www.sfgate.com BERND RADOWITZ, Associated Press Writer Saturday, February 8, 2003

(02-08) 11:02 PST RIO DE JANEIRO, Brazil (AP) --

President Luiz Inacio Lula da Silva -- a little more than a month in office -- has impressed financial investors, foreign statesmen and an overwhelming majority of Brazilians.

But his plans for putting Latin America's largest country on a path of economic growth and social justice have stirred up opposition from an unexpected side: legislators from his own Workers Party, known as the PT.

Silva, who was inaugurated on Jan. 1, has avoided any direct conflicts with fellow party members.

But several legislators have criticized the first economic policies adopted by the new leftist government as a continuation of the economic "neo-liberalism" of the previous government.

Silva was elected on Oct. 27 in a landslide by an electorate increasingly disenchanted by the government of President Fernando Henrique Cardoso, which capped years of high inflation but was only able to promote sluggish economic growth.

Finance Minister Antonio Palocci drew criticism Friday when he announced the government was hiking its target for the budget surplus before interest payments to 4.25 percent of gross domestic product to stabilize the country's ballooning debt.

"The cuts will hit the working class fully. The measure means less money for the social area and employment," Workers Party Para state Rep. Joao Batista Baba said in remarks published in Saturday's edition of O Globo newspaper.

Rio de Janeiro state Rep. Lindberg Faria said the measure would "touch the milk for children," and foresaw a "tragic end" of Palocci's policies.

A day earlier, Baba had attacked Palocci personally, saying he didn't trust the finance minister anymore, not even in his profession as a physician.

In January, prominent Workers Party Sen. Heloisa Helena voiced her indignation about Silva making former FleetBoston Financial Corp global banking head Henrique Meirelles the new Central Bank President. The PT barred Helena from a nomination session in the Senate to avoid public embarrassment.

The Senator also stayed away from a voting session that elected former President Jose Sarney from the centrist Brazilian Democratic Movement Party as Senate president in exchange for his support of Silva's government.

But while Helena and other leftists are angered by the appointment of fiscal moderates to key cabinet posts, Silva needs their help to push programs through Congress, where he lacks a majority.

Silva, who campaigned on promises to create 10 million jobs, lower interest rates and increased growth, has argued it will take time.

He and Palocci argue that the government needs a tough budget tightening now, to stabilize the economy sufficiently to be able to carry out ambitious social programs later.

At a meeting on Friday with Workers Party state presidents, he demanded that his party unite behind him and reportedly said "a little bit of patience has not harmed anyone yet."

Economists warn that statements by the prominent leftists, which have gained wide media attention in Brazil in the past weeks, could harm the honeymoon Silva and his moderate economic policies have enjoyed with financial investors.

"The PT needs to bring its radicals in line," Nicola Tingas, chief economist at West LB in Sao Paulo, told The Associated Press.

Fears that Silva might have trouble meeting Brazil's debt payments helped push the local currency, the real, down 35 percent last year.

Workers Party President Jose Genoino said Friday the inner party critics had no real backing in the party and should simply be ignored to dry out the media attention they receive.

The suggested tactics of Genoino, a former guerrilla fighter turned moderate, could work, analysts say.

"Only a small group of PT rebel legislators voices its criticism. Most have opted to stay silent as the government is very strong right now," Alexandre Barros, a political risk consultant in Brasilia, told The Associated Press.

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.

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.

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."

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."