Virgin America Expects DOT Rejection

[Matt Molnar]

From today's WSJ:


Virgin America
Doubts Prospects
For U.S. Operation
By LAURA MECKLER and COREY DADE
December 23, 2006; Page A4

Virgin America Inc., the brainchild of Sir Richard Branson, expects federal authorities to reject its application to start a low-cost airline in the U.S., amid concerns that the British entrepreneur and other foreigners would wield too much influence.

U.S. law requires that Americans control domestic airlines flying within its borders. The Bush administration has tried to loosen those rules but recently said it was dropping the effort, given intense opposition in Congress and elsewhere.

Virgin America, which has been waiting more than a year for a decision, has said it would offer low-cost service out of San Francisco, with plans for the inaugural flight from San Francisco to New York's John F. Kennedy International Airport. Currently, no major low-cost carriers fly out of San Francisco International Airport, which has lost passengers to airports in Oakland and San Jose that are served by Southwest Airlines Co. and JetBlue Airways Corp.

Federal law limits non-U.S. ownership of airlines to 25% controlling stock and requires that citizens remain in actual control of all decisions.

Opposition to Virgin America has been led by Continental Airlines Inc., based in Houston, which has pressed regulators to demand more information from Virgin America about its ties to Mr. Branson and other non-U.S. entities.

Virgin America has repeatedly stressed that Mr. Branson, who partly owns the British carrier Virgin Atlantic Airways Ltd., has no involvement in management decisions. U.S. citizens own 75% of the company and hold two-thirds of the directors' seats. Mr. Branson's Virgin Group Ltd. controls 25% of the stock and a third of the voting power. "We filed a U.S. application for a U.S. airline," said Fred Reid, Virgin America's chief executive. "This company has been American-controlled for 15 months."

Mr. Branson came up with the idea for the airline, hired its leadership, chose the aircraft and assembled the initial plan. Virgin America borrowed nearly $53 million this summer from one of Mr. Branson's companies, Virgin Management Ltd. The Burlingame, Calif., start-up already had secured $177 million in financing, including some from Mr. Branson.

"We've never disputed that the original concept was Branson's. Who cares?" said Kenneth Quinn, an attorney for Virgin America with Pillsbury Winthorp. "What matters for purposes of the citizenship laws is what party is in control of an airline."

But Mr. Reid isn't hopeful. "We are hearing that there is going to be a negative order coming. I regard that as really disturbing," he said in an interview. He and others expect a decision soon, perhaps during the week.

While rejection is possible, the Department of Transportation also could provide a road map for the airline to address concerns about foreign control or other matters.

The application comes at a sensitive time for the Department of Transportation. It had wanted to loosen foreign-control regulations in hopes of both attracting more foreign investment and sealing an open-aviation agreement with the European Union. But opposition from labor unions and other concerns persuaded Congress to block the move. Congressional opposition had been stoked by the controversy surrounding Dubai Ports World, a Dubai-controlled company that sought to manage commercial operations at five U.S. ports.

[mirrodie]

Unreal. Those DOT heads ought to let it happen.

Also, why doesnt Virgin America consider other runs? JFK-SXM is a nice start :)

[PhilDernerJr]

If this goes through, I honestly think JetBlue is done. I have a feeling Branson is planning on letting B6 start to die and buying them away.....jsut what Neeleman's fear was when he started JetBlue in regards to Southwest buying them.

[T-Bird76]

If this goes through, I honestly think JetBlue is done. I have a feeling Branson is planning on letting B6 start to die and buying them away.....jsut what Neeleman's fear was when he started JetBlue in regards to Southwest buying them.

Good point, B6's future is looking bleaker and bleaker, they just cut growth for 07 again. Looks to be like a classic case of management not listening to the front line employess. I wonder if Branson could buy B6? Would he run into the same problem?

[hiss srq]

Branson could probably only buy them if he re incoperated his management team here in the US which I could totally see him doing

[PhilDernerJr]

A coworker and I were discussing this, and we both agree that JetBlue only had such a low CASM whenthey started because they didn't have to pay for their planes for the first 5 years. They used that as a false sense of where they stood and bit off more than they could chew.....growing way too fast.

