Why U.S. Airlines Are Fleeing Venezuela

American Airlines, Delta Air Lines, and United Continental have all decided to make big cuts to their Venezuela flight schedules.

Jul 15, 2014 at 2:15PM

In the past month, each of the three top U.S. airlines -- American Airlines (NASDAQ:AAL), United Continental (NYSE:UAL), and Delta Air Lines (NYSE:DAL) -- have dramatically cut their flight schedules to Venezuela.

Images

Airlines are cutting capacity to Venezuela (Photo: The Motley Fool)

Indeed, airlines across the world have been complaining for months about the impact of currency manipulation and government regulations in Venezuela. Several other foreign carriers have stopped flying to Venezuela altogether this year. The U.S. legacy carriers have finally realized that they, too, need to cut their losses.

Venezuela's bizarre currency regime
Whereas most countries today operate with floating exchange rates that vary based on economic conditions across different countries, Venezuela has a fixed official exchange rate. For a long time, this official exchange rate has overvalued Venezuela's local currency (the bolivar), causing a shortage of foreign currency.

For a while, airlines benefited from this situation. A loophole allowed Venezuelan citizens to exchange bolivars for up to $3,000 dollars at the official exchange rate if they were traveling overseas. Those dollars were worth far more on the black market, which encouraged people to buy pricey airline tickets even if they didn't need to go anywhere!

However, while airlines have been banking huge nominal profits in Venezuela, there's a catch: Those profits are in bolivars, and they're stuck in Venezuela. That's because the government has been unwilling to exchange airlines' bolivars for foreign currencies like dollars and euros, which are in short supply in Venezuela.

In total, airlines have about $4 billion stuck in Venezuela. They can theoretically exchange this money through a new floating currency mechanism that Venezuela has established. However, this "Sicad II" rate is around 50 bolivars per dollar, compared to the official rate of 6.3 bolivars per dollar.

New American Livery

American Airlines has about $750 million trapped in Venezuela (Photo: American Airlines)

Thus, under the Sicad II rate, airlines would be taking pennies on the dollar. This would force big writedowns: particularly for market leader American Airlines. American has approximately $750 million trapped in Venezuela.

Time to cut flights
Several foreign airlines have reached deals to exchange their bolivars, but American, Delta, and United have not been so fortunate. As a result, American Airlines -- which has by far the largest presence in Venezuela of any U.S. airline -- decided last month to drastically cut capacity to Venezuela as of July 2.

American now operates just 10 weekly flights to Venezuela, down from 48 previously. Today, all of American's flights to Venezuela originate in Miami. Flights from New York, Dallas, and San Juan have been scrapped.

Delta Air Lines was next to cut back. Even though it only flew once daily to Venezuela, that was still more than the airline could stomach. Starting next month, it will fly just once weekly between Atlanta and Caracas.

Images

As of next month, Delta will operate just one weekly flight to Venezuela (Photo: The Motley Fool)

On Friday, United Continental followed suit, although it is implementing the shallowest cuts. Beginning in mid-September, United will go from daily service on its Houston-Caracas route to four weekly flights.

No good alternative
American, Delta, and United are probably making the right decision by slashing their Venezuela flights dramatically. (Indeed, it might have been wise to bite the bullet even earlier.) Venezuela does not have enough foreign currency to pay everybody at the official rate, meaning that airlines are just guessing at how many dollars they will get from each ticket they sell in the country.

The main reason why U.S. airlines have been so slow to leave Venezuela has been the high fare environment, which has been encouraged by travelers' ability to exchange bolivars for dollars at the official rate. However, Venezuela is cracking down on this loophole, limiting the upside for airlines that maintain service.

Foolish conclusion
Today, airlines have so many opportunities to profitably deploy aircraft in the U.S. that they have no reason to wait things out in Venezuela. Until they have certainty on when and at what rate they can repatriate their revenue from Venezuela, American, Delta, and United are better off staying away. That is exactly what they plan to do.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour (That's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers