Brazil's two largest airlines TAM and Varig have agreed to create by mid-year a new jointly owned company, although it remains unclear what form the partnership will take.
It will either be a holding company with both airlines operating as separate units under common ownership, similar to Mexico's Cintra, or a vehicle for integrating the two airlines into one, similar to Colombia's Summa. Their agreement does not refer to the venture as a merger.
The idea of joining forces has been around for some time. A merger was discussed two years ago, before the death of Rolim Amaro, TAM's founder and chief executive. Amaro held talks with Ozires Silva, who was then Varig's chief executive. Amaro's death set those talks back, but they quietly resumed under new leaders. Varig's latest president, Manuel Guedes, started hinting publicly in January that a merger with TAM might be the answer for Varig.
Both carriers are victims of the global traffic plunge, higher fuel costs, and devaluation of Brazil's real. TAM is debt-free, but has accumulated losses of over 620 million reais ($172 million). Varig has a $764 million debt load and has been frustrated in renegotiating it.
Varig is 87% owned by the non-profit-making Rubem Berta Foundation (RBF), which represents Varig's employees. The RBF rejected the most recent restructuring plan, which prompted the appointment of Guedes as Varig's third chief executive in three months.
Varig is the larger of the two airlines, but TAM is financially stronger. Thus, some observers predict TAM may have the bigger stake and more say in a merger. But TAM's pockets are not deep enough to pay Varig's debt, which means Varig must seek other solutions.
These include a renewed loan request to the Brazilian Development Bank (BNDES). That first requires an acceptable restructuring plan, but a merger would dilute the RBF's stake and influence, thus giving management more flexibility with Varig's creditors.
Another option is to attract more partners. Guedes has talked with potential investors in Europe and the USA. He estimates that $350 million would stabilise Varig, and it could seek that sum either from BNDES, foreign investors, or a combination of the two.
Any merger faces hurdles. The combined domestic marketshare of TAM and Varig would be 70%, well above the 50% ceiling set by Brazilian law. Competition regulators have waived this before, and might do so again on a "failing company" rationale. Alternatively, Brazil's new government could give TAM and Varig a statutory waiver. Defence minister José Viegas, who is also oversees aviation, says such a bill is planned.
The biggest hurdle may be Varig's strong unions. Their leaders have already met government officials to seek job guarantees and Brazil's new government will be sympathetic to their concerns.
TAM and Varig may be forced to relinquish slots on the busy Rio-Sao Paulo airbridge, which will benefit Gol and Vasp. The Star Alliance seems certain to welcome a TAM-Varig merger.
DAVID KNIBB SEATTLE
Source: Airline Business
