American, the largest US airline to Venezuela, is flying daily from Miami… with a 737. They shift up their schedule in the fall and return to flying New York JFK – Caracas just 5 days a week. Also with a 737. They bring back San Juan service too.
Delta is flying a 737 to Caracas four times weekly with a 737. United flies daily from Houston only, also with… a 737.
LAN is flying 2-3 times a week with a widebody from Miami, and of course there’s connecting service through Central America.
But much of the lift between the US and Caracas is just gone. And the story here is simple.
Back in 2008 Venezuela’s currency controls were considered an airfare arbitrage opportunity.
The riskiness of holding Venezuelan assets, though, was certainly underscored when the country nationalized a Hilton. (Not even a first in Venezuela for that brand.)
Nonetheless, as currency controls loosened for residents somewhat airline tickets became an arbitrage tool in a different way, an opportunity to get money out of the country and to convert currency from the black market rate to the official rate.
But those same currency controls, which tightened on airlines and prevented them from taking currency out of the country, translated into fewer flights to and from Venezuela as airlines bailed from the market to limit their exposure.
How much money is frozen and at stake for the world’s airlines? Over $4 billion is currently stuck.
The International Air Transport Association said Monday that airlines worldwide now have $4.1 billion of their revenues held up in Venezuela because they can’t get the money out of the country.
“Airlines can no longer afford the risk of not being paid when providing services to Venezuela. International capacity to and from Venezuela is down 49% from peak service levels offered last year and 36% lower year on year,” the airline group said.
“The blocked monies are from ticket sales in Venezuela and are being held by the government in breach of international treaties. Considering that the global air transport industry is expected to post a collective $18 billion profit this year, the outstanding $4.1 billion is significant,” it said.
American has 20% of those funds, itself, held up in the country. They’ve reduced their schedule 79% as a result.
It’s a sad state for Venezuelans, who face a challenge in getting out of their country and face a higher price with capacity tight. And the country will have a hard time re-building trust with international airlines, having shown that their funds can be effectively expropriated at-will.
This last may not be true. Airlines may return back as soon as their funds are released. As we’ve seen, hotels have been taken by the government at will — and the international travel industry continued to do business with Venezuela. Clearly, as the current currency freeze demonstrates, at their peril.
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This is a rather strange and interesting story. AA President Scott Kirby talked about it last week on their earnings conference call. What seems to have gone on is that the previous currency rules effectively enabled Venezuelans who could get a foreign ticket to get an effective 90% discount on their ticket prices, PLUS the chance to make hundreds (thousands?) more by being allowed to buy currency at way-below-black-market rates. Unsurprisingly, even in a country without famous travel blogs :), people went nuts buying these tickets. The flights were selling out at full fare (why not, right?).
The only problem, of course, is that the Venezuelan gov’t now doesn’t want to “pay” the airlines.
BTW, despite being only half a percentage of the airline’s flying, this change in the Venezuelan market is having a material effect on AA’s short-term profitability. While still rising due to the strength of the USA market, AA’s unit revenue will take a 2% hit this quarter due to Venezuela. Something totally out of left field.
“BTW, despite being only half a percentage of the airline’s flying, this change in the Venezuelan market is having a material effect on AA’s short-term profitability. While still rising due to the strength of the USA market, AA’s unit revenue will take a 2% hit this quarter due to Venezuela. Something totally out of left field.”
Well yeah, it’s called network contribution effects.
so AA will resume JFK -CCS and SJU – CCS flights in the fall? because right now flights are only available via MIA and extremely limited…thx!
If this is still a risk, why is AA or anyone else still flying there at all? Doesn’t an 80% schedule reduction still leave the remaining 20% of flights equally exposed?
This situation is such a mess. Don’t even where to start. But here’s what I’ve lived as a Venezuela-based frequent flyer:
Airlines know Venezuela is a gold mine. Is and has been for many years, especially since 2003 when the currency exchange control was established.
The problems started in 2012ish when the government stopped exchanging airlines the dollars they wanted. But don’t be fooled, whether in USD or VEB, airlines have been making BANK in Venezuela.
