Now that bankrupt Varig has filed its restructuring plan, it is starting to meet creditors, including Brazil’s government, in a campaign to gain their approval.
The key element in its blueprint for recovery is a new entity called “New Varig” that would take over Varig’s assets, staff, and operating rights, but would only assume current liabilities, including aircraft leases, that total 2 billion reais ($860 million), and perhaps another 1.2 billion reals in labour and pension liabilities.
The remaining 4.5 billion reais in taxes and duties would remain with “Old Varig” until it can compromise or retire those debts with the government. In about a year when the plan calls for that to be done, the two Varigs would then merge.
Separating Varig’s operations from its huge government debt is compelled by the reality that no investor is willing to assume it. If creditors approve this split-entity concept, Varig will start to solicit investment in New Varig by asking creditors to capitalise debt and by considering bids from new investors. Several have emerged, including TAP Portugal and a European consortium.
Varig also proposes to revamp operations by cutting less profitable routes – a process it has already started – realigning routes around a single hub at São Paulo, standardising fleet types, and slashing its work force by 13%.
Its plan has already run into resistance. Unions are angry. A government attorney says that Varig cannot use a judgment it won against the government to offset debts owed to the government. Lessor GECAS also claims a right to seize Varig receivables from French ticket sales under a pre-bankruptcy deal. Courts in Rio de Janeiro and New York expect to resolve this dispute. Creditors have until mid-November to decide whether to accept Varig’s plan.
Source: Airline Business
