33 The Cuban Thaw and its Effect on Charter Companies_FINAL (1)

-797-
THE CUBAN THAW AND ITS EFFECT ON
AIR CHARTER COMPANIES
by
Mclee Kerolle
S Y N O P S I S
SYNOPSIS .......................................................................................................797
ABSTRACT .....................................................................................................797
RÉSUMÉ..........................................................................................................798
KEYWORDS ...................................................................................................798
I. INTRODUCTION ...............................................................................799
II. HISTORICAL BACKGROUND ........................................................799
III. WHAT DOES THE ‘CUBAN THAW’ MEAN FOR THE
CHARTER FLIGHT MARKET? ........................................................804
IV. CASE NOTE: ISLAND TRAVEL AND TOURS V. CUBA
TRAVEL SERVICES ............................................................................806
A. BACKGROUND OF THE CASE ............................................806
B. THE APPLICABLE LEGISLATION: THE
SHERMAN ACT.......................................................................807
C. APPLICATION OF THE SHERMAN ACT...........................808
D. CASENOTE ANALYSIS: ISLAND TRAVEL AND
TOURS V. CUBA TRAVEL SERVICES ..................................811
V. CONCLUSION: WHAT DOES THIS MEAN IN RESPECT
TO THE CUBAN THAW? .................................................................812
A B S T R A C T
The story of the relations between the United States and Cuba is a story
rooted in both politics and aviation. The saga continued on December 2014
when US President Obama announced efforts to normalise relations with
the Cuban government. It is inevitable that the "Cuban Thaw", which

Mclee Kerolle J.D. LL.M is a graduate of the City University of New York Law School (2014)
and graduate of the International Institute of Air and Space Law (2015). From 2013-2014 he
served as the Head Magistrate of the international legal honor society, Phi Delta Phi’s Titone
Inn Chapter. He is a member of the American Bar Association Air and Space Law Forum. He
worked at the International Association of the Advancement of Space Safety (IAASS) as a
legal intern and has served as a rapporteur for the Legal Subcommittee of the United Nations
Committee on the Peaceful Uses of Outer Space.

798 ANNALS OF AIR AND SPACE LAW VOL XL
ushers in renewed growth and interest in the advancement of US and
Cuban diplomatic relations, will have an impact on the aviation industry.
Specifically, charter companies, which for over two decades have served
as a bridge between the two countries while the embargo was in place,
stand to lose the most from the thaw. Commercial airlines are expected to
enter the market within the next year or two according to insiders within
the Cuban travel industry. Some charter companies are already showing
signs of struggle, and Island Travel Tours has filed suit against Cuba
Travel Services for setting ticket prices too low and allegedly violating
antitrust laws. This paper will develop a case-note analyzing the legal
issues and considerations present in Island Travel Tours v. Cuba Travel
Services.
R É S U M É
L’histoire des relations entre les États-Unis et Cuba est une histoire
enracinée à la fois dans la politique et l'aviation. La saga s’est poursuivie
en décembre 2014, lorsque le président américain Obama a annoncé des
efforts pour normaliser les relations avec le gouvernement cubain. Il est
inévitable que le « dégel cubain », qui ouvre la voie à une croissance et un
intérêt renouvelé dans l'avancement des relations diplomatiques entre les
États-Unis et Cuba, aura un impact sur l'industrie de l’aviation. Plus
précisément, les compagnies de vols nolisés, qui, depuis plus de deux
décennies, ont servi de pont entre les deux pays alors que l'embargo était
en place, risquent d’être les plus désavantagées face à ce nouveau contexte
politique. Les compagnies aériennes commerciales devraient faire leur
entrée sur le marché dans la prochaine année ou la suivante selon certaines
sources de l'industrie touristique à Cuba. Certaines compagnies aériennes
à vols nolisés ressentent déjà les conséquences défavorables liées à ces
changements. À cet effet, Island Tours Travel a déjà déposé une plainte
contre Cuba Travel Services aux motifs que ladite compagnie avait fixé le
prix de ses billets d’avion à un prix moindre et aurait ainsi violé les lois
antitrust. Le texte ci-dessous commentera et analysera les questions
juridiques et considérations d’ordre pratique de l’arrêt Travels Tours c.
Cuba Travel Services.
K E Y W O R D S
Cuba-U.S. Relations, Sherman Anti-trust Act, Competition and Anti-trust
Law, monopolisation, charter airlines, Cuban embargo, Airline markets,
Cuban Thaw, US jurisprudence, predatory pricing

