- The Washington Times - Wednesday, December 27, 2006

U.S. transportation officials yesterday 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 and corporate structure so the airline is at least 75 percent owned and controlled by U.S. citizens before it can fly within the United States, the Department of Transportation said.

“Virgin America’s close relationship with the UK-based Virgin Group indicates that the carrier is not under the actual control of U.S. citizens,” the agency said.

The airline has two weeks to appeal.

Virgin America says the airline is 75 percent owned and operated by U.S. citizens, as required by law.

“While we disagree with this tentative order, we respect the department’s decision and intend to use the [ruling] as a road map to address the issues raised and to demonstrate to the DOT that Virgin America will meet all ownership and control requirements,” said Virgin America spokesman Gareth Edmondson-Jones.

Mr. Branson, whose Virgin Group includes Virgin Atlantic Airlines, long has wanted to expand his empire to U.S. 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 with the intention of meeting the 75 percent U.S.-held ownership threshold. The Virgin Group controls the remaining 25 percent.

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

Don Carty, who was American Airlines chief executive and chairman from 1998 to 2003, is Virgin America’s chairman. Last week he was named vice chairman and chief financial officer of Dell Inc. but will keep his position with the airline, Mr. Edmondson-Jones said.

Virgin America, based in San Francisco, last week passed the Federal Aviation Administration’s airline certification review, and was preparing to begin flying by early next year with an initial route between the city and New York’s John F. Kennedy International Airport.

The airline also had placed orders for more than 30 Airbus jets.

Virgin America last year secured $177.3 million in funding led by VAI Partners LLC, an investment group funded in by U.S. investment firms including Black Canyon Air Partners, VAM Partners and Cyrus New Joint Structure I and II, according to the agency.

But the agency says Black Canyon, VAM and Cyrus I and II don’t meet the statutory definition of a U.S. citizen because each has more than 49 percent of its total equity held by entities in the Cayman Islands or other foreign countries.

Critics, particularly several major U.S. airlines, say that as long as Mr. Branson has any affiliation with Virgin America, his influence will dominate the company.

Pressure from U.S. carriers almost certainly influenced the agency’s decision, some industry watchers say.

“It’s really not fair,” said Henry Harteveldt, an airline and travel analyst with Forrester Research. “There’s a lot of jealously at play here over the fact that the [major U.S.] airlines who opposed this have allowed their once-proud names to be tarnished and sullied by neglect and failure to invest and innovate.”

The San Francisco analyst added that Mr. Branson probably will have to distance himself further from Virgin America if the upstart has any chance of getting off the ground.

“The issue of control for an airline is more of perception than the reality,” he said. “It may be that Mr. Branson and his investment group would have to be willing to … dilute interests so that it is substantially below the 25 percent maximum cap” foreign ownership.

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