Sky Is Falling over Varig

 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.
by: 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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