Another boardroom shift has taken place at Varig as the carrier struggles to right itself in the face of heavy losses
It may have been Varig's 75th anniversary this year but the Brazilian flag carrier has had little cause to celebrate. Instead, it has been battling the worst financial crisis in its history. Buffeted by the worldwide recession last year and a steep decline in traffic following September 11, Varig has also been affected dramatically by the sharp and steady fall in the value of the Brazilian Real.
Then in August, Varig chief executive Ozires Silva stepped down to help clear the way for further reform. A former government minister and the president who had taken Embraer through privatisation in the early 1990s, Silva had held the reins at Varig for just over two years. Now they are in the hands of new chief executive Arnim Lore - Varig's sixth leader in less than 10 years - who has the unenviable task of reversing four years of losses and assuring the carrier's future.
Varig's new leader, a former director of Brazil's central bank and most recently chief financial officer at the carrier's Rio Sul regional unit, inherits some advantages bequeathed from his successor and has set about making the most of them.
Significantly there are signs of change in the group's complicated and unwieldy ownership structure. The 62-year-old Lore has become chairman of Varig's supervisory board - which Silva had not - and has already replaced most of its six members with directors of his choosing. Lore also replaced controversial Yutaka Imagawa as chairman of FRB-Par Investimentos, the division of the employee-controlled foundation that holds 87.5% of Varig's stock. Imagawa also had been chief operating officer of Varig until July.
Restructuring
One of Lore's top priorities - as it was Silva's - is a complete financial restructuring of the company to bring in new investors and capital. He left no doubt about the goal, declaring on his first day on the job that it was "clear that with the current financial structure, the company won't survive".
Varig has been working for some time with BNDES, Brazil's national development bank, seeking both a participatory stake and the bank's backing for a plan to raise $300 million in a new shares issue to help restructure its debt. The process continues. Lore, who spent 17 years at the private Unibanco, said the key parties - Varig, major shareholders Ruben Berta Foundation, creditors and the BNDES - were continuing negotiations on a broad recapitalisation plan.
The way for new investment was paved in March when the employee-controlled Ruben Berta Foundation agreed to a dilution of its ownership to bring in new capital, along with the implications that suggests. "The idea is to have the foundation just as a shareholder, and not to have members of the foundation in management positions," explained Silva, speaking shortly before his final departure from the president's office at Rio de Janeiro's domestic Santos Dumont Airport.
He points out that talks had been held with many potential investors, including some from outside Brazil, such as the USA's Texas Pacific Group. But a 20% cap on foreign investment appears to have proved too restrictive for some, he adds.
An encouraging sign for Lore must be the fact that some of the tough actions taken by Silva aimed at cutting costs and improving productivity have begun to pay off. The measures, including laying off 10% of the workforce, renegotiating aircraft leases and purchase commitments, retiring older aircraft and cutting back services, helped Varig's flight operations post a small 1.5 million reais profit ($475,000) in the first half of this year, compared with a loss of 75 million reais a year ago.
Overall, however, the group reported a 1 billion reais loss for the first six months of 2002, almost double that of a year ago. Yet 815 million reais of that loss is attributed to an 18% currency depreciation over the half, that caused a dramatic hike in operating costs and debt payments.
Silva had also been active in lobbying for government action to reduce the excessive regulation and taxes levied on Brazilian airlines and, after September 11, for the kind of relief offered airlines elsewhere in the world. There had been little movement. Last year Brazil gave airlines more freedom to set fares and also ended a tax on the purchase of Embraer regional jets. But looking back on his tenure at Varig, Silva still complains that Brazil had done "absolutely nothing, zero" to relieve a tax burden that stood at "almost 44% tax on fuel and 50% on infrastructure costs".
With some irony, just after Silva left, the government did produce an aid package of tax measures, debt relief and insurance-premium help that will save Brazil's carriers close to $300 million. Varig should be the largest beneficiary.
However, the most devastating factor behind Varig's losses remains the devaluation of the Real. That has inflated its debt burden, as well as aircraft lease payments and other operating costs such as fuel, most of which are US dollar-denominated. The relentless devaluation - about 35% this year alone - also has discouraged Brazilians from travelling to the USA and Europe. Most of Varig's international passenger traffic, which represents about 65% of its overall business, originates in Brazil.
Other difficulties plaguing Varig - in common with other Brazilian carriers - include the financial collapse of neighbour Argentina and its spillover effects, while new worries about the health of other Latin American nations have been surfacing. There is now too the political uncertainty surrounding Brazil's national elections this month and the prospect that a new government might reverse the country's economic direction and introduce more financial instability.
Causes for optimism
Despite his imminent departure from the carrier, Silva, 71, remained upbeat about Varig's future, noting that it has a strong market position and route system, as well as a respected trademark and sound operations.
In its favour, Varig has an 80% share of the international market, reinforced after competitor TAM started international services but soon abandoned several of the markets. Silva argues that Varig's traffic to Europe is good, with load factors over 75% - and over 80% for some destinations.
Traffic to the USA suffered more after 11 September but had been recovering, although Miami, a larger leisure market than its other US destinations, was hurt badly by the devaluation. Varig recently pulled back frequencies on some of its US services (although it dropped no markets) and will reinstate them in December when traffic traditionally picks up again. The carrier will codeshare with Star Alliance partner United Airlines this month when it begins Washington-Sao Paulo service, a market Varig left in 1999.
The airline also has a third of Brazil's domestic market, although Silva acknowledges that it lost "a bit" of share because it resisted matching low fares that were below its costs. Brazil's limited pool of air travellers also remains an issue. Silva reckons that with economic wealth concentrated in relatively few hands, only a small percentage of the population is doing all the flying - around 3-4% against 40% in the USA.
Under Silva, the airline had returned 18 aircraft to lessors, although he notes capacity was reduced only 5-6% because of improved utilisation. A recent merger of the fleet and routes of Varig and its two regional units - Rio Sul and Nordeste - is also expected to spur productivity improvements. Together they operate 117 aircraft, including 63 Boeing 737s. Varig is currently in the market for more 737s, possibly to be leased from Star partners, and up to four 757s, to replace 767s on Latin American routes.
Looking at Varig's position from a distance, Silva says the task is not as difficult as the one he faced him at Embraer in the early 1990s when he was asked to privatise the company, at a time when "inflation was 2000% and the devaluation was daily." He blames much of the recent pressure on the airline on an association of 32 fired pilots who had been constantly challenging Varig leadership in the press and in the courts, even succeeding in getting the personal assets of Varig officials frozen for a time, although that has since been reversed.
After he left, Silva wrote to a friend that it had been "fine" to be at Varig and he had tried hard, but felt he had to leave to pave the way for a resolution. "Be assured I have done that to be part of the solution, not of the problem."
Source: Airline Business
