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1 NEW CONTAINERS terminal at Mariel s Special Development Zone, the largest non-touristic investment in recent years. IN THIS ISSUE INTERVIEW LEGAL CUBA 2016: The Havana Consulting Prognosis David Adams THCH analysts talk about pending reform issues in Cuba, what was achieved in 2015 and the prognosis for Broad Legal Brushstrokes for Potential Investors THCG Legal insider Cuba s legal system is non-compatible with that of most developed countries, and investors must know. 21 LOGISTICS AIR TRANSPORT The Thaw Begins to Transform the Markets Emilio Morales 10 The future of the parcel delivery agencies to Cuba after restablishing the regular postal service between both countries. INVESTMENTS Investment Deficit: Implications for Future Growth Jorge Pérez-López 15 Cuba needs to triple its gross capital formation rate compared to its Gross Domestic Product for the economy to succeed. New Prospects for Spanish Businesses in Cuba Julio Cerviño Cuba ranks amongst the preferred investment countries for the Spanish companies in Latin America, a research concludes. 18 Commercial Air Travel Will Stunt Charter Flights THGC Business Intelligence Unit 23 The major U.S. commercial airlines would take over the vast majority of air traffic, with a small niche for Cubana de Aviacion and today s dominant charter airlines. ECONOMY Alternatives for the Future of the Cuban Economy Archibald Ritter There are several institutional structures that Cuba might accept that include the private sector. OUR TEAM About THCG Business Report 26 30

2 Some opening words Dear readers For the first time after more than five decades of antagonism and distancing from one another, the U.S. and Cuba have crossed the threshhold of change. Some basic steps have been taken since the thaw of Cuba- U.S. relations that began on December 17, 2014, in the difficult road to build confidence between the two geographic and historical neighbors: reestablishing formal diplomatic relations, establishing communications links, connecting individuals in the two nations, expanding academic collaboration, and lifting some restrictions to trade. The short distance traveled to date is merely the beginning of a long, tortuous and unknown road that eventually should lead to a positive relationship, in which suspicion and rancor might exist for some time but not to the extent that they would derail mutually beneficial relations. The thaw in diplomatic relations has generated an intense interest among businessmen in the U.S., Europe, Asia and Latin America in entering the Cuban market. They assess the Cuban market as potentially providing the greatest commercial opportunities in the Caribbean region in the next few years, principally because of Cuba's privileged geographic position, its natural resources and the high level of education of its human resources. Still ahead are the challenges of opening trade and investment relations to a scale that will reach persons of all social strata in both sides of the Florida Straits. Convinced that changes in that direction are forthcoming, The Havana Consulting Group has prepared the THCG Business Report to keep you informed about the course of the improvement in relations, the doors that are opening, and particularly about the characteristics of a market that is so near and so unknown. Published bimonthly, THCG Business Report is required reading for any company or investor interested in knowing about the opportunities of doing business in the island, how to manage risk and ways to compete in the Cuban market. THCG Business Report relies on a multidisciplinary team of experts with different backgrounds specializing in marketing, legal issues, and business development. These experts have studied all aspects and sectors of the Cuban market from inside and outside the island for more than 30 years. Each issue of THCG Business Report will contain information not available anywhere else originating from our own research and analysis of the Cuban market. The approach of our experts is objective, based on serious analysis of real and transparent business situations. The information and analysis will assist you in assessing the Cuban market and making your own decisions. Without further ado, we put in your hands the first issue of THCG Business Report. Emilio Morales Presidente y CEO The Havana Consulting Group & Tech LLC

