Varig is a nearly bankrupt carrier. At the moment, the carrier is being propped up both by the government and by GE Capital, which fears the consequences of more of its planes being dumped in the desert. While it is true that LAN codeshares with Varig on several routes between their two countries, it is also the case that LAN's longterm strategy is to establish and fund affiliate carriers under the LAN brandname (e.g., LanPeru and LanEcuador) that compete directly with all its Latin American competitors including Varig. If it joined Star Alliance and had to feed passengers to the much larger Varig, Lan would have to give up its own aspirations of being the largest carrier in Latin America.
Moreover, it is important to remember why Lan sought out AA for a codeshare relationship even before oneworld was a reality. AA dominates - it really has no peer - the US-Latin American market out of its strategically placed hub in Miami. When Lan entered into its relationship with AA, it was after much thought about the prospects of competing head to head with American in Miami and elsewhere. Much like the conclusion reached by Grupo Taca in Central America, Lan figured if it couldn't beat 'em it would join 'em. Given AA's future prospects at Miami upon the completion of the new SuperConcourse, it would be ill advised for LAN to join Star and codeshare with United. With American the future looks bright at Miami. With Star, Lan would have to face the prospects of American not only adding service to Santiago and points beyond, but also two probable consequences: (1) United reentering the Santiago market now that it had marketing support from Lan. Why would this be a favorable consequence when at the moment AA and Lan, with full ATI, have managed to achieve a virtual monopoly on Chile-US service? (2) An expanded relationship between AA and TAM, the much healthier and better managed of the Brazilian carriers, the likely successor to Varig as Latin America's largest carrier once Varig goes the way of Aerolineas. Under this prospect, it would be TAM and not Lan that would benefit from the expanded AA dometic network out of Miami. By maintaining their relationship with AA, LAN has been able to keep AA and TAM at arms length and thus provide cover for all their avatars.
But, yeah, LAN will join Star. After all, it makes sense to all of the arm-chair airline CEO's on this board. Better yet, maybe once LAN joins Star, don't you think they should offer DirectTV at every seat just like JetBlue?