US embassy cable - 05BRASILIA1839

UNCLAS SECTION 01 OF 02 BRASILIA 001839 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR 
NSC FOR CRONIN, RENIGAR 
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, Transportation Issues 
SUBJECT: BRAZIL - NEXT STEPS FOR VARIG UNCLEAR 
 
REFS: (A) BRASILIA 1608, (B) BRASILIA 1631, (C) BRASILIA 
1566 
 
1. (SBU) Summary.  Boeing Sales Director for Brazil, Jose 
Sicilia, told Emboffs that Boeing is still trying to assess 
what the immediate future holds for Varig after the 
carrier's recent move to obtain bankruptcy protection. 
While under Brazilian law the company has until August to 
file a reorganization plan and is immune until December from 
creditor suits to repossess assets, Sicilia noted that the 
U.S. federal district court injunction barring creditors 
from foreclosing expires on September 12 -- at which point 
it is unclear what would happen.  In the end, if Varig is 
unable to secure a debt-swap with the GOB (Ref A), then 
Sicilia thinks it unlikely that the airline will survive. 
Given the political scandals in which the Lula 
administration is currently enmeshed (Ref B), to avoid the 
accumulation of bad news the GOB may try to delay resolution 
of the Varig crisis until after the next presidential 
election.  End Summary. 
 
2. (U) This cable includes business confidential information 
and should be handled accordingly. 
 
3. (SBU) On July 1, Boeing Sales Director for Brazil, Jose 
Sicilia, met with EconOffs and Foreign Commercial Service 
staff in Brasilia and had a candid discussion of the Varig 
crisis.  Sicilia, who at times plays the role of the 
"advocate" for Varig in Boeing, noted that Boeing has had a 
long history of working with the airline.  Although in the 
past Boeing has forgiven some of Varig's debts (in exchange 
for an exclusivity contract), Sicilia considered the 
business relationship with Varig very positive over the 
years.  Indeed, he observed, if Varig puts together a good 
recovery plan, Boeing will fight for Varig to survive. 
Nevertheless, Sicilia stated, the company has to consider 
the interests of its leasing subsidiaries Boeing Capital 
Corporation (BCC) and Boeing Asset Management (BAM), both of 
which were more interested in cutting their losses than in 
looking to future sales.  Sicilia informed us that Boeing 
had been considering pulling its leased planes, but that 
IFLC had moved first (Ref C).  Given the popularity of Varig 
in Brazil, Boeing didn't want to be the "bad guy" who took 
Varig down.  (According to Sicilia, Varig has 29 different 
lessors, the biggest of which are Boeing, IFLC, ANCET, GATX, 
and Bristol.) 
 
4. (SBU) A group of high-level Boeing executives, including 
BCC and BAM, will be meeting with the Varig Board the week 
of July 4 at Varig President David Zylbersztjan's request. 
Sicilia predicted that the meeting will be mostly 
pleasantries, but that if Varig says something "wrong" (such 
as indicating it won't be able to make current payments), 
that Boeing may begin its lease termination planning.  In 
the final analysis, Sicilia believes the crux is whether the 
GOB will allow a debt-swap or not; if not, he said there is 
little hope that Varig can attract investors or survive. 
(On July 7, Varig announced that Henrique Nieves had stepped 
down as president to manage the debt restructuring 
operations and Omar Carneiro da Cunha, who was the VP, would 
assume the presidency of the airline.) 
 
5. (SBU) If Varig goes belly-up, Sicilia thinks that most of 
its domestic routes would be filled relatively easily by 
other Brazilian carriers.  Given the greater difficulties in 
operating overseas and the need to acquire slots at foreign 
airports, the international routes would be more complicated 
to fill.  Overall, he considered transferring Varig's leased 
planes and service infrastructure into TAM the best option 
for filling the service gap quickly.  However, since TAM has 
an Airbus fleet and no support infrastructure for Boeing's 
planes, Sicilia isn't sure such a transfer would 
materialize.  While cut-rate airline GOL operates Boeing 
planes, and has more cash available, Sicilia said GOL 
doesn't have authorization to fly wide-body planes, and that 
in general its low-cost carrier model wouldn't work as well 
on international routes.  In addition, GOL has already gone 
in another direction internationally as it announced this 
week the signing of an MOU to establish a low-cost carrier 
in Mexico as well as code sharing plans with Air France and 
Delta. 
 
6. (SBU) Comment.  Varig's bankruptcy filing has bought it 
some breathing room, but may only postpone the inevitable. 
Boeing's Sicilia was clearly trying to be upbeat about the 
future even though he admitted the situation was bleak.  We 
think it highly unlikely that the recovery plan will be 
sorted out by the September court date.  But, given the 
current political crisis, neither does the Lula 
administration want the demise of Varig on its hands.  We 
look for the GOB to try to kick the can down the road, which 
could happen if Brazil's judiciary extended the foreclosure 
prohibition period for 180 days and U.S. courts followed 
suit, thus preventing the lessors from seizing their leased 
aircraft. 
 
CHICOLA