2015 THE CUBAN THAW AND ITS EFFECT ON CHARTER COMPANIES 799
I. INTRODUCTION
n 10 April 2015, before the opening ceremony of the Seventh
Summit of the Americas, United States (US) President Barack
Obama and his Cuban counterpart Raul Castro were
photographed shaking hands in Panama City.1
This historic handshake
occurred the day after the highest level political session between the US
and Cuban governments in more than 50 years took place between US
Secretary of State John Kerry and Cuban Foreign Minister Bruno
Rodriguez. This session was to lay the groundwork for the advancing
reconciliation between the two countries.2
The story between the US and
Cuba has been a story about both politics and the aviation industry. With
the renewed growth and interest in the advancement of United States and
Cuban diplomatic relations, or what is colloquially being referred to as the
“Cuban Thaw”, it will be of interest to see what effect this will have on the
aviation industry. This is especially pertinent for the charter companies
that have historically served as the bridge between the two countries for
over two decades.
This article will examine the antitrust law regime of the US through
the lens of the “Cuban Thaw”. Since the ease of restrictions between US
and Cuba is still an ongoing process, to fully understand what is going on,
this paper will start with some of the historical background of US and
Cuban diplomatic relations that have led to this moment. The article will
then explain what these renewed relations will mean for the market of
charter flights and look at the specific case of Island Travel and Tours v. Cuba
Travel Services that is currently ongoing. The final part of this article will
be in the form of a case note assessing the legal issues that should be under
consideration in Island Travel and Tours v. Cuba Travel Services, and provide
some predictions on the decision the court may reach in that case.
II. HISTORICAL BACKGROUND
As the aviation industry has been an intrinsic part of US and Cuba
relations, what is currently happening between US and Cuban diplomatic
relations should be viewed as a historic moment in the antitrust law
regime of the US. For over 50 years of history, US and Cuban relations can
1
Julie Hirscheld Davis & Randal C Archibold “Handshake for Obama and Raul Castro of
Cuba”, NY Times (10 April 2015), online: New York Times
<www.nytimes.com/2015/04/11/world/americas/cuba-us-obama-castro-
terrorism.html?_r=0>.
2
Ibid.
O

best be characterised as the lack of relations more than anything due to the
US embargo against Cuba. The US embargo against Cuba is a commercial,
financial, and economic embargo imposed by the US on Cuba in 1960
following the Cuban Revolution of 1959 when relations declined
substantially between the two countries.3
The six statues that currently
enforce the Cuba embargo are: the Trading with the Enemy Act of 1917,4
the Foreign Assistance Act of 1961,5
the Cuba Assets Control Regulations
of 1963,6
the Cuban Democracy Act of 1992,7
the Helms–Burton Act of
1996,8
and the Trade Sanctions Reform and Export Enhancement Act.9
The Cuban Asset Control Regulations of 1963, adopted under the
Trading with the Enemy Act of 1917, is the main instrument of domestic
enforcement of the embargo. The provisions from §2332d(a) and (b)(1) of
the statue are what enforce the regulation:
(a)Offense.—
Except as provided in regulations issued by the Secretary of the
Treasury, in consultation with the Secretary of State, whoever, being
a United States person, knowing or having reasonable cause to
know that a country is designated under section 6(j) of the Export
Administration Act of 1979 (50 U.S.C. App. 2405) as a country
supporting international terrorism, engages in a financial
transaction with the government of that country, shall be fined
under this title, imprisoned for not more than 10 years, or both.
(b)Definitions.—As used in this section—
(1) the term “financial transaction” has the same meaning as in
section 1956(c)(4);10
3
Gary Clyde Hufbauer, et al, “Case Studies in Economic Sanctions and Terrorism”,
Peterson Institute for International Economics, (October 2011), online: Peterson Institute for
International Economics <www.iie.com/publications/papers/sanctions-cuba-60-3.pdf>.
4
Trading with the Enemy Act , 40 Stat. 411, enacted 6 October 1917, codified at 12 USC §§ 95a–
95b and50 USC App §§ 1—44.
5
Foreign Assistance Act, Pub L 87–195, 75 Stat 424-2, 22 USC § 2151 et seq (enacted 4 September
1961).
6
Cuba Asset Control Regulations of 1963, 31 CFR 515 (enacted 8 July 1963).
7
Cuban Democracy Act of 1992, Pub L 102-484 (enacted 23 October 1992).
8
Cuban Liberty and Democratic Solidarity Act of 1996, Pub L 104–114, 110 Stat 785, 22
USC §§ 6021–6091 (enacted 12 March 1996).
9
Trade Sanction Reform and Export Enhancement Act, Pub L 106-387, 22 USC §7201 et seq
(enacted 28 October 2000).
10
18 USC §2332d- Financial Transactions.

