CAROLE SHIFRIN SAO PAULO
Facing a dismal year financially, Varig Brazilian Airlines is seeking to cut operating expenses by at least $160 million over the next year to enable it to weather the current crisis.
Ozires Silva, president and chief executive officer, says the airline is seeking to renegotiate aircraft leasing conditions and prices, is talking to suppliers about price roll-backs for such products as spare parts and galley items, and is hoping to convince its unions to provide some relief from past contract terms to gain greater productivity. "Of course, this is not easy," he says, "but we're trying."
Even before the precipitous drop in international passenger traffic following the terrorist attacks of 11 September, Varig was suffering from a heavy debt load ($1.3 billion), devaluation of the Brazilian currency and continued economic stagnation in its home market.
About 85% of Varig's debt and all its lease agreements are US dollar-denominated so the fall in the Brazilian Real - between 30% and 40% - has increased its payment burden significantly. The airline had a record loss of 509 million Reals ($200 million) in the first six months of the year. "The situation was already bad," Silva says.
After 11 September, Varig's traffic fell about 30% from the USA and 10% from Europe, with the Brazilian market more or less stable, he says. In an effort to assure its future viability, the carrier announced plans to lay off about 10% of its workforce. It is seeking to stem some of the lay-offs with voluntary redundancy and leave programmes if unions agree.
Varig also grounded some older widebodies, accelerated the removal of ageing Boeing 737s from its fleet, delayed plans to begin nonstop New York-Rio de Janeiro flights and made modest schedule changes on long-haul routes. From December Varig will add back many of those services suspended for November, including its daily Miami-Rio de Janeiro flights, with passengers routed over Sao Paulo.
Varig also has not altered its planned fleet renewal programme and will not cancel any orders for new Boeing 777s or 737-700/800s. "Exactly the opposite," Silva says. "I refuse to increase the victory of the terrorists." He says the new-technology aircraft will provide necessary increased productivity and passenger amenities. Varig's first 777 was delivered in early November.
Although the internal Brazilian market is expected to be better this year than international, Silva says there is not much latitude to reduce fares and attract new customers within Brazil. "Tourist travel is very marginal because the competition is so fierce," he says, with yield in Brazil too low.
"To induce people to travel is difficult for us because we cannot go below where we are now." Business travel, though, is vital to the airline, he says.
Since joining Varig in May 2000, Silva - a former government minister and head of Embraer and Petrobras - has spent a lot of time in Brasilia talking to government officials to try to get both tax relief and some of the heavy regulations on Brazilian carriers lifted.
In August, the government gave the carriers more freedom to set fares. One of Silva's missions is to get a reduction in the high taxes Brazilian carriers have to pay, compared with their competitors. He says that Varig has to pay a 40% tax on jet fuel, compared with less than 5% paid by US carriers.
Although there had been talks between Varig and another Brazilian carrier Tam, Silva says they are not currently discussing a potential merger. Such a combination between the country's two largest carriers would depend on the government and "sounds like a monopoly" to many, he says. "We have enough problems today," he says. "I have other things to do, and they are sufficient to make me work more than 12 hours a day."
Source: Airline Business
