VZCZCXRO9677
PP RUEHRG
DE RUEHBR #0694/01 1011523
ZNR UUUUU ZZH
P 111523Z APR 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC PRIORITY 5062
RUCPDO/USDOC WASHDC PRIORITY
INFO RUEHRG/AMCONSUL RECIFE 4598
RUEHRI/AMCONSUL RIO DE JANEIRO 1857
RUEHSO/AMCONSUL SAO PAULO 6722
RUEHBU/AMEMBASSY BUENOS AIRES 3944
RUEHAC/AMEMBASSY ASUNCION 5361
RUEHMN/AMEMBASSY MONTEVIDEO 6180
RUEHSG/AMEMBASSY SANTIAGO 5442
RUEHPE/AMEMBASSY LIMA 2944
RUEHCV/AMEMBASSY CARACAS 3195
RUEHQT/AMEMBASSY QUITO 1783
RUEHLP/AMEMBASSY LA PAZ 4502
RUEHBO/AMEMBASSY BOGOTA 3693
RULSDMK/DEPT OF TRANSPORTATION WASHDC
RUEAYVF/FAA MIAMI ARTCC MIAMI FL

UNCLAS SECTION 01 OF 02 BRASILIA 000694 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAIR EIND OPRC BR
SUBJECT: VARIG'S DOWNWARD SPIRAL: WE'LL PAY YOU LATER 
 
REF: BRASILIA 688 
 
¶1. (U) The following cable has business sensitive information, 
please handle accordingly. 
 
¶2. (SBU) VARIG's downward spiral continues with a recent spate of 
cancellations that have left passengers stranded and caused outcries 
from local and international creditors clamoring for GoB action. 
The company is currently USD 3.3 billion in debt (with obligations 
growing), two months behind on payments to creditors for leased 
aircraft, 7 months behind on payments to the national airport 
operator INFRAERO, and will be required by Petrobras subsidiary BR 
Distribuidora to prepay for refueling. National Civil Aviation 
Agency (ANAC) representatives expressed concerns that foreign 
creditors will paralyze VARIG's cash-generating foreign operations 
with plane seizures and the loss of landing rights at foreign 
airports. VARIG recently paid its most vocal foreign creditor, 
International Lease Finance Corporation (ILFC), but did not pay the 
other 28, fostering ill will among those left holding the bag. VARIG 
has a scheduled date in U.S. bankruptcy court April 20, which will 
more than likely decide the company's operating future. End 
Summary. 
 
¶3. (SBU) Brazil's airport operator INFRAERO stated that it can/will 
no longer wait for VARIG to pay seven months of owed airport fees, 
equivalent to USD 492 million.  This is in the wake of VARIG's calls 
to hold off paying for another three months and despite INFRAERO's 
meeting with Lula Chief of Staff Dilma Rousseff. INFRAERO is itself 
being pressured by the Public Ministry and the Public Accounts 
Tribunal (GAO-equivalent organ) to collect these fees from VARIG or 
face prosecution for favoritism.  Similarly, Petrobras subsidiary BR 
Distribuidora, will require VARIG to prepay for fuel, despite 
VARIG's request to delay payment for two months. Airline pension 
fund AERUS, VARIG's largest single creditor at USD 943 million, last 
week opposed a deal proposed by MatlinPatterson's local subsidiary, 
VOLO, to purchase the airline's operations for USD 350 million.  The 
new company contemplated under the VOLO proposal would not assume 
any of VARIG's debt, including the post bankruptcy protection back 
payments of USD 18 million to AERUS.  Acceptance of the 
MatlinPatterson offer would have resulted in a 33 percent reduction 
in aircraft and a 56 per cent reduction in staff in the newly 
restructured entity.  The president of AERUS has since been fired, 
which he publicly blamed on his refusal to back the deal. 
 
¶4. (U) In the meantime, VARIG's leaders are banking on its status as 
an "institution" to save it and will thus take another proposal to 
Brazil's Economic and Social Development Bank (BNDES) this week to 
ask for a USD 200 million bridge loan until a suitable solution can 
be found.  Political leaders, including the new Finance Minister 
Guido Mantega, who needs to convince financial market participants 
of his fiscal-restraint credential, stated that the GoB does not 
have the money to finance a bailout of the airline and is not in the 
business of using public funds to save private enterprises. 
 
¶5. (SBU) In a lunch meeting with Emboffs (reftel), ANAC Directors 
Denise Abreu and Leur Lomanto openly worried that their biggest 
problem with VARIG is the takeover of Brazil's international routes 
of which VARIG has a 69.6 percent share.  While publicly denying 
that it has come up with a contingency plan for the eventuality of a 
VARIG stoppage of service, ANAC representatives told Emboffs that 
the carrier's domestic flights could be absorbed easily.  They 
pointedly questioned emboffs whether creditors like International 
Lease Finance Corporation (ILFC) would hold true to threats to seize 
VARIG planes.  (Of VARIG's 29 leasehold creditors, 19 are based in 
the U.S.)  A Boeing contact told econoff that ILFC, the most vocal 
and most likely to seize aircraft (per their past actions) had been 
paid the week of April 7.  However, this has left the other 
creditors, some of whom have Letters of Intent from other carriers 
for the aircraft currently under lease with VARIG, disgruntled. 
VARIG's post bankruptcy petition protections against plane seizures 
etc. were predicated on its staying current on their financial 
obligations.  The Boeing rep noted that now more than ever, it makes 
more financial sense for the leasehold creditors to move forward 
with plans to seize these planes for non-payment and lease them to 
other airlines. 
 
 
BRASILIA 00000694  002 OF 002 
 
 
CHICOLA