Whatever happens on Thursday, it will be an unsatisfactory end to a long and painful decline for the Brazilian flag-carrier.

Varig, under ceditor protection with an estimated R$8bn ($3.5bn) in debt, goes under the hammer on Thursday in a hangar at Santos Dumont airport in Rio de Janeiro.

Should anyone buy it they will acquire assets of questionable value and, in spite of assertions to the contrary by the judge in charge, could find themselves stuck with liabilities running to billions of dollars.

That some brave investor will take on such enormous risks is the only hope left for the 79-year-old company and its 10,000 employees.

Failing this or a last-minute rescue by the government – which Brasilia says is not a possibility – Varig will finally go under.

In part, Varig is a victim of the troubles that have beset most of the world’s “legacy” carriers in recent years and especially since the terrorist attacks of September 11 2001: high labour costs, high fuel costs, debt, a dwindling passenger base and competition from start-up, low-cost operators.

But Varig labours under additional troubles of its own. Chief among the problems is its unique ownership structure. Varig is controlled by the Fundação Rubens Berta, an organisation run by and for employees that has left the company answerable to nobody but itself.

Putting the effects of this into the simplest of terms – and leaving aside widespread allegations of mismanagement and corruption – Varig, says Arnim Lore, a former director, is “a company that had a monopoly of international travel and almost a monopoly of domestic travel that failed to recognise the changing times.”

Varig’s managers have behaved with startling arrogance, convinced that the company was simply too big to fail and that in case of disaster the government would come to the rescue. With no cash to pay tax authorities, employees, leasing companies, suppliers of fuel and airport authorities – to name only the biggest of its creditors – Varig simply stopped paying.

It has been supported by Brazil’s often dysfunctional legal system, in which judges have power to interpret the law that often mystifies foreign investors.

Courts in Rio de Janeiro, for example, have ruled that Varig can refuse to return aircraft to leasing companies on no better grounds than that the company needed them in order to keep flying.

“There are many other cases where Brazilian courts do uphold investor rights,” says Guilherme Abdalla of Pinheiro Neto, a law firm that represents Varig creditors, including leasing companies. “But Varig has really been a terrible example.”

This is particularly worrisome as Varig represents an early test of Brazil’s new “judicial recovery” law – similar to Chapter 11 in the US – which came into effect last year.

What raises most doubt over the outcome of Thursday’s auction is the use of clauses in the law that allow a company’s subsidiaries – or, in the law’s terms, “isolated productive units” – to be sold with no risk of contamination by the parent company’s debts. This happened earlier this year with the sale of Varig’s engineering and logistics divisions.

It is questionable whether Varig’s domestic and international airline businesses can be described as isolated productive units. The judge overseeing Varig’s creditor protection says they can. But his ruling is by no means definitive.

Who will buy Varig under such circumstances? TAM and Gol, Varig’s biggest Brazilian competitors, are mentioned as potential buyers.

However, they would surely prefer to see Varig go under and pick up its routes, aircraft and personnel at no risk – just as Gol, which began operating in January 2001, picked up many of its employees from TransBrasil and Vasp, when they were both grounded by debts.

One reason they might bid – assuming their Brazilian and overseas shareholders would sanction such a thing – would be to prevent Varig falling to a rogue outsider such as OceanAir, owned by German Efromovich, a Bolivia-born Brazilian entrepreneur.

OceanAir has bought troubled airlines elsewhere in Latin America and is reportedly backed in a potential bid for Varig by Boris Berezovsky, the exiled Russian oligarch.

Another unknown is whether the government will have the stomach to stand by and watch Varig go under in the event that no buyer emerges.

Ministers, and the president himself, have said categorically the airline will not receive public money.

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