Varig plans to reduce its debts by raising capital through the sale of equity in subsidiary operations and diversification into new business areas. Debts of $900 million saw the Brazilian flag-carrier suffer a net loss of $90 million last year - nearly double that of 1999 - despite reporting record operating profits.

Varig is contemplating the sale of 30% of wholly-owned cargo subsidiary VarigLog to an unnamed buyer, plus investment in the Brazilian airport sector.

"We're trying to generate value out of the subsidiaries by selling equity and so reduce debt," says Varig president and chief executive officer Ozires Silva. "VarigLog is now in the market for possible investors. We've completed a business plan and carried out several roadshows."

VarigLog contributed 15% of the group's 5.1 billion real ($2.3 billion) turnover last year, but Varig believes that can be doubled and has given it exclusive rights to sell belly space in its 90-plus passenger aircraft.

On the airports front, Silva reveals Varig is looking to take the maximum 20% stake in a consortium bidding as part of the impending privatisation process, with Sao Paulo's two airports earmarked as the first to be sold. "Varig has good experience of managing airports," he says.

Varig's great problem is the size of its US dollar-denominated debt, which has ballooned in recent years as the Brazilian currency has weakened - increasing the cost of debt servicing to a crippling 30% of sales. Rising fuel prices – costed in dollars - have worsened the problem.

Varig nevertheless says it is close to striking a deal with Boeing for delivery of some of the 39 aircraft ordered in 1998 but put on hold because of Brazil's economic crisis. "Boeing is extremely open and is responding to our requests," says Silva. "We're 95% sure we can achieve a good agreement."

Varig says it has ordered eight 777-200s, six 767-300s, 15 737-700s and 10 -800s, for delivery from next year - although it is due to receive an initial two 777s from International Lease Finance in October.

Scheduled for retirement are 15 Boeing MD-11s and six 737-200s, while several leased -500s operated by regional subsidiaries Rio Sul and Nordeste will be returned to their Japanese owners.

Source: Flight International