On a wing and a prayer

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Remind me again why we are here.
Remind me again why we are here.

The ongoing saga between international airlines and the Venezuelan government continues. Just when you thought airlines were going to get their money, the government is now suggesting they will only get paid in part, and at a much higher rate than previously thought.

According to El Mundo, the government is playing hard ball as usual, and is gunning to pay them 70% of what they owe, and at the Sicad I rate (roughly 11 BsF per dollar).

The way this works is the following: suppose Air Diosdado, for example, sold tickets to the Cayman Islands at BsF 1,000, under the promise that it would be able to translate those BsFs into dollars at a rate of BsF 6.3 per dollar. In other words, Air Diosdado sold the ticket for what it believed was $158.73.

Now, it turns out that the government will only recognize 70% of that debt,and pay it back at a higher rate. This means that the government only recognizes BsF 700 of every BsF 1,000 Air Diosdado sold, and that it will only pay them at BsF 11 per dollar, which comes out to $63. In other words, $158 that the airline thought it owned has become, thanks to magical chavista accounting, a mere $63.

Is it any wonder that airlines are leaving the country in droves?

1 COMMENT

  1. Hi! I follow hour blog regularly and am interested in all things Venezuela-economy. In your latest post regarding airlines, you mentioned a supposed offer by the government to pay the airlines 70% of the debt at the SICAD I rate. Yesterday in El Mundo Economia & Comercio p.11 an article on subject mentioned the same thing as you only the Fx rate would be at the higher SICAD II rate which, it that were the case, I doubt very much that the airlines would agree to such a deal. Please advise.

    Thanks!

    Lewis

    • It’s quite possible the Airlines won’t take the deal. On the other hand, if they turn it down maybe they get nothing but a boot in the arse.

      They could take the deal, and once they get their money move out and not come back until a new regime is in office.

      It’s possible, also, that long ago they calculated the risk of only getting part of what they were owed, and will still come out ahead.

      • Late last summer early fall I was checking pricing to fly to Miami. Tickets in AA were around BsF20,000. At 70% and SICAD I rate, that is ~US$1,275. At the same time, tickets from Miami to Bogota (slightly longer distance) were around $800 or less. So I guess they had calculated the risk because with this government a deal is not always a deal.

  2. The article quoted in your piece is confusing!

    The title and subtitle state: Modifican acuerdo de pago a las aerolíneas internacionales
    Según fuentes, la propuesta oficial es pagar solo 70% de la deuda a tasa Sicad 1

    Payment agreement modified, according to sources the proposal is to pay 70% @ Sicad 1.

    Further into the article it states:
    Hace unos 10 días Hebert García Plaza, ministro de Transporte Aéreo y Acuático, anunció que el Ejecutivo Nacional reconocería a estas empresas la totalidad de la deuda, que asciende a unos 3.800 millones de dólares. Además, precisó que se pagaría a la tasa de cambio vigente para la fecha de la emisión de los boletos.

    En la deuda son tres tipos de cambio a considerar, 4,30 bolívares por dólar hasta febrero de 2013, Bs. 6,30 por dólar hasta febrero de este año, cuando los boletos aéreos pasaron a cotizarse a la tasa del Sicad 1, Bs. 10 la última de ellas.

    The president stated 10 days ago that the debt would be paid in full, at the rates extant when the tickets were sold, namely 4.3, 6.3 & 10.

    Then further along the article states:
    Fuentes del sector aseguraron que la propuesta consiste en desconocer entre 29% y 35% de la deuda acumulada hasta 2013 y reconocer hasta 70% al tipo de cambio del Sicad 2.

    Sources from the industry averred that the proposal is for discounting between 29% & 35% AND recognize up to 70% @ Sicad TWO

    WTF?

    Whoever wrote the article is as confused as anything!

  3. Ok, Lets be honest here. Airlines are not saints, they inflated their tickets process knowing this was going to happened. Last January I paid a ticket Caracas-San Francisco, CA for over $6000 at the official rate. This is just pricing the risk of not getting paid.
    With this I am not saying they are not entitled to get paid but saying “poor airlines they only got 70% of the ticket value” is not fair either. They inflated prices so the 70% might end up been a very profitable ticket anyway. When I bought the CCS-SFO ticket I calculated the rate on the black market and ended up been the same price the airline was charging if they were selling the ticket in $.
    It was a risky game that might end up very well for them.

