The main shareholder of Brazilian flagship airline Varig will give up control of the company as part of a restructuring plan to prevent the carrier from collapsing under a mountain of debt, the company said Monday.
Previous efforts to reorganize Varig, the full name of which is Viacao Aerea Riograndense SA, have always fallen short because of reluctance by the Rubens Berta Foundation, which represents employees, to cede control.
But that step is necessary to attract new investors and pay off debts of 7.7 billion reals (US$3.3 billion; Ђ2.7 billion), Varig said in a statement. Nearly 60 percent of the debt is in overdue taxes and unpaid social security contributions.
"We won't fail to pay anyone. We just need time," said Varig President Omar Carneiro da Cunha.
The company presented its reorganization plan Monday to a Rio de Janeiro court and said it will hold a meeting with creditors Sept. 24 aimed at forming a creditors' committee representing their interests.
As part of the restructuring, Varig, the biggest carrier in Latin America's largest country, plans to break itself into two companies. One will manage most of Varig's current operational units plus two regional airline subsidiaries, Rio Sul and Nordeste. The second will include Varig's main administrative units and will manage debts and debt negotiations.
After the debt issues are resolved, the two companies will be merged, Varig said.
The airline also said it will cut 13 percent of its 12,000 person workforce by the end of 2006 in an effort to save about $168 million (Ђ138 million) annually. The carrier's fleet now stands at 78 planes, down from 118 in 2002.
Varig said cutting costs, streamlining operations and boosting sales would generate some $307 million (Ђ252 million) a year in revenue.
"It's not the end, it's the beginning," said David Zylberstajn, chairman of Varig's board. "This is Varig's proposal. Creditors can modify, alter or reject it."
Varig's plan must be approved by creditors and by the court before it can be put in place. Creditors have until Dec. 17 to approve or reject the plan, said Zylberstajn.
Portugal's state-owned TAP Air Portugal airline has expressed interest in acquiring up to 20 percent of Varig, Zylberstajn said, but the negotiations had stalled pending announcement of the restructuring plan. He said it is still possible that TAP could make an investment in Varig.
Varig said it will go ahead with the previously announced sale of its air freight division VarigLog, to U.S. private equity firm MatlinPatterson Global Advisors for $38 million (Ђ31 million) in cash plus $65 million (Ђ53 million) to be paid from VarigLog receipts later.
That should help solve the airline's immediate cash flow needs, Varig said.
The company is expected to further reduce its debt with proceeds from a December court decision giving it 2 billion reals ($870 million, Ђ713 million) in damages for losses from government-imposed price controls on airline ticket prices in the late 1980s and early 1990s.
The restructuring plan was filed under terms of a new Brazilian bankruptcy law approved last year aimed at speeding up reorganizations of debt-laden companies while encouraging negotiations with creditors.
Varig said passengers won't be affected during the restructuring and that frequent flier miles will be honored after the reorganization is completed, AP reported.