C. Moreover, Cuba is “one of the safest places for an American tourist to visit,” in stark contrast to such Latin American destinations as Brazil, Venezuela and some Caribbean islands.

Eddie Lubbers, who runs the Cuban Travel Network, an online travel portal, agrees with that assessment. Hosted in the Netherlands, his company’s website enables travelers from the U.S. to book land-tour reservations in Cuba, but not to buy air tickets to that country. Although “tourism” by Americans is still illegal, if they fit into one of the 12 authorized categories, American travelers to Cuba are not officially considered “tourists” by the Treasury Department’s Office of Foreign Asset Control (OFAC), which oversees such travel.

The process of qualifying for such an OFAC-authorized category is “self-censoring,” says Lubbers, making it more unlikely than in the past that anyone will be found to have been violating U.S. law. Not only has supervision of the rules become more lax, but it’s also become easier for Americans to mix the pleasures of being a tourist in Cuba with the business of building “people-to-people” ties. Many U.S. visitors who travel to Cuba ostensibly for cultural, business, humanitarian and other theoretically non-touristic goals engage in a wide range of leisure activities. Such diversions include catamaran tours on the turquoise waters of the Caribbean Sea; walking and driving tours of Havana seated in vintage 1950s American vehicles, and excursions to such remote tobacco-growing locales as the Viñales Valley, a unique landscape dotted with gigantic “mogotes” — karst formations — “surrounding a lovely valley with rich red earth and majestic palm trees,” according to the Cuba Travel Network site. Travel agents say that those U.S. travelers (not to be confused with “tourists”) who spend at least some of their time on the island pursuing cultural, business or humanitarian goals are free to enjoy dinner at a restaurant in a historic Havana fortress, listen to salsa performers or attend a “phenomenal show at the Cabaret Parisien” — all without violating the spirit of the waning U.S. embargo.

“It will take time for Cuba to be fully ready to take advantage of these new conditions, but they are working on it….”–Hugo Cancio

Potholes and Incomplete Highways

Although Lubbers lauds the availability of compact European-made rental cars, Bilbao notes that getting around Cuba can be a challenge. “The [road] signs are nonexistent, there are large potholes and the central highway remains incomplete.” Not only do the amenities in most Cuban hotels lag behind those in other Caribbean locations, the phones don’t work, says Bilbao. The Obama administration’s recent move to allow U.S. phone companies to do business in Cuba should help in this regard, along with the arrival of U.S. credit card companies to provide services on the island.

“It is not easy to do business in a country that is in transition,” says Cuba-born Hugo Cancio, chief executive of Miami-based Fuego Enterprises, which represents U.S. companies that want to do business in Cuba. “Cuba has built a very solid infrastructure in European tourism markets,” Cancio notes. “While there are several ‘five-star’ hotels,” — mostly operated by the Sol Meliá group of Spain, which has 26 hotels in Cuba — “there are not enough five-star hotels to accommodate an explosion of American tourists.” A lot of private homes are also being turned into hotels — properties that Cancio described as “wonderful” because of their unique, local charm. Giant chains such as Hilton International and Marriott have issued statements indicating that they look forward to opening hotels in Cuba, presumably after the embargo is lifted.

“It will take time for Cuba to be fully ready to take advantage of these new conditions,” Cancio concludes, “But they are working on it. No one was expecting the announcements of the relaxation of controls…. There will be gradual change. When the embargo is officially lifted, the Cubans will be ready.”

A 30% Uptick

How vast is the potential for Cuba tourism in the longer term? Lubbers says that after President Obama relaxed controls on American travel in Cuba in December, “our business went up 30% in January.” Virtually overnight, “the United States has become our No. 1 market,” he adds, followed by Canada, Great Britain and Germany, and other European countries that had been his main sources of business. According to Lubbers, even before January’s announcement by President Obama, American travelers were always among his agency’s top five sources of business. Many were flying to Cuba via stopovers through international cities that offer scheduled flights to Havana, especially Panama City, Panama; Cancun, Mexico, and Nassau, Bahamas. In all, some 124,000 American travelers were authorized to travel to Cuba last year, a drop in the bucket compared with the 20 million or so Americans who traveled to Mexico in 2013.

