Virgin America Goes Up . . . Must Come Down

Government Regulation, Virgin America

It’s been a good news/bad news kind of week for Virgin America. (UPDATE – it’s all bad news now. The application has been rejected. See bottom of this post for more.)

On Friday, the airline officially passed the FAA’s airline certification review, so it’s now considered fit to fly. You’d think that’d be time to celebrate, right? Well, no.

On the very same day, Virgin America admitted that it expects the DOT to reject its application.

See, the FAA governs actual operation of the airline, but the DOT is more concerned with broader issues. In this case, it’s foreign ownership that’s likely to kill the application, and the order could come this week.

Unfortunately for Virgin America, they’re stuck in the middle of a cat and mouse game between the US and UK governments. Both countries say they want an open skies agreement, but there are sticking points. One of those sticking points is foreign ownership, and that’s why Virgin America is about to get crushed.

Right now, foreign entities can own no more than 25% of the voting shares of an airline. Virgin America has been structured to meet those rules, but the DOT can still claim that Richard Branson would have more influence than the 25% would imply and therefore deny the application. Is it true? Who knows. But does it even matter?

I personally would suggest that foreign ownership would help make our country’s airlines more competitive. If foreign owners can do a better job running an airline in the US, then let them do it. Those airlines can still be required to participate in the Civil Reserve Air Fleet (CRAF – commercial planes needed in times of war) and there would need to be requirements for employment within the US. (You can’t ship in a bunch of third-world flight attendants to work for less.) But if you can get through that, then by all means let foreign owners in.

Unfortunately, it’s an intensely political subject and not many people agree. In fact, a proposal to increase foreign ownership amounts to 49% was just shelved due to strong opposition. So, Virgin America is likely to be caught in the crossfire here and unfortunately that means hundreds of jobs and millions of dollars down the drain.

UPDATE 12/27 @ 1107a: Looks like I wrote a couple hours too soon. The DOT officially denied Virgin America’s application this morning. They argue that more than 25% of the airline is controlled by foreign interests, so they are not allowed to fly.

vastructureFirst, the DOT tried to decipher the ownership structure. If you don’t believe me when I say “decipher,” check this out. On the right is one of FIVE pages of comical diagrams included in the DOT Show Cause Order that explains the ownership breakdown.

This throws up all kinds of red flags, including the fact that a lot of this ownership structure goes through the Cayman Islands. This sort of complexity was probably just asking to be shot down.

In addition to the actual ownership, the order discussed actual control of the airline as being foreign. Part of this is related to the current structure of the licensing of the Virgin name. Apparently there were conditions set forth in that agreement that give the Virgin Group more control than they should have over the airline, even if they are technically not controlling the operation on a day to day basis.

Assuming all of this is true, it is no surprise the application was turned down. I may not agree with the foreign ownership rules in the US, but you do need to obey them while they’re still in place. A lot of money has been sunk into this airline so far, so I wouldn’t be surprised to see all the appeals take place, but I would be shocked if they were able to make enough changes to satisfy the DOT as well as Richard Branson. This could be the end for them.

UPDATE #2 – 12/27 @ 435p: Virgin America has said that it will submit a response on January 10 as requested by the DOT. I can’t wait to see what they have to say.

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