Many believed that it was impossible VARIG end. After all was a national pride, situated between the largest and best airlines in the world.
VARIG was not the only one, several traditional airlines like Pan Am, Eastern and SwissAir went bankrupt for not being able to adapt to the new market reality. The list would be much higher if European airlines were not save by the government, such as Air France, KLM, Tap, Lufthansa and many others.
To understand it better we need return to the 60s, more precisely in February 1965. At that time the military regime in Brazil had just begun. Panair do Brasil was the main brazilian airline and its major shareholder (Mário Wallace Simonsen) was João Goulart and Juscelino Kubitcheck friend. Because of that Panair became an enemy of the government. On February 10, 1965 Panair's president received a telegram informing that the company's operations were suspended. Five days later, the company was declared bankrupt, all national routes were transferred to Cruzeiro and international routes to VARIG. On the same night VARIG's Boeing 707 were ready to take off and perform all Panair's routes, without any delay. It was clear that Panair's end was planned months before, otherwise it would be impossible that VARIG could operate all Panair's international routes on the same day that it closed.
Panair episode revealed how big influence in government was essential to survive and grow. As all depending on government approval, for VARIG was easier to bring new aircraft and expand its routes. Meanwhile other companies like VASP and Transbrasil found difficulties to renew the fleet and expand.
In late 80s the military regime ended and Brazil became a democracy again. In March 1990 occurred the deregulation of the Brazilian commercial aviation market. Now, finally, the airlines could compete and charge as they wanted. This caused a radical change in the market. The USA market was deregulated in 1978, and many new airliens was established, but also many traditional airline failed to adapt.
In Brazil there was also many new airlines, mainly regional and charter. VARIG lost its monopoly on international routes and now had to compete with more airlines. Before only VARIG and Pan Am had flights between Brazil and the USA, in less than one year they had to compete with VASP, Transbrasil, Eastern, American Airlines, United, Tower Air, Delta and Continental. If VARIG and Pan Am used to fly with crowded Boeing 747 and high tariffs, now prices fell to less than half and the aircraft flew empty.
Besides problems in the international market, VARIG also began to face the increasingly competition of Tam in the domestic market. While Rio Sul (VARIG's subsidiary) still flying with Fokker F-50 turboprop, Tam had modern, faster and more comfortable Fokker F-100 jet. Tam grow dramatically in the 90s and VARIG brought the Boeing 737-500 with an extremely comfortable configuration (only 107 seats) and ERJ-145 jets. But Tam went further, bringing Airbus A319 and A320 with greater levels of comfort and technologies. In 1998 Tam also brought Airbus A330-200 (with individual monitors in all classes and seats that reclined 180 degrees in business class) and started flights to Miami and Paris, and compete with already outdated VARIG's MD-11.
After all these changes, VARIG began to lose lots of money and must restructure. In 1994 VARIG returned all Boeing 747-400, which had received just three years ago. The problem was that these aircraft were acquired with a Japanese bank and the value of the transaction was in yen. There was a great appreciation of Japanese currency against Brazilian currency and Boeing 747-400 leasing was so expensive that even with 100% occupancy it still gave loss. Moreover VARIG also withdrew all Boeing 747-300, Boeing 727-100, Boeing 737-200 and Douglas DC-10-30.
VARIG also suffered with brazilian government's plans to try to control inflation. VARIG's fares were "frozen", causing even more losses. Fundação Ruben Beta realize that the situation was not good and began to intervene more and more. The Foundation that was created by Ruben Berta to protect the company, was now helping to take it down. Fundação Ruben Berta was owned by VARIG's employees and dominated more than 80% of company shares. Any member of the association could be president and often the person had no technical knowledge. The Foundation was totally against fire employees, but the company was shrinking and could not maintain the same number of employees. As an example, in 2006, VARIG had about 60 aircraft and Tam had more than 80, but VARIG had twice employees.
In 1995 Fundação Ruben Berta fired, for the first time, VARIG's president. Between 2002 and 2005 VARIG had no less than nine presidents, all fired by Fundação Ruben Berta.
With debts rising, VARIG sold all its aircraft and leased back. In 2001 Gol enters in the market with low cost, low fare concept and made ticket prices tumble. Tam becomes the leader in domestic market. On September 11, 2001 the commercial aviation enters in a financial crisis after the terrorist attacks in New York. While Tam canceled international flights and reduced frequencies, VARIG did nothing and flew with empty aircraft, accumulating more losses.
In 2003 there was a merger proposal between Varig and Tam and both airlines started a code-share in the domestic market. VARIG was benefited from an improvement in aircraft's occupation, but many passengers exchanged VARIG for Tam, after ealize that Tam's aircraft were more modern. The merge failed because it encountered strong resistance of Fundação Ruben Berta and VARIG staff. The output was then a merger between VARIG, Rio Sul and Nordeste later in 2003. However with Fundação Ruben Berta preventing any measures that went against its will, VARIG fate was sealed. The only salvation was being purchase by another company or government interference. In June 2006 the situation became untenable and VARIG stopped flying.