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Best of Airways — Venezuela’s Turbulent Skies

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Best of Airways — Venezuela’s Turbulent Skies

ROBERTO LEIRO

Best of Airways — Venezuela’s Turbulent Skies
September 04
09:46 2017

By Roberto Leiro • Airways Magazine, June 2014


Since the last day of October 2013, none of the international airlines registered in the Commission of Foreign Exchange Administration in Venezuela (CADIVI), have received any sums of money corresponding to their sales of passenger tickets and cargo space. As a consequence, these airlines have accrued a combined outstanding unpaid accounts receivable debt of more than USD 3.7 billion from delays that, in some cases, go back as far as 18 months.

How did Venezuela get to this situation?

The stringent exchange control exerted by the Venezuelan government through CADIVI since 2003, has fostered a parallel market in which foreign currency is exchanged at a significantly higher rate of an illicit profit. In recent years, the gap between the official and parallel market rates has widened up to 800%, partly attributable to fraudulent travel activities intended to obtain lucrative profits from the differential ratio. This scenario has dwindled the foreign reserves of Venezuela to critically low levels and forced the government to devalue the Bolivar Fuerte (VEF) in four instances within the past five years.

The Venezuelan government announced at the end of January that both airlines and travel allowances would be placed in a secondary currency exchange rate market managed through an auction scheme at almost twice the official rate of 6.3 VEF per USD. However, this new approach has proven to be discretionary and has raised concerns among air carriers about the specific rate they would be paid and when these auctions would take place.

According to the Venezuelan Airlines Association (ALAV), foreign airlines have legal rights to send remittances to their respective head offices, as these are bonded to bilateral agreements subscribed to between governments. Most of these agreements explicitly acknowledge that the exchange rate at the time of billing the air service is the exchange rate to be observed. Mr. Humberto Figuera, President of ALAV states, “The mere fact that Venezuela is a member of the World Trade Organization, forces the country to grant to other nations the most favorable deal in this matter.”

While these agreements had been honored during the first three devaluations, (two occurred in 2010 and one in 2013), the most recent exchange decree enacted in January 2014 has not explicitly addressed the exchange rate, thus leaving uncertainty as to which currency rate should be applied to past debts.

Aerolineas Argentinas offers daily flights to Buenos Aires with its A340-313X. PHOTO: AUTHOR.

Meanwhile, airlines and government have explored ways to honor the obligations. During the last quarter of 2013, a combined offer of bonds, cash, and jet fuel was offered by the Venezuelan government to alleviate stress from outstanding debts. However, the response of the airlines was lukewarm as several (especially those from the Caribbean region such as Insel Air and Tiara Air Aruba) asked for a complete payment in very much needed cash in order to continue running their businesses.

Mr. Figuera assures that although this is a complicated scenario for airlines, “they are willing to stay in Venezuela, and doing an enormous effort in order to continue their operations in the country.”

The downfall or air travel in the country: downsizing and cancellations

As a direct consequence of these policies, international airlines have opted to use different mechanisms to exert pressure on the Venezuelan government to follow through on the necessary currency exchange. Since the last quarter of 2013, several airlines have begun restricting sales, downsizing the availability of seats, and in some cases, canceling services altogether to Venezuela -– a contradictory decision in a nation where air travel demand largely exceeds both seats and cargo space supply. This restriction in sales, together with the adjustment to the new, as-yet-unestablished exchange rate, has caused ticket prices to skyrocket as much as 300% for some destinations such as Miami, Quito and Panama -– the top three international destinations for Venezuelans in the last year, according to ALAV figures.

A mix of Venezuelan and International carriers at Maiquetia Airport. PHOTO: JUAN DE GOUVEIA.

Passengers stranded in Caracas often spend more than eight hours in line trying to acquire a ticket out of the country. These long queues have been commonplace since last December in most international airlines’ offices throughout Venezuela.

