The glass must always look half full to Fernando Pinto. The first thing that Varig's president and chief executive officer wants to point out is that his airline is in a better position today than it was three years ago.
It would be easy to overlook this piece of apparent good news. The first quarter of this year, when Varig lost 49 million real ($27 million) on revenues of 1 billion real, was the company's worst ever. Faced with a triple hit of rising costs, a local currency in freefall, and a sharp decline in sales, Varig's viability was in question. Adding to the turmoil and uncertainty, some members of Varig's administrative council attempted a rebellion to unseat Pinto. Perhaps it is most telling of this chief executive's cool management style that he was able to turn that personal crisis to his advantage by rallying his supporters and putting into place a new council that strengthens his position.
That same calm demeanour could be seen during the International Air Transport Association (IATA) annual meeting in June. Staged in Rio de Janeiro, Varig was host airline and Pinto the meeting's chairman. The venue was chosen long before the Brazilian economic crisis could have been foreseen, but if Pinto was distracted by other events then this was never apparent during the business meetings or the hospitality. His gracious manner prompted special praise from both James Strong, chief executive of Qantas, which hosts the next IATA annual general meeting, and IATA director-general Pierre Jeanniot.
Not that Pinto is totally unruffled by the near-catastrophe of the first half of this year. When the airline was recently awarded what must have been the most timely bonus of all - a court decision in its favour assigning 2.2 billion real in compensation for losses incurred during price freezes imposed by the Brazilian Government in 1986 - Pinto welcomed the news, but reportedly admitted that he could not sleep calmly. However, Pinto clearly believes that panic is not the solution and that, if anything, the company will emerge stronger from this year's experiences.
"The first thing that is very important to know is that by the end of 1998, Varig had achieved its position in terms of efficiency. Its casm [cost per available seat mile] was as good as that of any US carrier, which was very important. So 1999 was going to be a very nice year for us," says Pinto. "But, on 12 January, everything changed." That was when Brazil devalued its currency, killing the travel plans of many business and tourist travellers and increasing Varig's dollar-denominated costs several fold.
Pinto is critical of the way that the government first handled the process. "It could have been avoided," he says. "There was a problem of management in the whole process of change from a controlled exchange into a free market and we lost control. It was very hard for the first two or three months, with inflation close to 90% at some points. But then the new president of the central bank came in and started to put some controls back and things started to come back to normal."
Muted celebrations
Many observers and analysts, fearing another regional crisis similar in scale to that in Asia, were surprised at just how quickly Brazil was able to halt its own economic freefall, but Pinto believes that the Brazilian people deserve as much credit for the recovery as the government. "Inflation was going way high, but then immediately dropped, which shows that Brazilians will not accept inflation any more. If prices go up, they will not buy. That is a huge shift by Brazilians. Another good thing happening is that the interest rate is going down. Yes, this crisis was a shaker, but maybe that was what was needed and the reaction has been the right one," says Pinto.
Still, for Varig, the celebration was muted. This year's economic problems have compounded those of 1998, when the government lifted its controls on ticket prices and industry responded with a fierce and destructive fares war. Pinto blames that fares war for the net loss of 25 million real that Varig posted last year, having recorded a 25 million real net profit the previous year. "We had put structural changes in place and were preparing for a good year in 1998, but then came the fare wars," says Pinto. "That didn't help us at the beginning of this year. But it must be remembered that, over the past three years, our total debt amounted to 2.5 billion real and we have still managed to reduce this to 1.6 billion real today despite the problems. So we are in a better position today because of the restructuring we had already put in place. A small part of that is because of the dollar, but we have paid off 700 million real of debt and, if you add up what we paid off in terms of interest, then it amounts to 1 billion real."
Over the first three months of this year, however, Varig's revenues were reduced by 80 million real a month and traffic slumped by 20% because of the currency devaluation and the economic crisis. Such numbers called for a second restructuring plan even more brutal than Pinto's 1998 programme. Cities were quickly slashed from its international network: Atlanta, Orlando and Washington disappeared from Varig's US destinations and two separate services to New York from Rio de Janeiro and Sao Paulo have been merged into a single, one-stop flight. Amsterdam, Bangkok, Hong Kong, Porto and Zurich have also been dropped. "We don't believe it is necessary to cut any more," says Pinto. "We have rearranged aircraft so that we can serve cities with fewer aircraft. We have reduced capacity. For instance, we removed Boeing 747-300s from Japan/Miami and put Boeing MD-11s on that route. Similarly, we have reduced capacity to Italy by switching from MD-11s to Boeing 767s. We are looking at markets with more potential."
Varig has also slimmed down its fleet, both in numbers and in types. Boeing 747s and McDonnell Douglas DC-10s have been grounded, put up for sale or returned to lessors, trimming Varig's fleet from five to three types - Boeing 737s, 767s and MD-11s. Pinto says he is still negotiating with Boeing over two 777s that were to be delivered in March through a leasing company, and delivery dates for 14 New Generation 737 plus two more 777s. Two-thirds of Varig's aircraft are leased and payments were suspended earlier this year for two months, although they have restarted. Pinto is seeking to reschedule these payments and has opened talks with 20 leasing companies, including Boeing, General Electric Capital and International Lease Finance." We don't want to spoil the future, so we see no need to cancel any of the new aircraft. We must not lose sight of the long-term as we restructure," says Pinto.