Here, “financial transaction” meaning “a transaction in which any way or
degree affects interstate or foreign commerce”.11
However, as with most
business regulations, the activity in question is usually one that must be
approved through licensing. In the case of Cuba-US diplomatic relations,
legislative regulations are no different. With regard to travel restrictions
set in place by Cuba Asset Control Regulations, according to the US
Department of State:
Transactions related to travel for tourist activities are not licensable.
This restriction also prohibits tourist travel to Cuba from or through
a third country such as Mexico or Canada. U.S. law enforcement
authorities enforce these regulations at U.S. airports and pre-
clearance facilities in third countries.12
This is unfortunate considering that with over 2 million arrivals per year,
tourism as an industry in Cuba is one of the island State's main sources of
revenue.13
Cuba is less than 500 miles from the southern coast of Florida.
Presumably, depending on the political climate, the revenue Cuba can
make from an American market can increase by 15-25 per cent.14
The last two decades has seen the US both tighten and then relax
restrictions on the embargo.15
The Helms-Burton Act of 1996, which
applied an embargo on any foreign countries that traded with Cuba, is the
strongest and most recent politically-motivated legislation of the US. The
Helms-Burton Act reinforced the embargo rules as retaliation to Cuba's
shooting down of two civilian planes.16
At the time, Cuba was not a party
to the Convention for the Suppression of Unlawful Acts against the Safety
of Civil Aviation, also known as “Sabotage Convention,” which
criminalises this behaviour.17
As a result, not only did this strengthen the
embargo, but on a broader international scale, the unfortunate events led
11
18 USC § 1956- Laundering of monetary instrument.
12
US Department of State, "Cuba Country Specific Information", online: US Department of
State
<travel.state.gov/content/passports/english/country/cuba.html>.
13
“Individual Country Statistics (2010, 2009, 2007, 2006, 2004)", online: One Caribbean
<www.onecaribbean.org/content/files/Strep2BVItoDominica2010.pdf>.
14 Paul Guzzo, "Charters see risk, reward in U.S.-Cuba thaw", TBO (6 February 2015), online:
TBO
<tbo.com/news/politics/charters-see-risk-reward-in-us-cuba-thaw-20150206>.
15
Claire Suddath, “A Brief History of U.S.-Cuba Relations”, Time (15 April 2009), online:
Time <content.time.com/time/nation/article/0,85991891359,00.html>.
16
Ibid.
17
Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, 23
September 1971, 974 UNTS 178 (entered into force 26 January 1973). The United States signed
and ratified the agreement in 1971 and 1972, respectively. The date of accession for Cuba was
2001.

to the United Nations Security Council passing Security Council
Resolution 1067 condemning Cuba’s actions.18
However in 2001, in the
aftermath of Hurricane Michelle, an agreement was put in place for the
US to sell Cuba food.19
The agreement is still in place and with sales
reaching US$ 710 million in 2008, the US is now Cuba’s main supplier of
food.20
As stated earlier, currently the only way for Americans to travel to
Cuba is through licensed activity that is usually reserved for Cuban
Americans with family in Cuba.21
The US has adopted a policy of limiting
air travel to Cuba to companies holding special licenses and operating
non-regular flights, otherwise known as charter companies.22
In 2003 and
2004, US President George W. Bush almost crippled the charter industry
when he placed restrictions on family and cultural visits.23
This occurred
when the Office of Foreign Asset Control (OFAC) published changes to
the Cuban Asset Control Regulations implementing the Bush
Administration’s directives to enact certain recommendations of the
Commission for Assistance to a Free Cuba.24
As stated, many of these
changes included restrictions on family visits where one trip every three
years under a specific license to visit only immediate family could be
made, cultural visits where people-to-people educational exchanges
unrelated to academic coursework were no longer allowed family visits
were restricted, as well as a decrease in the amount of money family
visitors could spend.25
“People to people” is the term used to describe a
program that the OFAC developed for specifically licensed organizations
that sponsored and organised certain educational programs to promote
contact with the Cuban people pursuant to §515.565(b)(2) of the Cuban
Assets Control Regulation.26
While the reasons for these restrictions under
the Bush Administrations are not entirely clear, at least for the educational
exchange some groups applauded the restriction because they believed
they had become a channel for unrestricted travel.27
18
UN Security Council, On the conclusion of the ICAO report on the shooting down of two civilian
aircraft by Cuban Air Force, UNSC Res 1067, UN Doc S/RES/1067 (1996).
19
Suddath, supra note 15.
20
Ibid.
21
Max Kutner, “Charter Flights to Cuba Surge", Newsweek (20 February 2015), online:
Newsweek
<www.newsweek.com/2015/02/20/charter-flights-cuba-surge-306142.html>.
22
Ibid.
23
Federal Register Volume 69, Issue 115 (16 June 2004), 69 FR 33768.
24
Ibid
25
31 CFR 515
26
31 CFR 515 §515.565(b)(2)
27
Congressional Research Service, Cuba: U.S. Restrictions on Travel and Remittances, RL31139

