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Thursday, 6 February, 2003, 23:36 GMT
Brazil's top airlines plan to merge
Varig logo
Varig is struggling under too many debts
Latin America's two largest airlines, Varig and Tam of Brazil, have announced plans to merge.

The combined company would have 218 planes, annual revenues of just under $4bn, and control about 70% of all air travel in Brazil.

However, details of how the merger will proceed are scarce. There is no business plan yet, and the two firms have not even agreed on the structure of the combined company.

Both airlines are carrying a heavy debt burden, and some analysts have warned that Varig could be close to bankruptcy.

Last week Varig suffered the humiliation of having one of its most modern aircraft, a Boeing 777, seized on a Paris airport, because it had failed to keep up with its lease payments.

Competition concerns

Daniell Mandelli, the president of Tam, said the two firms were most likely to merge, although an alternative could be the creation of a holding company that would own both airlines.

The details are to be worked out during the next six months.

Technically, the deal violates Brazilian antitrust law, which puts a limit of 50% market share on any merger.

However, these rules have been waived in previous instances, for example when brewing giants Antarctica Paulista and Brahma merged to control 80% of the beer market.

Observers suspect the airline deal was probably helped along by the new government of President Luiz Inacio Lula da Silva, which should help to smooth any regulatory obstacles.

Dragged down by debt

Brazil's airline industry is struggling to cope with the same problems as most other carriers around the world.

The global economic slowdown, especially a slump of passenger numbers to the United States, and high fuel prices have hit profits hard.

Varig is finding it hard to cope with a debt burden of 2.7bn reals ($767m), and has also been hit by an accounting scandal after government officials discovered wrong bookings worth $370m.

Varig, which was founded in the 1920s, has 116 planes flying to 107 Brazilian cities, and to 24 foreign destinations.

The company is owned by the non-profit Rubem Berta Foundation, which represents Varig employees.

Tam is the upstart rival, but in terms of revenues has managed to overtake the flag carrier Varig. The airline has 102 planes that fly to 41 Brazilian destinations and three foreign cities.

Last year Tam returned 21 leased planes, but executives of both firms have promised that the merger will not result in any further plane reductions.

See also:

07 Jan 03 | Business
04 Jan 03 | Americas
27 Nov 02 | Business
25 Nov 02 | Business
31 Oct 01 | Business
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