The new aircraft are being acquired through a mix of lease and purchase. "We have a simpler company now and that is very important. We have only three aircraft types and are making money with them because where we fly them now makes sense and money. From now on we can start to grow." Pinto seems to think about this potential growth for a moment, then pauses a little before adding, with a wry smile: "And, perhaps, grow up a little as well."
Hand-in-hand with the aircraft reductions have come reductions in staff - 2,500 of Varig's 17,800 employees. Pinto expects all these to be competed by the end of July, but acknowledges that it will take longer to overcome the morale problem that such cuts inflict. "It is still a difficult period and no-one likes it when you reduce staff and aircraft," says Pinto. "So we still have a hard time ahead and we must work on restoring spirit. Getting morale back is important now for 1999. But the message I can deliver to employees is that we have a solution now and it's in place, so we can move on." Pinto is particularly concerned to help senior pilots who were flying the 747s to find new placements. "These are good, very experienced pilots and there is a lot of interest out there in hiring them," he says.
Pinto himself has come close to being in search of work. A rebellion in March by some member of Varig's administrative council came close to forcing him out of his chief executive's position. They were apparently disgruntled at the way in which Varig was caught by the economic crisis and, for a few days, Pinto's future was uncertain. But he rallied support - reputedly from those council members who represent the Rubens Berta Foundation, which owns 87% of Varig's shares. Pinto also received the backing of the airline's pilots' association, APVAR, for the restructuring plan he had engineered since taking the helm at Varig. As a result, a new and supportive council was put in place. "There is a very good relationship now with the administrative council," says Pinto.
But there is much to be done. This year's first quarter loss of 49 million real was double that for all of 1998. Pinto reveals that overall revenues in March fell to 144 million real, compared to 229 million real for the same period last year. About 70% of Varig's earnings are derived from international traffic, of which 80% comprises Brazilians who have been forced to curtail travel by a weaker real. In addition there has been a "huge impact" on domestic revenue. The aircraft cutbacks equate to a 6% cut in seat capacity, but still fall short of what is needed. International traffic has dropped by 17% and domestic traffic 13%, which in turn has pushed load factors down to 60%. Pinto would like to see those load factors closer to 70%.
Pinto is also trying to persuade the Brazilian Development Bank (BNDES) to lend it around 400 million real to roll over debts. The BNDES loan would allow Varig to roll over part of its debts nominated in domestic currency at lower interest rates. "This possibility is being analysed. It will only be carried out provided it is economically interesting and has all the guarantees required by the bank. But it is a commercial operation, not a treatment," says Pinto.
It was Pinto who led Varig into the Star Alliance via an alliance with United Airlines, which meant first disentangling from a relationship with Delta Air Lines. Pinto says he has no regrets about his decision. "Being part of the Star Alliance has been a very interesting experience," he says. "And it's important to us. We are getting very good feedback from the passengers. Our relationship is very good with most of the other Star airlines," he says, adding that the number of cross sales by both airlines has increased by 300%.
Star Alliance ties
"We are selling more into United in the USA and United is flying more into Varig in Brazil. That is a huge boost and it has been very helpful with everything else that has been going on. The key for us is United, Lufthansa and SAS because we are in direct contact with them, but the relationship with Air Canada is also valuable." Another issue that Pinto believes will further cement the relationship will be total integration with United's computer reservation system. "It will happen," he says.
Pinto would like to find a way to expand his airline's relationship with Thai Airways. "The relationship with Thai was growing, but we had to cancel our flight to Bangkok, which was through South Africa. Now we are talking about finding a way to do some kind of service between them and SAS," he says.
And, despite rumours that have circulated this year, Pinto dismisses the notion that Varig is seeking an equity partner. "It is not the time for that now. An airline has to be well adjusted first - then you can search for capital for the future," he says. Varig may begin a joint pilot training initiative with Lufthansa, to save costs, but Pinto says even this idea is still only in early stages of negotiation.
Although the first half of this year has shown there can be no guarantees for Varig, Pinto seems confident that the measures he has put in place will begin to reap improvements by the end of the year. His view is cautiously supported by some outsiders. Stock prices have started to climb - although this was mainly a response to the court win announcement - and a Wall Street banker who has worked on deals with Varig acknowledges that the airline has become "more aggressive" because it has had to fight to survive. "They knew they had to make serious changes and I get the feeling it's happening now," he says.
Pinto is also optimistic that the crisis will force others in Brazil to implement change, which will put Varig in better standing in future. In particular, he believes that the heavy taxations the airline has been forced to pay will be reviewed by the Brazilian Government. "There will have to be change," he says. "We have become a serious international competitor despite heavy taxation, so we could jump ahead is this issue was resolved." Pinto believes that 150 million real could be returned "straight to the bottom line" if taxes were more reasonable.
Pinto has demonstrated a tenacity for getting his own way over the past three years and he seems to have maintained the general support of employees - a remarkable feat, given the upheavals. It could well be that his predictions for a better second half of this year will prove to be on the mark.
Pinto's past
Fernando Pinto joined Varig in 1973 as an engineer in the airline's maintenance department - his first job after graduating from the Federal University of Rio de Janeiro, where he studied mechanical engineering. He was born in Porto Alegre in Rio Grande de Seol, Brazil's southern-most state, in 1949. Pinto progressed through a series of jobs in engineering and maintenance, eventually becoming director of engineering. Successful integration of regional carrier RioSul into Varig. Promoted to president and chief executive of Varig in January 1996, he has led Varig into the Star Alliance. Pinto is a private pilot and enjoys flying gliders and ultralights. At one time, he was a partner in an ultralight factory in Rio de Janeiro.Source: Airline Business
