Back to top

Image: Bigstock

Lufthansa, LATAM Airlines to Exit Venezuela, More to Follow?

Read MoreHide Full Article

The Venezuelan economy has been in the doldrums for quite some time with the onslaught not sparing airlines with operations there. The Venezuelan government apparently owes over $3.5 billion in revenues (from ticket sales) to airlines. Naturally, this has compelled many carriers to trim capacity/suspend operations in the country, dealing a heavy blow to the nation’s tourism sector.

Oil Woes

As oil is the country’s primary source of income for the nation, the fall in the commodity price since mid-2014 has crippled the economy.

Despite the recent rally, oil is currently hovering around the $50 a barrel mark. The commodity had traded over $100 a barrel in mid-2014. No wonder this massive fall has hit the cash-reserves of this oil rich country, with inflation rate in triple-digits. With the economy on the verge of collapse, residents are feeling the heat and are apparently struggling to have access to even basic amenities like treatment.

Repatriation Issues

Airline companies are required to sell tickets in Venezuelan currency, the bolivar. Meanwhile, the tightening of currency policies in the nation has made it increasingly difficult for international carriers to convert their earnings into dollars.

With a considerable amount of their earnings trapped in the South American nation, carriers like Delta Air Lines Inc. (DAL - Free Report) and American Airlines Group Inc. (AAL - Free Report) had trimmed their services to Venezuela. American Airlines had reinstated flights connecting Caracas and New York in Dec 2015, only to scrap it three months later, citing low demand as the reason.

Currency issues caused carriers like GOL Linhas suspend their Venezuelan operations altogether. The list of international carriers exiting the troubled country have been on the rise with the likes of Santiago, Chile-based LATAM Airlines Group S.A. and German carrier Lufthansa (DLAKY - Free Report) announcing their decisions to suspend operations in the nation.

According to a Bloomberg report, Lufthansa will also not be operating flights between Frankfurt and Caracas (until further notice) starting next month. The carrier apparently has revenues over $100 million trapped in Venezuela. LATAM Airlines also announced plans to withdraw its operations in Venezuela, effective July-end. However, the carrier might resume operations if the situation in the country improves.

Meanwhile, it is to be noted that repatriation issues are not unique to Venezuela. Few days ago, United Continental Holdings (UAL - Free Report) had announced its decision to stop flying to Nigeria on similar grounds.

More Pullouts Likely

With the situation showing no signs of improvement, the International Monetary Fund has predicted that recession in the Venezuelan economy will continue in 2016. The economy is predicted to contract 8% over 2015 levels. This marks a drastic deterioration from the 5.7% contraction witnessed in 2015.

Political uncertainties are increasing with each passing day and the inflation rate is likely to hover around 500% in 2016. In view of this gloomy projection, it is likely that more international carriers will join Lufthansa and LATAM Airlines in suspending flights to Venezuela.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Published in