become a no-fly country?
Will Venezuela become a no-fly country if it defaults on its airline debt?
In order to buy dirt-cheap commercial airline flights, Venezuelans have for years taken advantage of a wide gap between a fixed government exchange rate on the US dollar against the bolivar — the national currency — and the bolivar's fluctuating value on the black market.
The government introduced the fixed exchange rate in 2003 and, in an attempt to keep large amounts of capital from flowing out of the country, decreed that it alone could exchange bolivares for foreign currency under certain conditions.
For example, a Venezuelan who had purchased international airfare was permitted until recently to acquire up to $3,000 at the state rate of 6.3 bolivares per dollar.
But Venezuela's Chavista government stuck to its fixed rate even as the bolivar lost considerable real value against other world currencies, while demand for dollars on the country's black market set the bolivar far cheaper. Many Venezuelans made a habit of taking the $3,000 exchange allowance and reselling it on the black market for a profit as high as 700 percent.
This loophole also permitted Venezuelans with access to dollars to fly around the world at outlandishly low prices while the airlines kept profiting — or at least thought they were.
That era is now drawing to a close, as the Venezuelan government confronts the reality of its currency's plummeting value.
The trouble began in late 2012, when Venezuela began to stop paying airlines the dollars for ticket sales in bolivares. Before long, some international carriers threatened to stop flying to Venezuela altogether if the government didn't pay up.
The cheap-fare loophole had turned into a national racket. Tales of $300 round-trip fare to Europe and weekend jaunts to New York for relative peanuts were said to be common among Venezuelans — not just for the wealthy but also middle-class travelers. Even foreign tourists were joining in, flying through Caracas just to take advantage of the low fares until the government prohibited non residents from paying for airfare in bolivares in January.
But everyone will soon be forced to pay higher airfare across the board as Venezuela struggles to pay off unpaid “repatriation” fees to airlines, which the Venezuelan Airlines Association estimates at some $4 billion.
Facing rampant inflation and dwindling foreign currency reserves, on July 1 Venezuela will drop the official trading value of the bolivar for airfare from about 10 bolivares to the dollar to 50. This narrows the gap but does not match the black market rate, which is currently about 70 bolivares to the dollar. The government has also set stricter limits on access to dollars by Venezuelans traveling abroad.
The move means that many Venezuelans working the system to get cheap air tickets will now get far less bang for their bolivar.
On a recent cloudy Colombian morning, various passengers on a Tame Airline flight from Bogota to Caracas told VICE News that they didn't look forward to seeing ticket prices for getting in or out of the country go up as much as four times over current costs.
“It's just going to be too expensive,” sighed Pastor Lara, who owns a small shoe business in Cagua, a city west of Caracas. He was making the most of what he said would be his last trip for some time: his suitcase was stuffed with clothes and souvenirs for family members.
Thomas Arroyo, a Venezuelan employee of an oil company, told VICE News that he has traveled to Houston from his office in Bogota indirectly via Caracas every month for years — but no longer. For Arroyo and travelers like him, the bubble has burst.
“The cost is going to be barbaric,” he said as he waited to check into the flight to Caracas from Bogota. “I'm not going to fly through Venezuela anymore.”
On the same flight, Venezuelan student Marianela Ruiz was traveling with her guitar after taking an entrance exam at a university in Colombia. She said she was unsure that she would be able to afford going back even if she's accepted.
“I want to study music in Colombia, but it's going to cost a lot for me to return here after the prices rise,” Ruiz fretted.
It's just the latest bad news for Venezuelan travelers. Many airlines have already reduced flights to the country in order to pressure the government to pay the debt. It's been piling up since late 2012 as the government delayed granting approval to the airlines to repatriate revenue from tickets sold in bolivares.
“It would seem that the government is running out of funds, and it has prioritized public costs within the country rather than paying off the airlines,” Ennio Cardoza, a political scientist at the Venezuelan Central University, told VICE News.
As the crisis continued, unpaid airlines became reluctant to sell tickets in bolivares, fearful that they wouldn't be able to recuperate the sales in dollars. American Airlines, United Airlines, and Panama's Copa carrier were among airlines that suspended ticket sales in Venezuela earlier this year. Air Canada suspended flights to the country altogether in March, and last month Italy's flagship carrier Alitalia announced that it would also stop flying to Venezuela.
The air-travel issue is part of a wider pattern of shortages of even the most basic products in Venezuela, despite its position as one of the top oil producing countries in the world. Frustration with the malfunctioning economy has led to large protests and violent clashes between security forces and opposition groups that have left at least 42 dead so far. Concern that the country is becoming ever more isolated is only adding to the tension.
Libia Muñoz, who owns a business selling silver jewelery, has for weeks been trying to find a flight to get her daughter back from Switzerland.
“We went on the internet, and to ticket agencies,” Muñoz told VICE News. “We couldn't find anything.”
Venezuelan President Nicolas Maduro has been defiant — at least publicly.
“Anyone who leaves Venezuela in the middle of this economic war won't return,” he thundered at the inauguration of a new route for the state airline Conviasa in May. “Because Venezuela is respected!”
However, despite Maduro's imperious warnings, his government has started to give into the airlines' pressure. Air and water transport minister Hebert García Plaza announced June 6 that the government had so far paid its debt from 2012 and 2013 to six airlines: Tame, Avianca, Tiara Air, Aeromexico, Insel Air, and Aruba Airlines.
But the head of the Venezuela Airlines Association, Humberto Figuera, told VICE News that he expected the government to only offer airlines a portion of what it owes.
“They're going to pay some airlines 70 percent, others 80 percent, and so on, of what's due,” Figuera said. “It all depends on which airline, and various factors.”
The government is also asking airlines to help lower prices for Venezuelan flights. The majority of the 24 international airlines that fly to Venezuela are still considering the idea.
“At least there is a proposal on the table now, and there wasn't a month ago,” Figuera said. “I think the airlines will pick the best of some bad options.”
It appears that both sides will have to compromise for regular commercial flights to be resumed in Venezuela, but the government cannot afford the alternative — a country isolated from international air-travel in a globalized world, and another unresolved economic headache for its citizens.
John Holman is contributor of Vice News. Petroleumworld does not necessarily share these views.
This commentary was originally published by Vice News on June 10. Petroleumworld reprint this article in the interest of our readers.
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