While they waited and waited for the dollars to be repatriated, the smart ones realized they were drowning in local currency and started buying the offices/buildings they had been renting for years. Whole buildings. (This became a must for all transnationals). Other started repatriating at the black market rate. On paper, “losing money.”
It is no secret airlines have been pricing to CCS at 2-3x the normal rate because they knew it was still a great deal for venezuelans paying in bolivares.
So while the official rate (used for airline tickets) was at 4.3 per USD and the black market commanded 40+ per USD, airlines knew they could price at 2-3-4 times a normal rate and still get ahead.
When the black market $ started to commands 40-50+. Almost became too easy for flyers from other countries. A “flying tourist” could pay a few hundred dollars to get to Caracas, sell 1200$ at 70, and with the resulting Bolivares book two RT flights to Europe in J.
There must have been a sweet spot for all international airlines, circa 2010-2012, when they were regularly repatriating profits selling tickets at 2-4x the usual rate for miles traveled.
Even today, while a RT ATL/IAH/MIA-POS/BOG/AUA/CUR can go for 300-400$, to CCS that becomes $1200. So even if airplanes fly to CCS at 40% capacity (with only tickets sold outside Venezuela) they are still making money.
Yes, they continue to be “at risk.” But they won’t leave because:
1. Some people are still willing to pay their tickets in USD. Especially business people. (This is particularly clear when you see UA reduced IAH-CCS to only 4x week. Lots of oil-industry travel paying +$2800 for Y)
2. Maduro has made it clear if they leave now they won’t be allowed to return as long as he (or his people) rule the country. A perfect example of that is Delta, which will start flying ONCE PER WEEK next month. Which says: “Look, we never left.”
Earlier this year Air Canada said they were suspending their operations “temporarily” due to “safety concerns” and Maduro was clear to them saying:
I paraphrase) “Is that so? Screw you, then. You’re never coming back and good luck getting your bolivares exchanged”
There were announcements this year that we (Venezuela-based flyers) hoped would allow the market to normalize. Starting July 1st, the official rate for airline tickets was to be moved from SICAD I (at ~11per $) to SICAD II (at ~50 per $).
On paper, this would have meant a 5x fold increase in the tickets but in reality this would have forced the airlines to reduce their fares (in $) to a more realistic price.
An example would have been CCS-MAD/FRA/CDG, which is ~$2400 at the SICAD I rate while BOG-MAD/FRA/CDG is ~1000$. Once SICAD II came in effect using SICAD II, I’m confident that $2400 would have become <$1200. Just had to.
But important to get this point across,airlines price at $2400 because they know at 11 bolivares per USD, it's a bargain for flyers. Except, if you wanted to buy that ticket in reverse, starting in MAD/FRA/CDG, you WOULD HAVE STILL PAYED $2400 in cold hard US cash. In my eyes, not "normalizing" the fare for those that bought the tickets outside of Venezuela, made them go from very understandably "trying to protect our income" to, a "let me sneak in that extra profit."
But anyways. July 1st came in, criminal travel agencies started pricing at 5x, massive backlash ensued, airlines and government could not reach an agreement to bring that $2400 down to $1200…and the whole thing went to hell…again.
A few days later a government official appeared on TV saying: "Per order of our President Maduro, all tickets will remain to be priced using the SICAD I rate." (With that "Look, we're making you a favor" tone)
And that's when DL, AA, UA decided to make their moves and slash flights.
I'm a oneworld flyer and it's been 2.5 months since I was last given a price in our dying currency bolivares. There is PLENTY of space if you want to fly in or out of Venezuela.
Just be aware you will have to pay in USDs and your CPM will be very, very crappy.
Maybe this is the perfect time to book last minute award flights?
@Vinny That’s the most interesting post I’ve ever read on any site. Thanks for the insights.
As a Star Alliance frequent Flyer Ua 1k Sen Living in Venezuela All that Vinny from VM commented is true… The scenario is getting worse also lh stopped selling tickets in VEF currency also United, Copa, Delta, and all the european airlines did the same thing… The only way of get out this fc…king country is through Bogota or Aruba and then pay a ticket from there in $