This article from NYTimes.com has been sent to you by psa188@xxxxxxxxx /-------------------- advertisement -----------------------\ Explore more of Starbucks at Starbucks.com. http://www.starbucks.com/default.asp?ci=1015 \----------------------------------------------------------/ It's Boeing vs. Airbus in Big Battle Over Brazil June 3, 2003 By TONY SMITH SÃO PAULO, Brazil, June 2 - With a merger of Brazil's two leading airlines, Varig and TAM, now a near-certainty, the battle lines are being drawn between Boeing and Airbus Industrie over who will supply aircraft to the merged carrier, which will be Latin America's largest by far. Boeing has traditionally been dominant in the region, and it supplies the ailing Varig. But Boeing's leadership in Latin America has been threatened in recent years as four regional airlines - TAM, LAN Chile, Mexicana, and Grupo Taca in Central America - have opted for Airbus instead. It is a winner-take-all business, because most airlines prefer to operate a single-manufacturer fleet for efficiency's sake. So a fierce fight can be expected over the new carrier's business, not least because, in a sector that has had serious trouble since Sept. 11, 2001, Latin America is a rare bright spot. Airlines the world over are cutting back their orders as the slump in air travel after the Sept. 11 terror attacks has been deepened by war in Iraq and the emergence of severe acute respiratory syndrome, or SARS, in East Asia. Some carriers, like US Airways and United, a unit of UAL, have filed for bankruptcy protection and others, like Swissair, Ansett and Sabena, have collapsed altogether. All that has made for a tough two years for Airbus and Boeing, and their immediate prospects still look bleak. Both posted losses in the first quarter - $478 million at Boeing and $105 million at Airbus. Latin America has had its share of airline restructuring and forced mergers, too - the Varig-TAM combination is effectively a rescue of Varig, one of Brazil's most prestigious brand names. But "the only market with potential growth at the moment is Latin America," said Carlos Albano, aviation analyst at Unibanco, a bank based in São Paulo. "All the others are in advanced stages of maturity or, like China, have other problems." So the chance to be the supplier of choice to a new airline backed by the Brazilian government, with 70 percent of the local air travel market, is a tempting prospect. "This is more of an opportunity for us than a risk," said Michel Clanet, Airbus sales director for Latin America. "Over the last three years we have outsold and outdelivered Boeing by three to one" in the region, he said. "As things are today, I think Boeing will have more work to do than us" to win the new carrier's business. He said the oldest and most outdated equipment will probably be first to go as the combined carrier streamlines its fleet - in other words, Varig's McDonnell Douglas aircraft and older Boeing jets. Varig has not made a profit in six years and is saddled with about $1.2 billion in debts. Under the merger plan, drawn up by Banco Fator, which is based in São Paulo, Varig shareholders would receive only 5 percent of the equity in the new airline. TAM, which is also losing money but is in much better financial shape, would get 35 percent; creditors, mainly of Varig, would get the rest. Among the creditors, a number are Brazilian state entities: the national development bank, BNDES; Banco do Brasil; the distribution arm of the oil giant Petrobras; and Infraero, the national air traffic authority. Together they would get two-thirds of the creditors' shares, or 40 percent of the airline over all. International creditors, including Boeing and GE Capital, would own some 20 percent of the airline. Under the deal, BNDES is expected to provide $600 million in fresh financing and short-term loan guarantees to keep the airline supplied with fuel. Over the longer term, economies of scale, staff cuts and elimination of overlap are meant to help make the new airline financially viable. Although it voted for the merger in late April, the Ruben Berta Foundation, a charity which has run Varig - many say into the ground - had resisted the merger at every turn. But in an emergency meeting last weekend, representatives of Varig employees voted overwhelmingly to replace the foundation's seven-member board, clearing the way for the merger to be completed quickly. Together, TAM and Varig now have over 200 aircraft, and will need only about 150 after the merger, analysts said. Still, the combined airline will need to renew the fleet with new aircraft over time. "For the first years, we would obviously be running a mixed fleet," said Ruy Amparo, TAM's vice president for technical operations. "But over the next 5 to 10 years we would standardize to lower costs." "The best is to have one type of plane only," Mr. Amparo said. "The day will come when we will have to choose between Airbus and Boeing." Because Boeing's financial arm, Boeing Capital, which is a creditor of Varig, would presumably become a shareholder of the merged company, analysts have speculated that it could influence purchasing policy from the inside. But Boeing has sent out mixed signals on the subject. "Our business is to sell airplanes, not to have stakes in airline companies," Ricardo Caveiro, Boeing's Latin American sales director, told reporters in mid-May. "But given the situation here in Brazil, any option is possible." Then on May 26, Reuters quoted John Wojick, a regional vice president, as saying, "We're not interested in owning Varig or the merged Varig." Mr. Clanet of Airbus said he did not think Boeing would hold much sway in the new company even as a shareholder, but even so, his company was watching closely and would meet Boeing head to head. "If it comes to that point, we will study the possibility of becoming a shareholder, too," Mr. Clanet said. http://www.nytimes.com/2003/06/03/business/worldbusiness/03JETS.html?ex=1055647157&ei=1&en=b230f40fd306ba2e --------------------------------- Get Home Delivery of The New York Times Newspaper. Imagine reading The New York Times any time & anywhere you like! Leisurely catch up on events & expand your horizons. Enjoy now for 50% off Home Delivery! 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