2 Biggest Airlines in Brazil, Varig and TAM, Plan Merger

www.nytimes.com By TONY SMITH

ÃO PAULO, Brazil, Feb. 6 — Brazil's limping flagship airline said today that it would merge with its largest rival to form a single airline with $4 billion in annual revenue and 70 percent of the domestic market.

At a joint news conference, the presidents of Viação Aérea Rio- Grandense, known as Varig, and TAM Linhas Aéreas, the No. 2 carrier, said they had signed a letter of intent to combine the two airlines.

They said their airlines would continue to operate separately for at least six more months while they work out the specifics. The combination would be Latin America's largest carrier by far, transporting 29 million passengers a year.

"There's nothing better for the sustainability of both companies than working toward improving costs and operations," Manuel Guedes, Varig's president, told reporters. He promised that the merger process would be "as transparent as possible."

With $900 million in debts, Varig has been losing money since 1997 and is barely bringing in enough cash to stay in operation. Last week, a Varig jet was impounded in Paris because a lease payment on it was overdue. The company, founded in 1927, has been wrangling for months with its creditors and its pilots over a financial rescue plan. Mr. Guedes is its third president in three months.

TAM, a much younger company, has stronger finances and little debt, but it has suffered as much as rivals have from the global slump in travel and the sharp fall in the value of the Brazilian real. It is spending $500 million a month on aircraft leases and its fuel costs have soared. Analysts said the airlines could cut costs significantly in a merger.

The deal was widely seen by both analysts and the government as the best hope for resuscitating the ailing industry. "We need to make the civil aviation sector sustainable, with a competitive model and efficient management," said Brazil's defense minister, José Viegas, who was appointed by President Luiz Inácio Lula da Silva to oversee the talks between the airlines.

Analysts welcomed the deal. "It's a huge step forward" said Carlos Albano of Unibanco in São Paulo. "Brazil needs one carrier that is strong, large scale and competitive."

A Varig-TAM merger had long been the dream of Rolim Amaro, TAM's founder, who was killed in a helicopter crash in 2001. The two airlines set up a joint travel Web site in the mid-1990's.

A merger will mean, however, that both Mr. Amaro's family and the Ruben Berta Foundation, a workers' association that is Varig's main shareholder, will have to cede control, something analysts said might prove to be an obstacle.

The deal will also have implications for the two main builders of passenger jets, Boeing and Airbus Industrie. Varig uses Boeing jets, while TAM largely operates Airbuses; eventually, analysts said, the 218-plane combined fleet would be re-equipped with just one maker's jets.

"Logically, they will have to opt for Boeing or Airbus," Mr. Albano said. "That means it will be big business for one of them."