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When Varig Is Gone


When Varig Is Gone

Getting ready for the worst, in case Varig, Brazil’s largest airline,
folds under the weight of its debts,
the Brazilian government
has prepared a contingency plan. The public will not suffer,
guarantees Air
Force commander Silva Bueno.

by:
Émerson Luiz

Despite Varig’s—Latin America’s leading airline—shaky finances and the prospect of an
impending bankruptcy, the
new Brazilian administration is decided to avoid a collapse in air transportation in Brazil. While refusing a bail out for the
embattled company, the government has prepared a contingency plan to be implemented in case the airline giant folds.

In an interview with the daily newspaper O Estado de S.
Paulo, Air Force commander, brigadier Luiz Carlos da Silva
Bueno, said that the Lula administration will do everything short of spending money
to save Varig and has created a scenario in
which Varig wouldn’t exist anymore:

"We have a contingency plan, which is being constantly updated. The last update we had was this month of
January. The public will not be harmed in any way. Varig’s case is the gravest because there are interests that we don’t know
where they are coming from…We have to conclude that there are people rooting for the demise of Varig. But this is not the
government’s intention. Au contraire. The government has a huge interest in the company although it remains steadfast and won’t
budge in order to guarantee funds so that Varig be kept alive. There is a very big interest in not allowing that 15,000 jobs be lost."

In the same interview, Bueno talked against a model that would open Brazil to any foreign air carrier willing to
operate in that country: "This policy introduced by President Ronald Reagan in the United States brought companies like Pan
Am and Braniff into bankruptcy. This is collective suicide. This is good for those who have lots of money, for the United
States. The big one kills the small one and gets bigger. This is not a healthy competition. The best thing in order to control our
international flights is the reciprocity between two countries. One country has the same rights as the other one. Without this the
bigger ones will wipe out the smaller ones."

A dispute over debt renegotiation with the controlling shareholder led in November to the resignation of Armin Lore
as Varig’s president. Lore was formerly Brazil’s Central Bank director. The Ruben Berta Foundation holds an 87 percent
stake in the company. It represents the majority of the airline’s 17,500-strong workforce.

In December, Varig sought without success an agreement with its creditors, which would help the company sail out
of its crisis. The airline is now trying to get at least $350 million in foreign investment. Talking about the airline’s efforts to
secure fresh capital from Europe and the U.S., Manuel Guedes, Varig’s president, declared, "Some of these contacts had to be
interrupted in August of last year when the company went through a management change."

Decade-long Bleeding

Varig has been accumulating losses for the last 10 years, during which time it was able to show profit only once. The
company’s creditors include Boeing, General Electric and Brazilian state-owned Petrobras, an oil company. December 17, just a week
before Christmas, Varig announced that its employees due to lack of funds would not get any time soon their
13th salary, a Christmas bonus equivalent to a month salary that is paid by all Brazilian employers. Last year, Varig fired 3,000 employees and got
rid of 30 planes.

Varig, already struggling under the weight of too many debts, was caught recently by the Brazilian Securities and
Exchange Commission making improper claims in tax credits. The company was ordered to restate its accounts for the previous
two years. The airline, which was founded in 1927, claimed around $450 million in tax credits that can only be claimed by new companies.

Varig is trying to renegotiate debts that amount to $760 million, most of which are chalked up to debt-servicing cost.
The airline flies to 110 cities in Brazil and 18 countries in four continents. It has a fleet of more than 100 planes.

On January 17, Carlos Lessa, the new president of the BNDES (Banco Nacional de Desenvolvimento Econômico e
Social—National Bank for Economic and Social Development) hinted that his bank might help Varig. "I believe that Brazil, a
country with 8 million square km and 170 million inhabitants, must have a great air company," he said. Lessa was quick to add
however that any help should be in accordance with economic policies of the government as well as with directives coming from
the Defense and Development ministries. Since last year, Varig has been trying without success to get a BNDES financing.

Young and Successful

Meanwhile, upstart Gol, which in the two years since its beginning was able to become Brazil’s
3rd largest airline—behind Varig and TAM—was able to secure something Varig never could: a foreign partner. Gol announced this January that
US-based AIG (American International Group), an insurance company, will buy 20 percent of Gol’s capital, the maximum
allowed by Brazilian law. The transaction should be worth more than $120 million.

Why is Gol thriving while powerhouse Varig is failing? Analysts say while Varig carries vices accumulated in years
of mismanagement, the new company is able to operate at a lower cost than its competition and pass the savings to its
passengers. The airline has studied and learned from American Southwest Airlines, which is also a low-fare, no-frills air carrier.

Gol’s first flight was January 15, 2001. From an initial fleet of seven planes, the airline has acquired 12 more and
another three are being expected for February. They are all Boeings. In December 2001, Gol had an 8.01 percent share of the
Brazilian market. One year later it had more than doubled this number to 17.17 percent. In 2002, Varig led the Brazilian domestic
market with 39.25 percent of the passengers followed by TAM with 34.93 percent.

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