Brazil's Varig Airline Headed for the Auction Block

RIO DE JANEIRO, Brazil_Six companies were expected to bid at an auction for Brazil's embattled flagship airline on Thursday, despite uncertainty over whether the new owner would be saddled with the carrier's debt.

The auction of Viacao Aerea Rio-Grandense, or Varig, had been scheduled for Monday but was postponed at the request of bidders uncertain about conditions of the sale under Brazil's new bankruptcy law.

Judge Luiz Roberto Ayoub, who is overseeing the airlines' restructuring under bankruptcy protection declared in July 2003, said Tuesday that the new owner was not at risk of assuming all or part of the company's estimated US$3.5 billion (€2.7 billion) in debt.

But many lawyers said the law was unclear, and only six bidders indicated interest in the carrier, down from 11 last week.

"We have good expectations for the auction even though the company is broke," said Edson Hydalgo Jr., a trader at the Sao Paulo-based Intra brokerage. "What the market is looking at is if the buyer is ready to clean up the company and invest in aviation."

Hydalgo said despite the failure of several big Brazilian carriers over the past decade, it is still possible to make money in Brazil's aviation sector.

"It's not all bad, there are airlines like Gol that are working and making money," he added, referring to one of Brazil's new low-cost airlines modeled after U.S. carriers, like JetBlue.

Several Brazilian carriers, including TAM, Gol Linhas Aereas Inteligentes, BRA, Webjet and OceanAir, had picked up documents allowing them to bid, Varig said.

Varig's domestic and international operating assets will be put up for sale for a minimum of US$860 million (€670 million). If that bid is not met, the company's domestic assets could be sold, for at least US$700 million (€550 million).

Under Brazil's new bankruptcy law, if the airline is not sold Thursday it will be liquidated.

The proceeds would be used to pay debts on operating expenses to allow the airline to continue flying.

Varig remains Brazil's leading airline on international routes, but has fallen behind TAM and Gol due to financial problems.