Airlines are causing a new potential headache for Venezuela at a time when this South American country doesn't need any more problems. With inflation for 2013 estimated at 56.2%, social unrest following the election, and problems with blackouts, this country has significant issues to be resolved.
Why are major airlines beginning to cut service to Venezuela, and what does it mean both for the airlines and Venezuela?
For most currencies, the exchange rate can be found just by looking it up on a currency-exchange website. However, the Venezuelan bolivar is a different story altogether. Officially, the bolivar is valued at 6.3 bolivars per dollar, but other rates set by the government value the bolivar at far less.
Although the Venezuelan government has tried to crack down on it, there's still a thriving trade for bolivars on the black market. According to dolartoday.com, a website that tracks the exchange rate outside Venezuela, international trading of bolivars values them at around one-tenth of the official rate.
In large part because of these currency controls, although airlines can earn money there, the money remains trapped in Venezuela. In March, Air Canada (TSX: AC.B) cut its Venezuelan flights, citing "civil unrest," and it has yet to resume these flights. Like the airlines mentioned below, Air Canada also has cash trapped in Venezuela.
American Airlines Group (AAL 2.65%) recently dealt another blow to the international side of the Venezuelan airline industry. Even as it becomes the world's largest airline, American slashed its total number of weekly trips from 48 to 10 as of July 1.
For American, the issue is clearly a financial one. Bloomberg notes that as of March 31, American Airlines Group had $750 million trapped in Venezuela because of tight government controls.
Following the decision by American, Delta Air Lines (DAL 2.62%) has announced that it will also trim its Atlanta-Caracas round-trip service from once daily to a once weekly. Although Delta is not disclosing publicly how much of its cash is trapped in Venezuela, Bloomberg reported that Delta spokesperson Sara Lora said: "Delta will remain in the market to serve valued customers; however, the debt created over the past several years due to currency issues made us take a business decision to minimize our risk."
Citing debt concerns as a primary factor, Delta is in the same boat as the other major airlines.
North American airlines aren't the only ones frustrated with Venezuelan government policies. Colombian airline Avianca Holdings (AVHO.Q) has also slashed flights by around 70%, even though Colombia borders Venezuela. Not surprisingly, Avianca is facing a similar situation of trapped cash.
With their money trapped in Venezuela and negotiations with the government failing to solve the issue, many airlines are taking the next step of cutting flights. Not only does this prevent more airline resources from being spent only to have the profits rendered inaccessible, but reducing international service also puts pressure on the government to offer better terms so the country doesn't become isolated in terms of air travel.
Trouble for Venezuela?
Unless Venezuela begins to allow airline cash to leave the country, flyers and investors shouldn't be surprised to see even further flight cuts as airlines stop spending resources only to have the profits trapped in the country.
Near term, this could harm trade and tourism as the country becomes more isolated from the rest of the world. Although Venezuela-based airlines would probably continue to operate flights to and from the country, it would result in fewer options for international travel, and the country would be unable to replace the major carriers' established larger networks.
Over the next several months, investors should look to see which other airlines join this trend and try to save their resources by cutting flights to Venezuela.