The level of restrictions on sales in the airline ticket market has varied widely from an open full-fare price policy in airlines such as Delta, GOL, and Tame, to limited booking windows implemented by Aerolíneas Argentinas, American Airlines, and Avianca. Furthermore, online sales have been shut down by many carriers. Last November, Aero Mexico (AM) decided to remove Caracas from their list of destinations on its website. Soon thereafter, LAN Airlines, Iberia, Lufthansa, and United opted to take the same measure.

Tiara Air, a small Aruba-based airline with a high dependency on its Venezuelan destinations, has been the most affected airline in this unusual situation. In early January, the government of Aruba extended a bridge loan to keep the debt-stricken carrier operating while waiting for the repatriation of capital, estimated to be USD $40 million. At the same time, Tiara Air decided to reduce its flights to Venezuela and increase its operations to Colombia, as a means of decreasing its exposure to risk and improve its financial numbers.

Another exemplary case involved Colombian carrier Avianca, which announced the cancellation of the San José-Caracas and Bogotá-Valencia routes in early March 2014 pleading “an operational reorganization.” In addition, the airline drastically reduced seat availability between Caracas and Lima by 36% and frequency between Bogotá and Caracas from three daily flights to just a single flight per day.

The crisis reached new heights a few days later when Air Canada decided to suspend until further notice its three-times-weekly Toronto-Caracas service. The airline alleged on a travel advisory note published on its website that “The current situation has exacerbated the challenges of doing business in Venezuela following months of economic and political instability. Among other things, this has resulted in onerous currency restrictions imposed on all airlines preventing them from recovering their funds from Venezuela.”

The loss of Air Canada’s service to Toronto leaves Venezuela without a direct link to Canada, where a growing community of expatriates has settled in the last 10 years. Additionally, all the European airlines serving Caracas have changed to the smallest wide body aircraft in their fleet to cope with the uncertainty.

Alitalia is the only European carrier with no capacity changes to Caracas. PHOTO: GUSTAVO RAMIREZ.

Extreme measures, extreme responses

The governmental response to the action of the airlines was straightforward and extreme. During a local broadcast held the day after Air Canada’s announcement, President Nicolás Maduro assured that airlines “have no reason to leave Venezuela,” and threatened that “if they leave the country, they will not return while I am in the office.”

In response to this threat, IATA’s general director, Tony Tyler, noted, “We are not in a position to negotiate with the Venezuelan government. Maduro’s administration must pay back those funds, otherwise, airlines won’t be able to continue operating in that country.”

At the same time, General Hebert García Plaza, Venezuela’s Air Transportation Minister, announced the end of commercial ties between the Government of Venezuela and Air Canada. “It is not a suspension of flights but virtually a termination of the bilateral air services agreement,” the Minister said during a press conference. The end of the commercial ties between Venezuela and Air Canada now leaves the debt caught in a legal limbo with no predictable outcome.

Lufthansa has downgraded its daily Airbus A340-600 service to Caracas with smaller A330-300 equipment. PHOTO: GUSTAVO RAMIREZ.

The future scenario: Bracing for impact

The prospects for international airlines seem grim and unsure. Given the unstable economic, political and social conditions of the country and the measures that the government may eventually take (especially in the matter of the exchange market), it appears impossible to determine what the short-to-middle term scenario will be. Moreover, Tyler assured, “after six unsuccessful meetings with the Venezuelan government, the horizon doesn’t look any much clearer.”

International carriers face the tough decision of either closing down operations in Venezuela– leaving behind large cash amounts unsettled for repatriation– or negotiation.  A much more drastic option is to appeal to the existing bilateral agreements by taking the situation to international arbitrage with lengthy legal and financial implications for both parties. At the moment, none of these options would benefit travelers to and from Venezuela.

Regardless of the outcome of any of the scenarios, it seems evident that the scarcity of tickets, as well as fewer travel and freight choices, will continue for an indefinite time period, leaving Venezuelans with limited air travel and expensive air tickets. Once one of the most coveted of Latin American markets, Venezuela has now entered a turbulent and volatile period with unpredictable results.

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Roberto Leiro

Roberto Leiro

Airline and Aviation Writer, with a Fascination for Languages and History, Translator, Incurable Planespotter and Aviation Enthusiast.

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