Venezuelan Government Signs Agreement with Six Airlines to Settle Debt, Ticket Prices Still in Flux

Caracas, 29^th May 2014 (Venezuelanalysis.com) – Today Venezuela’s Minister of Sea and Air Transportation, Herbert García Plaza; Minister of Tourism, Andrés Izarro and President of the National Center for External Commerce, Alejandro Fleming, signed an agreement with representatives of six airlines.

The pact covered how Venezuela would pay its outstanding 2013 debt to them. The meeting with Aeromexico, Aruba Air, Insel Air, Tame Ecuador, Tiara and Lacsa-Taca took place behind closed doors. The Transportation Minister also announced he hoped to reach a settlement soon with Avianca, Air France and American Airlines.

In addition, the ministers announced that beginning July 1, tickets will be sold at the foreign exchange rate set by SICAD II, about 50 bolivares to the dollar which is around five times higher than the currently-used exchange rate, SICAD I.

This change in calculating airfare will make the cost of tickets bought in bolivares by people leaving the country significantly more expensive and the cost of airfare for incoming passengers buying tickets from abroad cheaper. The government’s aim is to use some of the projected increased revenue to pay the remaining debt owed to airlines.

However, the exact price of tickets after July 1 is still uncertain. “We’ve worked with airlines to reduce the dollar price of tickets,” Transport Minister Hebert Garcia Plaza said today in a post on his Twitter account. “We’ll work to place a realistic price on air tickets before they are moved to Sicad II.”

The President of the National Assembly Permanent Commission on Services, Claudio Farias, explained that, when it comes to Venezuela, airlines violate the international formula for calculating ticket price according to miles flown. Instead, they are imposing a 300% surcharge on top of the fare they charge any other Latin American country. For example, tickets between Caracas and Madrid cost $4400, while tickets between Bogota, a longer distance, and Madrid are $1129.

Representatives of airlines claim they raise the ticket prices as a hedge against the unstable Venezuelan currency.  The problem persists as long as there is lack of agreement between Venezuela and the international airlines on the value of Venezuela’s currency.

As Bloomberg reported, “Airlines had the equivalent of $3.9 billion stuck (sic) in bolivars as of April as they struggled to repatriate revenue from ticket sales, according to the International Air Transport Association. At least 11 carriers cut capacity, sales or routes to South America’s largest oil exporter in the past year, with Air Canada (AC/B) becoming the first airline to stop flying to Caracas in March.”  

Avianca Chief Executive Officer Fabio Villegas said today that Venezuela’s payment of $12 million represents only about 4% of the total debt owed. Bloomberg reported that Avianca shares rose 2.6 percent to 3,700 pesos in Bogota today.

The Venezuelan government’s goal is to normalize flights and prevent more airlines from cutting their schedules. The Ministry of Tourism noted an added benefit of pegging ticket prices to the SICAD II rate. Airfares will be cheaper, and therefore more attractive, to tourists who will bring more foreign exchange into the country.

However, representatives of travel agencies and other private commercial enterprises are concerned that the cost of flying out of the country will become more prohibitive, especially for those Venezuelans who regularly fly to Miami to tend their business and family interests. They also noted that the cost of imported products shipped by air will rise.