Brazil's airline market is undergoing historic change as Varig is forced to relinquish to local rivals much of its former international prowess.

The Rio de Janeiro bankruptcy court handling Varig's restructuring has lost the debate over who should control the future of Varig's dormant routes. After a tense standoff between the bankruptcy judges and Brazil's civil aviation authority, ANAC, two appeals confirmed in September that ANAC could redistribute Varig's dormant routes despite its bankruptcy.

Since these rulings, ANAC has reallocated 148 routes, including 51 international ones, plus unused slots and airport terminal space that Varig claimed.

TAM is the big beneficiary of this reshuffle, gaining daily frequencies to Paris and Milan. The new Paris authority allows TAM to operate thrice daily to the French capital that started in late October. At the same time it will launch flights to London. TAM plans to begin its new Milan service before year end.

On the heels of its Paris award, TAM has inked a codeshare deal that will put its code on Air France flights to eight French cities, plus Geneva and Zurich.

New low-cost player BRA has also gained authority to serve Italy from Brazil's northeast. Regional carrier Ocean Air has been granted daily flights to Mexico and the USA. GOL has obtained more Latin American frequencies, including a new route to Mexico City.

But none of these carriers currently have adequate fleets to serve all the new routes. For its new European rights, TAM is retrieving two Airbus A330s subleased to Gulf Air. GOL and TAM await a number of other deliveries. According to one official: "The only reason GOL and TAM are not growing faster is a lack of aircraft."

Varig's route reallocations may not be over. ANAC did not touch any routes that Varig promised in its restructuring plan to revive before the end of 2006. Varig is now scrambling to keep that promise, knowing it could lose even more routes if it fails to carry through.

Its main obstacle is a lack of aircraft. Varig has leases or orders ready for 14 Boeing 737s and 50 Embraer regional jets, but these are contingent on it securing a new operating certificate.

Equally critical is Varig's shortage of capital. The rulings giving ANAC a green light to redistribute routes also cooled interest from potential investors.

Source: Airline Business