Varig and Tam link up to beat sector crisis

news.ft.com By Raymond Colitt in São Paulo Published: February 7 2003 4:00 | Last Updated: February 7 2003 4:00

Brazil's two largest airlines said on Thursday they would merge their operations into a joint venture in a move to overcome a deep crisis in the industry.

Varig and Tam are to join their fleets in a new company to be listed on the stock exchange, they said.

With a joint fleet of 218 aircraft and 29.1m passengers a year, the joint venture would be larger than some European airlines such as Iberia or Alitalia.

Varig's preference shares rose more than 8 per cent by mid-afternoon, compared with a 1.3 per cent decline of Bovespa, the São Paulo stock exchange index.

The deal, to be detailed by June 30, is subject to regulatory approval and could face some limitations by antitrust authorities in the domestic market, where the two companies have roughly a 70 per cent share.

On international routes, where they face stiff competition from European and US carriers, they have only a minority market share.

Yet analysts are not expecting serious regulatory obstacles to the merger as the deal was facilitated by the government of President Luiz Inácio Lula da Silva, who took office just over a month ago.

The government has demanded restructuring of the industry to boost competitiveness before considering any additional aid for the troubled carriers.

The government would not act as "hospital for companies" said Luiz Furlan, industry and trade minister.

There would not be funds "until the sector is stable and sustainable", he said.

José Viegas, defence minister, who is responsible for civil aviation, said the government would work with congress and the private sector towards creating a new regulatory framework to create sustainable conditions for the industry.

While both companies will seek efficiency gains, they sought to reassure employees by insisting there would not be immediate job losses.

The joint venture would have more than 26,000 employees.

Varig is Latin America's largest airline, but it has slipped deeper into financial trouble as a weakening currency has increased operating costs and dollar denominated debt of $760m (as of last September).

In five years it has failed to make a profit.

Last month one of its aircraft was temporarily impounded in Paris because a lease had not been paid.

Tam is generally considered more efficient than Varig but also slipped into the red last year with a net loss of R$450m ($125m) in the first nine months.

The companies have yet to determine what share each will have in the joint venture. Varig's unwieldy ownership structure is certain to complicate negotiations.

The companies hired Banco Fator, a local investment bank, to advise them.