U.S. Government Stymies Virgin America Bid
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Virgin America Inc., a startup airline partly owned by British billionaire Richard Branson, won’t be able to begin flights because of the American government’s concerns about foreign ownership.
Before it can start service, Virgin America must revise its corporate structure to show that American citizens own and control at least 75% of the company, the Transportation Department said today. Mr. Branson’s closely held Virgin Group Ltd. put up 25% of the initial $177 million investment to start Virgin America, as well as a $53 million loan.
The decision is a victory for American rivals that opposed the Virgin America bid as well as for organized labor, which feared job losses. It’s a blow to Mr. Branson’s plan to funnel U.S. passengers to his trans-Atlantic carrier and expand the Virgin brand in the world’s largest travel market.
“What could salvage this for Virgin America is owners with obvious independence,” an airline consultant of Morten Beyer & Agnew, George Hamlin, said.
Virgin America officials say American investment firms Black Canyon Capital in Los Angeles and New York-based Cyrus Capital Partners control 75% of the carrier.
“While we disagree with this tentative order, we respect the department’s decision,” Virgin America said in a statement. “We remain committed to getting our wings.” The company said it will use the order as a road map to resolve the concerns and will respond to the Transportation Department by January 10.
The department said that “Virgin America’s close relationship with the U.K.-based Virgin Group indicates that the carrier is not under the actual control of U.S. citizens.” The department cited “various interlocking financial agreements” with Virgin Group.
The ruling may hurt American efforts to open aviation markets worldwide to additional competition. Analysts have said Mr. Branson could use the denial to argue that the European Union shouldn’t expand access to London’s Heathrow airport, as America wants.
The Transportation Department, in reviewing the airline proposal, had to consider a law that limits foreigners to 25% of American airline voting equity and bars them from “actual control” of an American carrier.
Virgin America Chief Executive Officer Fred Reid said in an interview December 22 that he expected the rejection. Changes in its structure may allow the Burlingame, California-based carrier to start service next year, Mr. Reid said last week.
The carrier has 169 employees, nine aircrafts, and plans to start service with a flight between San Francisco and New York. Donald Carty, former chairman and CEO of American Airlines’ parent AMR Corp., is Virgin America’s chairman. The Federal Aviation Administration has approved the carrier as safe to fly, Virgin America said December 22.
Rivals of Virgin America, including Continental Airlines Inc., AMR Corp.’s American Airlines, Delta Air Lines Inc., and US Airways Group Inc., have said in filings that the startup carrier doesn’t meet the ownership test.
Continental said August 2 that since Reid “was hired by, and is clearly beholden to, the Virgin Group” he cannot qualify as a citizen under American law. Continental also argued that the Virgin Group conceived, financed, and designed Virgin America, and handpicked its fleet and key personnel.