With Vasp now grounded, Brazil's government is free to focus on the bigger challenge of how to rescue debt-laden Varig.

For months there has been little doubt that VASP eventually would fail, but aviation officials cut short its slow death late in January by ordering VASP to suspend all scheduled passenger flights. It had already cut so many routes on its own that it only had eight left. With protests mounting from VASP's unpaid staff, the government's suspension simply accelerated the inevitable.

VASP's best hope of revival is to convince authorities by April, when its licence will expire, that the government owes it enough under a separate claim to boost its finances back up to an acceptable level. Its claim against the government is similar to ones by other airlines and arises from a domestic fare freeze from 1987-2002. A court recently ruled that the government owes Varig $750 million from that period. Amounts owed to other airlines, including VASP, await determination.

The suspension of VASP removes any doubt about whether the government would treat VASP and Varig differently. Officials stress that Varig will not be allowed to fail, even if they remain unsure on how to save it. Saving Varig, however, is far different than saving VASP, because Varig generally can pay obligations as due, whereas VASP could not.

The two big obstacles to Varig's rescue are its accumulated $2 billion debt, most of which it owes to government agencies for fuel, airport fees, and the like, and the Ruben Berta Foundation (FRB), which still owns most Varig shares. Investors have shied away because of both obstacles, even though the national development bank has offered to finance private investment in Varig.

The government has yet to commit itself, but recently refloated the idea of capitalising debts that Varig owes it – using Varig's $750 million judgement against it to settle third-party debts – and taking control of the airline. That would also resolve what to do about the FRB.

Brazil's vice-president, José Alencar, insists that the government would hold Varig only temporarily, and would resell it to private investors as soon as it could. This idea is still only a trial balloon, and Varig employees have reacted badly to earlier hints of a government takeover. But with no obvious alternatives, temporary renationalisation may be the only option.

Source: Airline Business