Brazil's Varig Airline Sold to Former Subsidiary

Brazil's flagship airline Varig was sold to its former subsidiary VarigLog on Thursday as the deeply indebted airline struggles to avoid bankruptcy.

The operating assets of Viacao Aerea Rio-Grandense SA, or Varig, were sold for US$485 million (euro388 million) at an auction in which VarigLog, Varig's cargo unit, was the only bidder.

No other company was willing to put up the US$24 million (euro19.2 million) to take part in the auction.

VarigLog also must deposit an additional US$75 million (euro60 million) by Monday, auctioneers said.

The auction, held by administrators responsible for restructuring Varig, was a lifeline for the airline, struggling under a mountain of debt.

"We have shown all the doubters that Varig has a future," said Marcelo Bottini, the company's chief executive officer.

Last week, creditors rejected a bid for Varig by Brazilian investment group Volo do Brasil, which recently purchased VarigLog. Varig workers and pensioners favored the offer, but it was blocked by airplane leasing companies, Varig's press office said Monday, endangering the sale.

The airline's stock plunged on the Sao Paulo stock exchange and put the airline on the verge of bankruptcy. But a bankruptcy court judge annulled creditors' vote and rescheduled the auction for Thursday.

The company VarigLog bought is known as the new Varig and will continue flying the airline's domestic and international routes, honoring tickets already issued, but without the airline's massive debts, which belongs to the "old" Varig.

The new Varig is expected to lay off thousands of workers, but VarigLog President Joao Luiz Bernes de Sousa said the number would depend on how many planes keep flying. He said Varig hoped to increase the total of planes in operation from 13 to 25 "within the next few days."

VarigLog said late Thursday, however, that it was canceling its international flights and most of its domestic routes until July 28. In a statement, the company said it would maintain only the Rio de Janeiro-Sao Paulo route, with an increased number of flights.

Auctioneers said they would officially tell U.S. courts of the sale and request an extension of the deadline for Varig to return leased planes.

"We are going to rebuild Varig," Sousa said. "It will be reborn and see a return to its golden age."

Varig has been in financial trouble for years, with debts that now total around 8 billion Brazilian reals (US$3.6 billion; euro2.9 billion).

The airline is having trouble paying for landing and departure fees and fuel for its jets. More than two-thirds of its planes are grounded as leasing companies demand their crafts back and the company can not pay for basic maintenance.

The company has been able to continue flying because of daily deposits by Volo do Brasil, which already total more than US$13 million (euro10.4 million).

On June 8, a Varig workers' group agreed to purchase the airline for US$449 million (euro351 million) at a bankruptcy auction. But it was unable to make the first payment, throwing the airline's fate back into doubt.

Varig, once Brazil's biggest airline, today has just 13 planes - down from 58 in December - and has seen revenues drop by 80 percent, to US$32 million (euro25.5 million) a month, Fabio Carvalho, a lawyer for the company, told the government news service Agencia Brasil last week.

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