Latest News (Sep. 13, 2005)
September 13, 2005
Brazilian airline Varig unveiled plans on Monday to fire 13 percent of its 12,000 employees and form a new company by the end of 2006 to avoid bankruptcy.
The new entity will shed much of the original Varig's debt burden and hopefully attract new investors, the company said.
It will be auctioned off under a recovery plan that will serve as a basis for discussions with creditors and judges as part of its efforts to exit bankruptcy protection.
"Today we kicked off the discussions with creditors and those interested in the recovery of Varig," said David Zylbersztajn, president of the company board who had been invited by the company's administration earlier this year to try to save the Brazilian carrier.
The plan was prepared by his team with the help of Lufthansa Consulting and UBS bank.
Varig has until the end of the year to find a solution to avoid bankruptcy. A creditors' committee is due to be set up on September 24.
Varig owes BRR7.7 billion reais (USD$3.3 billion) to the government and private creditors, including BRR4.5 billion (USD$1.9 billion) in taxes and duties.
The remaining BRR3.2 billion (USD$1.4 billion) in debt is owed to suppliers, aircraft leasing companies and state agencies and firms. It has not yet been decided whether this debt will be made part of the new entity.
It will get some of the assets of airlines forming part of the original Varig.
"The new Varig will have obligations with the old one. If it uses Varig's brand name it will have to pay the old company, if it wants to have access to the Smiles frequent flyers program, it will also have to pay," said lawyer Fabiano Cavalcanti, who worked on the plan.
The administration expects the fiscal debt to the government to be resolved after two years and the two entities could then be unified again.
On Tuesday, Varig administration will meet Vice President and Defense Minister Jose Alencar, who is in charge of civil aviation, to try to resolve the mutual debt problem.
Meanwhile, Varig hopes to break even this year with revenues matching expenditures thanks to operating improvements including the cancellation of unprofitable flights and an increased number of flights that are bringing money into its coffers, said Varig President Omar da Cunha.
Although it is vying for second place in the domestic market with no-frills airline Gol after market leader TAM, Varig still holds the leading position in international flights among Brazilian firms.
International flights provide 60 percent of the company's revenues.
Under the plan, Varig plans to reactivate 14 aircraft now idled due to a lack of funds and renew half of its fleet in the next two years when the current leases expire.
Da Cunha said it would depend on the new controlling shareholders whether to lease Boeing planes -- a brand traditionally used by Varig -- or another make.
Varig hopes to obtain over USD$40 million before the final decision on the plan by selling its express courier and logistics arm, VarigLog, to the US private equity firm MatlinPatterson.
(Reuters)