    • Pepe I’m not sure but I think the airlines started raising their rates when the government didn’t honor their side of the deal to exchange the bolivars they were earning in Venezuela into dollars. Does anyone know how long the airlines have been forced to hold onto their bolivars?

  4. So, of the $3.7 billion owed to the airlines, the government proposes to pay them only $1.5 billion (at SICAD 1), thus screwing them out of $2.2 billion. I would fully expect the airlines to respond, “See you in court.”

    • What Court? The celestial one? Once airlines start leaving Venezuela, people will see how serious this is. Adicora-Aruba botas will be the preffered form of travel.

      • Once they start leaving? It already started with Canada Air. And Marc is correct, I was thinking of International Court, though I don’t know how solid their legal case is. I suspect that they will eventually make a deal with the next government.

        • I doubt the ICJ would have legal jurisdiction here. That’s typically a venue for complaints based on nation-nation disputes.

          Nominally, this is something that would fall under the ICSID, but Venezuela withdrew from that about 18 months ago (with several cases still pending). Likewise, Venezuela has quietly been terminating their bilateral investment treaties, which would provide the terms and venue for an arbitral tribunal with or without the ICSID.

          It would depend entirely on whether any of the airlines are subject to existing BITs and if the could invoke them to push Venezuela to arbitration.

          I would point out that 1). Several of the airlines are based in countries that are ideological if not geographical neighbors of Venezuela which may dissuade them from falling back on BITs and 2). Until the funds are repatriated or until the government definitely enforces an exchange rate on the airlines (and other companies) they are able to book the Venezuelan profits as cash holdings at the agreed upon CADIVI rate with only a footnote warning of currency risk pending a real or de facto devaluation.

  5. I agree with pepe trueno in that the airlines played a bet on getting partial payment. It is unjustified that American Airlines was charging almost $2000 from Puerto Rico to Caracas on a flight that lasts about an hour and in tourist. It was almost cheaper to rent a jet between 4 and fly private!

    This is one of those few times where I think they should get screwed!. They made it almost imposible for Venezuelans living abroad to visit Venezuela.

    • The blame is on the governments that enact FX controls that allow Airlines to profit like that while there are no medicines for cancer patients. Airlines are just calculating risk, they might end up getting paid at the Sicad 2 rate,so it was perfectly advisable to calculate the fares on that basis, you would do exactly the same if you were the Manager of AA Venezuela, as you sell any property you have at the black market rate and not at 6,30.

    • Actually, that’s not entirely right. While tickets outside of Venezuela were priced very high (which, by the way, may have something to do with excess demand and little supply, not necessarily price gouging), every time I flew to Venezuela from Chile I paid market rates.

    • Four times is 24 Bs. at 55 they lose money, they were protecting themselves. just like those thta buy $ in the black market.

    • For much of the last 18 months, I flew my relatives up here (to gringoland) and some round trips were as cheap as $220 after selling dollars on the black market.

      Since November or so it’s more expensive.

  6. No company can operate at a loss or just break even on their costs. Communism simply destroys all production incentive and the government replaces the capitalist. Then you have nothing but handouts that the government decides you can have. Welcome to Cuba.

  7. Airlines will not get their money at Sicad 1, they may get part at Sicad 1, the rest who knows? The only airline to agree to a deal is Aeromexico, they are bankrupt, so who cares? They will get 70% at Sicad 1 and 30% at Sicad x, average is Bs. 22 or so. Those that bitch they paid 2,000 dollars paid it at Bs. 6.3. At 22, that is $572, a fair price for a Mia CCS flight, no? So, the airlines were doing ok calculations. But remember, they have not collected yet, it could get worse for them. Why is it that people criticize what they would do to protect their personal interests. The airlines will get screwed by the Government, period.

    • I understand that non-enchufados who were “awarded” Sicad II rates 2 weeks ago still have not received their $/$ bonds, but their Bs. accounts were debited–great confidence builder in Govt. promises to pay….

