MercoPress. South Atlantic News Agency

Varig and TAM merge.

Brazil's two largest airlines, Varig and Tam, announced they will be merging their operations in a joint venture to overcome the deep crisis in the industry. With a joint fleet of 218 aircraft and 29 million passengers a year, the joint venture to be listed in the stock exchange would be larger than some European airlines.

The deal to be detailed by June 30 is subject to regulatory approval and could face limitations since the two companies dominate 70% of the Brazilian domestic air market. Internationally Varig and TAM face stiff competition from European and US carriers and only have a minority market share.

Brazil's Defence Minister who is responsible for civil aviation said the government would work with Congress and the private sector towards the creation of a new regulatory framework with sustainable conditions for the industry.

Varig is Latinamerica's largest airline but has failed to make a profit in five years, slipping deeper into financial trouble as a weakened currency increased operating costs and servicing a 760 million US dollars debt.

TAM is more efficient but also run into trouble last year and had a net loss of 125 million US dollars.

Both companies requested government assistance but the Lula da Silva administration replied it was not prepared to act as "a hospital for companies" and conditioned any aid to the restructuring of the industry to boost competitiveness and cost reduction.

"There will be no funds until the air sector becomes stable and sustainable", said Luiz Furlan Industry and Trade Minister.

The merged companies would have approximately 26,000 employees.