Death by a thousand cuts (Updated)

/ January 17, 2014
Coming ... to an airport near you

Coming to an airport near you

There are many ways to make a capitalist country – one with plenty of private companies doing all sorts of business – go socialist.

You can take over the companies. That is what Cuba did in the 1960s. It’s also something Hugo Chávez did with particular sectors – cement, agriculture, oil services, and steel refining to name a few.

But the main way chavismo has imposed its economic model on an unsuspecting population is by regulation – by taking over profits, decreeing basic economic decisions, and downright bullying. In the end, private companies give up and either die … or flee.

Case in point: the airline industry.

It is well known that the government owes foreign airlines billions of dollars. For years, airlines have been selling tickets inside Venezuela at the local currency, under the promise by the government that it would allow them to exchange the cash for dollars at the official rate.

Well, years have passed, and foreign airlines operating in Venezuela are flush with cash – useless, devalued Venezuelan cash that is. The situation got to be so bad that a few weeks ago Spanish carrier Air Europa threw in the towel and said it was leaving the country.

The government seemed to take notice, and they scheduled a meeting. Did Air Europa get their money?

The government basically said they would pay with a combination of cash, government debt, and fuel. In other words, Venezuela has no cash, and it has to settle for useless Venezuela debt papers just to get a percentage of its cash back. Take it or leave it.

You can be sure the market value of what they are getting is but a fraction of what is owed to them. That, my friends, is what you call a loan default. It will probably make foreign airlines leave the country in droves.

The situation for local carriers is not much better. Local airlines have trimmed or downright halted their operations because the government simply does not give them the cash they need for things like spare parts or paying international insurance policies.

If the situation continues like this, the only airlines left in Venezuela will be state-owned carrier Conviasa and Cubana de Aviación.

And that … is just what they’re looking for.

UPDATE: As befits a default, Venezuela’s bonds hit a two-year low today. (HT: @nmcrooks)

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14 thoughts on “Death by a thousand cuts (Updated)”

  1. Having only state-owned businesses is a clear goal of the government. Most likely, the businesses will actually be owned by Maduro and another high-level Chavista. Just like Cuba and the Castros.
    The major problem is that state-owned airlines must be heavily subsidized to stay flying. Moreover, service and safety will have left also.

    Let’s not forget that opposition members will be banned from flying or will have to pay triple.

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    • Most Madrid Margarita flights are probably going to be used by spanish tourists who pay for their fares in Euros so little harm in letting them happen . For the venezuelan govt allowing this flight is face saving as they can now proclaim that no international airline is leaving the country because Venezuelas financial situation is so miserable . They dont like the world making them look as financial failures , too tough on their international image !! Meantime ccs madrid flights used by more Venezuelans paying bs are abandoned !!

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  4. The perfect crime. The government, determined to eliminate the domestic private sector, it is applying an operation “morrocoy” in providing access to the much needed 6,30 dollar. Thus, the industry is forced to go to the black market, and ends up buying the illegal dollar from the same guys who denied them the official dollar in the first place. This scheme, that could be openly denounced as illegal or criminal in an international court, ends up being perceived as an accident, as a product of the “inefficiency” of the government. Ironically, this would not be possible without the cooperation of analysts and economists who insist on imposing the erratic government thesis, over the one of the government that acts on premeditation. In that smooth way nobody sees the crime, not to mention that the amount of money they are getting from this scheme, could that high that it might not be that urgent to devalue the Bolivar.

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    • The black market dollars are coming from somewhere.
      If not from the government of PDVSA then from the drug trade.

      Either way it’s a trap for anyone who gets involved although the alternative is to go out of business.

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  5. Cuban-style isolation without the need of a prohibition to exit the country. At one point or other, if things go on like this, no more foreign airlines will fly to Venezuela.

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  6. At least there is a neighboring country to flee to. Venezuelans don’t have to swim to Miami like the Cubans to escape the communist mess that is coming. Hopefully there will be no mass murder since it is hard to hide it in this era of internet and cell phones.

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    • “Hopefully there will be no mass murder since it is hard to hide it in this era of internet and cell phones.”

      Tell that to the Syrians or the south sudanese

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  7. Good god, i need some counseling.
    i was planning to leave the country next year after i graduate but by then there won’t be a single airplane left here.

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  10. I’m sure some Chavistas would love to ban private airlines. But I’m also sure there are many that would squeal in horror at the thought of using a state airline for their monthly flight to Miami.

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