Carnival time has come early for Transbrasil. The carrier is set to receive a massive compensation settlement following Brazilian government fare freezes. But Varig, Vasp and TAM may be shortchanged.

Brazil's supreme court ruled in early December that Transbrasil will receive US$500 million in damages from the Brazilian government. This falls short of Transbrasil chairman Omar Fontana's expected prize of $720 million.

The carrier claimed compensation following government-imposed price freezes between 1986 and 1992. Transbrasil claims that the fare freezes meant it could only cover 40 to 60 per cent of its costs during this period.

While the compensation is guaranteed, the form in which it will be made has yet to be determined. However, the industry widely expects the government to offer to wipe out part of Transbrasil's debts as part of the deal. 'There is strong speculation that the government will offer to offset Transbrasil's debts in the form of taxes and tariffs amounting to US$214 million owed to government bodies,' says Marcelo Cardoso Martinelli of EuroLatin consultants.

While Transbrasil waits for its compensation, its Brazilian counterparts Varig, Vasp and TAM may be left empty-handed after filing similar compensation cases. Although Varig won its suit in the Brazilian first court of appeal, speculation is mounting that the government will win its appeal against the Brazilian giant. During the period in question, Varig enjoyed a monopoly on international routes, whose rates were unaffected by the price freezes, explains Martinelli.

Instead, Varig may well opt to transform some of its $2.2 billion of debt into shares when a new Brazilian air code is introduced. Scheduled to come into effect next June, the code will allow foreign entities, including airlines, to buy up to 49 per cent of the voting rights of a Brazilian carrier, as opposed to the current 20 per cent limitation. Currently 51.4 per cent of Varig is owned by the Ruben Berta foundation, with 0.5 per cent owned by the state of Rio Grande do Sol and 48.1 per cent distributed among other Brazilian and foreign investors on the Brazilian stock market.

Vasp and TAM have lost their compensation suits in the first court. However, Martinelli predicts that Vasp will win the case after a second appeal, and says: 'I don't see TAM coming out empty-handed, but they will only be awarded a portion of what they claimed.'

Vasp's compensation bid was refused because it received funds by the state of Sao Paulo when the fare freezes were in force.

TAM's failure in court relates to its status as a regional airline, which meant that it received subsidies from the Department of Civil Aviation. In the mid-1970s, DAC created a subsidy for regional carriers to encourage their development. DAC used funds from the subsidy to reimburse regionals if they were unable to meet a certain load factor on routes operated with Brazilian built aircraft. Although the subsidy is now only an insignificant part of TAM's total revenue, it was originally important at a time when TAM and other regionals were beginning to tap into the regional market, explains Martinelli.

The compensation cases come at a time when Varig has announced plans to offer up to 50 per cent discounts on certain domestic routes from mid-December through February 1998. If Varig goes ahead with the discount policy, other Brazilian carriers will have no choice but to follow suit to avoid losing market share, says Martinelli.

Lois Jones

Source: Airline Business