Virgin America, the Burlingame startup airline that hopes to begin flying from San Francisco International Airport, was dealt a setback Wednesday when the Department of Transportation tentatively rejected the carrier's application to begin service, citing substantial foreign control of the company.
The denial, which the airline said it will appeal, was expected. Virgin America Chief Executive Officer Fred Reid, citing unnamed sources on Capitol Hill, said late last week that he expected the application to be denied, at least initially, and that Virgin America remains determined to fly.
In a report issued Wednesday, the Transportation Department ruled that "Virgin America would have to revise its ownership, corporate structure and associated agreements to be 75 percent owned and actually controlled by U.S. citizens before it can receive an operating certificate.''
The airline has 14 days to respond, which it has said it will do. Otherwise, the tentative ruling would become permanent and the carrier would never get off the ground.
Virgin America has contended since it applied for permission to fly in December 2005 that its foreign ownership is an allowable 25 percent and actual control resides with U.S. citizens. It plans to operate as a low-fare carrier and begin service with flights between SFO and New York's John F. Kennedy International Airport, gradually expanding its network.
Virgin America has been preparing for take-off for some time. The company has raised $177 million in startup capital, hired a staff of 169 people, rented offices near SFO and ordered 33 planes. Now all it needs is permission to fly them.
In ruling against the airline, the Transportation Department said an intricate, interlocking network of Cayman Islands corporations gave foreign interests more than the permissible 25 percent ownership, that a licensing agreement that Virgin America signed with British entrepreneur Richard Branson's Virgin Group ties the hands of U.S. management, and that Branson personally hired Reid before any U.S. investors came on board, making Reid beholden to Branson, a British citizen.
Virgin America spokesman Gareth Edmonson-Jones said the airline plans to formally respond to the department's ruling on Jan. 10.
"The Department of Transportation's show-cause order is a long-awaited step in our certification process,'' Edmonson-Jones said in a statement.
"While we disagree with this tentative order, we respect the department's decision and intend to use the order as a roadmap to address the issues and to demonstrate ... that Virgin America will meet all ownership and control requirements," he said. "We remain committed to getting our wings.''
Edmonson-Jones did not provide details about how the company plans to refute charges of foreign control or revamp its corporate structure to allay them.
Airline industry analyst Henry Harteveldt, head of Forrester Research's San Francisco office, said the fledgling airline could meet the Transportation Department's criteria for approval, though a thorough rethink may be in order.
"This is a double-edge sword in that the Virgin brand is closely identified with Mr. Branson,'' Harteveldt said. "The Virgin Group and Mr. Branson may have to sell off part of their investment, reduce Mr. Branson's role and go way below the 25 percent cap.''
Fly by another name?
The fledgling airline may even have to consider giving up the popular Virgin brand, Harteveldt said, if that becomes necessary to get the airline off the ground.
Virgin America's application has been opposed by major U.S. carriers, led by Continental Airlines, and by organized labor groups that fear a loss of aviation industry jobs should foreign control of U.S. airlines be allowed.
Virgin America has long been acknowledged as the brainchild of Branson, the brash Brit who operates Virgin Atlantic Airways of London and sells Virgin-branded colas, vodka and comics. He also runs Virgin cinemas and trains in the United Kingdom.
Harteveldt attributed the staunch opposition of major U.S. airlines to fear of competition. "People know that Richard Branson is an innovator. Innovation is not something that's closely associated with U.S. legacy airlines, who have exhibited less creativity than a pile of mud,'' he said.
Virgin America's June 2004 decision to make the Bay Area its home base came with widespread public and media attention and the promise of up to 3,000 jobs, many of them earmarked for workers furloughed from other airlines.
San Francisco Mayor Gavin Newsom championed creation of Virgin America, along with Gov. Arnold Schwarzenegger, state Sen. Jackie Speier, D-Hillsborough, and other California political figures.
Newsom spokeswoman Jennifer Petrucione said Wednesday that "Virgin America would bring thousands of jobs and millions in revenue. We're disappointed but we're hopeful, and we applaud Virgin's commitment.''
Harteveldt said he expects that Virgin America will meet the government's criteria and believes that it can be successful. "Given that passenger traffic demand remains strong, with likely industry consolidation, more new brands will provide competition and help the consumer.''
In the long term, Harteveldt said, the United States should consider revising the laws that prohibit foreign ownership and control and that have kept Virgin America in a holding pattern.
"Those regulations may have been truly legitimate at one point in time, but they may no longer be applicable,'' he said. "A strategic opening may be appropriate,'' with guarantees that U.S. carriers, regardless of ownership, supply planes to the military during wartime, if needed, and meet other national security needs.
"The irony in all this is that the (United Kingdom) is one of the strongest allies of the United States, and Virgin Atlantic is flying Boeing airplanes,'' he said. "We live in a globalized world.''
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