Published On: Thu, Jul 10th, 2014

Airlines not the only ones affected by Venezuela currency controls

dollars_bolivarsCARACAS, Venezuela -- Venezuela’s arcane system of multiple exchange rates and currency controls is making life difficult not just for airlines but also for other multinational companies doing business in the South American country.

Armoured car company Brink’s could see some $400 million in revenue disappear this year from its operations in Venezuela, if its sales are recalculated at the recently created exchange rate of about 50 bolivars to the dollar instead of the primary rate previously used for accounting purposes of 6.3 bolivars.

If the devalued exchange rate had been applied to last year’s Venezuela revenues, the company said, they would have shrunk by 88 percent and the operating profit for the entire company would have fallen by 31 percent.

Procter & Gamble announced in April that it had the equivalent of about $900 million in cash in Venezuela and that it was taking a $275 million write-down as a result of applying the government’s intermediate exchange rate to its Venezuelan balance sheet. Coca-Cola said that its Venezuelan subsidy took charges of $247 million related to "the devaluation of the Venezuelan bolivar." Merck reported $140 million in exchange losses in Venezuela during the first quarter and Ford has written down about $316 million.

Further complicating matters, the Venezuelan government has not allowed companies to repatriate profits for the last five years.

Meanwhile, Air France KLM became the latest airline to sound the alarm over service to Venezuela. The airline predicted weaker earnings this year due to, among other things, "the challenging situation in Venezuela."

On Monday, Delta Air Lines announced that it is reducing service to Venezuela by 85 percent amid a dispute with the government over unpaid revenue. The carrier’s daily roundtrip flight between Atlanta and Caracas will be replaced with one roundtrip weekend flight as of August 1.

The decision by Delta was the latest in reductions in airlift to Venezuela by international carriers, who have so far rejected the government’s offers to repatriate revenue delayed by local currency controls.

Frustrated over the continued non-payment of some $750 million owed to it by Venezuela through March 31, American Airlines has cut its weekly flights to the destination to ten, down from 48 previously.

Italian airline Alitalia announced in May that it was suspending all flights to Venezuela "due to the ongoing critical currency situation” in the country, "which is "no longer economically sustainable."

The move by Alitalia followed a similar suspension in late March of all flights to Venezuela by Air Canada and a number of regional airlines have reduced the frequency of flights. Colombia's Avianca has reduced itineraries by more than two-thirds. Other airlines represented by the International Air Transport Association (IATA) are considering suspending all flights to Venezuela.

Lufthansa said the Venezuelan problem had cost it €60 million ($81.2 million) and contributed to the airline’s profit warning. The German carrier also suspended ticket sales in the country for several days and has reduced its daily Frankfurt-Caracas service to three weekly flights.

“The airlines get to a point where they want to serve the country and they want to serve the Venezuelan people,” said IATA spokesman Jason Sinclair. “But they’re owed so much money, it just becomes not viable to operate in Venezuela.”

The Venezuelan government and a half-dozen, mostly smaller airlines in the region agreed last month to terms on repayments. The deal reduced the outstanding debt owed to the airlines by about $200 million, Sinclair said.

One of the airlines finally receiving payment from CADIVI, the Venezuelan foreign exchange authority, was Curacao airline InselAir, which was reported to have been paid a large part of its outstanding debt of $75 million.

The exact amount is not known, but it is said to be about three-quarters of the total outstanding debt.

According to the Association of Venezuela Airlines (ALAV), out a total of 25 international airlines operating to and from Venezuela, 16 have not yet signed a payment agreement with the government, through the aeronautical authorities.

Those companies that are still waiting for an agreement are Air Canada, Air France, Alitalia, American Airlines, Avianca, Caribbean Airlines, Copa Airlines, Delta Air Lines, Federal Express, Iberia, LACSA, LAN Airlines, Lufthansa, TACA, TAP Air Portugal and United Airlines.

ALAV indicated that the cumulative amount owed as of December 2013 is $3.4 billion.

Most of the major international airlines flying to Venezuela have declined the government’s offers because they include significant discounts on the principal amounts and have long repayment schedules.

“The terms were very complicated, and the offers that were made to different airlines were very different,” Sinclair said. “The discounts were arbitrary. There wasn’t a calculation to them that we saw.”

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