Varig's new chief executive Manuel Guedes is vying to win state aid before a change of Brazilian government next month.

Varig is owed around $272 million in improperly demanded taxes levied between 1989 and 1994. The government has suggested using this as guarantee for a loan to Varig from the state-owned BNDES development bank, but insists that the carrier must reduce costs by cutting its staff and route network before it releases the tax overpayments.

After the airline's majority owner, the Ruben Berta Foundation (FRB), rejected a state recapitalisation plan last month, the industry minister Sergio Amaral demanded cost cuts before allowing assistance from BNDES. Due to rapidly falling credit, Varig has to pay many operating costs daily in advance. Fuel supplier Petrobras and airport operator Infraero, major Varig creditors, are demanding around $750,000 a day.

The incoming government has no official position on the crisis, although recent statements indicate it generally agrees with the incumbents. Local market analysts believe Varig can only survive by cutting domestic and international routes.

Local rival TAM would be the major beneficiary, absorbing most of the surrendered international services. Brazil's civil aviation authority is thought to have already drawn up plans to redistribute routes to other Brazilian carriers, should Varig collapse, in order to maintain air service in the aftermath.

Source: Flight International