Varig walks a high rope

Varig’s aircraft –the largest Brazilian airline- could get grounded. The crisis now sweeping the air travel sector following the 9/11 terrorist attacks took its toll on an airline that’s been losing cash since 1998. And the strong devaluation of the Brazilian currency has just given the carrier a coup de grace. In recent months, Varig’s debt has soared to $900 million and is now threatening payment suspensions.

Manuel Guedes, the company’s new delegate advisor and the third in three months, is stepping up negotiations with creditors to reschedule the debt and prevent the entire fleet from getting grounded altogether.

The crisis took an unexpected twist last week when Varig CEO Arnim Lore handed in his resignation driven by difficulties to piece together a new debt payment plan.

The Ruben Berta Foundation –named after the airline’s former president who remained at the helm for twenty years and that currently holds 87 percent of all shares- turned down a bailout plan. The agreement contemplated negotiations, starting in December, of debt payments for up to $118 million long overdue since last October. The Ruben Berta Foundation explained it rejected the plan for not being aware of the operation details.

For a number of weeks, the company’s front office has been bending over backward to cut a deal with its major creditors that include BNDES (Brazil’s Bank of Development) and such firms as Boeing and General Electric. In the face of inner problems, creditors continue to demand the defraying of pending invoices on fuel supply and other services. If Varig doesn’t come up with the money, it could be forced to either reduce or call off flights temporarily.

Mr. Guedes is trapped in a Catch-22: he ought to talk creditors into thinking the company does have a viable plan for the future and that implies taking unpopular actions. “A readjustment of our routes means payroll shakeups, too,” Mr. Guedes, who’s been an exec in Varig for the last 13 years, explained. Experts believe the airline should wipe out some routes and lay off more workers than the 1,800 employees who lost their jobs in the latest reshuffling.

The problem is that Varig goes on in the red –it lost $315 million in the first half of the year. Moreover, if the Brazilian currency continues to head south against the dollar, indebtedness and fuel expenses will keep on skyrocketing.

In order to overcome this sensitive situation, Varig is resorting to add more routes between Europe and Latin America, a segment of the market that’s faring well amid the demand’s pratfall. Out of Spain, Varig is now offering nine weekly flights from Madrid to Sao Paolo, Rio de Janeiro and Salvador de Bahia, 25,000 plane seats a year in all.

With a fleet of 115 aircraft, Varig flies regularly to 25 international destinations including London, Frankfort and New York. Furthermore, it dominates over 40 percent of the whole Brazilian air travel market. This explains the Brazilian government’s fears of a potential payment suspension on the part of the company.

The Fernando Henrique Cardoso administrations is taking part in the negotiations through the Brazilian Bank of Development. But the bottom line is that president-elect Luiz Inacio Lula da Silva does not seem to be keenly inclined to pouring public funds into the private sector. An advisor to Mr. Lula said, shortly after the resignation of the company’s former delegate, that bailing out Varig will be a squandering of money.

There’s overspread fear that Varig will be bound to temporarily freeze its operations, a situation that would bring chaos to transportation in so big a country like Brazil, especially after the Transbrasil crisis. The nation’s two other second largest airlines –Tam and VASP- are also singing their own financial blues. As a matter of fact, VASP wobbled on the brink of bankruptcy a couple of years ago.

By and large, the Latin American aviation sector is not going through the best of times. B