The charter industry bounced back in 2009 and 2011 when President
Barak Obama respectively eased restrictions on Cuban-Americans visiting
family and restored the 12 “people to people” categories for legal travel to
Cuba.28
Within the last few months, things have taken an interesting and
historic turn in US-Cuban diplomatic relations. In December 2014,
President Obama announced efforts to normalise relations with the Cuban
government.29
While regular tourism to Cuba remains banned and
travelers must fit into one of 12 categories, things continued to take a
historic turn when in January 2015, the US announced that the
government would no longer require case by case approval for travelers.30
In addition, Americans visiting can now use credit cards there and spend
larger amounts of money, actions that were once restricted under the
Cuban Assets Control Regulation.31
This historic warming of relations
between the US and Cuba is now being referred to as the “Cuban Thaw.”32
On 20 July 2015, the Cuban and United States re-established relations with
the opening of the Cuban embassy in Washington and the US embassy in
Havana.33
As a result of thawing relations, business at charter companies have
increased exponentially.34
Since the US government’s announcement,
traffic to GoToCuba.org has risen from 50 visitors a day to more than 800
on a daily average.35
It is inevitable that this ease in restriction will make
way for a complete lifting of the embargo. Due to the ease of restrictions,
charter companies now fear that once commercial airlines enter the
market, charter profits will go into a free fall.36
at 19, online: Federation of American Scientists
<www.fas.org/sgp/crs/row/RL31139.pdf>.
28
Ibid.
29
Max Kutner, New on Charter Flight Roller Coaster: Eased Cuba Restrictions", Newsweek,
(1 February 2015), online: Newsweek <www.newsweek.com/new-charter-flight-roller-
coaster-eased-cuba-restrictions-303594>.
30
Ibid.
31
Ibid.
32
K Quincy Parker, “CARICOM Launches Five-year plan”, The Nassau Guardian (6 January
2015), online: The Nassau Guardian <www.thenassauguardian.com/bahamas-business/40-
bahamas-business/52862-caricom-launches-five-year-plan>.
33
Azam Ahmed & Julie Hirschfeld Davis, “U.S. and Cuba Reopen Long-Closed Embassies”,
The New York Times (21 July 2015), online: The New York Times
<www.nytimes.com/2015/07/21/world/americas/cuba-us-embassy-diplomatic-
relations.html?_r=0>.
34
Kutner, supra note 29.
35
Ibid.
36
Ibid.

III. WHAT DOES THE ‘CUBAN THAW’ MEAN FOR
THE CHARTER FLIGHT MARKET?
There have been executive orders from President Obama to begin
negotiations with Cuba that includes opening flights operated by US-
based commercial airlines for the first time since the 1960s.37
As a result,
according to insiders in the Cuban travel industry, airlines are expected to
enter the market within the next year or two.38
Delta, American Airlines,
JetBlue, Southwest and United are just some of the major commercial
airlines that have already expressed interest in flying to Cuba.39
In fact,
JetBlue, which already operates three weekly charter flights to Cuba from
Tampa and Fort Lauderdale, recently announced that they would add a
new charter flight to Cuba starting 5 June 2015 reflecting on the
“thoughtful approach of taking in Cuba over the long-term".40
Once
regular scheduled flights to Cuba start occurring, it can be foreseen that
nothing good can result from it for the charter companies that have
focused on the US to Cuba market. Lilian Manzor, a University of Miami
Associate Professor and expert on US to Cuba travel policies, thinks that
logically the inevitable influx of options to Cuba will drive down ticket
prices and charters will struggle.41
Charter companies like Miami-based ABC Charters and California-
based Cuba Charters expect that once relations normalise commercial
airlines will take as much as 80 per cent of the Cuba travel business. While
most charter companies fear this development, these companies hope the
20 per cent of the market amounts to more business than they own
currently.42
To ease the concerns of the charter flight industry, the
Department of Transportation issued a notice on 15 January 2015
addressing its plan to renegotiate the 62-year old air travel agreement in
place and specifically announced:
37
Guzzo, supra note 14.
38
Ibid.
39
Kutner, “Charter Flights to Cuba Surge”, supra note 21.
40
“JetBlue Announces Additional Flights to Cuba and Haiti”, Huffington Post (12 February
2015), online: Huffington Post
<www.huffingtonpost.com/2015/02/12/jetblue-cuba_n_6669248.html>.
41
Kutner, “New on Charter Flight Roller Coaster: Eased Cuba Restrictions”, supra note 29.
41
“JetBlue Announces Additional Flights to Cuba and Haiti", supra note 40.
42
Ibid.

The US Government will engage with the Government of Cuba to
assess our aviation relations and establish a bilateral basis for
further expansion of air services… Nothing in this Notice is
intended to interfere with US-Cuba charter services.43
The president of New York-based Insight Cuba, a non-profit travel
organization specialising solely on people to people travel to Cuba, has
stated that while he believes that the end for charter companies
specialising in travel to Cuba is near, we have to “wait and see before we
make assumptions”.44
However, the legal community might not have to
wait and see what the results of eased restrictions to Cuba will have on
charter companies. Nor do they have to worry about the Department of
Transportation’s notice having a direct effect on US-Cuba charter services,
because an example already exists highlighting the potential effect the
Cuban Thaw will have on the services.
On 23 October 2014, Island Travel and Tours filed suit against Cuba
Travel Services at the Florida Southern District Court for setting ticket
prices too low and allegedly violating antitrust laws.45
While the case was
filed before the US President’s announcement to begin efforts to normalize
relations with Cuba, technically, as mentioned earlier, the easing of
restrictions had been taking place since 2009. This case serves as an
example of the type of cases that can be expected once the antitrust law
regime starts to become affected by the complete normalisation of
relations between the Cuban and US government. The case is currently
ongoing and the attorneys for Cuba Travel Services have stated that the
claim is completely “meritless”.46
However, because the case was filed in
Federal Court, if the claim was completely meritless, proper lawyering
would dictate that the attorneys for Cuba Travel Services file a motion to
dismiss if there were not sufficient grounds for the case to be taken to
court. Therefore, the next section of this paper will analyse some of the
legal issues and considerations present in Island Travel Tours v. Cuba Travel
Services.
43
44
Guzzo, supra note 14.
45
Island Travel & Tours Ltd. Co. v. Cuba Travel Services, 1:2014cv23947, Florida Southern
District Court (2015), Justia Dockets and Filings, Inc., online: Justia
<dockets.justia.com/docket/florida/flsdce/1:2014cv23947/450901>.
46

