Fasten your seatbelts: cutting costs, TAM Airlines follows low-cost Gol's model to cater to Brazil's growing airline business

Latin Trade, March, 2005 by Carlos Adese

The president of the national airline employees' union, the Sindicato Nacional dos Aeronautas, Graziella Baggio, says Brazilian President Luiz Inacio Lula da Silva's decision to step in to save the company is the right one: "President Lula has publicly declared it necessary to find a way to keep Varig operating. It's a national resource and a business with 75 years of history that can't be written off."

The Brazilian government is committed to saving Varig, and at press time the method most likely to occur seemed to be an official intervention in the company. One idea is to remove the Rubem Berta Foundation, Varig's controlling entity, and take charge of the airline, guaranteeing jobs and existing flights while creating a new, healthy--yet not state-run--airline, called "Super Varig." Yet Varig's reported net profit of $91.7 million during the third quarter of 2004 barely enabled it to begin paying down accumulated losses of more than $100 million reported during the January-September period of last year.

Some in the government believe that Varig could be profitable, yet they recognize that the airline's debts are nearly impossible to pay. Executives at TAM and Gol declined to comment on Varig's problems. Behind the scenes, the two companies are quietly negotiating with the government the possibility of taking control of Varig's national and international market share without taking on its overwhelming debts. Other pending items for Varig include the airline's employees pension fund and mileage credits owed to thousands of Varig frequent-fliers. On top of these unknowns, internal disputes rage inside the government itself over the best course for the former airline giant, a sure sign that progress will be slow at best. The battle to save Varig could turn out to be a long flight with many stops along the way.

CARLOS ADESE

SAO PAULO