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Wings of desire

Varig's crisis reveals precarious situation of Brazilian civil aviation

In a curious irony, in the year that celebrates the centenary feat of the Brazil who first managed, at a cost, to drag an aircraft from the ground, Brazilian airports are chocked with the most modern aircraft, which go up into the sky with great facility, but are stuck to the ground because of economic problems. The question even went so far as to touch on national pride. President Lula himself, who refuses to “put public money there”, recognized that the company was “a national passion”. The mention of the Christmas jingle “Estrela brasileira no céu azul/ Iluminando de Norte a Sul” [Brazilian star in the blue heaven/ Lighting up from North to South], which was closed with the famous “Varig, Varig, Varig”, draws tears even today.

What could have led the first Brazilian airline, which went so far as to feature amongst the 20 largest airlines of the world, with 87 planes, 40 thousand employees and 44 destinations abroad to its current state of penury, fighting to maintain its check-in counters at the airports? “They even thought of nationalizing the company, to privatize it afterwards. But Varig has already been managed like a government-owned company, in a way that is not very transparent: by a foundation that, in practice, acts like a self-managed government company, with a slow process for decisions, a swollen personnel structure, and showing, for years, an apparent lack of concern with economic results”, in the assessment of transport engineer from Poly-USP, Antonio Henriques de Araújo. From 2000 until today, the company has now had nine CEOs, none of them with autonomy for taking effective decisions. “Varig fragmented the lines of command inside the company, and to buy anything, be it a pen or a turbine, there had to be the approval of a countless number of employees”, the researcher observes. At the end of 2003, according to Araújo, the number of employees per aircraft was more double than in TAM or Gol, while the total productivity of Varig’s factors was 86% of TAM’s productivity and 95% of VASP’s. Each seat on a flight would usually cost 30% more than with the competition. Varig, Varig, Varig…

Even so, it was seen as the Brazilian company par excellence, although it was born, in 1927, by dint of a German immigrant, Otto Meyer, who, in Porto Alegre, won tax exemption to run his pioneer airline business. Meyer joined up with a German consortium, brought the Atlântico aircraft to Brazil, and brought together 550 other children of immigrants to found the first Brazilian civil aviation company, Varig. Already in 1931, it showed its most characteristic facet: its relationship with political power. In crisis, it received intense support from the Rio Grande do Sul state government, giving rise to the claim that the company was an ‘institution’ to be preserved. In 1944, with the war, the German Meyer yields his position to the Brazilian Ruben Berta. Varig then shared the domestic air space with Vasp, a company created in 1933 by businessmen from São Paulo that was put under the control of the state of São Paulo, and with Panair, a Brazilianized name that was saddled on the Brazilian branch of Pan American Airlines.

“But Varig was able, in the sense of constructing for Brazilian society an image of a company bound up with the interests of the country, a symbol of modernity, development and national integration, of the regions amongst themselves, and of Brazil with the world”, observes Cristiano Monteiro, from Cândido Mendes University, the author of the doctoral thesis The political dynamics of the reforms for the market in Brazilian civil aviation.

The researcher reveals Berta’s work in always keeping in operation the close relationship with power, guided by clientelism. “Berta has helped us a lot in the campaign, and I would like you to look sympathetically at Varig’s pretensions, and attending to it with good will”: it was in this casual tone that Vargas pressed his Minister of Aeronautics, Nero Moura, to assign the routes of South America to the young company. All the presidents, up until FHC in his second term, were transported by Varig. A friend of Goulart and Brizola, Berta did not think twice about joining the military men that were taking power in 1964. When Costa e Silva decreed, for reasons that are still obscure, Panair’s bankruptcy, Varig was ‘summoned’ to take over its international routes, making it the country’s number one. “Going beyond questions of efficiency and competitiveness, the construction of a company of the country always had to be renewed symbolically”, Monteiro notes. Hence the transportation of the football teams, the favors for politicians: in 1970, a line was implemented between Brasilia and Porto Alegre, not by chance with the presence of Médici, born in Rio Grande do Sul, and, during the Collor government, the creation of a connection between Maceió, the city of the former president, and the Federal District.

“This is the recognition extended to our government, which, since the saving 1964 Revolution, has focused on the pressing task of creating, in Brazil, conditions for accelerated economic development”, ran the company’s Annual Report of 1971. For the ‘Great Brazil’, a ‘Great Varig’. “If during the pre-64 period one glimpsed the possibility of matching air and land transport in terms of costs, and there was a proposal to offer popular prices, Varig’s post-64 paradigm is another one”, Monteiro reveals. The flights is made to New York had a Boeing 707 with half of its cabin dedicated to the first class. The profile of the desirable customer, for the company, was precisely the rich businessman, capable of paying well for a de luxe service. The relationship with power, and that was not just a privilege of Varig, included a direct connection between the private companies and the Ministry of Aeronautics, based on the Doctrine of the Unified Air Power.

In economic terms, aviation wafted on the basis of two pillars conferred by the link with the Ministry: ‘fare reality’ (that is, the passengers would have to bear the costs of transportation), and ‘controlled competition’, which prevented the overlapping of routes and schedules. In this context, Varig came out better than the others, since it won the monopoly of the international lines, a prerogative lost only in the Collor government. With the shield of the military, it did not even have to worry about labor pressures, as the trade union leaders were persecuted by the new regime. With the arrival of the redemocratization, the ideal world of Brazilian commercial aviation found itself thrown into reality.

