Brazil’s New Varig First Day: All Flights Cancelled, Good News from New York

Varig, Latin America’s oldest airline, averted liquidation as its former cargo unit agreed to invest more than US$ 600 million to take over its operating assets and preserve a portion of the company’s 9,500 jobs.

Varig Logí­stica SA, which was bought this year by a group led by investor Marco Antonio Audi, was the only bidder at the auction supervised by Brazilian bankruptcy court.

Varig Log will pay 277 million reais (US$ 128 million) for assets including the company’s routes, airport slots and the 80-year-old airline’s brand and invest $485 million to maintain service to destinations such as Frankfurt, Aruba and Buenos Aires.

"Varig will be back on its feet in no time," Varig Log President João Luis Bernes de Souza, told cheering employees after the sale was announced at Varig’s Rio de Janeiro headquarters. "We will make Varig’s star shine again," he said, referring to the airline’s golden star symbol.

The sale paves the way for the carrier’s recovery and payment of some of its almost US$ 3.7 billion of debt to employees and creditors including aircraft leasing companies, banks and the Brazilian government.

It also benefits consumers, as Varig will continue to compete on some routes with rivals such as TAM SA and Gol Linhas Aéreas SA, which have been serving Varig’s customers since the bankrupt airline was forced to cut more than half its flights last month, Audi said.

"We will make this airline the benchmark of civil aviation in Brazil as it once was," Audi told reporters at a press conference.

Varig was founded by German immigrant Otto Ernest Meyer in early 1927 in Porto Alegre, the capital of Brazil’s southernmost state of Rio Grande do Sul, and had become Latin America’s biggest airline, before filing for bankruptcy protection last year.

Varig’s Chief Executive Officer Marcelo Bottini declined to specify how many aircraft will continue to fly or what routes will be maintained in the short term. Varig is operating with 13 airplanes, down from 58 at the end of 2005, according to court documents.

"Our priority is to increase the number of flights to around 20 in the very short term, but we are still negotiating with the leasing companies, so it’s hard to say anything now," he said at a press conference.

Audi is one of the investors in Volo do Brasil SA, which controls Varig Log. Audi, Luis Eduardo Gallo and Marcos Haftel are the main investors. Private equity fund MatlinPatterson Global Opportunities Partners LP has a 20 percent stake in Volo do Brasil, which acquired Varig Log early this year for US$ 48 million, said Jose Carlos Mattos, a spokesman for Varig Log.

Under a reorganization plan, a new unit will be created to assume debt of the company, whose formal name is Viação Aérea Rio- Grandense SA. Another new company will be created to integrate Varig’s operating assets, according to court documents.

Varig Log is seeking to use US$ 46 million (100 million reais) of 10-year bonds to cover part of the carrier’s debts. Creditors have the option to receive US$ 38 million  in cash instead of the bonds. Half of the bonds or cash will be paid to workers and the other half to secured and unsecured creditors, court documents said.

Sao Paulo-based Varig Log also agreed to leave real estate assets with the so-called "old Varig" and contract some services from that company after the sale of the assets. Varig Log paid US$ 24 million to take part in the auction.

In a hearing in New York, this Friday, July 21, U.S. Bankruptcy Judge Robert Drain extended until Sept. 14 a preliminary injunction preventing leasing companies from seizing Varig planes. Drain said he might make the injunction permanent in the next hearing scheduled for September 13.

The new owners of Varig also got together with the Brazilian aviation authority, ANAC, to discuss what will happen to the thousands of passengers stranded after Varig’s decision to cancel all domestic and international flights until July 28. They will be flying only in the São Paulo-Rio shuttle service.

Varig Log guaranteed that all passengers would be accommodated in other companies. The problem is that the other companies have their own passengers and priorities. Besides, some tickets are for places that were served exclusively by Varig.

Passengers who carried Varig tickets embarking this morning in Rio de Janeiro and São Paulo were having a hard time to book a place in another airline.

Mercopress, Bzz

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