Virgin America Can't Take off Until Red Tape Is Taken Off

Frequent fliers accustomed to flight delays can perhaps appreciate Virgin America's dilemma. The putative startup airline, which announced it would locate its headquarters near SFO and offer low-fare transcontinental service from San Francisco International Airport, has been waiting to take off for 27 months now.

It's still waiting.

The Burlingame company has rented office space, hired airline industry veteran Frederick Reid as its chief executive officer, lined up a robust $177 million in financing and licensed the well-known "Virgin'' brand name from British entrepreneur Richard Branson, a minority investor in Virgin America who has global interests in everything from trains, cola drinks and telecom services to London carrier Virgin Atlantic Airways.

The only thing Virgin America hasn't been able to do is get permission to fly from the federal Department of Transportation. The airline had hoped to begin flying this year, but now says it hopes to start in the first quarter of 2007.

Virgin America's application to the department, filed in December, is being held up because of to formal objections by other U.S. carriers. They say Branson will be pulling the strings, in violation of laws that require U.S. citizens to hold at least 75 percent equity in U.S.-based airlines. Branson, who owns a 25 percent stake in Virgin America, is a British subject.

That accusation frustrates Virgin America executives, who say that established rivals -- among them American Airlines, United Airlines and, most aggressively, Continental Airlines -- are using the citizenship issue to restrict healthy competition that would generate lower fares and provide more choices for travelers.

"American citizens provided 75 percent of the equity and hold two-thirds of the seats on the board,'' Virgin America spokesman Gareth Edmonson-Jones said. "This is a U.S. company.''

Edmonson-Jones said the citizenship question distracts from the real issue: namely, Virgin America's planned entry into a competitive but barely profitable U.S. aviation market where low-fare carriers such as folksy pioneer Southwest Airlines and stylish JetBlue Airways have carved out nearly 25 percent of the market.

The discount carrier phenomenon has spread from the United States to the rest of the world, where 1 in 6 seats is flown by a low-cost carrier, according to the Center for Asia Pacific Aviation in Sydney.

Established network carriers simply don't want to let another well-financed low-cost carrier in on the action, Edmonson-Jones said.

Airline industry analysts say competitive pressures are indeed strong motivators in a U.S. aviation industry that is beginning to recover from the dual shocks of a recession early this decade and post-Sept. 11 fear of flying.

"For the first time in six years, roughly, the airlines are starting to experience some profitability, and the last thing the domestic carriers want to see is new competition,'' Dan Petree, dean of the college of business at Embry-Riddle Aeronautical University, told Reuters.

"No one wants to see new competition,'' agreed Tim Sieber, vice president of the Boyd Group, a Colorado airline consultancy firm. "If I were the Continentals and Americans of the world, I'd try to block it myself.

"Virgin America is really well-funded, and it has the really well-known Virgin brand. They'd be a formidable competitor,'' Sieber said. "But you can't go before (federal regulators) and complain about competition and have them say 'Well, that's too bad.'

"It's probably postponing the inevitable,'' Sieber said of the stalled application, adding he expects that Virgin America will be approved eventually.

Department of Transportation spokesman Bill Mosley confirmed that competitors' objections have slowed the progress of Virgin America's application, but said a government fly or no-fly decision will be made by mid-February at the latest.

"We look at four things,'' Mosley said. "Whether an applicant's financing is adequate, the quality of its management, adherence to the law and whether the airline is controlled by U.S. citizens.''

Virgin America's $177 million in startup money surpasses the successful $130 million launch of JetBlue in 2000. Major investors in Virgin America such as Black Canyon Capital and Cyrus Capital Partners have held fast through the repeated delays, according to Edmonson-Jones. "Everyone's still in.''

But Mosley said that filings by other airlines have raised questions about U.S. control of Virgin America. "We asked them (Virgin America) for additional information,'' said Mosley, who added that department requests for more information from an applicant aren't unusual.

In two lengthy objections to Virgin America's application to fly, Continental last month asserted that "Since Virgin America is foreign-owned and foreign-controlled, it fails to meet the U.S. citizenship test, and its application must be denied at once.''

Continental went on to claim that Virgin America's business model was developed by London's Virgin Group and that "actual control'' of the company is in the hands of non-U.S. citizens. "Despite Virgin America's persistent efforts to distract the department from the real issue, this case is about enforcing the laws, not about restricting competition,'' Continental said.

Virgin America's Edmonson-Jones, in turn, said that Continental opposes Virgin America's plans at least in part because of Continental's desire to gain access to London's lucrative Heathrow, the world's busiest airport for international traffic. At present, only American and United fly to Heathrow from this country, as specified in aviation treaties between the United States and the United Kingdom that are under review.

"Their thinking is, why should we stand by for a British company (as Virgin America is said to be) to compete with us, when we can't fly to this British airport?'' Edmonson-Jones said of Continental.

Continental spokesman Dave Messing called the Heathrow issue "a complete red herring'' and "an unrelated issue.''

While the airlines trade charges, the Bay Area -- which stands to gain what Virgin America executives say would be 1,500 airline jobs by 2008 -- watches and wonders.

SFO spokesman Michael McCarron said the airport is just waiting for the Transportation Department to issue its ruling but remains confident that Virgin America will fly eventually.

San Francisco Mayor Gavin Newsom -- who lobbied Virgin America to base itself here and counted the June 2004 announcement that it would do so as a victory -- said he has subsequently written letters in support of Virgin America's application. "But there are still issues,'' Newsom said. "I don't want to be overconfident here.''

The city has marketed itself to airline executives as a rich repository of talent and painted itself as a cool place to be -- one that would match up beautifully with the hip Virgin brand.

Asked if Virgin America still expects to get off the ground, Edmonson-Jones said, "Oh, sure, absolutely. We know what we have to do to launch an airline, subject to government approval. It's a little bit later than we'd hoped. We could be flying by the first quarter of next year.''

In line with that, Virgin America has ordered 33 Airbus A320s, he said, and expects to show off one of them painted in the Virgin America colors at SFO next month.

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