Why Airlines Hate Venezuela

If you happen to live in Venezuela and want to fly out of the country, good luck. Thanks to truly terrible government policy, it’s becoming increasingly difficult to get a ticket out of town. While most airlines continue to fly to the country, one has pulled out. And the situation isn’t likely to get any better.

Airlines Hate Venezuela

I’m focusing on the US in this post to try to simplify a very complex situation, but this is a problem for airlines in every country. Though political relations between the US and Venezuela haven’t been good for a long time, airlines have continued to fly between the two quite often. It’s a huge market for American, in fact, with multiple daily flights to Caracas from Dallas/Ft Worth, New York, Miami, and even the all-but-abandoned San Juan. American also has a daily Miami to Maracaibo flight. Delta and United both have daily flights from Atlanta and Houston respectively.

You would assume that other than visiting friends and relatives (a big business especially to Florida), oil must have a lot to do with the success of these flights since that’s really the only thing keeping Venezuela from failing. While that’s probably true, even oil is on the decline in the country. In fact, it’s the overall economic problems of Venezuela that have created quite the crisis, and the airlines are paying for it to the tune of $3 billion so far. That’s the amount of money that Venezuela currently owes to airlines around the world, and there doesn’t seem to be an adequate solution in sight.

Venezuela has really strict currency regulation. When airlines (and other businesses) sell anything in Venezuela’s currency (which since 2008 has been the bolivar fuerte), the government is responsible for converting that to the company’s native currency and delivering the funds. They’ve kind of stopped doing that and instead have just been sitting on (or spending) the money for months.

You would think this would be a real problem for many airlines, but it’s worse for those who sell to a lot of Venezuelans. If United, for example, is selling tickets in US Dollars to anyone, then there is no issue getting the money. It’s just tickets sold in the Venezuelan currency that are being held hostage. And that may very well be why most airlines continue to fly there… they make enough in dollars (or euros, or whatever) to justify the flying. But not every airline feels that way.

TAME in Ecuador became the first to suspend flights. I can only assume it was more exposed to these currency issues with more people buying in bolivars. But if things don’t improve, other airlines will have to think about doing the same.

For its part, the government has been trying to negotiate a deal where they pay the airlines with a mix of cash, bonds, and jet fuel. If that sounds desperate, it’s because it is. Venezuela’s foreign cash reserves have dwindled and there isn’t much hope for that changing. To try to reverse this pain, Venezuela has made some policy changes that are going to make things even worse for airlines. It seems like a short-sighted way to try to right the ship, but it’ll have the opposite effect.

The bolivar is pegged to the US Dollar at rate of 6.3 to 1. However, the official exchange rate doesn’t reflect reality. People selling dollars on the black market can get 10 times as much because nobody wants to hold bolivars.

That black market has created quite an opportunity for Venezuelans who can travel outside the country. If you’re Venezuelan, you could buy a plane ticket to the US at the 6.3 rate. Once you got there, you could use your Venezuelan credit card to buy up to $2,500 worth of stuff and you could pull out $500 in cash at the same 6.3 rate. Take that back to Venezuela and you could make a tidy profit on the black market, possibly even paying for the trip.

To stop that, Venezuela has made two changes. First, if you go to Florida, the most popular US destination, you can now only charge up to $700 on your card and take out $300 in cash per year. That’s a huge cut.

Second, the exchange rate for purchasing travel with bolivars has abruptly changed. For air travel purchases, the rate is now tied to this strange secondary rate that is determined at weekly auctions. At last check, it was somewhere between 11 and 12 bolivars per dollar.

The upshot is this. Let’s say American wants to get $1,000 for a roundtrip ticket from Venezuela to Miami. Up until recently, it had to charge 6,300 bolivars. Now all of a sudden, it has to charge somewhere north of 11,000 bolivars. Demand should drop precipitously if people are even allowed to buy tickets at all.

For now, airlines have pulled availability tight regardless of where it’s being sold. Delta appears to only be selling full fare coach (around $3,000 from Atlanta roundtrip) while American seems to have pulled availability entirely. I assume this is temporary until there’s more confidence in this market.

As long as there’s enough demand outside Venezuela for travel into the country, airlines will likely keep flying there in some form, but I have to assume it’s becoming increasingly difficult to justify it.

[Original TAME photo by Sylvain2803 (Own work)/CC-SA 3.0 via Wikimedia Commons]

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