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01 November 2006
A dispute has arisen concerning the authority of a bankruptcy court to limit the powers of the Brazilian Agency for Civil Aviation (ANAC) over the regulation of Brazilian route rights and slots. In general, route rights and slots are regulated solely by ANAC; however, circumstances have arisen that have cast some doubt on ANAC's authority. In addition, route rights and slots were not previously thought to be part of the assets of a Brazilian airline, but this seems subject to change in light of recent developments.
The controversy arose between ANAC and the Eighth Commercial Court in Rio de Janeiro in relation to the redistribution of Varig's route rights and slots. Resolution of the dispute may have long-term effects on the scope of ANAC's authority to regulate the aviation industry.
Since June 2005 Varig Brazilian Airlines has been undergoing restructuring (known as judicial recuperation) under the Brazilian Bankruptcy Law (for further details please see "New Law Impacts on Repossession in Aircraft Leases"). In July 2006, under the judicial recuperation procedure, nearly all of Varig's airline business was separated off and sold to a group of US and Brazilian investors. The new operating entity is called VRG Linhas Aereas SA. Varig Brazilian Airlines still exists as a separate entity.
According to the bid rules for the sale of VRG, which were approved by the commercial court in June 2006, the domestic route rights and slots held by Varig as of April 2006 should be guaranteed to VRG for 30 days from the date on which VRG receives its airline operator certificate. International route rights and slots are supposed to be guaranteed for a period of 180 days after issuance of the certificate.
Part of the reason behind the route rights dispute is the delay in VRG receiving its airline operator certificate. Although the auction of VRG occurred in July 2006, as of mid-October 2006 VRG did not yet have its full certificate. The new investors took practical control of VRG on July 20 2006, and since that date Varig has been operating flights under its own airline operator's certificate for and on behalf of VRG. The auction rules provide for this type of operation for an interim period; however, this period has lasted far longer than expected. As soon as VRG receives its own airline operator's certificate it will operate in its own name and will no longer rely on Varig for operational authorization.
The fleet of aircraft kept by VRG from Varig's fleet in July 2006 is much smaller than the fleet operated by Varig in April 2006. The fleet that VRG preserved for the first few weeks after taking control of VRG on July 20 2006 comprised nine aircraft (as opposed to the 45 aircraft that were operated by Varig in April 2006). VRG has since increased that number, but it is still far short of the number of aircraft operated by Varig. Instead of leasing aircraft VRG has negotiated the purchase of 15 of the aircraft that formerly made up Varig's fleet. However, the conclusion of this purchase depends on issuance of the airline operator's certificate.
The net result is that a large number of the routes that Varig was operating in April 2006 are simply not in operation at the moment. Demand in Brazil remains high and Brazil's other airlines (eg, TAM, Gol, BRA and Ocean Air) have been pressing for the redistribution of Varig's unused routes and slots. As so many routes are undistributed the cost of air travel has risen significantly, particularly for international flights. In some markets there are no Brazilian carriers servicing major international destinations.
In August 2006 ANAC announced that it would redistribute Varig's unused route rights and slots. However, the commercial court viewed this redistribution as contrary to the auction bid rules. As a result, a public debate between ANAC and the two of the commercial court judges took place through the newspapers in late August and early September 2006.
On September 1 2006 the Eighth Commercial Court issued a summons and an injunction against ANAC and its directors prohibiting them from redistributing Varig's unused routes. The injunction provided that ANAC and its directors would be fined if they proceeded with the redistribution of Varig's rights.
As no ANAC directors were present at the meeting at which the summons was served, procedural doubts arose over whether ANAC had been formally notified of the summons. Nonetheless, in mid-September 2006 ANAC officials attended a hearing at the commercial court where they discussed the issue of authority over route rights. Shortly after that hearing ANAC lawyers filed a suit in the federal courts seeking an injunction to prevent the commercial court (which is a state court) from interfering in the redistribution of Varig's route rights and slots.
Towards the end of September 2006 the Rio de Janeiro Federal Appeals Court upheld ANAC's complaint and issued a ruling affirming that ANAC, as the regulator of the aviation industry, was allowed to redistribute Varig's unused routes and slots. VRG appealed the ruling to the Superior Court of Justice.
On receipt of VRG's appeal the Superior Court of Justice issued a procedural ruling that essentially upheld ANAC's ability to redistribute Varig's routes. However, on September 26 2006 a three-judge panel of the Rio de Janeiro Federal Appeals Court was convened and reversed the initial federal appeals court ruling.
Since the Superior Court of Justice ruling was procedural in nature, the merit arguments were initially considered in the federal appeals court hearings only. One of VRG's arguments, which has a potentially broader impact on future Brazilian bankruptcy proceedings, is the concept of universal jurisdiction. Commentators who advocate universal jurisdiction contend that in a bankruptcy proceeding the bankruptcy judge should have unimpeded jurisdiction over all matters relating to the bankrupt's business. This would mean that labour disputes would be resolved in bankruptcy courts instead of labour courts. Labour unions strenuously object to this concept. Another argument cited by VRG was that if the routes were redistributed, the Brazilian market would lack competition as it would be concentrated between just two airlines, TAM and Gol. ANAC argued that the public was suffering while VRG was organizing its business. Significant demand was being left unmet even though other Brazilian airlines were able to fulfil that demand.
The federal appeals court panel ruling provided that ANAC's general regulatory powers are to be limited by the commercial court's specific powers over Varig's route rights and slots. In essence, the panel's decision provided that route rights and slots are airline assets. Previously it was thought that such rights did not constitute airline assets since they are granted on the basis of concessions that can be revoked by the regulatory authority. However, the federal appeals court panel decision expressly ruled that route rights and slots are assets.
In October 2006 the Superior Court of Justice upheld the ruling of the federal appeals court panel favouring the Eighth Commercial Court. Consequently, ANAC cancelled the auction of Varig's unused routes that was scheduled for October 16 2006.
For the time being, therefore, it appears that ANAC will have to share the regulation of Brazil's route rights and slots. The ruling also means that a general reassessment of the nature of route rights and slots, and whether airlines can now claim that these are fixed assets, is required. The war is far from over; however, the commercial court has won the latest battle.
For further information on this topic please contact Kenneth D Basch or Priscilla Branco at Basch & Rameh by telephone (+55 11 3065 4455) or by fax (+55 11 3064 6049) or by email (firstname.lastname@example.org or email@example.com).
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Priscilla Ferreira Branco