VARIG BOARD STRUGGLES TO SAVE AIRLINE

UNCLAS SECTION 01 OF 02 BRASILIA 001608

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR
NSC FOR BREIER
DEPT OF TREASURY FOR FPARODI
USDOC FOR 3000/JOHN TOCCO
USDOC FOR 3134/USFCS/OIO/WH/EOLSON
USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD
USDOC FOR 6950/Dean Woddard - Aerospace
DOT FOR SUSAN MCDERMOTT, CAROLYN COLDREN
FAA MIAMI FOR MARK RIOS

E.O. 12958: N/A
TAGS: EAIR EINV
SUBJECT: VARIG BOARD STRUGGLES TO SAVE AIRLINE

REF: BRASILIA 1566


1. (SBU) Summary and Introduction. In a June 14 meeting
with the Ambassador, key members of the VARIG board
outlined the predicament in which the airline finds itself.
ILFC (International Leasing Finance Corporation),a
subsidiary of of AIG and a key aircraft leasing company,
has indicated that it intends to start repossessing the 11
planes that it has leased to VARIG, beginning on June 17.
And while, at least according to our VARIG interlocutors,
the GOB has agreed to drop its appeals of the airline's
US$1.1 billion judgment against the government, it will
still take several weeks for this money to be disbursed.
In the meantime, ILFC is playing hardball and has
reportedly stated that it plans to take back its aircraft
even if VARIG pays its debt arrearages. Airline officials
worry that the rescue package they have been so carefully
constructing will begin to unravel once ILFC repossesses,
as the other leasing companies might follow suit and the
GOB might then backtrack on its commitment to ensuring the
company's survival. End Summary and Introduction.


2. (U) On the morning of June 14, VARIG Chairman Henrique
Neves telephoned the Ambassador to request a meeting that
same day. Scheduled for that afternoon, key members of the
VARIG board (including President David Zylbersztajn and
Vice-President Omar Carneiro da Cunha) recounted to the
Ambassador the airline's plight. Michael Conolly,
Executive Vice-President for TAP (Air Portugal) - VARIG's
potential foreign investor- accompanied the VARIG
delegation. Econ Counselor, Commercial Service Deputy
Senior Commercial Officer, and SpecAsst sat in as well.


3. (U) During the conversation, Zylbersztajn and Carneiro
da Cunha made the following points.

-- President Lula had directed that the GOB cabinet and
staff find a way to allow the government to quickly inject
capital into VARIG. While rescheduling debt, particularly
with INFRAERO (the GOB's airport authority),might take as
along as six months, within "a few weeks" the GOB would be
able to free up the US$1.1 billion due VARIG in the
airline's court case against the government.

-- All the major aircraft leasing companies were on board
with the VARIG restructuring plan (Reftel) except for ILFC.
(Per post's contacts, the accuracy of this statement is
open to question.) Sensing that it could place its
aircraft with better customers, ILFC had taken the tack
that it would take back its planes regardless of whether
VARIG paid its debt or not. (Apparently, ILFC's two Boeing
777s are headed to Continental while the Brazilian cut-rate
airline GOL would take its 737-700s.)

-- Just this week, VARIG had resumed payments to all its
leasing companies planned to at least keep up with current
payments.

-- If ILFC repossessed its planes - and VARIG planned to
return them at a rate of one per week - the other leasing
companies might follow suit. The GOB might then rethink
its commitment to the airline, reasoning that there is no
point in releasing a billon dollars to a company that will
soon collapse anyway. Board members worried that the lack
of a financing bridge between June 17 (ILFC's deadline) and
the expected two to three week period it would take for the
lawsuit revenues to arrive might be fatal.

4. (U) Ambassador acknowledged that the new VARIG board had
made valiant efforts to free the carrier from its debt
nightmare. However, he stated, time was not on the
company's side and if the airline was to survive the U.S.
leasing companies would, at a minimum, need to receive
payment quickly for as much of their receivables as
possible. Carneiro da Cunha noted that GOB Vice-President
Alencar had already sent a letter to ILFC, although, he
admitted, that correspondence did not contain detailed
assurances. VARIG board members agreed that it is
essential for VARIG to make known to the leasing companies
the GOB's commitment to saving VARIG.


5. (SBU) Comment. Judging from the body language of our
interlocutors, VARIG's situation is indeed grim. While
Lula may have indeed directed that his staff work to rescue
the carrier, getting all the agencies/interests within the
government to quickly work toward this goal will be a stiff
challenge, especially given the legal constraints outlined
in reftel and the ongoing preoccupation of key policymakers
with ongoing corruption scandals. Post will continue to
monitor developments regarding this issue as the June 17
deadline approaches.

DANILOVICH