American Airlines leads
class action suit in Venezuela
Sliding from Bs170 to the US$ in December 1995, to Bs473 in July 1996, foreign airlines are hard hit by the huge currency losses caused by Venezuela's rapidly weakening currency

American Airlines (AA) took a dispute with the Venezuelan government to a climax when it filed a US$8.2 million lawsuit against the State and the Central Bank of Venezuela (BCV) last June. In the case, presently before the Supreme Court, AA claims the government and the BCV made the carrier incur losses when they froze US dollar sales in a bid to save dwindling international reserves. AA says this impeded them from being able to repatriate the profits they earned in bolivars.

The sum represents the profits made during the summer months of 1995. At the time, the bolivar was fixed at Bs.170 against the dollar. American Airlines Inc. sued the Venezuelan government seeking compensation for losses it said it suffered when the bolivar was devalued in December. After intense negotiations with the government, AA was allowed to buy greenbacks (US dollars) but at a devalued rate of Bs290 instead of the Bs.170 which existed in December.

"We are filing the claim after months of unsuccessful negotiations with the government," said Fabian Ponce, director of the airline's Venezuelan operations. AA began the legal case against the government on February 2, this year, when its attorneys from Rodríguez & Mendoza law firm presented the Finance Ministry, the Foreign Exchange Control Board, the President's Office and the BCV with pre-trial documents.

Since AA took legal action, 10 other airlines have decided to take their cases to the Supreme Court, if ongoing negotiations between the Venezuelan Airlines Association (ALAV) and the government reach a stalemate, Luis Enrique Vargas, an ALAV legal advisor said. ALAV is negotiating with the government on behalf of 24 airlines affected by the exchange rate modification.

"We met with the finance minister yesterday, and we told him that we just couldn't wait any longer, but it is not too late for an out of court resolution to this problem.'' The suit stems from restrictions on the sale of foreign exchange in place between June 1994 and April 1996. The government had pledged to make available dollars to American last year, but failed to do so before the currency was devalued in December. As a result, the airline was unable to swap earnings from July, August and September at the then prevailing rate of 170 bolivars to the dollar. The airline was paid early this year after the currency was devalued to 290 bolivars in early December. AMR is seeking to be compensated for the difference between the two rates.

Since then, the Venezuelan government has allowed its currency to float as part of a preliminary agreement with the International Monetary Fund for new credits. The currency now fetches 473 bolivars to the dollar. No date was set to hear the case, lawyers representing American said. Given the state of the Venezuelan legal system, which is widely criticized for its corruption and slowness, hearing the case could take months at the very least, said lawyers.

American's suit is seeking payment, charging that the government is bound to honour its request because of two exchange resolutions that were issued in August 1994 and December 1995, says Luis Ortiz Alvarez, a lawyer at Escritorio Rodriguez Mendoza. The August decree, Resolution 19, specifically said that airlines "had the right to remit all earnings to their home offices,'' he said.

While, the restriction on the sale of dollars hurt all companies operating in the country, airlines were especially hard hit because of the multi-national structure of their business. Foreign airlines are owed about $80 million by the government, said officials from the country's airline association. In February, AMR flexed its muscles by filing a preliminary claim of $18.8 million against the government and cancelled two flights, from Miami to Maracaibo and San Juan, Puerto Rico to Caracas.

The company also suspended plans to open a new route from Miami to the central city of Valencia. American operates three daily Miami-Caracas flights as well as the daily New York-Caracas flight. The airline is the largest foreign carrier serving Venezuela. Overall, about two dozen foreign carriers serve Venezuela. Other airlines might also opt to follow American's lead, especially if the government doesn't honour its promises to compensate airlines for losses.

"I can't say why other companies haven't taken similar action,'' said Ortiz Alvarez. "American is the first to take such action but I suspect other companies will follow.'' American is also seeking to repatriate $25 million for income earned after September, Ponce said. No legal action is contemplated until the government's exchange board formally answers the company's request, Ponce said. American's decision to file suit coincided with the government's promise to resolve quickly the issue of exchange losses suffered by foreign airlines.

Finance Minister Luis Raul Matos Azocar said the government would soon issue regulations covering the repayment of losses. Industry officials said the first payments could be made by early July. Recompensation will be handled on a case-by-case basis, depending on existing bilateral agreements, Matos Azocar said.

Still, few bilateral agreements make provisions for losses suffered under exchange restrictions such as were in place in Venezuela, Ponce said. Two exceptions are Venezuela's pacts with France and the Netherlands, whose carriers are expected to be paid within days, Ponce said.

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