3 Commercial Air Travel Will Stunt Charter Flights By THCG Business Intelligence Unit When commercial airline transportation is established, charter airlines - who have dominated the market since the end of the 1970s - will lose business while travelers will see a reduction in air fares Passenger air travel between the U.S. and Cuba has been dominated by charter flights for many years. Regularly-scheduled flights between the U.S. and Cuba were suspended in 1961, with charter flights since then the only means of passenger air travel between the two nations. In the last six years, charter flights grew by leaps and bounds, particularly since President Obama eliminated the regulation put in place by his predecessor President Bush that allowed Cuban- Americans to travel to the island only once every three years. As shown in Figure 1, the number of charter flights to the island has grown steadily, rising by % between 2010 and 2015, from 1,996 flights in 2010 to 4,794 in Figure 1. Charter flights from Miami and Tampa grew by 135.6% since Another factor boosting the number of charter flights is the relaxation of requirements on the travel of American citizens to Cuba under academic and cultural exchange programs generally known as people-to-people travel. At present, such people-to-people travel is authorized for 12 categories of travelers. To accomodate the growth in demand for travel to Cuba in , numerous agencies organizing charter travel services and selling charter travel tickets sprung up in the U.S. Between 2011 and 2013, the number of agencies organizing charter flights to Cuba grew by %, while the number of agencies selling charter travel tickets rose by %, as can be seen from Figure 2. Figure 2. Agencies and ticket sales had a healthy growth in The average price of airline tickets to Cuba has risen in response to the strong demand for travel. In 2012, the average price was $419 dollars per ticket, while it was $486 in 2015, 16% higher. Figure 3. Figure 3. The average price of airline tickets rose by 16% since The estimated value of airline ticket sales to Cuba in 2012 was $177.6 million dollars, compared to $ million dollars in 2015, an increase of 96.16%. See Figure 4. Figure 4. The value of sales of airline tickets to Cuba almost doubled since 2012 In 2015, the market for charter flights to Cuba was dominated by the airline World Atlantic, which flew 1,142 flights, followed by mega-company American Airlines with 977 flights. See Figure 5. Figure 5. The top five airlines conducted 78% of the charter flights, Commercial Air Travel In the context of the thaw in U.S.-Cuba relations, the two countries reached an understanding that will open the way for the resumption of commercial flights. This development raises several questions for the owners and clients of travel agencies: Will prices of airline tickets fall in the future? Will it be possible to buy tickets online? Will charter flights disappear altogether? Will the small agencies that until now enjoyed a monopoly over charter flights survive? Which airlines will participate in the commercial air flight market? The monopoly held by charter flights is very likely to disappear in the near future, bringing about a radically different scenario in which there will be some competition. It is conceivable that large U.S.

4 THCG, Business Report, Nº 1, commercial airlines such as American Airlines, Delta and Jet Blue could break into the Cuban market, introducing flights priced at between $150 and $250 dollars to more than 9 destinations in the island. This would mean prices between % and 69.13% lower than the the average price for charter flights from the U.S. to Cuba in That is, at the lower prices, it would be possible for two travelers to fly to the island for the price one traveling on a charter flight in In Figure 6 we project the number of flights to Cuba for the next four years based on the historical record of charter flights from 2011 to 2015 and the increasing demand of air passenger transportation from the U.S. over this period. According to the projections, the number of commercial flights from the U.S. could reach 3,192 or 67.89% of the projected number of flights in that year, compared to 1,850 charter flights or 21.11%. See Figure 6. In the short term, American Airlines will probably lead commercial flights to Cuba with a projected 3,976 flights or 68.84% of the market in 2007, followed Figure 6. Over the next few years charter flights tend to vanish. by Jet Blue with 18.21% and Delta with 12.95%. See Figure 7. In the mid term, Cubana de Aviación might also enter the market, with an estimated 8.08% of commercial flights in 2019, compared to 60.19% for American Airlines, and participation by other airlines as shown in Figure 8. Figure 7. The main airlines keep their market share, while by 2019 they would yield some room to Cubana de Aviación In analyzing the drastic changes that the Cuban passenger air travel market will undergo in the next few years as a result of the resumption of commercial flights, the convenience for buyers of being able to purchase their tickets online is another advantage this mode of making travel arrangements will have compared to charter flights. In addition, the probability of flight delays will be drastically reduced in the case of commercial flights. Initially, the two modalities -- commercial flights and charter flights -- will coexist, but over time charter flights will disappear. By 2019, THCG projects that commercial flights will hold 98.57% of the market, while charter flights will hold a small share of 1.43%. See Figure 8. Impact on Tourism At present, U.S. flights bound for Cuba originate mainly from the Miami and Tampa Airports, with some flights also departing from New York, Orlando, New Orleans and Los Angeles. With the resumption of commercial air travel, the number of U.S. cities originating air travel to Cuba is likely to rise. In the island, the charter flights from the U.S. currently land at six destinations: La Habana, Villa Clara, Cienfuegos, Camagüey, Holguín and Santiago de Cuba. The reestablishment of commercial air travel could increase the number of destination airports in Cuba to 10, with attractive locations such as Varadero, Cayo Coco, Baracoa and Cayo Largo high on the list of potential destinations. See Map 1. The measures implemented by the Obama Administration that have facilitated travel to Cuba have been partly responsible for the sharp increase in Cuban tourism, which exceeded 3.5 million tourists in 2015 and may reach 4 million tourists in Not only has the United States become the second largest emitter of tourists to Cuba, but travelers from the United States have contributed to pushing the island's tourism infrastructure to its limit. The impact has been felt on the lodging sector as well as on logistics, transportation, and supply and distribution of food and other inputs that are essential to meet the needs of the hundreds of thousands of visitors arriving in the island each year. These projected increases in air travel undoubtedly will present challenges for Cuba's tourism infrastructure, which already reached its tourism lodging limit in December Cuba's investment efforts have not kept pace with the demand for construction of hotels and maintenance of tourism facilities. In particular, some 4- and 5-star hotel properties have high shares of rooms that are out of service because of maintenance issues. Other issues of concern are the low passsenger capacity of airports and lack of options to transport tourists to the island. Cuba requires substantial infrastructure investments to be able to meet the large growth in demand for tourism services expected in the next few years. In the next 10 to 15 years, Cuba could become the most attractive and important tourism destination in the Caribbean. In the April issue of THCG Business Review we will analyze investment opportunities in Cuba's tourism infrastructure, particularly in the strategic Port of La Habana, where a megaproject valued at $30 billion dollars is planned. See in our April edition an analysis of the investment chances in tourism infrastructure focused in the Port of Havana, where an interesting investment megaproject in excess of $30,000 millions is being prepared by Cuban authorities.

