May 2003

Sky Is Falling over Varig

Varig will keep its name, but very little more, after its merger
with TAM and a rescue package from the Brazilian government
that will make the state the main shareholder of
the new airline, which should be called Varig.

Émerson Luiz

Brazil's Varig Airlines, which once was the pride and model of a successful private organization in Brazil, is becoming a state company. In order to survive, the airline, which flies to 110 Brazilian cities and 18 countries and has a fleet of more than 100 planes, will have to merge with smaller airline TAM.

The new company will be rescued by a government loan through a plan in which 40 percent of the firm's shares will belong to state companies. The remaining 60 percent of the shares will be distributed between Varig (not more than 5 percent) and TAM (up to 35 percent), besides several foreign creditors, which include Boeing and General Electric (up to 20 percent).

The government's rescue plan calls for an initial US$ 1 billion loan from state bank BNDES (National Bank of Economic and Social Development). Early indications are that the new airline will start flying in September under the name Varig. Varig's creditors Banco do Brasil, Infraero, and BR Distribuidora, all state companies, will get shares in exchange for the money Varig owes them.

Commenting on the rescue package to save Varig, Unibanco's aviation analyst, Carlos Albano, said to Brasília's daily Correio Braziliense, "This operation is not advantageous for the BNDES as a business deal, but from a strategic point of view of the country's interests it makes all the sense to assure the existence of a big national airline company."

In December, Varig sought without success an agreement with its creditors, which would help the company sail out of its crisis. For 10 years Varig has been accumulating losses. Among the company's creditors are Boeing, General Electric and Brazilian state-owned Petrobras, an oil company. Last year, Varig fired 3,000 employees and got rid of 30 planes. In 2002 alone, TAM and Varig together, accumulated losses amounting to US$ 900 million.

For the second month in a row Varig workers who make more than R$ 600 ($200) a month will have their salaries delayed. A strike or any such act seems out of the question for the moment. According to Marcelo Branco, president of the Varig Pilots' Association, there isn't much choice: "Either the company pays its supplier and is able to fly or it pays us and stays on the ground."

According to experts, the airline industry never had it so hard. The international travel slump brought in by 9/11 doesn't seem to let up despite lowering of fares and while the economy continues sluggish the world over. Varig has a bloated workforce. While American JetBlue, for example, has 83 employees per aircraft, Varig has 213 employees for each of its planes.

Talking recently in Coral Gables at AvGroup's 11th Annual CEO Conference entitled Survival 101, Steve Hazy, chairman of major aircraft leasing firm International Lease Finance Corp., talked about the need for Latin American airlines to control costs, fight corruption inside their companies and get rid of heavy government regulations: `'In Latin America, government rules and regulations restrict and are basically a noose around the industry.'' Varig seems to be going in the countercurrent of good business practices.

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