Within weeks, Lubbers expects his Cuba Travel Network will be able to offer Americans the option of purchasing tickets online for the chartered U.S.-Cuba flights that are already licensed. Soon thereafter, anticipates Lubbers, U.S. carriers such as Jet Blue, American Airlines and Delta will start offering scheduled flights to Havana from U.S. airports, especially Miami. Those airlines have already announced their desire to provide such service. “That is now only a matter of bilateral discussions” between U.S. and Cuban officials, he notes. For that to happen, however, the embargo first has to be ended officially by Congress.

“Cubans are unlikely to make the instant transition to capitalism. The Eastern Europeans were revolting against external domination, but in Cuba, [the adoption of Communism] was an internal process.”–Stephen Kobrin

How long will that take? Naturally, no one knows for sure. Cancio says that he is “optimistic that before the end of [the Obama] administration, the embargo will be lifted.” Some observers believe that the embargo will more likely be lifted quickly if the next president is a Democrat, but the Congress is controlled by Republicans, Cancio notes.

Even if the next president turns out to be a Republican, Cancio is confident that U.S.-Cuba economic ties — in the tourism sector and elsewhere — will continue to deepen because of growing support among a broad cross-section of the exile community in the United States. “The majority of Cubans in Miami want to lift the embargo,” he says, noting that 90% of the businesses that are flourishing in Cuba today are “Miami-owned by Americans.” Anybody who visits the island and chats with Cubans who live there knows that investments have been made by Cubans who live abroad, Cancio says. “The small and medium-size private businesses that are developing [in Cuba] are mostly doing so thanks to capital that is being invested by those who live outside the country. Some experts have estimated the rate of remittances to Cuba at $2 billion annually, and close to 50% of that is being invested, or planned for investment, in small businesses.”

Faquiry Diaz Cala, a Miami-based venture capitalist and private-equity investor, says that “tourism is a great way to get dollars into the Cuban economy. It will spur a significant number of small tour operators” and promote further development, as well as more conversions of small homes into European-style bed-and-breakfast establishments and small restaurants — known as “paladares” — for travelers “looking for history” and an authentic experience, rather than for familiar high-end luxuries.

Kobrin wonders how quickly the Cuban government will commit itself to opening up to foreign investment so that it can attract the large-scale capital influx that Cuba will need in order to develop a modern infrastructure, which in turn would attract a higher volume of travelers, including upscale travelers.

Unlike the peoples of Eastern Europe following the collapse of the Berlin Wall, “the Cubans are unlikely to make the instant transition to capitalism,” Kobrin suggests. “The Eastern Europeans were revolting against external domination” — that is to say, against the communism imposed on them by the Soviet Union shortly after World War II. “But in Cuba, it was an internal process.” Moreover, despite the hardships suffered by the Cuban people over the decades, the Cuban state has not entirely lost the support of its population, and “they are not likely to ditch the state-controlled system” in its entirety. In addition, the normalization of Cuba’s economic relationship with the U.S. will require the two countries to settle all claims for properties expropriated by the Cuban regime in defiance of international law. More positively, despite their pride in going it alone for decades, the Cuban people have “very mixed feelings about the United States,” including affection for such emblematic symbols of American culture as baseball and classic cars.

Cancio advises the travel industry in other Caribbean countries not to be afraid of the coming wave of tourism to Cuba. For Puerto Rico and the smaller islands of the Caribbean, the key to survival, he advises, will be to promote Cuba as one of several multiple destinations in the travel packages of the future. One example might be to market trips that comprise two or three nights in San Juan, Puerto Rico, followed by a few nights in Havana and then another few nights at a third nearby destination. Rather than struggle against the tide of Cuba’s resurgence, he says, the other islands of the Caribbean would do better to embrace Cuba as a partner in their joint efforts to expand the appeal of the entire region.

For more on this story go to: http://knowledge.wharton.upenn.edu/article/what-the-changes-in-us-cuba-relations-mean-for-caribbean-tourism/