5 THCG, Business Report, Nº 1, Bibliografía Reuters. EEUU elimina el veto impuesto por Bush en 2004 para viajar a Cuba. El Mundo. Abril /2009/09/03/internacional/ html Ayuso, Silvia; Faus, Joan. EEUU suaviza las restricciones para el comercio y los viajes a Cuba. El País. Morales, Emilio. Explosión en viajes de Miami a Cuba durante el verano. Agosto Café Fuerte. CNN. Cuba y EE.UU. llegan a un acuerdo para reanudar vuelos comerciales después de más de 50 años. Diciembre Terreo, Ariel. Crujen las costuras del turismo en Cuba. CUBADE- BATE. Diciembre /crujen-las-costuras-del-turismo-en-cuba/#.vn3at1lw_dg Morales, Emilio. Growth of Tourism is Affecting Cuba's Infrastructure. The Havana Consulting Group. Noviembre

6 THCG, Business Report, Nº 1, ABOUT THCG BUSINESS REPORT The team of expert consultants who prepare this Business Report is composed of experienced analysts and researchers with vast knowledge of the internal dynamics of the Cuban economy, the social and political situation, and the legal framework as well as the island's international and commercial relations. The team is composed of some of the most prolific and cited authors in the academic literature, experienced journalists who have taken Cuba's pulse for an extended period of time, businessmen who are familiar with the world of business in the U.S. as well as in Cuba, and lawyers who are able to navigate the peculiar Cuban legal environment. It is important to listen to experts particularly at a time when Cuba is attempting to reform its economic system to improve efficiency and create sustainable economic growth that improves the standard of living of the population. Frank, clear, and independent analysis and opinions are needed, based on the most recent information available. The experience and authority that The Havana Consulting Group offers fills this gap. Emilio MORALES Team leader & President & CEO The Havana Consulting Group & Tech LLC, USA Jorge SALAZAR-CARRILLO Head of the Center of Economic Research of the Florida International University (FIU) Jorge PéREZ-LóPEZ Editor & International economist Arch RITTER Distinguished Research Professor Emeritus, Carleton University in Ottawa, Canadá Armando H. PORTELA Editor & Consulant Geographer and cartographer Carmelo MESA-LAGO Distinguished Service Professor Emeritus of Economics and Latin American Studies University of Pittsburgh Julio CERVIÑO Doctor in Economic and Entreprenurial Sciences, Carlos III University, Madrid David ADAMS Contributor Former Reuters Editor in charge for the Southeast U.S. and Caribbean, USA THCG LEGAL INSIDER Legal team working for THCG THCG BUSINESS INTELLIGENCE UNIT Marketing Intelligence team of THCG The THCG Business Report is created and published by THCG & Tech LLC. Copyright 2016 by THCG & Tech LLC. All rights reserved. Annual subscription, $5,000.00USD. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying or otherwise, without the prior permission of THCG & Tech LLC.