What is an ‘Open Skies’ Agreement?

In this week’s newsletter I’ll explain an open skies agreement in detail, what it’s meant historically and what it will mean for those traveling to DR.

Spoiler alert .. you may not see much if any reduction!

Back in January, I shared news of a pending agreement between the US and DR that should reduce airfare SIGNIFICANTLY!

It was finally signed on June 28 .. so it’s official!!

But what’s an ‘open skies’ agreement anyway?

Simply put, it’s an agreement between countries to allow commercial airlines to create any routes they want without needing the approval of the local government.

It gives countries unfettered access to each other skies without need for permission or consultation.

The US has open skies agreements with over 120 nations.

The Brookings Institute did a study in 2016 that showed $4b in savings for travelers, representing a 15% drop in airfare.

BUT WHAT ABOUT DR?

With the agreement just signed, it’ll take some time for enough flight options to pop up that create the kind of competition that drops prices.

That said, there’s some promising news.

JetBlue has ended certain domestic routes to increase their routes to DR.

Frontier announced additional routes between San Juan PR and DR

And there are other airlines who had committed to additional routes as well.

I think we wait and see at the end of the year.

But here’s the thing ..

There WILL be a 15% drop in prices .. but not for everyone.

Let’s break it down.

This is the actual airfare for a flight I booked recently.

Note the $615 base fare.

That’s high!

But here’s why.

That flight is direct from Punta Cana to Detroit.

To my knowledge, that’s the ONLY direct route between the two cities.

So what happens if United decides to create a direct route from Detroit as well?

You guessed it .. the price will decrease.

15% would be $90 .. which doesn’t seem like a lot on $615

More likely, if 1 or 2 other routes are introduced, you’ll see a 30, 40, 50% reduction in that airfare (fuel prices notwithstanding).

Competition where there is none will create price decreases.

Now duplicate that for Minneapolis, Cleveland, Austin, Boston, Charlotte - even Los Angeles!

Adding just 1-2 more routes to all of those locations will likely significantly impact airfare from those cities.

Meanwhile, Miami and New York are where the demand currently is.

It’s also where there are MULTIPLE options already.

More routes or more diversely timed routes will create some competition .. but likely that will create a 3, 4, 5% reduction.

But when you aggregate the prices of fares from the US to DR, because of heavy discounts where there is NO competition .. it’s easy to see the path to 15% off!

WHAT ABOUT THOSE FEES?

A common argument on the idea of reduced airfare is that a ‘significant chunk of the fare is taxes and fees’

That’s more true from New York and Miami than it is from, say Detroit.

Looking at the fare above, $192 of the total $891 fare is Dominican taxes and fees

Another $80+ is US based taxes and fees

I don’t see that being reduced.

A large percentage is the $110.70 in VAT (value add tax) charged by DR on the ticket above.,

That’s 18% of the total fare .. and I doubt it changes.

That said, there is a big gap between DR and other countries not named Colombia in terms of their VAT percentage.

Take a look

Two of the biggest destination competitors for tourists and expats are Mexico and Costa Rica respectively.

They are at 4% and 5% VAT on flights.

The catch 22 for DR .. they need tax revenue overall to INCREASE in order to gain traction with their credit rating.

Reducing taxes wouldn’t help the cause .. makes you wonder if CONFOTUR is a long term proposition on the real estate side 🤔

Expect the fees to remain and the fare to drop.

Depending on where you are flying from, the percentage will likely vary widely!

Now this is my best guess based on my own research.

But the theory is rooted in very simply supply vs. demand principles.

Where there’s more demand than supply, prices are high.

When additonal supply is provided to meet or exceed demand, prices are low.

What say you?

Do you anticipate lowered rates from your home town??