Brazil: Why Varig Airline’s Rescue Has Become an Impossible Proposition

Today judge Luiz Roberto Ayoub, of a Rio business court (8ª Vara Empresarial do Rio), will send a copy of the proposal by VarigLog to buy Varig to government legal officials (Ministério Público) and the Deloitte consultancy firm, which is the administrator appointed by the court.

Buying a troubled airline loaded down with problems and debt is never easy. To ease the sale, Varig was divided into two parts: a debtridden Varig Comercial, where the company’s liabilities have been placed (it is reported that Varig has debts totaling as much as US$ 3.5 billion).

More than 30% of the debt is owed to the Brazilian government (back taxes and social security contributions, mostly). This is an important point because last week government legal officials obtained a court injunction enabling them to move to the head of the line of creditors.

The other part of the old flagship airline is now known as Varig Operacional, and it is an attractive proposition as it has no liabilities, only Varig’s domestic and international routes.

Meanwhile, also last week, the union representing Varig employees went to court to question whether or not VarigLog is a legally eligible buyer under Brazilian legislation. Behind this maneuver is concern with another part of Varig debt: worker rights and benefits, not to mention salaries which are in arrears.

Also under analysis is the Varig frequent-flyer program, known as "Smiles." The question is if and how it will be honored by any buyer.

ABr

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