  8. I wonder what the rating agencies make of this, because under any circunstance there is only one word to describe this (even if its 70%), DEFAULT – the State can not make whole a promise of payment and creditors are being forced to take a haircut

    • The Wall Street Journal had a good article on this very topic a month ago. Basically, the only thing the government is paying on time and in full is on government bonds. Literally everything else they are not paying or are paying partially, which leads to this debacle when the country produces nothing of it’s own anymore. .

      From the article:

      “When it comes to choosing between its own people and Wall Street, Venezuela’s socialist government has picked the latter—at least in regard to allocating foreign currency.

      The oil-rich country pays its overseas bondholders right on time. But the cash-strapped government is in hock to the tune of $50 billion to the private companies that service its economy.

      They range from oil contractors and airlines to supermarkets that need dollars to import everything from flour to toilet paper. The delays in foreign-currency payments to the private sector come as the government intensifies foreign-exchange controls adopted more than a decade ago by the late populist leader Hugo Chávez, who sought to contain rising dollar demand in an economy that depends on imports. The result: widespread shortages of basic goods.”

      • It seems like everyone I know who works for the Venezuelan government or a government corporation is owed back pay…although that is nothing new.

  9. I agree that the government is screwing the airlines by changing the rules of the game now (i.e. paying them at the Sicad rate, if at all) because, well, changing the rules after the game has started is synonymous with cheating. However, I think that the airlines weakened their negotiating position by charging such high prices for tickets in Venezuela, in that they made it very obvious that they were taking into account the risk of not getting paid at the Cadivi rate or even needing to use the black market.

    I mean, I can easily imagine the Chavista bureaucrat arguing “dude, but if you really expected to get paid at the Cadivi rate, then why were you charging 5600 USD for a Caracas-Paris ticket in economy class, when the other way costs 1500 EUR, at most?”.

    And he has a point there.

    Sure, the airline manager could say that it was because of the demand and whatnot, but I don’t really buy that, and I am not a Chavista bureaucrat. The airlines would have a much harder time convincing the Chavista bureaucrats that the peculiar ticket pricing in Venezuela was not either to (a) price gouging, or (b) taking currency risk into account.

  10. A bunch of thieves complaining about another bunch of thieves. The goverment provided an opportunity to rob us blind and the airlines took advantage of it. They took advantage and the prices they charged were more than highway robbery. They made obscene profits here for years. Now they are saints complaining about legalities, pretending to collect from the goverment several times the amount of dollars for a ticket to caracas compared to bogota might be legal, but defending them? Screw them. American will never leave the miami route, never.

  11. If the airlines were charging customers the usd fare calculated at the black market rate then they were using their bs to buy usd at the black market rate so that if later they are paid those fares using the cadivi or sicad rate they are really getting a profit they didnt earn , In such case the govt might have an ‘economic’ (not a legal) argument for refusing to recognize them the payment of their bs fares at the original official rate. Double dipping their charges is a no no in most civilized market systems.

    If however they were charging their customer the usd fare using the official rate then the govt has no reason to deny them the payment of their bs fares using the official rate prevalent at the time.

    Depending on their behaviour the airlines have a good case for getting their bs fares paid at either the then current official rate or at a less generous rate. .

    Airlines as most business will charge what the market will bear and where they together hold a market captive (with no real competition) their fares can become close to extortionate at their customers cost. In venezuela the raspa cupo rage made the distortion all the more awful . We are now paying the price of the govts mismanagement combined with some airlines probably predatory ticketing practices. .

    • My thoughts exactly. And it seems to be the fact that in many, many routes the airlines were (are) charging tickets at the black market rate. See, I want to buy an Iberia ticket to Madrid- something I do a couple of times a year. Iberia tickets are not expensive. When the black rate was at 8, it went for about 7,000 to 10,000 Bs, depending on how early I got it. That made about 875 to 1,250 USD at the black market rate- totally in line with international prices and a little more expensive than flying from, say Miami to Madrid. That also made for a very expensive (for Iberia) 1,630 to 2,325 USD ticket at the legal rate.
      IMHO, they did charge the costumer at black market share. That is backfiring now that the SICAD rate is so over the old black rate.

    • If the airlines were making so much money you wouldn’t have any of them leaving the country. On the contrary they would be lining up to do business.

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