Airlines Mull Venezuelan Exit on Debt Concerns - Analyst Blog

Of late, things are not going well for Venezuela, and airlines that operate within the country are facing the brunt of it. Amid political turmoil, the country now faces the danger of losing the service of major airlines as they are unable to transfer $3.8 billion in unpaid revenues, which have been accumulating since 2012.

As per International Air Transport Association (IATA), the airlines have to incur considerable losses to transfer funds owing to the country's currency control system. Further, both IATA and individual companies have held talks with the government but with no results.

Although President Nicolas Maduro has assured to resolve the issue, he has threatened to sever ties with carriers who will suspend operations due to payment disputes. In keeping with this, Venezuela ended commercial relations with Air Canada after it discontinued operations in the country last week.

The airline industry is apprehensive that this debt concern might compel airlines to reduce or even terminate operations in Venezuela. 11 carriers serving the nation have limited their operations by 15–78% in the last one year, confirming the fears.

Notably, carriers require airlines to sell tickets in the nation's currency and the permission of the state currency board to exchange it with dollars. Previously, companies sold tickets at the official rate of 4.3 bolivars per dollar in 2012 and 6.3 in 2013.

Recently, the country initiated a new foreign exchange platform with a rate of around 52 bolivars per dollar. However, the new rate will translate into heavy losses for the carriers because of the substantial rate difference.

The country's government officials might argue that such losses are part of currency risks, however, airlines like American Airline Group Inc. AAL, Delta Airlines Inc. DAL Copa Holdings SA CPA and Avianca Holdings SA (AVH) will have to bear significant losses which will largely hamper their financials. Both Delta and American ended in red on Wednesday trade. The delay in the payment settlement is aggravating the problem, leading to suspension of air services.

American Airline sports a Zacks Rank #1 (Strong Buy), while Copa holds a Zacks Rank #2 (Buy). Both Delta and Avianca currently carry a Zacks Rank #3 (Hold).