Fitch Ratings | April 12, 2016

Fitch Ratings-New York-12 April 2016: Flexible and less capital-intensive business models should facilitate US leisure companies#39;, including cruise operators, hotels and online travel agencies (OTAs), Cuban market entry following renewed US/Cuba diplomatic relations, according to Fitch Ratings. Several companies are laying the groundwork for expansion. However, Cuban infrastructure and legislative hurdles pose some near-term challenges to material business platform development and growth. Companies will also encounter familiar international competitors that have long operated in Cuba with potentially better positions and local market knowledge. The ability to reposition ships to meet demand is a hallmark of cruise line business models and a credit strength that helps balance the risk of high dollar value commitments of building new vessels. Carnival Corp. recently formalized its approval to operate in Cuba and plans to reposition its 704 passenger ship Adonia to capture US to Cuba cruise demand under its new Fathom brand. Fitch expects other operators to follow Carnival's lead given the potential for stronger ship occupancy shaped by future demand. Larger ship trips (between 1,250 and 2,000 passengers) are unlikely in the near term given the infrastructure and demand uncertainty. Supply constraints will allow cruise operators to implement modest price increases as demand builds. Fitch expects slow demand growth in American travel to Cuba given social and political differences and a lack of accommodations and creature comforts to which many American travelers are accustomed. Cruise lines will primarily source Cuban travel demand from countries with comparatively high cruise penetration rates (i.e. the US) and not in other emerging markets such as China. Lastly, limited port infrastructure will also temper cruise line growth in Cuba. Lodging C-Corps are also well positioned to enter Cuba with minimal capital investment by signing existing hotels to long-term franchise and/or management contracts. Starwood Hotels and Resorts and Marriott International also received US permission to pursue business in Cuba in March. Starwood announced three Cuba hotel agreements, while Marriott is establishing business relationships. Challenges to entering Cuba abound for lodging companies. Less modern utility infrastructure will complicate replicating hotel brand standards on the island. US companies will need to become comfortable with Cuba's government-administered employee compensation. Also, lodging REITs are unlikely to enter Cuba given its complex foreign investments laws, which primarily limits economic expansion into the country to joint ventures. OTAs have successfully entered the Cuban market, highlighting the scalability of their technology platforms, which is a key credit strength that provides barriers to entry against smaller players. Inbound travel to Cuba from the US will represent the largest incremental bookings opportunity for OTAs. Fitch does not expect Cuban outbound travel to contribute material bookings growth due to the country's relatively modest population (roughly 11 million) and affordability. GDP per capita was $6,789 in 2013 compared with $52,980 in the US, according to the World Bank. Priceline's Booking.com subsidiary announced it will soon allow Americans to book hotels in Cuba. The OTAs' widely cast net of relationships with hoteliers, airlines and cruise operators and solid penetration rate in the US travel market will allow them to broadly participate in increased tourism trends to Cuba. Global distribution service companies also have a solid foundation of airline industry relationships that will allow them to participate in most of the upside demand regardless of which airlines ultimately operate daily commercial flights between the US and Cuba.