Brazilian airline Varig, once Latin America's largest carrier, was sold at auction on Thursday to a local investment fund for USD$24 million, saving it from collapse for now.
A Brazilian group called Volo do Brasil, which together with US investment fund MatlinPatterson already controls Varig's former cargo unit VarigLog, was the lone bidder.
The sale, which has to be approved by Brazil's Civil Aviation Agency, throws Varig a lifeline at a time when its survival appeared in doubt. Strapped for cash to pay for fuel and airport fees, the debt-ridden carrier has been canceling flights and grounding planes for months.
Volo moved quickly to assert control and on Thursday night said it would halt all Varig flights -- except the highly profitable Sao Paulo-Rio de Janeiro commuter route -- until July 28. Volo said it needed time to bring more planes into operation to adequately service its routes.
"Today a new Varig is reborn," the airline's chief executive, Marcelo Bottini, said to an audience of about 1,000 Varig employees who attended the auction.
Besides the USD$24 million price tag, Volo pledged to invest USD$485 million to resurrect the 79-year-old airline. It has already injected USD$20 million in Varig in recent weeks to keep it operating, money that will be counted as a down payment.
The sale foresees splitting Varig, which has been operating under bankruptcy protection for a year, into two companies.
Volo will get most of Varig's routes and the bulk of its fleet, which has dwindled to 13 aircraft from 60 just a few months ago. It will also take over Varig's frequent flyer program, called Smiles, which has 6 million members.
It will not, however, inherit Varig's crushing debt load of more than USD$3.1 billion. That will have to be paid back by another company run by Varig's long-time controlling shareholder, a nonprofit group called the Ruben Berta Foundation.
The foundation, which has been widely criticized for mismanaging Varig, will remain in control of the airline's pilot training center and other company buildings. It will also keep one domestic route to ensure a source of cash flow.
Volo's bid also foresees widespread layoffs. In its filing with auction officials, the group said it intends to keep about 2,000 of the airline's employees out of a total of 10,000.
Thursday was the second time in just over a month that Varig has gone on the auction block. In June, a Varig employee group offered to pay USD$449 million for the airline, but the sale was annulled after the group failed to make a down payment.
Varig, short for Viacao Aerea Rio-Grandense, has long been one of Brazil's best-known companies. But it has been agonizing for years, racking up debt and losing market share to more cost-efficient rivals such as TAM and Gol.
A decade ago, Varig, which has had 11 chief executives since 1995, commanded nearly half of Brazil's aviation market. In June, its market share dropped to 10.5 percent, compared with 47.6 percent for TAM and 35 percent for Gol.
But with air travel in Brazil growing at a double-digit pace, Varig's new owners are confident they can recover some lost ground. Marco Antonio Audi, a managing partner at Volo, said the group is already seeking additional investors to help out, starting with Canada's Aeroplan.
"We are looking to include them and other investors in a new phase for Varig," he told reporters, adding the group hopes to increase Varig's fleet to 25 as soon as possible.
Since Varig has a long history of failed rescue attempts, some aviation analysts and industry executives remained doubtful about the airline's future. Others, however, said the new owners deserved a vote of confidence.
"They have already shown that they are serious by putting money in the company," said Arnim Lore, a former Varig chief executive. "With Varig's name, I think the new company is going to grow quickly. I'm optimistic about this outcome."
