Varig starts on long road to recovery

Seattle
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In the first fortnight after VarigLog bought its former parent as the only bidder in a second court-supervised auction, a new set of crises engulfed the airline. Specifics always vary, but the themes have been recurring throughout Varig's 15 months in bankruptcy - conflicting decisions by different Brazilian courts, government orders that countermand restructuring plans and rival airlines exploiting the confusion.

Brazil's government made some huge concessions to allow Varig's sale. Foremost was its acquiescence in a split of the flag carrier into "old" and "new" Varigs, with most of Varig's estimated $3.6 billion in debts, largely owed to the government, staying with old Varig. The government also dropped its inquiry into the level of foreign ownership in VarigLog once it became apparent that VarigLog was the only bidder willing and able to rescue what is left of Latin America's once-largest and proudest airline.

New Varig consists only of operating assets - aircraft leases, slots, routes, staff and, most importantly, the Varig brand itself. For this VarigLog, with backing by US risk capital fund Matlin Patterson, paid $24 million in pre-purchase advances and $75 million in an immediate post-purchase injection with another $75 million due by late August.

The rest is in various commitments that total another $350 million. How soon they are due depends partly on the willingness of creditors to accept bonds versus immediate payouts.

The future is uncertain. The sale still requires approval from Brazil's aviation agency. Even though that agency dropped its investigation into VarigLog's foreign ownership, a lawsuit by employees who made an earlier abortive bid for Varig could keep this issue alive.

Varig's most immediate task, however, is to hang on to those rights needed for any comeback. Some check-in counters and gates have already been reassigned to rivals TAM and GOL. Airports assure Varig these transfers are temporary, but TAM and GOL are growing at record rates, hiring laid-off Varig staff and asking for some of its routes.

Aviation officials warn Varig that any unused routes may be forfeited in 30 days and unused slots within 60. Varig hopes to boost its functioning fleet from a low of 10 aircraft in July to 45 by year's end, but this will require much maintenance and more patience by lessors than some have shown. ■