This record is a partial extract of the original cable. The full text of the original cable is not available.

151506Z Jun 05

UNCLAS SECTION 01 OF 02 BRASILIA 001608 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR 
NSC FOR BREIER 
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: VARIG BOARD STRUGGLES TO SAVE AIRLINE 
 
REF: BRASILIA 1566 
 
¶1. (SBU) Summary and Introduction.  In a June 14 meeting 
with the Ambassador, key members of the VARIG board 
outlined the predicament in which the airline finds itself. 
ILFC (International Leasing Finance Corporation), a 
subsidiary of of AIG and a key aircraft leasing company, 
has indicated that it intends to start repossessing the 11 
planes that it has leased to VARIG, beginning on June 17. 
And while, at least according to our VARIG interlocutors, 
the GOB has agreed to drop its appeals of the airline's 
US$1.1 billion judgment against the government, it will 
still take several weeks for this money to be disbursed. 
In the meantime, ILFC is playing hardball and has 
reportedly stated that it plans to take back its aircraft 
even if VARIG pays its debt arrearages.  Airline officials 
worry that the rescue package they have been so carefully 
constructing will begin to unravel once ILFC repossesses, 
as the other leasing companies might follow suit and the 
GOB might then backtrack on its commitment to ensuring the 
company's survival.  End Summary and Introduction. 
 
¶2. (U) On the morning of June 14, VARIG Chairman Henrique 
Neves telephoned the Ambassador to request a meeting that 
same day.  Scheduled for that afternoon, key members of the 
VARIG board (including President David Zylbersztajn and 
Vice-President Omar Carneiro da Cunha) recounted to the 
Ambassador the airline's plight.  Michael Conolly, 
Executive Vice-President for TAP (Air Portugal) - VARIG's 
potential foreign investor- accompanied the VARIG 
delegation.  Econ Counselor, Commercial Service Deputy 
Senior Commercial Officer, and SpecAsst sat in as well. 
 
¶3. (U) During the conversation, Zylbersztajn and Carneiro 
da Cunha made the following points. 
 
--  President Lula had directed that the GOB cabinet and 
staff find a way to allow the government to quickly inject 
capital into VARIG.  While rescheduling debt, particularly 
with INFRAERO (the GOB's airport authority), might take as 
along as six months, within "a few weeks" the GOB would be 
able to free up the US$1.1 billion due VARIG in the 
airline's court case against the government. 
 
--  All the major aircraft leasing companies were on board 
with the VARIG restructuring plan (Reftel) except for ILFC. 
(Per post's contacts, the accuracy of this statement is 
open to question.)  Sensing that it could place its 
aircraft with better customers, ILFC had taken the tack 
that it would take back its planes regardless of whether 
VARIG paid its debt or not.  (Apparently, ILFC's two Boeing 
777s are headed to Continental while the Brazilian cut-rate 
airline GOL would take its 737-700s.) 
 
--  Just this week, VARIG had resumed payments to all its 
leasing companies planned to at least keep up with current 
payments. 
 
--  If ILFC repossessed its planes - and VARIG planned to 
return them at a rate of one per week - the other leasing 
companies might follow suit.  The GOB might then rethink 
its commitment to the airline, reasoning that there is no 
point in releasing a billon dollars to a company that will 
soon collapse anyway.  Board members worried that the lack 
of a financing bridge between June 17 (ILFC's deadline) and 
the expected two to three week period it would take for the 
lawsuit revenues to arrive might be fatal. 
¶4. (U) Ambassador acknowledged that the new VARIG board had 
made valiant efforts to free the carrier from its debt 
nightmare.  However, he stated, time was not on the 
company's side and if the airline was to survive the U.S. 
leasing companies would, at a minimum, need to receive 
payment quickly for as much of their receivables as 
possible.  Carneiro da Cunha noted that GOB Vice-President 
Alencar had already sent a letter to ILFC, although, he 
admitted, that correspondence did not contain detailed 
assurances.  VARIG board members agreed that it is 
essential for VARIG to make known to the leasing companies 
the GOB's commitment to saving VARIG. 
 
¶5. (SBU) Comment. Judging from the body language of our 
interlocutors, VARIG's situation is indeed grim.  While 
Lula may have indeed directed that his staff work to rescue 
the carrier, getting all the agencies/interests within the 
government to quickly work toward this goal will be a stiff 
challenge, especially given the legal constraints outlined 
in reftel and the ongoing preoccupation of key policymakers 
with ongoing corruption scandals.  Post will continue to 
monitor developments regarding this issue as the June 17 
deadline approaches. 
 
DANILOVICH