- The Washington Times - Friday, January 31, 2003

RIO DE JANEIRO, Brazil, Jan. 31 (UPI) — Top airline company Varig, once a darling of Brazilian business, is sinking deeper into a crisis that is threatening to end the 75-year run of Latin America's biggest carrier and shake-up the industry across the region.

The company has recently run afoul of regulators and remains under a cloud of speculation that it will merge with a rival or be purchased by a foreign competitor.

With that weight on its shoulders, the last thing company officials needed to hear late Thursday was that one of its leased jets had been impounded in Paris for failure to make payments to International Lease Finance Co.

"Varig is negotiating with ILFC about the plane," Varig spokesman Paulo Fonseca said Friday in regard to the impounded Boeing 777, one of two Varig leases — and the pride and joy of its fleet.

"The negotiations aren't finished, they're continuing today. That is all we are saying at this time," Fonseca added.

Varig might not have much of a say in its future, as it floats along waiting for a government bailout, the long-rumored merger with Brazil's No. 2 airline TAM, or bankruptcy.

"I can say that we're talking with the government," Fonseca said. "But Varig is open to all the possibilities that would bring about a solution for our business."

The impounded Boeing 777 was to fly from Roissy-Charles de Gaulle airport in Paris to Rio de Janeiro. Fonseca said that an MD-11 jet took over the route, transporting passengers to Brazil, and that Varig's operations haven't been interrupted.

But while that temporary fix may keep Varig flying for now, at least one industry analyst said both the impounding of the plane and the company's protracted financial woes are spelling big trouble not only for Brazil's aviation industry, but for that of Latin America as a whole.

"If Varig can't pay for their regular operations, then they shouldn't be in business," said Michael Miller, owner of the Orlando, Fla.-based aviation consulting firm Miller Air Group.

"Varig is having domestic troubles, they're having international troubles and they're having financial troubles just in paying their bills. It is a prelude to bankruptcy, or a recipe for a near-term decision to take Varig out of that situation."

Miller said one of the biggest problems for the Latin American aviation industry is government intervention.

"If you look at the airlines in Brazil and Argentina — and to some degree Peru — those are three countries that have had nothing but turmoil for a decade," Miller said.

"You can then look to the west to (Chilean airline) LanChile, it has been operating profitably, soundly and efficiently for years. It's not as if the region can't support air service. It just can't support air service with heavy-handed governments."

Which is why Miller says that Brazil's government must take a chunk of responsibility for the financial health of Varig, a company he said has been pushing for reforms in Brazil's airline industry for years.

"There are high fuel taxes. Taxes on Brazilian airlines are much higher than what other country's charge their airlines," Miller noted.

It was earlier this month that the privately owned Varig — saddled with an estimated $770 million in debt — was asked by regulators to restate its financial results for 2001 and the first half of 2002 after about $400 million in accounting irregularities were discovered.

Some $250 million was found to have been incorrectly listed as tax credits that the government reserves for new businesses, while $150 million of pension fund liability was reported incorrectly, regulators say.

The new figures regulators have asked Varig to report may push losses for the first half of 2002 from $288 million up to $556 million, analysts say.

That blow came on the heels of a late-November shake-up in the company's leadership, when the board of directors resigned en masse to protest an ongoing dispute with an employee-controlled foundation that controls about 84 percent of Varig's stock.

The Ruben Berta Foundation sparked that mass resignation by refusing to approve a debt-renegotiation plan that would have given the company some breathing room.

Because of Brazilian law, should Varig be forced to file for bankruptcy, it would immediately be liquidated, likely resulting in a quick change of ownership.

Yet analysts say any merger with TAM airlines — which Varig officials have admitted is being considered — would raise the concerns of regulators. The two airlines together control about 80 percent of Brazil's market.

But there have been nascent signals from Brazil's government that it might ease the way for the deal, as the outright collapse of Varig would be a huge blow for the country's airline industry.

For the better part of a year, Varig's creditors — which include Boeing, GE's jet leasing unit and local bank Unibanco — and unions alike have called for the Ruben Berta Foundation to give up control of the company.

"Varig has a good underlying structure, but a poor over-arching ownership structure," Miller said. "It has to change or the airline won't survive."

One interesting sub-plot to the latest Varig drama involves the creditor that requested the impounding of the jet in Paris: International Lease Finance Co., or ILFC.

ILFC is a subsidiary of the U.S.-based insurance company, American International Group, or AIG.

There have been several reports in Brazil's media of late that AIG is negotiating with Brazil's fastest growing airline — the two-year-old discount Gol airlines — to take a 20 percent stake in the company.

Neither officials at the privately held Gol nor AIG will comment on the matter.

But Miller said that if Brazil's government is somehow making it hard for AIG to buy into Gol, then perhaps ILFC's order to impound Varig's jet was a gentle nudge to show dissatisfaction.

"If there are government impediments to AIG buying into an airline, then this could be a way for them to signal their displeasure," Miller noted.

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