June 15 (Bloomberg) -- Varig, Brazil's biggest international airline, improved the chances it can avert a shutdown after a group led by TAP SGPS SA, Portugal's state-owned carrier, said it may make a bid for the bankrupt company.

Lisbon-based TAP may seek to buy Varig in partnership with Air Canada, the country's biggest airline, and Brookfield Asset Management Inc. if a Brazilian bankruptcy judge rejects an offer by an employee-led group, TAP Chief Executive Officer Fernando Pinto said.

``This possibility is causing a frisson, and it's now very unlikely Varig will stop flying this week,'' Amaryllis Romano, an airline industry analyst at Tendencias Cosultoria in Sao Paulo, said in a telephone interview. ``The bid increases the chance of survival because it's being made by companies in the industry and that have capital to invest in Varig right away.''

Varig's stock plunged 59 percent this month after NV Participacoes, a company controlled by the airline's pilots and flight attendants, made a purchase offer at an auction that attracted only a single bid. Brazilian Bankruptcy Judge Luiz Roberto Ayoub, who's overseeing restructuring of Varig's $3 billion of debt, said he would approve the only bid if NV increases its cash offer to $346 million from $125 million. The airline may lose more than half of its fleet as early as next week unless its makes payments on leased aircraft.

Unpaid Workers

Pinto said his group hasn't made any formal offer to Viacao Aerea Rio-Grandese SA, known as Varig, and it will only do so after Ayoub rules on NV's offer.

ACE Aviation Holdings, the owner of Montreal-based Air Canada, is willing to look at any investment that has potential, Chief Executive Officer Robert Milton said yesterday at a Merrill Lynch investor conference in New York. He declined to comment on plans to join a bid for Varig.

ACE and its predecessor Air Canada have invested in financially troubled airlines in the past, including Continental Airlines in the early 1990s and a $75 million investment in US Airways Group stock in September.

Brookfield Asset Management's spokeswoman Linda Northwood declined to comment today on the company's interest in Varig.

Varig, founded 80 years ago, needs cash to keep operating in coming days, Romano said. The carrier said maintenance problems have forced cancellation at least 16 flights a day.

Porto Alegre, Brazil-based Varig needs fresh cash to pay vendors such as Petroleo Brasileiro SA, its biggest jet-fuel supplier, as well as the lessors, Romano said. Its 9,000 workers haven't been paid since April, Selma Balbino, president of Brazil's ground workers union, said last week. A purchase by a group with a strong financial backing would help the airline keep flying, Romano said.

Plane Seizures

Ayoub, who said he would rule on NV's offer yesterday, delayed his decision until next week after TAP and other investors expressed interest in making new bids. TAP said it hopes to place a bid as early as next week if NV's offer fails.

Investment groups Syn Logistica and Fontidec also have bid, Jose Carlos Tedesco, Ayoub's spokesman, told reporters at a news conference in Rio de Janeiro yesterday.

U.S. Bankruptcy Judge Robert Drain in New York extended an order on June 13 that blocks leasing companies from seizing as many as 25 of Varig's jets. Drain, who scheduled another hearing for June 21, turned down pleas from lessors, including Wells Fargo Bank Northwest, NA and Boeing Co., to lift the injunction after hearing about the new offers.

Government Guarantee

Separately, Drain ordered Varig to pay International Lease Finance Corp. $3.8 million on leases for 11 aircraft or risk having the planes seized, refusing to extend an order first entered almost a year earlier. The airline has 60 aircraft on lease, of which 47 are in service.

A shutdown of Varig would put an end to Brazil's oldest airline, the official carrier of the country's World Cup team, and cost about 9,000 employees their jobs. Creditors such General Electric Co., Petroleos Brasileiro SA and national airport authority, would be forced to write off their losses because the airline has no tangible assets.

Brazilians flying to Varig destinations, including Europe, North America and Far East, on 180 flights a day would have to travel on foreign carriers.

Brazil's civil aviation regulator said it's making contingency plans to cope with a shutdown of Varig. The carrier's tickets would be honored by other airlines, said Milton Zuanazzi, the head of the agency meeting Brasilia yesterday with airlines including TAM SA, Gol Linhas Aereas Inteligentes SA and OceanAir Linhas Aereas.

``We won't leave Varig passengers grounded,'' Zuanazzi told reporters. ``We will make sure 100 percent of the people that are supposed to fly will fly.''

To contact the reporter on this story: Romina Nicaretta at rnicaretta@bloomberg.net

Last Updated: June 15, 2006 14:43 EDT