Last September’s merger of Brazil’s Varig with Rio Sul and Nordeste, its two regional-airline subsidiaries, has resulted in a new alignment of the operator’s 15 Embraer ERJ-145s, the only under-100-seat aircraft it currently flies. Alberto Fajerman, executive corporate planning vice president of Viação Aerea Rio-Grandense (Varig), told AIN that a “problematic fleet has been turned into a profitable one,” to such an extent that the company will “most likely” buy Embraer 170s and 190s. “If we come to this conclusion, we will see these Embraers in Varig livery in 2005,” he said.

To stem five years of financial losses, Rio Sul, Nordeste and Varig, the largest airline in Latin America, on September 2 pooled their fleets, 106 aircraft in all, in an operational alliance to form a new route schedule serving 70 Brazilian cities. Before the merger the three airlines operated 127 aircraft, but 21 narrowbodies were returned after their leases expired, Varig’s Fajerman explained. He said that the subsequent fleet reorganization includes a completely new network for its homogeneous fleet of 15 ERJ-145s–Rio Sul’s 12 Embraers and the three ERJ-145s previously operated by Nordeste. Rio Sul, which used to operate EMB-120 Brasilias, had returned the Embraer turboprops to their lessors.

Fajerman stressed that the merger of Varig’s component companies was necessary: “The three companies were competing with each other, as well as with other operators in Brazil’s domestic network. The new plan is more coherent and, with more efficient utilization, we are using each airplane for longer periods, thus increasing the number of seats we offer. Embraers can now be found in the Amazon, the northeast, flying between regional capitals and in the south.”

Fajerman said that after World War II some 300 Brazilian airports were served by domestic airlines, but that number fell to 100 by the mid-1970s. The establishment in 1969 of Embraer and its subsequent introduction of the EMB-110 Bandeirante twin turboprop facilitated air service to more cities. The Brazilian government then created SITAR, the regional network system, formed with the intent of dividing Brazil into five air network regions, each to be served by one national airline backed by a
regional carrier. In the end, only four regions were actually created. Varig was backed by Rio Sul, VASP by TAM and Transbrasil by Nordeste, while the fourth region was served alone by Taba without regional airline backup.

The airlines received no subsidies, but a fund fed by 3 percent of national passenger fares encouraged regional airlines to go to these smaller airports. Fajerman said that “airplanes were bought, jobs created, airport building technology acquired and service expanded.”

Later, Transbrasil and Nordeste split, and Nordeste operated alone as a regional airline before it was purchased by Varig subsidiary Rio Sul. In 1994 the regional air network was liberalized and airlines could fly anywhere they wanted. TAM was the first to take advantage of the new opportunities and merged its two subsidiaries, but Varig maintained its three airlines as separate operators. Rio Sul flew from Rio de Janeiro to southern Brazil, Nordeste to the north and Varig to other domestic destinations, mainly between state capitals. Fajerman said there were problems with the profitability, higher price and maintenance costs of the ERJ-145s and the routes on which they flew. Finally, it became apparent that competition among three airlines would prove counterproductive.

The merger process continued last month, following the announcement of a code-share deal between Varig and family-owned TAM, about two-thirds Varig’s size. Capacity on domestic routes fell by 30 to 40 percent on March 10, when the airlines began listing each other’s codes on 113 daily flights to nine domestic destinations. The O Globo daily newspaper said the airlines’ daily flights on the profitable São Paulo-Rio de Janeiro route– Brazil’s busiest–could fall by 30 percent as a result of the deal. If approved by government regulators, the code-sharing agreement will lead to a merger by June 30, when the yet unnamed new company will provide about 70 percent of Brazil’s domestic flights.

Fajerman claimed that Varig’s reorgan-ization and the use of its Embraer airplanes has been “successful.”