Virgin American loses bid to fly in U.S.

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4:18 p.m.

U.S. transportation officials today rejected a request by the proposed airline Virgin America to fly because it has too much foreign control.

Virgin America, the brainchild of British entrepreneur and billionaire Richard Branson, who heads the British business conglomerate Virgin Group, would have to revise its ownership, corporate structure and associated agreements to be at least 75 percent owned and controlled by U.S. citizens before it could receive an operating certificate, the Department of Transportation said.

"Virgin Americas close relationship with the U.K.-based Virgin Group indicates that the carrier is not under the actual control of U.S. citizens," the agency said.

Virgin America has two weeks to appeal.

A Virgin America spokesman said the company would comment later today.

Mr. Branson, whose Virgin Group includes Virgin Atlantic Airlines, long has wanted to expand his empire to the American skies but has been hindered by U.S. laws forbidding foreign ownership and control of domestic airlines.

So he partnered with U.S. investors to set up an ownership structure in which 75 percent of Virgin Americas voting stock was U.S.-held, the minimum required by law. The Virgin Group controls the remaining 25 percent.

Virgin America, based in San Francisco, last week passed the Federal Aviation Administrations airline certification review and was preparing to begin flying by early 2007 with an initial route between that city and New Yorks John F. Kennedy International Airport.

The would-be carrier had placed orders for 34 Airbus jets.

However, the Transportation Department wasnt convinced that Virgin Americas ownership structure had truly achieved the 75 percent threshold.

"The Virgin Groups and its executives pervasive involvement in the creation of Virgin America, the funding Virgin Group provided to the carrier, various interlocking financial agreements, and the Virgin Groups ability to influence decisions of the carriers board" would make Virgin America, in essence, a foreign carrier, the agency said.

Virgin America last year secured $177.3 million in funding led by VAI Partners LLC, an investment group funded by U.S. investment firms Black Canyon Capital and Cyrus Capital Partners.

The airlines chief operating officer is an American, Fred Reid, ensuring that the airline is free of foreign control, company officials say.

Don Carty, a former American Airlines chief executive and chairman from 1998 to 2003, is Virgin Americas chairman. Last week, he was named vice chairman and chief financial officer of Dell Inc.

The Transportation Department, under orders from President Bush, earlier this year proposed allowing foreign investors to increase stock ownership in U.S. airlines from 25 percent to 49 percent. The House overwhelmingly voted against the plan.