Varig Sold to US-Brazilian Investors for 24 Million Dollars

Posted 21 July 2006 @ 11:14 am EET     Print     Reprint     E-Mail     Comments

RIO DE JANEIRO (AP) - Brazil's tarnished crown jewel of aviation Varig fell to a US-Brazilian investor group for a knockdown 24 million dollars saving the once-proud national carrier from liquidation.

The partially-grounded airline was bought by the Volo do Brasil consortium, made up of US investment fund Matlin Patterson and Brazilian partners, after an earlier employees group bid to rescue the company fell through.

Volo do Brasil was the only bidder in the auction for Varig, created 79 years ago to fly the flag of Latin America's largest country but now operating a bare 13 aircraft. "A new Varig is born," said Varig Chief Executive Officer Marcelo Bottini, who is expected to keep his job in the new ownership structure.

"We are not afraid to face the future after the difficulties we have seen."

Varig fell under bankruptcy protection last year and since the end of June has only been flying to half of its destinations dropping such prestigious locales as New York and nearly stranding Brazil fans in Germany during the soccer World Cup. A plan by Varig's staff to buy the company collapsed last month after they failed to make the first 75 million dollar down payment. A judge then annulled the sale, setting the stage for Thursday's auction.

Volo do Brasil, which also owns the airline's former freight operation VarigLog, had already put enough money into Varig during the past month that it will not have to pay any more to complete the purchase. But the deal also compels the company to invest a total 485 million dollars into the airline to keep it going. "We are entering a new stage. The great challenge will be the negotiations with our aircraft leasers," said VarigLog Chairman Joao Bernes de Sousa.

Varig is saddled by more than three billion dollars in debt and last turned a profit in 1995. Its fleet is depleted from 70 aircraft one year ago as a number of jets fell into creditor hands. A New York court is shortly expected to rule whether Varig aircraft it allowed to be seized in the United States will remain grounded or can be taken back over and operated by Varig's new owners. The new owners take the helm of a company with 10,600 employees, who are expected to face drastic cutbacks as the Volo do Brasil team decides how many of Varig's destinations to keep.

Officially, Varig still controls 60 percent of Brazil's international routes to 21 foreign and 46 regional destinations. But rivals Tam and Gol, which have lower costs and cheaper tickets, have left Varig with only 16 percent of the domestic market. Varig was hit hard by the economic problems that dogged Brazil in the 1980s and 1990s. In 1982, when Brazil declared a foreign debt moratorium, the company was forced to finance new aircraft purchases in Japanese yen that cost it heavily when the yen sharply revalued several years later. A decision to freeze ticket prices between 1986 and 1991 further cost the airline two billion dollars.

Its bad luck was compounded by the buffeting of the aviation industry that followed the 1991 Gulf War. By 1994, Varig was forced to lay off 10 percent of its 29,700 employees and suspend payments for 60 days. The airline crisis after the September 11, 2001 attacks further worsened the problems, sending it toward bankruptcy. Some observers said the year-old saga to stave off liquidation reflected a deeper national malaise and that seeing Varig disappear would have hurt Brazilians' already-wounded psyche. "It would perhaps be excessive to say Varig is our Coca-Cola, but its disappearance would deliver a blow to our already weak national self-esteem," wrote Zuenir Ventura, who chronicled Varig's battle for the O Globo newspaper.