Vasp has seen a return to profits and growth despite having almost shut down three years ago. Wagner Canhedo, the president and CEO of the Brazilian carrier, talks to Mead Jennings about his plans for a new trans-border airline in South America.If anyone were to personify the character of Brazil, surely it would be Wagner Canhedo. The majority owner of Vasp, the Brazilian airline notorious as much for Canhedo as for being the country's third largest carrier after Varig and Transbrasil, embodies everything the biggest Latin American country has popularly become: he is crisis-oriented, in search of long-term stability and tends to bluster. Furthermore his reputation (especially in the eyes of financiers) took a serious knock as a result of the events of Thursday, 5 April.

Canhedo was arrested as he stepped off a private jet and charged with not meeting the debt repayment criteria for US$196 million owed by Vasp to the Brazilian bank Banespa. Wire reports at the time said Canhedo would be jailed for six months. 'No, he was only under arrest for six hours,' says a spokesman for the airline. And, says Joseph Martinelli, an adviser to the president, 'the debt figure is wrong. We agreed to pay $140 million'.

Welcome to Vasp, one of the world's more inscrutable airline companies, even though it is 38 per cent owned by the state of Sao Paulo. Having survived a brush with extinction in 1992 after domestic fare wars and overexpansion, the airline is now not only reporting profits - a $182 million net profit last year, and $180 million for the first six months of 1995 - it is also beginning a new, aggressive domestic and international expansion programme. Believing that Vasp has learned from its mistakes, Canhedo now says 'there is nothing behind us, but there is a lot ahead.'

Considering the track record, it's a good maxim to live by. After taking Vasp private in 1991, Canhedo went on a leasing spree for aircraft to build up the carrier's domestic presence and launch international flights. The airline leased an inordinate amount - close to 30 per cent - of its 58-aircraft fleet from then megalessor GPA. As Canhedo tells it, growth plans for the airline were encouraged by the Brazilian government, which wanted Vasp - its first big privatisation - to be a success and 'promised' that economic growth would support the carrier's expansion.

Oops. The disastrously corrupt Collor administration sent the economy into a tailspin, inflation went wild and the Brazilian real fell precipitously in value against other world currencies. During that period in 1991-2, Vasp launched a spree of low fares chiefly directed at Trans-brasil, and the latter responded in kind. The resulting fare war, combined with the two carriers' over-capacity, burgeoning competition from Brazilian regionals like Rio Sul and Taba, and poor global industry conditions, sent Vasp's bottom line reeling. It went from a 1990 net profit of $88.6 million on sales of $446 million to net losses of $214 million on revenue of $424.2 million in 1991. Losses peaked at $250 million in 1992, with 1993 losses of $103 million.

Noting the losses, and especially the unpaid lease bills, lessors GPA, Ansett, Potomac Capital, Maersk and others pulled back a total of 32 aircraft, mostly renegotiating their contracts. From a monthly lease tab of $11 million, airline officials say the bill has now settled around the $3 million mark.

The main exception was GPA which has since been taken over by General Electric. Vasp says it owes the lessor $30 million though others say the amount is higher. Conveniently, it has done an estimated $100 million in business with GE for engines on an order of 10 new Boeing 737-300s and will doubtless bring this fact to the table in negotiations with GE Capital Aviation Services over the old debt.

Whether they were the result of poor management decision-making or a GPA plan to reduce its liability in Brazil (sources formerly with GPA lend a qualified credence to this Canhedo belief), the troubles of 1992 seem to have had an instructive value at Vasp. The economy has since been dramatically restructured under the Real Plan, with inflation hovering at the 20 per cent a month level and the Real strongly overvalued against the dollar, and domestic travel has rebounded. Thanks to the sharp capacity reduction across the industry and stable fare increases, Vasp's domestic yields are 40 per cent up over 1992 and are the main driver behind the carrier's recovery. At the same time, Canhedo has cut costs by slashing his employee roster in half.

But, with each passing quarter of profitability at Vasp, there is a danger that the memory of 1992's lessons will fade. The carrier has already become sufficiently emboldened to commit to new aircraft deliveries in the form of three MD-11 with a total of six planned. They will be used on international routes, from which the carrier now gets 60 per cent of its revenue, and which include destinations such as Barcelona, New York and Miami.

Additionally, the August agreement to buy 51 per cent of Equador's Equatoriana in a privatisation auction for $10.9 million in cash, plus another promised $22.5 million in investments over five years (including $5 million for cash flow and 10 per cent of the cash needed for leases on up to seven new aircraft), may be stretching Vasp's liquidity as it also bids for Bolivia's LAB, slated for an October privatisation.

So why is Vasp expanding internationally when the domestic market is the reason behind its recovery? Canhedo considers such a question a mark of timidity, though Vasp is in fact considering buying Brazilian regional Taba, which mainly serves the Amazon region, say informed sources.

But the carrier's officials are preoccupied with a debt load that is reportedly close to $1 billion and the need to lower costs by another 30 per cent. Besides, it is in the international arena that fortunes will be won in the future, says Canhedo. But to succeed there Vasp will need to maintain its cash flow, and repair the loss of confidence that many in the banking and leasing community say they have experienced when it comes to dealing with Wagner Canhedo.

Canhedo dismisses the financiers' talk, pointing to a time in 10 years when 'there will only be three or four major airlines in South America', and adding: 'We will be one of them.'

To one industry executive, such talk is reminiscent of another phrase: 'Brazil is the country of the future, and it always will be.'


Airline Business: Looking back, what do you feel was the primary cause of Vasp's recent problems? Most people believe you instituted far too aggressive an expansion programme combined with a low-fare environment?

Wagner Canhedo: We believed the Collor government was going to be good. We based our plans on its promises of general economic growth of 2 per cent in 1991 and 5 per cent in 1992. What we saw was the exact opposite in Brazil, but the company was being pressured to grow because we were the country's first big privatisation. I believed in privatisation, and I had to believe the government's estimates of growth.

We also made a strategic mistake by leasing a lot of planes from one leasing company. If we had been less exposed to GPA, it probably would have been a lot better. It was a joke. They were going broke, and because of this and other problems, especially [overexposure] in Brazil, they went after us. The overcapacity in the industry was so great, they decided, that Transbrasil [also a large GPA lessee] or Vasp had to disappear. It was us or Transbrasil, and they chose us. We suffered all those problems that actually ended up being good for us, and, in my opinion, disastrous for them. They tried to turn us into the pirates of the marketplace, but Vasp is here, strong, and GPA has disappeared.

At Equatoriana, I will be passive in its governance. But over the next five years the plan is to invest $22.5 million into the company, adding to the $10.5 milllion in cash we paid to the government of Equador. Vasp will complement the new company, which will have new blood and use a lot of Vasp equipment. For example, we will export our reservations system to the airline, and share a lot of aircraft. Vasp will take on leases, then pass the aircraft on to Equatoriana at a cheaper price, since we are in a position to assume this price differential and Equatoriana needs to learn to walk again.

We have no interest in an alliance with a US carrier. As to competition with American, United and Varig, we believe our costs are lower and in targeting lower yield traffic we are not interested in competing directly with them. But we want to double [the amount of] our international traffic that transfers to domestic services to 28 or 30 per cent.

Source: Airline Business