DOT Says OK to Virgin America . . . Sort Of

The day has finally arrived. Believe it or not, the Department of Transportation gave Virgin America the go ahead today to start flying . . . with conditions. An early press release from Virgin America (VX) says they’ll take these new conditions to the shareholders for approval.  I’m guessing that they’ll go for it, and once FAA approvals roll in, we should see them in the sky.

Before you start getting too excited, let’s run down the 64-page DOT Order to Show Cause (PDF) issued today. Go ahead, I’ll wait for you to finish. Nevermind, I’ll just summarize for you.

The changes VX (the airline, not the nerve gas) made in their last round of filings are just about sufficient for the DOT to consider them under US control.  But not entirely.  Take it away, DOT:  “. . . there do remain a few areas where the revised application . . . still falls short . . . . Therefore, we are proposing to stipulate further conditions that the applicant must accept (or persuade us not to require) before making its certificate authority effective.”

Oh so close. Well what are the additional conditions (and would dancing girls be enough to “persuade [the DOT] not to require” them)? I can’t answer the latter question, but I can answer the former. I may have missed a few things since a lot of the document is blacked out as confidential, but my understanding is that this is what they have to do.  First, the boring stuff:

• VX has to prove that it will have access to just over $200 million to be able to fund initial operations. This is pretty standard and is based on VX’s own previous cash flow and future projections.
• Foreign investors must be completely walled off from investing in VX going forward and the Board of Directors must be reapproved again by the new re-formed Board.
• The DOT will take VX up on its offer to have the Virgin Group (Sir Richard Branson’s British company and source of all controversy) put all its voting shares with a US-based trustee. Any changes in that trustee will have to be approved by the VX board members that are US citizens. That trustee will have to vote the same way as the US investors when a conflict of interest is determined to exist between the US investors and Virgin Group.
• All executed and signed agreements must be submitted to the DOT before certification.
• Any more money flowing in from the Virgin Group in the way of a loan has to be reported to the DOT.

Now for the more interesting stuff:

• VX will only be allowed to fly 17 aircraft.  If they want to fly more, they’ll have to file with the DOT for further approval.  Anyone know if this is standard for a new airline?
• Virgin Group was proposing to only allow VX to fly within North America and to only permit VX to codeshare with Virgin Atlantic and nobody else while operating under the VX name.   The DOT is saying that isn’t gonna fly (horrible pun intended). VX needs to be allowed to operate under the VX name and codeshare with anyone they want (I think) except on routes that are in direct competition with Virgin Atlantic. On those routes, the airline won’t be allowed to use the VX name but the airline can operate or codeshare under a different name. Also, any operations under a different name than VX will not be subject to royalty payments to Virgin Group since the name isn’t being used.  Oh, and sorry spaceflight fans. Virgin Galactic will be able to keep its monopoly.  The rule of not allowing VX to use their name on flights above 85,000 feet was found to be ok.

And now for the soap opera-style drama:

• Fred Reid, CEO, has to be fired.  He has 90 days after the certificate is issued to get out, though he can stay for another 180 days after that as a consultant.  The DOT says he’s just too close to Sir Richard Branson and Virgin Group to avoid allowing some sort of foreign control.  This is a pretty spiteful move by the DOT, and I bet it’s in response to VX’s snarkiness throughout this process.  VX offered Fred Reid’s head in the last filing as an overly dramatic way of showing how far they’d go.  Apparently the DOT decided to call them on it, though I can’t imagine it’s going to make a difference at all.

Is that enough for you? As usual, there are 21 days for others to comment and I’m sure all the big US carriers will be ready with a ton of paperwork that requires review. They’ll do anything permissible by law that they can to delay certification (duh).

Meanwhile, when they do get certified, several airlines will be waiting to greet them with open arms. VX’s first route will be San Francisco to New York/JFK.  JetBlue will start that same route on May 3, probably before VX gets airborne.  LA, Vegas, San Diego, and DC will soon follow.  Southwest will start new service to SFO in the fall, so combining that with JetBlue’s routes will mean some good old fashioned competition among the low cost carriers.  Meanwhile, United is by far the biggest airline at SFO and they have a large presence in the other cities VX will fly, so they’ll be ready to throw down as well.

It’s certainly not going to be an easy road for VX, but it’ll be fun to watch the fireworks.  Congrats to them on (almost) getting their certificate.