The encyclopedia · Strategy & Leadership · Operational decision · 1990–2006
VARIG was Brazil’s flag carrier for 79 years — then it ran out of runway
Brazil’s flag carrier for 79 years, VARIG filed for bankruptcy in 2005 with R$5.7B debt. The airline was split; the “new” VARIG was sold to Gol for US$320M.
VARIG · 2005-06-17
What happened
VARIG (Viação Aérea Rio-Grandense) was Brazil’s flag carrier and the oldest airline in the country, founded in 1927. For decades it dominated the Brazilian market, operating international routes across the Americas, Europe, and Asia. It was a founding member of the Star Alliance.
The airline’s decline began with deregulation in 1990, which broke its near-monopoly on international routes. That was followed by the early 1990s recession, high inflation, and a foreign currency crisis. The emergence of low-cost carrier Gol in 2001 and TAM’s aggressive expansion accelerated the loss of domestic market share. VARIG posted its first net loss in 2000 (R$148.6 million), followed by a R$523 million loss in 2001. Year-long merger talks with TAM collapsed in 2004.
On 17 June 2005, VARIG filed for judicial reorganization with R$5.7 billion in debt. The company was split into “old VARIG” (which retained the debts) and “new VARIG” (which kept the brands, routes, and the Smiles loyalty program). The new company was auctioned to Volo do Brasil for R$52.3 million in July 2006 and then sold to Gol for US$320 million in March 2007. Over 5,000 employees were laid off in a single day. The old VARIG was declared bankrupt in August 2010.
Why it happened
- Deregulation in 1990 broke VARIG’s monopoly, and it never adapted. Low-cost carriers Gol and TAM took its market share while costs remained high.
- The airline ran at a loss for over 15 years while management changed five times in six years. There was no restructuring strategy while it still had revenue.
- Year-long merger talks with TAM failed in 2004, burning a year VARIG could have used to restructure. By the time it filed for bankruptcy, the debt was R$5.7 billion and there was no way out.
The lesson
A former monopoly that cannot adapt to competition has a cost problem, not a revenue one. VARIG ran losses for 15 years before restructuring, and by then the only option was liquidation.
Sources
- VARIG — Wikipedia (Portuguese)
- VARIG — Wikipedia (English)
- Folha de S.Paulo — Varig deve ficar protegida durante 6 meses (17 Jun 2005; judicial reorganization filed 17 June 2005 under the new Lei 11.101; 180-day protection period; among the first filings under Brazil's new bankruptcy law)
- Senado Federal archive (Tier 1) / O Globo — Justiça Aprova Recuperação Judicial Pedida Pela Varig (23 Jun 2005; the court approved VARIG's judicial reorganization request)
- O Globo — VarigLog deposita US$ 75 milhões na Nova Varig (24 Jul 2006; the auction was held 20 July 2006; the VarigLog/Volo group deposited US$75 million into the 'new VARIG')
- G1 — Gol compra Varig por US$ 320 milhões (28 Mar 2007; the 'new VARIG' was sold to Gol for up to US$320 million)
- Folha de S.Paulo — Justiça do Rio decreta a falência da 'velha Varig' (21 Aug 2010; the 'old VARIG' that retained the legacy debts was declared bankrupt on 20 August 2010)
- Band — A Varig acabou? O destino do grupo e da marca após o colapso de 2006 (retrospective; ~5,500 employees — about 60% of the workforce — laid off, announced 28 July 2006)
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