[Matt Molnar]

I'm glad the government is being so protectionist for once...there aren't many industries that they have that kind of power over. And I think they are right to question the influence of Branson. Sure, the management is made up of Americans, but those managers ultimately get paid by Branson. If he gives them orders, are they going to say "No, you're not allowed to make that decision"? Probably not.

But at the same time...so what? Is Richard Branson going to act as an agent of the UK government and attempt to disrupt American commerce and threaten national security by running this airline? I think not.

I think throwing a foreign-run airline (even a pseudo-foreign-run airline like VA) into the mix would be a bright flashing red neon warning sign to US carriers: if you can't serve every potential customer on your own, we are going to allow more foreign carriers to enter the market. They would be forced to reconfigure their operations for the good of the flying public, not just for the good of their balance sheets.

I hate to be pessimistic, but I think this is just the first battle of a legacies vs. foreigners war. I think eventually we will outsource our domestic air carriers the way we outsource so much of our other labor. Get ready to fly JFK-LAX on Air India.

[Matt Molnar]

A coworker and I were discussing this, and we both agree that JetBlue only had such a low CASM whenthey started because they didn't have to pay for their planes for the first 5 years.

They also weren't paying their employees nearly as much because they were all new.

[T-Bird76]

A coworker and I were discussing this, and we both agree that JetBlue only had such a low CASM whenthey started because they didn't have to pay for their planes for the first 5 years. They used that as a false sense of where they stood and bit off more than they could chew.....growing way too fast.

Phil is this the biggiest myth out there that B6 didn't pay for its planes. It most certainly did. One look at their yearly shareholder reports shows payments made on their planes. The expenses are growing because of labor and MX. Those nice new Airbuses are out of warranty and as we saw B6 dumped the ones coming up on C and D checks to save money.

[nwafan20]

Good for the DOT, I think all domestic airlines should be funded by funds from America, as not to have foreign influence in the US airline industry.

Also, if you let Virgin America start with foreign control, it's just a matter of time until you have Jihad Air seeking approval... Then we are in trouble. If we deny "Jihad Air" the right to fly, out comes "But you let Virgin America do it!". It's only a matter of time.

(P.s. I don't actually expect an airline to name itself Jihad Air)

[Matt Molnar]

Also, if you let Virgin America start with foreign control, it's just a matter of time until you have Jihad Air seeking approval... Then we are in trouble. If we deny "Jihad Air" the right to fly, out comes "But you let Virgin America do it!". It's only a matter of time.

I think it's only a matter of time before the "Jihad Airs" of the world like Emirates and Etihad start knocking on the door. I also think US carriers will start farming out their pilots and flight attendants the way they've begun outsourcing their maintenance. It wouldn't be very difficult to set up a base in the Caribbean and use their much cheaper labor to serve intra-U.S. destinations.

[nwafan20]

Small note, I wasn't referring Jihad Air as a reference to Middle Eastern airlines, just an airline that has ill intentions.

But I agree, all airline jobs would probably be outsourced due to trying to compete with overseas airlines.

[Nonstop2AUH]

True globalization as endorsed by its supporters on Wall Street requires there to be no more US airlines or foreign airlines, only airline companies that represent not a country but a brand. This is true of any industry, all big companies are global now, if they have a nationality it is only for tax or marketing purposes. But airlines are somewhat of a special case because of the history of the industry and, especially in the US, its connection to national security.

In Europe, which considers itself to be an integrated economy, there has recently been an issue with Ryanair in as much as it is legally an Irish airline but the majority of its operations are in the UK. To say nothing of security issues, I am not sure America really needs this sort of situation as we are a much larger country and much less integrated with our neighbors than any country in Europe. For example, while I am sure it would be highly efficient from a cost perspective, I don't think most Americans would want Mexicana to set up a hub in Houston to fly US domestic flights with aircraft and crews brought in every day from south of the border, etc. you get the idea.

If you really think about it, almost anything in America can be done cheaper on some other country's cost structure (India, China, Mexico, etc.) but that doesn't mean that it should be.