Airline Flies From Complacency to Competition

Latin America's largest airline, Varig, has long been a source of national pride in Brazil for its first-world standards.

But lately, high-class service hasn't been enough to keep the 69-year-old carrier profitable. Between 1990 and 1993, Brazil's national airline lost $759 million. Last year, losses were held to $7.1 million on $3.2 billion in sales, but Varig was burdened with a spiraling debt of $2.4 billion.

The story of Varig's financial tailspin is also a case study in Brazil's economic reforms. Fattened and favored under a military dictatorship, the airline now must make the transition to a free-market environment.

"They acted like a monopoly," says Richard Foster, editor of the Brasilia-based business newsletter Brazil Watch. "They thought they were the standard for how to run an airline, got lazy, and then got hit by the winds of history."

Since 1945, Varig has been managed by a foundation that holds the majority of its stock for its employees. They are given shares based on their years of service. Some analysts say the foundation became complacent during decades when Varig dominated the Brazilian market. Brazil's military dictatorship from 1964 to 1985 gave Varig virtual control of international routes and the richest domestic ones.

Then, in 1990, President Fernando Collor de Mello began turning Brazil's state-controlled economy down a free-market path. His team abolished fixed quotas and price controls, and increased the number of flights to the United States, opening international routes for the first time to Vasp and Transbrasil, Brazil's second- and third-largest carriers.

In the meantime, American Airlines and United Airlines, after acquiring routes once operated by other US carriers, introduced a new concept: frequent-flyer programs. The incentives included mileage credits for non-airline purchases by consumers.

Varig responded smugly with advertisements boasting that its service was so good that it didn't need to offer such deals. "Mileage points on trips are as necessary as another free toaster from your local bank," the ads said.

Varig's market share of flights to the United States dwindled from 39 percent in 1992 to 32 percent last year, while American and United captured 45 percent by 1994, according to the Brazilian Department of Civil Aviation.

Although tamed inflation has made travel cheaper (3 million Brazilians traveled overseas in 1995), Varig's international sales increased only 1.5 percent last year, according to the news magazine Veja. That's a serious blow for a firm counting international flights as 64 percent of its sales.

The domestic picture isn't much better. Varig's market share has fallen from 70 percent in 1985 to 53 percent last year. Experts say one major reason is Varig's overpriced fares. A 40-minute Rio-So Paulo flight costs $275 round-trip. A So Paulo-Miami round trip ($918) is less expensive than a flight from So Paulo to the Amazon River metropolis of Manaus ($936).

Varig also faces an upstart domestic airline, TAM, which has won a reputation for excellent service. Recently TAM was voted the world's best regional airline by Air Transport World, a US magazine. A roughly threefold surge in profits helped make the carrier the hottest stock on the Brazilian exchange in 1995.

In the past, Varig executives blamed their financial troubles on Brazil's economic chaos, most recently manifest in recession and high interest rates. Now, managers prefer to emphasize what they describe as the company's "restructuring program."

"It's not important to dwell on what Varig was and what it's not," says Varig financial director Carlos Ebner. "What's important is what we are doing to confront the competition."

In 1994, Varig allowed its principal creditors - General Electric, McDonnell Douglas, and several private banks - to name five members to sit on its nine-member board of directors. They quickly began downsizing.

In the past two years, Varig has reduced its fleet from 90 to 77 airplanes, sold off its advertising agency and car-rental firm, and closed 65 international sales offices. It has begun using smaller aircraft on domestic flights, cut down on the size of in-flight meals, and dropped several international destinations.

The company has finally introduced a frequent-flyer program, which currently has more than 100,000 members, and a Visa card mileage agreement with Avis rent-a-car and 16 Brazilian hotels.

Most important, the company that had always assured workers and executives of a lifetime job has made drastic personnel cuts. The foundation reduced its work force from 28,000 to 18,500.

Francisco Pinto, who became chief executive in January, is a mechanical engineer and a career Varig employee. As president of Varig's regional airline, Rio Sul, he modernized the fleet, created new routes, and saw sales leap from $50 million in 1992 to $400 million in 1995.

In March, Mr. Pinto gave Varig shareholders their first good news in years, announcing that the airline had lowered its short-term debt from $531 million to $475 million; had doubled profits on ordinary operations from $133 million to $243 million; would expand destinations to Orlando, Fla., England, Germany, and Japan; and would invest $40 million in data processing and improved customer service.

Pinto says he plans to keep cutting costs by rescheduling debt, closing more agencies, selling six hotels, and seeking alliances with other airlines.

"Pinto knows exactly what to do," says Bob Booth, publisher of the Miami newsletter Aviation Latin America & Caribbean. "If I had money, I would bet on Varig."