IV. CASE NOTE: ISLAND TRAVEL AND TOURS V.
CUBA TRAVEL SERVICES
A. BACKGROUND OF THE CASE
This case is unique because the charter companies involved in the
suit are US-based companies whose business is centered on the Cuban
market. Here, the aviation legal community is offered a glimpse into the
dealings of what US citizens must pay the Cuban government for use of
Havana’s José Martí International Airport. In the suit, Miami-based Island
Travel and Tours alleges that California-based Cuba Travel Services is in
violation of US anti-trust laws because Cuba Travel Services sets ticket
prices artificially low to drive out competition.47
If true, this claim would
constitute an attempt by Cuba Travel Services to monopolise the market
through predatory pricing. If the evidence establishes that Cuba Travel
Services did not price its fares below an appropriate measure of costs in
its flight routes to Cuba, then the court should grant them a summary
judgment.
In an email to the Tampa Tribune, the attorney for Island Travels,
Richard L. Richards, stated:
Cuba Travel Services is blatantly charging below cost in an unfair
attempt to put competitors out of business. This action is against the
law and public policy for obvious reasons — i.e. once all the
competitors are out of business — then Cuba Travel is free to charge
uncompetitive rates to the detriment of the flying public.48
Island Travel’s claims that Cuba Travel Services is engaging in or plans to
engage in monopolistic activity, one of the defining activities that violate
US antitrust laws. Lisa Zuccato, president of Cuba Travel Services,
responded stating that prices are set based on seasonal demand,
competitors’ prices, assigned routes, customer demand and “other
economic factors”, and that any allegation they "have engaged in
monopolistic activity is absurd”.49
To understand better why the claim is
not as “meritless” as Cuba Travel portrays there must be a closer look at
the allegations.
47
Ibid.
48
Paul Guzzo, “Fees for Americans a sore spot in Cuba travel”, Tampa Tribune (23 November
2014), online: Tampa Tribune <www.tbo.com/news/politics/fees-for-americans-a-sore-
spot-in-cuba-travel-20141123/>
49
Ibid.

In its lawsuit against Cuba Travel Services, Island Travel &Tours
presented the three following fees charged to US citizens traveling to Cuba
in order to demonstrate that Cuba Travel Services undercut prices:
1) US$ 58.90 per passenger in the US passenger fees;
2) US$ 148 per passenger for a Jose Marti International Airport
landing fee; and
3) US$ 46 per passenger for a Cuba required medical insurance.50
The plaintiff states that the typical airplane used for such flights is a
Boeing 737-800 with a capacity of 162 seats.51
This is noteworthy because
according to the lawsuit, the rental fee for travel companies using the
aircraft is $25,608 which breaks down to a cost of about US$ 158 on a sold-
out flight, more than double the price Cuba Travels charges.52
Furthermore, according to the suit, when you consider costs alone, adding
the Cuban government fees and airplane rental should result in prices of
US$ 411 per person for a single trip, US$ 822 for a round trip. However,
according to a survey of prices in December, Cuba Charter Services
charged US$ 399 to US$ 529 for roundtrip tickets to Havana.53
B. THE APPLICABLE LEGISLATION: THE SHERMAN
ACT
The Sherman Antitrust Act, passed in 1890, is a landmark federal
statute in the history of US antitrust law. Section 2 of the Sherman Act is
as follows,
Every person who shall monopolize, or attempt to monopolize, or
combine or conspire with any other person or persons, to
monopolize any part of the trade or commerce among the several
States, or with foreign nations, shall be deemed guilty of a felony,
and, on conviction thereof, shall be punished by fine not exceeding
$100,000,000 if a corporation, or, if any other person, $1,000,000, or
by imprisonment not exceeding 10 years, or by both said
punishments, in the discretion of the court.54
50
Ibid.
51
Ibid.
52
Ibid.
53
Ibid.
54
Sherman Antitrust Act, 26 Stat 209, 15 USC §§ 1–7.

