Brazil's largest two airlines agree to create new company By ALAN CLENDENNING The Associated Press 2/6/03 3:27 PM SAO PAULO, Brazil (AP) -- Brazil's two biggest airlines, Varig and TAM, announced plans Thursday to merge and create a huge new carrier following years of financial troubles and a steep drop-off in business. Terms were not disclosed, and officials said the structure of the new company would be formed over the next six months. The airlines said all of their 218 planes would be included. The move could save Varig from being forced into bankruptcy liquidation because of its massive debt, analysts said. The airline, the continent's largest carrier, had one of its two Boeing 777 jetliners seized for three days in France last week after failing to make lease payments. But Thursday's announcement was so vague in terms of a business plan that some questioned whether the carriers can pull it off. TAM president Daniel Mandelli said the deal may close as a merger or as an agreement that creates a holding company for the airlines. Both Varig and TAM said their agreement called for a new publicly traded company, but a new name was not announced. "It begs the question, 'What's the plan for these companies?'," said Michael Miller, president of the Orlando, Fla.-based Miller Air Group. "It can't be lost on a situation like this that Varig is in such dire shape that to take on the enormity of a merger may the worst thing to do now." Varig has 116 planes serving 67 Brazilian cities and 24 foreign destinations. TAM has 102 planes that fly to 41 Brazilian destinations and three foreign cities. A union of the two airlines would give them about 70 percent of Brazil's domestic flights, a move that could hurt VASP and Gol, the country's two other major carriers. Gol spokesman Fabio Lobo and VASP spokesman Jose de la Pena declined to comment Thursday. Brazilian antitrust regulations prevent any carrier from having a domestic market share of more than 50 percent, but opponents of big mergers and alliances traditionally have a tough time winning antitrust cases in Brazil. For example, Ambev got control of 80 percent of the country's beer market in 2000 when it was created through the merger of brewing giants Antarctica Paulista and Brahma. Efforts by smaller breweries to kill the merger failed. Varig and TAM announced their plans at a news conference in Brasilia with several government ministers attending. The companies didn't provide information on any financing for the deal, but said Brazil's national development bank may provide loans. Brazil's airlines have been hard hit by a slump in demand caused by the country's sluggish economy and a plunge in travel following the Sept. 11, 2001, attacks in the United States. Also, a steep drop in the value of Brazil's currency, the real, has made it difficult for the country's carriers to pay costs linked to dollars -- including jet fuel and aircraft lease payments. The real lost 35 percent of its value against the dollar last year. Varig is Brazil's flagship carrier, and a source of deep national pride. But government officials have said Varig will receive no financial help until its owner, the nonprofit Rubem Berta Foundation representing Varig employees, surrenders control. Varig is struggling with debt of 2.7 billion reals ($767 million) and was asked several weeks ago by Brazilian securities regulators to restate financial results for 2001 and the first half of 2002. Government officials found about 1.3 billion reals ($369 million) in accounting errors. Last week, a division of U.S.-insurance giant American International Group seized the Varig jetliner, one of the jewel's of the airline's fleet, at Paris' main international airport. Passengers scheduled to fly on the plane from Paris to Rio de Janeiro were instead put on an MD-11 heading from Paris to Rio with a stop in Sao Paulo. After negotiations, the plane was released on Saturday. TAM last year laid off more than 500 workers, eliminated service to nine cities and returned 21 leased planes. Brazil's Sao Paulo Stock Exchange suspended trading in the two airlines Thursday, saying it wanted more details about the agreement between Varig and TAM. _________________________________________________________________ The new MSN 8: smart spam protection and 2 months FREE* http://join.msn.com/?page=features/junkmail