American and LAN Cut Schedules to Venezuela as Cash Crisis Worsens

American Airlines and LAN Airlines are the latest victims to the seemingly unending commercial aviation saga in Venezuela pertaining to the $4.2 billion USD (IATA estimate) worth of withheld funds that the local government owes to roughly two dozen foreign carriers which provide scheduled air service to the country.

Effective today, July 1, 2014, American, which is the largest foreign operator into Venezuela, measured by number of weekly flight frequencies, will cut schedules for the month of July from 96 to 16 roundtrips from its hubs at Dallas/Ft. Worth, New York JFK and Miami International, as well as from San Juan, Puerto Rico, to Caracas and Maracaibo. American serves all four of the U.S. and Puerto Rico markets from Caracas as well as between Miami and Maracaibo.

Reduction = 79.17%

LAN Airlines is also suspending its twice-weekly service that operates from Santiago to Miami, which operates via Caracas in both directions, during the month of July. The only other carrier which flies between Miami and Caracas, SBA Airlines, will retain its current level of frequency of three daily nonstop flights. It is currently unclear whether the suspensions will continue into August, although schedules and inventory are still loaded in OAG.

The delusional Venezuelan government, under current President Nicholas Maduro, continues to talk out of the sides of its mouth as it works with foreign carriers concerning repatriation for trapped sales funds in the country. Petroleum-rich Venezuela imposed currency exchange restrictions over a decade ago under late President Hugo Chavez’ government, forcing airlines to sell tickets in Venezuela in the local Bolivar currency and applying a regulated exchange rate.

However, in 2012 the government started to limit the supply of US dollars to the airline industry, which created roadblocks for foreign carriers seeking to repatriate revenues accrued in the local currency. This buildup has continued through 2013 and as it stands today, debts to individual airlines have reached into the hundreds of millions.

Government plan to base airfares at devalued exchange rates in July was the tipping point

Adding to the headache for these carriers in Venezuela has been rising inflation and currency devaluation, thereby muddling any hopes of receiving funds at the appropriate exchange rates during the time at which the sales were incurred. Given the governments’ tight control over air service access to Venezuelan airports, airlines have been reluctant to completely withdraw services, which could potentially (and likely) risk long-term ban from resumption in the near-term future. Despite its political challenges, Venezuela is a high-yielding, lucrative market for foreign carriers. Even as airlines have tried various maneuvers to over-compensate for the lack of repayment, such as raising ticket prices, slashing schedules and imposing restrictions on sales conducted within Venezuela, flights continue to leave the country completely full.

In reality, the only short-term losers in the entire battle are local Venezuelans seeking to travel abroad, but instead are forced to contend with fewer flights available for sale and skyrocketing ticket prices. Stuck with foreign cash reserves at an all-time low, the Venezuelan government has sought out alternative remedies to repay carriers in the form of bonds and jet fuel, according to the Associated Press.

For years, carriers have have priced tickets at the strongest official exchange rate, but the currency devaluations have created opportunities for the Venezuelan government to drag its feet during the repatriation process. Squeezed by its short supply of dollars, the government has succumbed to fixing exchange rates at prices 4.5 times the actual rate of bolivars to dollars.

To put it in perspective, foreign carriers should be repatriated at a rate of 4.3 Bolivars per US dollars for debts accumulated in 2012, 6.3 Bolivars per US dollar for 2013, and 10.8 Bolivars for 2014. However, the governments’ quick-term solution is to repatriate revenue at a black-market rate of 50 bolivars per dollar, starting in July, in an effort to make the process move more swiftly. This of course, is unacceptable for an airline as it doesn’t balance out the correct amount of funds the carrier is owed.

For simplicity’s sake, let’s suppose American sold a one-way flight from Caracas to Miami in 2013 at the official exchange rate, and charged the amount as 630 Bolivars. Per the official rate, that means that American is owed $100 USD by the Venezuelan government for that ticket.

However, with the black-market rate going into effect in July, the Venezuelan government will pay American only $12.60 USD for that ticket, effectively trapping $87.40 that American is owed.

That only leaves an airline with one alternative: to dramatically cut services to the country.

American’s drawdown is significant as it is the largest foreign operator to Venezuela

Since January 2014, foreign carriers have slowly either halted services, greatly reduced schedules or suspended sales to flights operated to Venezuelan airports. The first carrier to pull out of Venezuela entirely, Air Canada, dropped its 4-weekly services from Toronto to Caracas in mid-March 2014, citing “civil unrest” as an ongoing safety concern which prompted the routes’ discontinuation.

Alitalia followed-up next in mid-May after announcing that its daily Rome – Caracas service would end on June 2, 2014, citing that “given the persistent monetary crisis of Venezuela,” had made flights economically unsustainable. Alitalia’s future as a standalone carrier remains uncertain as it works with creditors to restructure debt and sort out labor woes, while the likeliest scenario is that the carrier will proceed ahead with an equity investment from Etihad Airways. The Board of Directors approved a partnership proposal between the two carriers on June 13, 2014.

At 96 weekly frequencies, American is the largest foreign carrier serving Venezuela, based on number of departures, according to CAPA. The schedules below display the 25 foreign carriers, as well as all cargo carriers, serving Venezuela prior to the suspension of Air Canada’s services in March 2014 [Source: CAPA]

It is estimated that American, as the largest foreign operator to Venezuela, has $750 million in cash awaiting repatriation. COPA of Panama has almost $500 million, and Avianca has about $300 million. American, surprisingly, is actually one of the last remaining carriers to succumb to schedule reductions, as Copa, Avianca, AeroMexico, Delta, Air Aruba and several other European carriers have already taken measures to insulate themselves against the repatriation woes. In May, Lufthansa, Iberia and Air France imposed restrictions on sales within Venezuela, going to and from the country.

American pledges to “continue working with Venezuela” on the matter

Though American’s reductions in Venezuela are slated to occur for only the month of July (at least at this stage in time) the carrier is unlikely to see any steps towards repatriation taken by the Venezuelan government anytime in the near future. Being the largest carrier with the largest exposure to the country will take a long time to recuperate frozen funds.

Moreover, there is little optimism that the country has an understanding on how to fix its currency challenges, which creates further unlikelihood that airlines will restore capacity anytime soon. As saddening as that sounds, there is little within their realm of control, especially when Venezuelan’s own President is more apt to blame the issue on airlines adjusting capacity for the World Cup rather than accept that the situation is far more longstanding and problematic.

In the end, the country has nobody else besides itself to blame for this mess.