The law was enacted to prevent restraints on free competition in business
and commercial transactions. These restraints tend to restrict production,
raise prices, or otherwise control the market to the detriment of purchasers
or consumer of goods and services. When pursuing a claim under Section
2 of the Sherman Act, two elements must be met:
(1) the possession of monopoly power in a relevant market; and
(2) the willful acquisition, maintenance, or use of that power by anti-
competitive or exclusionary means as opposed to “growth or
development resulting from a superior product, business acumen,
or historic accident.55
In addition, under Section 2 of the Sherman Act, an attempt to monopolise
occurs when a competitor engages in anti-competitive practices with the
specific purpose of building a monopoly or excluding or destroying
competition with the dangerous probability of success.56
Moreover, a
claim of attempted monopolisation can be supported by proof of various
types of conduct, including refusing to deal, price fixing,
and predatory pricing.57
Predatory pricing occurs when an actor
relinquishes short-term profits and then raises prices later to recoup
losses.58
Due to the nature of the claims alleged against Cuba Travel
Services, this paper will focus on the possession of monopoly power in
relation to predatory pricing.
C. APPLICATION OF THE SHERMAN ACT
Predatory pricing schemes are rarely tried, rarely successful, and
the costs of an erroneous finding of liability are high. The mechanism by
which a firm engages in predatory pricing—lowering prices—is the same
mechanism by which a firm stimulates competition. The standard of proof
necessary to prove predatory pricing was established in Brooke Group Ltd.
v. Brown & Williamson Tobacco Corp., a case regarding below cost sales of
generic cigarettes.59
The Court recognised the validity, in appropriate
actions, of having a way to establish anti-trust liability for predatory
pricing. As a result, the standard was set forth in Brooke Group that requires
the plaintiff to prove both that the defendant priced its product below an
appropriate measure of cost, and that the defendant enjoyed a realistic
55
Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 US 585 (1985) at 595–96.
56
Smith v. N. Michigan Hosp. Inc., 703 F.2d 942 (6th Cir, 1983) at 954.
57
Sherman Antitrust Act, 26 Stat 209, 15 USC, § 2.
58
Brooke Group Ltd. v. Brown and Williamson Tobacco, 113 SCt 2578 (1993) at 2581[Brooke Group].
59
Ibid.

prospect of recouping its losses by supra-competitive pricing.60
In
addition, the Court concluded that one essential element of any predatory
pricing claim was proof that the asserted predator priced its product
“below an appropriate measure” of its costs.61
However, the Court noted
“the general implausibility” of finding predatory pricing in the average
case.62
One reason is because in the US the nature of “cutting prices in
order to increase business often is the very essence of
competition.”63
Similarly, in Cargill, Inc. v. Monfort of Colorado, Inc., a case
regarding the attempt to enjoin a merger between the US second and third
largest beef packers, the Court warned that “mistaken inferences”
concerning allegedly predatory prices “are especially costly, because they
chill the very conduct the antitrust laws are designed to protect”.64
As a
result, the court applies a cost-based analysis in order to determine if the
appropriate measure of costs is predatory.
Applied to the airline industry, in Spirit Airlines, INC v. Northwest
Airlines the issue of predatory pricing was brought under Section 2 of the
Sherman Act in front of the United States Sixth Circuit Court.65
In this case,
Spirit Airlines alleged that Northwest Airlines was engaging in predatory
pricing tactics towards the leisure passenger airline markets for Detroit-
Boston and Detroit-Philadelphia routes. The court held that:
1) fact issues existed as to whether competitor engaged in predatory
pricing in leisure passenger markets on those geographic routes in
order to force low-fare airline out of business;
2) fact issues existed as to whether, once low-fare airline exited the
market, competitor raised its prices to recoup the losses it incurred
during predation period; and
3) even if the jury found that competitor’s prices exceeded
appropriate measure of average variable costs, the jury would have
to consider the market structure to determine if competitor’s deep
price discounts in response to low-fare carrier’s entry and its
accompanying expansion of capacity on those routes injured
competition.66
60
Ibid at 1195.
61
Ibid at 2589.
62
Ibid.
63
Matsushita Electric Industrial Co. Ltd. v. Zenith Radio Corporation, 106 SCt 1348, 475 US at 594.
64
Cargill, Inc. v. Monfort of Colorado, Inc., 107 SCt 484, 93 L.Ed.2d 427 (1986), 479 US 104 at 122.
65
Spirit Airlines v. Northwest Airlines 431 F.3d 917 (2005).
66
Ibid at 953.

