BRAZIL - NEXT STEPS FOR VARIG UNCLEAR

UNCLAS SECTION 01 OF 02 BRASILIA 001839

SIPDIS

SENSITIVE

STATE PLEASE PASS TO USTR
NSC FOR CRONIN, RENIGAR
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: BRAZIL - NEXT STEPS FOR VARIG UNCLEAR

REFS: (A) BRASILIA 1608, (B) BRASILIA 1631, (C) BRASILIA
1566


1. (SBU) Summary. Boeing Sales Director for Brazil, Jose
Sicilia, told Emboffs that Boeing is still trying to assess
what the immediate future holds for Varig after the
carrier's recent move to obtain bankruptcy protection.
While under Brazilian law the company has until August to
file a reorganization plan and is immune until December from
creditor suits to repossess assets, Sicilia noted that the
U.S. federal district court injunction barring creditors
from foreclosing expires on September 12 -- at which point
it is unclear what would happen. In the end, if Varig is
unable to secure a debt-swap with the GOB (Ref A),then
Sicilia thinks it unlikely that the airline will survive.
Given the political scandals in which the Lula
administration is currently enmeshed (Ref B),to avoid the
accumulation of bad news the GOB may try to delay resolution
of the Varig crisis until after the next presidential
election. End Summary.


2. (U) This cable includes business confidential information
and should be handled accordingly.


3. (SBU) On July 1, Boeing Sales Director for Brazil, Jose
Sicilia, met with EconOffs and Foreign Commercial Service
staff in Brasilia and had a candid discussion of the Varig
crisis. Sicilia, who at times plays the role of the
"advocate" for Varig in Boeing, noted that Boeing has had a
long history of working with the airline. Although in the
past Boeing has forgiven some of Varig's debts (in exchange
for an exclusivity contract),Sicilia considered the
business relationship with Varig very positive over the
years. Indeed, he observed, if Varig puts together a good
recovery plan, Boeing will fight for Varig to survive.
Nevertheless, Sicilia stated, the company has to consider
the interests of its leasing subsidiaries Boeing Capital
Corporation (BCC) and Boeing Asset Management (BAM),both of
which were more interested in cutting their losses than in
looking to future sales. Sicilia informed us that Boeing
had been considering pulling its leased planes, but that
IFLC had moved first (Ref C). Given the popularity of Varig
in Brazil, Boeing didn't want to be the "bad guy" who took
Varig down. (According to Sicilia, Varig has 29 different
lessors, the biggest of which are Boeing, IFLC, ANCET, GATX,
and Bristol.)


4. (SBU) A group of high-level Boeing executives, including
BCC and BAM, will be meeting with the Varig Board the week
of July 4 at Varig President David Zylbersztjan's request.
Sicilia predicted that the meeting will be mostly
pleasantries, but that if Varig says something "wrong" (such
as indicating it won't be able to make current payments),
that Boeing may begin its lease termination planning. In
the final analysis, Sicilia believes the crux is whether the
GOB will allow a debt-swap or not; if not, he said there is
little hope that Varig can attract investors or survive.
(On July 7, Varig announced that Henrique Nieves had stepped
down as president to manage the debt restructuring
operations and Omar Carneiro da Cunha, who was the VP, would
assume the presidency of the airline.)


5. (SBU) If Varig goes belly-up, Sicilia thinks that most of
its domestic routes would be filled relatively easily by
other Brazilian carriers. Given the greater difficulties in
operating overseas and the need to acquire slots at foreign
airports, the international routes would be more complicated
to fill. Overall, he considered transferring Varig's leased
planes and service infrastructure into TAM the best option
for filling the service gap quickly. However, since TAM has
an Airbus fleet and no support infrastructure for Boeing's
planes, Sicilia isn't sure such a transfer would
materialize. While cut-rate airline GOL operates Boeing
planes, and has more cash available, Sicilia said GOL
doesn't have authorization to fly wide-body planes, and that
in general its low-cost carrier model wouldn't work as well
on international routes. In addition, GOL has already gone
in another direction internationally as it announced this
week the signing of an MOU to establish a low-cost carrier
in Mexico as well as code sharing plans with Air France and
Delta.


6. (SBU) Comment. Varig's bankruptcy filing has bought it
some breathing room, but may only postpone the inevitable.
Boeing's Sicilia was clearly trying to be upbeat about the
future even though he admitted the situation was bleak. We
think it highly unlikely that the recovery plan will be
sorted out by the September court date. But, given the
current political crisis, neither does the Lula
administration want the demise of Varig on its hands. We
look for the GOB to try to kick the can down the road, which
could happen if Brazil's judiciary extended the foreclosure
prohibition period for 180 days and U.S. courts followed
suit, thus preventing the lessors from seizing their leased
aircraft.

CHICOLA