Brazil's largest carriers, Varig and TAM, plan to merge after last week signing a "protocol of understanding" aimed at creating a joint venture airline employing staff and aircraft from both carriers.

In what amounts to an attempt to fundamentally restructure the struggling Brazilian air transport industry, the new enterprise will be a publicly held company with its managers taken evenly from TAM and Varig. The pair aim to draw up a business plan by 30 June.

After a proposed recapitalisation plan foundered last November, Varig has been hard pressed to remain afloat. TAM is also in difficulty and is expected to post a $173 million loss for 2002. The merger plan was urged on the airlines by industry minister Luiz Fernando Furlan, eager to avoid propping up Varig with state funds.

"This is the beginning of an engagement that should take some time before it ripens into marriage," says Manuel Guedes, Varig's chief executive.

The new carrier will have annual sales of $4.5 billion, operate 218 aircraft and employ 26,000 staff. Both airlines will continue to operate independently until late June, but with growing route integration.

Source: Flight International