Similarly, in United States v. AMR Corporation, American Airlines, Inc.,
and AMR Eagle Holding Corporation,67
the US government alleged that
American Airlines participated in a scheme of predatory pricing against
low cost carriers in violation of Section 2 of the Sherman Act.68
The
allegation included a claim that American's pricing decisions on certain
routes resulted in pricing tickets below cost, and American intended to
subsequently recoup these costs by supra-competitive pricing by
monopolising or attempting to monopolise these routes against low fare
carriers in the core markets.69
The Court found that the government's
claims failed for several reasons, including the fact that American did not
price its fares below an appropriate measure of cost because American
mostly matched the prices of its competitors, and because there is no
dangerous probability (even assuming below-cost pricing) of recoupment
of American's supposed profits by means of supra-competitive pricing.70
The rationale for cost-based analysis rests in the limited ability of
courts to accurately separate real-world predation from lawful
competition, and the inherent threat to competition that a failure to make
such a recognition creates. Courts are reluctant to implore cost-based
strategies because, as the Court stated in US v. AMR Corporation, antitrust
law
begins with the premise that all firms, even dominant firms, are
permitted to compete aggressively, and that hard competition is a
desideratum rather than an evil. Thus prices above the relevant
measure of cost become an absolute safe harbor.71
In Brooke Group, the Supreme Court declined to resolve the conflict among
the circuits over the appropriate measure of costs, but applied the average
variable cost standard “because the parties in this case agree the relevant
measure is average variable cost”.72
Thus if plaintiff proves that the
defendant's prices were below average variable cost, the plaintiff has
established a prima facie case of predatory pricing and the burden shifts to
the defendant to prove that the prices were justified without regard to any
anticipated destructive effect they might have on competitors.
67
US v. AMR Corp, 140 F.Supp.2d 1141 (2003) [AMR].
68
Ibid at 1144.
69
Ibid.
70
Ibid at 1218.
71
Ibid at 1196
72
Brooke Group, supra note 58 at 223

D. CASENOTE ANALYSIS: ISLAND TRAVEL AND
TOURS V. CUBA TRAVEL SERVICES
When assessing whether Cuba Travels violated any of the US
antitrust laws, the best approach the court should consider is to determine
whether Cuba Travels did attempt to monopolise and whether there is a
legitimate instance of predatory pricing. Traditionally, part of the test to
determine whether monopolisation has taken place is to determine
whether the market power of one party starts at 60 per cent or more.73
To
determine predatory pricing, the plaintiff must show competitive injury
resulting from pricing by its competitor below an appropriate measure of
its rivals cost.74
However, an action to challenge an attempt to monopolise
can take place at lower market shares, even at approximately 30 per cent,
than monopolisation challenges. Additionally, the plaintiff must show a
specific intent and a dangerous probability of success.75
When
determining whether there is a dangerous probability of success, this
criteria requires some form of market analysis, and US cases have shown
that intent by itself is not enough to constitute an attempt to monopolise.
Case law has also shown that the court does not have to analyse the
question of the dangerous probability of success. Thus, the analysis will
focus on the average variable cost. The Court reasoned in American that
using average variable cost as a measure of predatory pricing not only has
the weight of authority behind it, but is also “most congruent with the goal
of the Sherman Act: prohibiting unfair competitive practices while
simultaneously encouraging open, indeed vigorous price competition”.76
Here, in interest of the analysis, this paper will assume that Cuba
Travel Services controls 30% of the market needed to bring an attempt to
monopolise claim. Additionally, partly due to the secretive nature of the
Cuban government, the Court will only be able to work with the facts as
they are presented. With respect to costs, it can be argued that Cuba Travel
Services is pricing its flights below the average variable costs of the
market. As the facts indicate above, Cuba Travel Services charged US$ 399
to US$ 529 for roundtrip tickets to Havana while the average variable costs
should be $822 for a round trip. While at first glance this may be indicative
of an instance of predatory pricing, there are certain factors that must be
considered, including the issue of recoupment and whether the below
average cost is just a part of normal business practice.
73
Piet Jan Slot, “Synopsis US Anti-Trust Law” in PMJ Mendes de Leon, eds, Competition and
Antitrust Law 2015, (Leiden: Leiden University Law School, 2015) at 192.
74
Ibid at 193.
75
Ibid at 194.
76
AMR, supra note 67 at 1198.

As stated above, predatory pricing is found when an actor
relinquishes short-term profits and then raises prices later to recoup
losses. With respect to the issue of recoupment, there is a lack of proof
demonstrating that Island Travel and Tour's claims against Cuba Travel
Services are accurate. The evidence would need to show that following the
period of low-fare competition, Cuba Travel Services fares would have
returned to about their previous prices. Thus, with the information that is
currently available, no basis in evidence exists for actual or likely
recoupment by supra-competitive pricing. Due to the fact that political
environment between Cuba and the United States had been in a gradual
thaw over the past decade, the prices set by Cuba Travel Services could
have been in anticipation of the change in seasonal demand, competitors’
prices, assigned routes, customer demand and “other economic factors”.
Thus, the claims against Cuba Travel Services should be dismissed and
summary judgment should be granted.
V. CONCLUSION: WHAT DOES THIS MEAN IN
RESPECT TO THE CUBAN THAW?
The case Island Travel and Tours v. Cuba Travel Services of is an
example of the type of cases that will begin to flood the courts once the
relationship between the US and Cuban government enter a phase of
complete normalisation. The air charter companies that specifically serve
the market to Cuba find themselves in a precarious situation because
larger airlines will be able to offer more flights to Cuba at cheaper rates.
As a result, this will most likely force charter companies that primarily
serve routes to Cuba, such as Cuba Travel Services, out of business.
However, before this occurs there will be a litany of litigations mirroring
Island Travel and Tours v. Cuba Travel Services with allegations that there
has been a violation of Section 2 of the Sherman Antitrust Act.
What the courts will have to keep in mind is that the act of setting
prices low is, within itself, not a violation of antitrust law. Regardless of
how the price is set, low prices benefit consumers. In addition, in light of
the Sherman Antitrust Act, as long as prices are above predatory levels,
they will not threaten the nature of market competition. It is suggested
that courts view these inevitable claims of predation towards charter
companies serving routes to Cuba on a case by case basis. Although the
courts have accepted the marginal or average variable cost standard as an
indicator of intent, many allow for consideration of other factors indicative
of predation. A leading example of this hybrid approach is that taken by
the Ninth Circuit in Inglis v. ITT Continental, a case involving one of the

