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Brazilian airline at edge of collapse

By Jack Chang
Philadelphia Inquirer Foreign Staff

RIO DE JANEIRO, Brazil - The Brazilian carrier Varig, once Latin America's biggest airline and a source of national pride, is facing the biggest crisis of its 79-year history, with many predicting that its collapse is near.

The firm's dim future was highlighted last week when an auction designed to save it turned up only one bidder, a group made up of airline employees. They offered $449 million, about half of the minimum asking price, for the company's operational wing.

Late Friday, a second, $800 million offer for the airline was made by Brazilian investment fund Multilong Corp., according to news reports. The offer is conditioned on financing from the government development bank and may include the participation of Boeing Co., one of Varig's creditors.

Bankruptcy Judge Luiz Roberto Ayoub will decide by tomorrow whether to accept the offers. If not, Ayoub could liquidate the company, as Brazilian law stipulates. Varig carries $3.1 billion in debt and has been under bankruptcy protection for about a year.

On Tuesday, New York state bankruptcy Judge Robert Drain will rule on a petition by U.S. aircraft leasers to seize 27 planes that were lent to Varig, almost half of its fleet. The company is months behind on lease payments and owes U.S. creditors about $71 million.

Boeing won a court order Friday to take back seven of its planes from Varig.

The purchase offer submitted by the Workers of the Varig Group did little to reassure investors, who have been predicting the company's demise. Varig's stock price fell 58 percent after the auction, to about 70 cents a share.

Especially worrisome to investors was that only $125 million of the purchase offer would be in cash from three unidentified foreign investors. The rest would be funded by yet-to-be-sold bonds, workers' shares of profits in the new company, and money owed to employees.

If the sale is approved, the workers' group would have three days to come up with a $75 million deposit.

"There is a lot of doubt about how viable this purchase offer actually is," said Carlos Albano, a broker with the Brazilian bank Unibanco. "It's about the capacity of this buyer to make the changes that are desperately needed, and if there aren't dramatic changes, this will not be a company with a future."

A report issued by Brazilian investment bank Banco Pactual after the auction estimated a 60 percent likelihood that Varig would be liquidated by the end of the year. Several travel agents said they no longer sold tickets for Varig flights, and the government already has crafted a contingency plan for those holding Varig tickets.

Many Brazilians would see a Varig collapse as a blow to national pride. The airline, which for years was the country's only major international carrier, has long been considered a corporate ambassador for the country.

That sentiment has persisted even though Varig is no longer the region's or even the country's biggest airline.

Varig has 60 airplanes, 14 of which are grounded for lack of maintenance, and it employs 9,400 people. Industry leader TAM operates 83 airplanes with about 9,700 employees.

Varig is still Brazil's biggest international carrier, but its flights represent only 17 percent of the domestic market.

Brazilian President Luiz Inacio Lula da Silva for months resisted popular outcry to save the airline, but his government gave in this week by offering to forgive Varig's unpaid taxes if the airline was sold.

"This is a company with a history in Brazil and a symbolic importance, but that is changing," said Felipe Camara, an analyst with the law firm Tozzini, Freire, Teixeira & Silva Lawyers. "There's a lot of sympathy for the company, but there's a realization now that maybe Varig's time is up."

Many blamed the company's troubles on management that refused to cut costs and staff even as debts mounted. The airline is run by the Ruben Berta Foundation, an elected body dominated by Varig employees.

"Over the years, there has been a need to streamline, but the foundation refused to touch anything," said former Varig president Arnim Lore. "Cutting back personnel would have been like cutting into their own flesh. The management was an enclosed society that fought change at all cost."

Other analysts faulted interference from government regulators. From 1986 to 1991, for example, the government ordered Varig to freeze ticket prices as hyperinflation wracked the economy.

"In many ways, all the economic turbulence Brazil has lived through over the years sent Varig into its current crisis," Albano said. "It's been a long road down."

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