Little by little: at a first moment, the aeronautical authorities saw themselves drained of power, faced by their economic colleagues, for whom controlling inflation was a priority, and this included a rigid control over air fares. Greater turbulences were to come with the arrival in the Brazilian State of the neoliberal clouds, which preached the closing of the mechanisms of dialog between state-owned and non-state-owned players, fortifying a technological style of management of the economy, as Monteiro observes. The first impact was the privatization of Vasp and the entry onto the field of Wagner Canhedo, with an aggressive style of competition that startled the competitors. One year afterwards, the businessmen found himself enmeshed in a Parliamentary Commission of Inquiry, accused of participating in a scheme of favors, with PC Farias.

What they were really afraid of was a repetition in Brazil of the deregulation of the airlines put into effect in the United States, during the Reagan government. “In the Collor government, there was a pro-market rhetoric, which admitted an increase in competition, but, from the practical point of view, maintained conservative postures”, Monteiro recalls. “But in the first term of FHC, an orthodox version of the technological style of management prevailed, leaving no space for formal political mechanisms of mediation between economic agents, unions and the State. That, unfortunately, at a moment when the airlines were maturing and striving to create strong bonds with their workers, after years of neglect”, the researcher notes. Monteiro recalls that the sector was the object of growing pressure from the Executive to reduce their fares, under penalty of opening up the domestic market to foreign companies. In the ‘fare war’, there were benefits: a 20% increase in the flow of passengers. “But they didn’t last long, because with the end of the parity between the real and the dollar, as from 1999, the sector entered into a deep crisis.” After decades of a relationship with power, Varig believed in it unconditionally.

“The depreciation of the currency affected the finances of the Brazilian companies, and the operating revenues obtained in the period were offset by the increase in financial expenses, generating great losses, since they received in real but had debts (leasing, interest on financings, payment of aircraft and parts) in dollar”, Araújo explains. In a well-managed company, that is a big problem. What can be said of the case of the ‘white elephant’ into which the Ruben Berta Foundation had been transformed, swollen and inefficient? “In this period, Varig saw a growth in financial expenses of 642.2%, against an increase of operating revenue of 107.8% and in operating costs of 139.2%.” Even so, the company went ahead mounted on an imaginary growth, in the spirit of ‘Great Varig’. Even without the ‘fare reality’, a policy that broken with the price freeze of the Cruzado Plan, the company “has to go in with the necessary gigantism, which requires constant growth of it, a Latin America hallmark of leadership”, as an internal report of the company said. New aircraft were bought, even when the monopoly of the international lines was taken away from it. “The company’s structure grew a lot for an increase of demand that did not come to fruition”, reckons Monteiro.

The discourse changes and the dismissals and cuts begin. “In the quest for a new identity, Varig still preserves the motto of the ‘company at the service of the country’, assuming the stockholders’ profit as a priority in relation to the other jingoist commitments to the nation, which stay in last place. But the New Varig, integrated with Star Alliance and with an innovative mileage program (Smiles), although it tries to remain in the business of a global company connected with the market, cannot manage to keep its feet on the ground, and continues to buy new aircraft. There were 39, between 1997 and 1998, an investment of US$ 2.7 billion, shortly before the drastic depreciation of the real, which brought, for good measure, a decrease in the demand for international journeys and a reduction in discounts on the domestic flights and an overall reduction in the number of passengers.

“Oddly enough, the products aimed at the public with greater spending power have remained, going against the logic that had, since the 1970’s, inspired the American policy of deregulation, which is the popularization of air transport”, reckons Monteiro. In the meantime, competitors are arriving that are thinking with realism, like TAM, which opted for the domestic lines, and, more recently, Gol. “If the current situation of crisis persists, you can foresee, in the short term, the bankruptcy of the traditional companies, and only the low cost ones, with the profile of Gol, should survive.”

For him, it would be better to employ the US$ 2.5 billion that many are demanding that the government inject in Varig in the recovery of the road network and in the elimination of the bottlenecks in the ports. “The solution for the company involves market solutions and a managerial and operational restructuring, to make it possible to generate profits that can be reinvested in programs to increase productivity and efficiency. One thing is certain: who should pay for this is the company and its stockholders, and not, once again, the Brazilian taxpayer.” Sérgio Lazzarini, the coordinator of the Center for Researches in Strategy at the Brazilian Capital Market Institute (Ibmec), agrees with Araújo. “There is nothing strategic about the air transport sector. If a route is profitable, there is no doubt that there will be people interested in investing in the sector. Large foreign companies have looked for opportunities in Brazil, but there are restrictions for foreigners on exploiting domestic connections and routes.” Heloísa Pires, from the Federal University of Rio de Janeiro, reminds us that we are a continent country, with low per capita income. “Of the 105 flights of the agreement between Brazil and the USA, they use 93% of their quota, and us, 47%. There’s no lack of passengers, but of planes.” If the square belongs to the people, the sky has to go back belonging to the planes.