nation’s largest wholesale bakeries charging discriminatory and below-
cost prices.77
In that case, the position was taken that although average
variable cost is a generally reliable indicator, there are market situations
where a rational firm would find it prudent to sell below its average
variable cost.78
A possible market situation where this can happen is the
inevitable influx of large commercial airlines serving routes to Cuba. The
Court also acknowledged that in certain situations, a firm selling above
average variable cost could be guilty of predatory pricing.79
Consequently,
the Court chose to focus on what a rational firm would have expected its
prices to accomplish.80
As a result, the Court permits the introduction of
any evidence, in addition to cost price figures, that will help explain the
rationale behind the defendant's pricing policy.
There is no doubt that the major commercial airlines serving routes
to Cuba will be difficult and brutal competitors for charter companies.
While a case–by-case basis is one way for the courts to handle the
impending lawsuits, there is also the possibility of a class action lawsuit.
Due to the fact that the question of law is common and a number of parties
will be affected, a class action suit might be the most logical route for
charter companies to take action to protect their own interests and
survival. As a result, this may have the effect of reducing the procedural
efficiency of the case by case application of the Brooke Group standard. In
addition, it may be difficult to determine the result of a class action suit
because of the inherently difficulty of finding predatory pricing in real life
situations. For instance, in class action with multiple airlines serving as
defendant, it may be extremely difficult, due to length of time or other
reasons, to prove the recoupment of each airlines losses. For the future of
the aviation industry, and in particular the relationship between charter
companies and major commercial airlines at this historic time, it is
imperative that the court keeps in mind a fundamental principle of
antitrust law. The purpose of antitrust law is to be foster competition, not
suppress it, regardless of the ever-changing political climate.
It is worth noting that at the time of this article’s publication there
has been significant changes regarding both US-Cuba relations and Island
Travel and Tours v. Cuba Travel Services. First, almost a year after his historic
handshake in Panama City with Raul Castro, in March 2016 President
Obama became the first US president to visit Cuba in almost a century.81
77
Inglis v. ITT Continental Baking Co., 668 F.2d 1014 (9th Cir, 1981), 33 Fed.R.Serv.2d 983.
78
Ibid at 1035.
79
Ibid.
80
Ibid at 1034.
81
Dan Roberts, “Obama lands in Cuba as first U.S. President to visit in nearly a century”,

This historic visit should have the effect of expediting the normalistion of
relations between both countries. In fact, President Obama has stated that
he believes Congress will finally lift the trade embargo once he leaves
office.82
Additionally, as of February 24, 2016 Island Travel & Tours Ltd.
Co. and Cuba Travel Services, Inc. have both agreed to voluntarily dismiss
the action.83
If the case were to continue, it would most likely follow the
analysis laid out in the previous section. As stated above, as relations with
Cuba and the US warm, it is inevitable that more allegations similar to
those put forth in Island Travel and Tours v. Cuba Travel Services will occur
alleging that there has been a violation of Section 2 of the Sherman
Antitrust Act.
The Guardian (21 March 2016), online: The Guardian
<www.theguardian.com/world/2016/mar/20/barack-obama-cuba-visit-us-politics-shift-
public-opinion-diplomacy>.
82
Ibid.
83
Island Travel & Tours Ltd. Co. v. Cuba Travel Services, 1:2014cv23947, Florida Southern
District Court (2016), online: Law360
<www.law360.com/dockets/download/56ce14a0edede53f6900005c?doc_url=https%3A%2
F%2Fecf.flsd.uscourts.gov%2Fdoc1%2F051116149817&label=Case+Filing&attachment=&in
terstitial=y>

33 The Cuban Thaw and its Effect on Charter Companies_FINAL (1)

Recommended

Recommended

More Related Content

Similar to 33 The Cuban Thaw and its Effect on Charter Companies_FINAL (1)

Similar to 33 The Cuban Thaw and its Effect on Charter Companies_FINAL (1) (20)

33 The Cuban Thaw and its Effect on Charter Companies_FINAL (1)