Varig Slowly Dying -- Gol Continues to Benefit (GOL)
Still more news this week from the sad story of Varig, Brazil's flagship airline that is continuing to fall apart even as the bankruptcy proceedings near a close.
I seem to write about this a lot, but it's a fascinating story of an industry leader facing the first big bankruptcy filing in a developing country that is trying to let capitalism work. Think of what the French are calling the "industry champions" of Europe, and imagine whether they would allow their leading companies, storehouses of national pride, to fall like this, and in so doing allow better, younger, stronger companies like GOL and TAM to emerge fairly. Heck, this even calls to mind Nortel Networks in Canada, which probably should have gone bankrupt a dozen times over in the past few years but is, at least according to some, being protected by the Canadian government.
Now, nearly half of Varig's international flights have been cancelled due to lack of planes (they remain the dominant international airline for Brazil, though their domestic market share is now tiny). Actually, they still have the planes -- they just can't pay for them, so a US judge has issued injunctions to stop flying on behalf of leasing creditors.
The employee group that is still trying to buy Varig to keep it afloat (and keep their jobs and pensions intact) is having a tough time of it -- they're looking for a huge cash inflow that they need to invest in the airline by the end of this week in order to confirm their winning (and only) bid from the bankruptcy auction. It's push and go whether they'll get the $75 million they need by Friday to meet the judge's edict, some commentators believe the banks will refuse to lend them the operating capital they need but others believe the government development bank will come through as a last resort (summary of this news is here).
At the same time, other possible buyers have completely disappeared -- a TAP executive (that's a big Portuguese airline that was a reputed possible savior) confirmed to an AP reporter that "It turned into a high-risk operation and yes, I can confirm that the deal is off."
It's no real surprise that no one but the employees wants Varig at anything approaching the prices the bankruptcy judge demanded, and even the employee bid was well below the limit set. It's no surprise why -- their highly leveraged fleet doesn't have that much value given the much higher efficiency of newer aircraft and the fact that most of their planes are being repossessed, and their brand must be dying a slow death in Brazil.
Who would want to buy an airline if all you get are the employees whose unions make it impossible to compete against TAM and GOL, an albatross of a leveraged fleet, and a brand name that is now associated with thousands of trips lost and tickets made worthless? This isn't as bad as a plane crash, like the one that forced ValuJet to change its name to AirTran, but it's pretty bad -- would anyone who heard about an airline cancelling flights and not refunding tickets want to fly them again?
On the other hand, GOL and TAM are taking those Varig passengers that they can, without charge, and counting on some recompense from the government. That should help both by expanding the universe of people who have been exposed to GOL's improved customer service and efficiency, and by giving GOL and it's larger competitor TAM the halo of a good samaritan, helping passengers in their time of need.
This situation remains very fluid and there's no way of knowing whether Varig will survive, but my guess is that it will endure for the near term as a mere shell of its former shelf with employee concessions and government loans, with very little chance of returning to profitability. Still good news for GOL, as you can see from the quick incline in the stock price when the latest Varig cancellations were announced this morning.
I seem to write about this a lot, but it's a fascinating story of an industry leader facing the first big bankruptcy filing in a developing country that is trying to let capitalism work. Think of what the French are calling the "industry champions" of Europe, and imagine whether they would allow their leading companies, storehouses of national pride, to fall like this, and in so doing allow better, younger, stronger companies like GOL and TAM to emerge fairly. Heck, this even calls to mind Nortel Networks in Canada, which probably should have gone bankrupt a dozen times over in the past few years but is, at least according to some, being protected by the Canadian government.
Now, nearly half of Varig's international flights have been cancelled due to lack of planes (they remain the dominant international airline for Brazil, though their domestic market share is now tiny). Actually, they still have the planes -- they just can't pay for them, so a US judge has issued injunctions to stop flying on behalf of leasing creditors.
The employee group that is still trying to buy Varig to keep it afloat (and keep their jobs and pensions intact) is having a tough time of it -- they're looking for a huge cash inflow that they need to invest in the airline by the end of this week in order to confirm their winning (and only) bid from the bankruptcy auction. It's push and go whether they'll get the $75 million they need by Friday to meet the judge's edict, some commentators believe the banks will refuse to lend them the operating capital they need but others believe the government development bank will come through as a last resort (summary of this news is here).
At the same time, other possible buyers have completely disappeared -- a TAP executive (that's a big Portuguese airline that was a reputed possible savior) confirmed to an AP reporter that "It turned into a high-risk operation and yes, I can confirm that the deal is off."
It's no real surprise that no one but the employees wants Varig at anything approaching the prices the bankruptcy judge demanded, and even the employee bid was well below the limit set. It's no surprise why -- their highly leveraged fleet doesn't have that much value given the much higher efficiency of newer aircraft and the fact that most of their planes are being repossessed, and their brand must be dying a slow death in Brazil.
Who would want to buy an airline if all you get are the employees whose unions make it impossible to compete against TAM and GOL, an albatross of a leveraged fleet, and a brand name that is now associated with thousands of trips lost and tickets made worthless? This isn't as bad as a plane crash, like the one that forced ValuJet to change its name to AirTran, but it's pretty bad -- would anyone who heard about an airline cancelling flights and not refunding tickets want to fly them again?
On the other hand, GOL and TAM are taking those Varig passengers that they can, without charge, and counting on some recompense from the government. That should help both by expanding the universe of people who have been exposed to GOL's improved customer service and efficiency, and by giving GOL and it's larger competitor TAM the halo of a good samaritan, helping passengers in their time of need.
This situation remains very fluid and there's no way of knowing whether Varig will survive, but my guess is that it will endure for the near term as a mere shell of its former shelf with employee concessions and government loans, with very little chance of returning to profitability. Still good news for GOL, as you can see from the quick incline in the stock price when the latest Varig cancellations were announced this morning.
Labels: GOL
This article posted by One Guy @ 6/21/2006 12:02:00 PM 0 comments
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