Being a Monopoly Contributed to Brazil’s Varig Airline’s Demise

If Varig is eventually declared bankrupt, passengers of the airline will suffer at least two unpleasant consequences within 20-30 days.

According to Ronaldo Seroa da Motta, coordinator of Market and Regulatory Studies at the Institute of Applied Economic Research (IPEA), the first will be the lack of accommodations on domestic flights for people who have already purchased tickets on Varig, "because there will not be enough seats available immediately on other airlines."

The other problem has to do with the World Soccer Cup. Motta pointed out that "people who have already bought tickets to Germany may suffer some difficulty finding seats on other flights headed there, and some will be surely be hurt financially."

He suggested planning as the way to minimize the problems that will occur in the transitional period, "which is what the government appears to be doing, with a concern for gathering information in order for it to be handled properly."

The economist said he believes that the other airlines will also be affected, trying to organize themselves to cover Varig’s routes. Despite the possible decrease in the number of flights offered, he declared his confidence in the tendency for the market to make room for new companies, including foreign ones.

Motta also said that he understands the concern that exists worldwide to avoid domination by a foreign company, because airlines are seen as an important part of a country’s defensive and offensive infrastructure at times when national sovereignty is threatened, such as in cases of war.

"Thus, it is important for local citizens to direct or own these companies," he affirmed, adding that, otherwise, nothing would prevent an intervention.

In the economist’s view, apart from these aspects, opening the airline market to international companies does not represent a problem.

"There would be more competition." In the last ten years, according to Motta, the airline sector in Brazil has evolved from a system dominated by a single firm, in other words, a monopoly, to a more competitive system.

"It is precisely this condition of possessing a monopoly that makes companies inefficient," he emphasized.

He explained that since they had been participating in the market for over 30 years, these companies had a large contingent of their workforce on the verge of retirement, posing an enormous actuarial (retirement benefits) risk.

The new companies, on the other hand, have less burdensome pension plans, allowing their costs "to be lower, for this very reason."

Agência Brasil

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