The DOT has ruled once again that the “America” in Virgin America isn’t a lie. Despite Alaska Airlines’ efforts to have the airline ruled to be under foreign control, the DOT decided that wasn’t the case. But to get to that point, Virgin America had to make some real concessions according to a letter from the DOT (pdf). The bottom line? They aren’t going away anytime soon, but they had to make a lot of changes to get that 
to happen.
The secret rumors of a change in control at Virgin America proved true. Let’s see if I can make this make sense, because it’s somewhat complicated. Richard Branson’s Virgin Group will continue to own the maximum 25 percent of voting shares in the airline that’s permitted for international investors. The rest is owned by VAI, as it was before. Before, the shares of VAI were owned primarily by Black Canyon Capital and Cyrus Capital Partners funds, but they cashed out with the guaranteed return that was promised to them.
Now, the new owners are in four groups. The biggest is a familiar name, Cyrus Capital. They’re back with 42% of the airline. Another 12.5% of the airline is owned by a group set up for distribution to employees if they sell or go public. A very tiny 0.2% is saved for management. But it’s the last group that I find most interesting.
VAI MBO Investors was formed to own just over 20%. Who is behind this? Five Virgin America board members. Actually, it’s four current members, including CEO David Cush, alongside a new guy. Robert Nickell will become a board member as soon as the deal closes. So why is this so interesting? While they were able to get Cyrus back onboard, it looks like they had to get their board members to pony up the rest of the cash. The DOT actually likes this move, because it makes the American management team more invested, but it also makes me wonder if they couldn’t find anyone else to give them money.
But simply replacing the existing equity wasn’t enough for Virgin America. They’re low on cash, so they’re pulling in some more loans. Cyrus will loan the airline $5 million in new money and $15 million to replace some existing Virgin Group debt. Meanwhile, Virgin Group will loan another $63.4 million to the airline. The amount of money they’ve poured into this airline is just amazing.
In return, they’re getting a bunch of warrants. Virgin America will issue 60 million warrants to Virgin Group and 62 million to Cyrus and the board members. Isn’t that problematic for ownership percentages? Nope. These aren’t considered voting interests unless they’re exercised. And if they’re exercised, they have to alert the DOT.
But this structure alone wasn’t enough to get the DOT to sign off. They had to make some more changes. The biggest is that no guaranteed return is allowed for these investors. That’s a good thing since it keeps it more like equity and less like debt.
Virgin America will also add a ninth board member to its roster. CEO David Cush will now be a full-fledged voting member, probably something he wanted as a new investor. The DOT also likes this because it dilutes the say that the Virgin Group has on the board.
There are also a ton of additional restrictions being put out there to restrict Virgin Group’s ability to control the airline. Virgin America will now be able to make more decisions without asking for Virgin Group’s approval. A host of other provisions have been added that you can read in the letter from the DOT if you care.
To me, this looks like Virgin America needed new investors and it needed money. Virgin Group had to give up a lot here and the board members had to throw in some cash, but in the end, Virgin America seems to have a new lease on life. Let’s see if they can keep up the improved financial performance they showed in the last quarter. If so, they’re in a decent place right now.
