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.
7 comments on “DOT Says Virgin America is a US Citizen, But It Requires Significant Concessions”
They may be in a decent place right now, but maybe now they need to work more on that promise of flying to what was it 30 cities.
From what I can see Virgin America (along with a few others) has added market leading new products to the market and added some competition trans-con.
They employ American citizens, and lets be honest jobs in the airline industry aren’t exactly abundant at the moment, and add money into the American economy. Yet all I have heard since they launched is people bitching about who owns what shares.
Seems to me that anyone creating jobs and competition in the domestic market should be welcomed with open arms.
Alex wrote:
Very true, now if we can only get American companies to keep jobs here instead of sending the work to Indian, China, Central America, etc
David SFeastbay wrote:
I’ll support that. Move to a territorial tax system like everyone else, but go the next logical step and zero out the corporate income tax. Treat all individual income, from whatever source, equal under a tax code that takes up no more than fifty pages. All the money still gets taxed (as income to the shareholders), but corporations don’t have to spend large sums on accountants to minimize their tax bills, consumer prices fall, and you’ve got companies rushing to put their money in the US rather than the opposite.
No, we can’t possibly have that — no opportunities for legislative graft.
Alex — Congresscritters write the stupid laws; DOT just has to enforce what they’re given. Alaska’s at fault for spending money on laywers because they’d prefer not to compete on the merits (or lack thereof) of their product, but the primary bad actors here are the legislators who force everyone to waste time and money debating how many angels can dance on the head of a pin and suing when they don’t get their way. (The Buy America Act is another example of this crap; some companies — for instance, one that I’ll refer to as Like a Square But In 3D — appear to have based their business models around winning contracts by suing agencies that don’t go their way, and the BAA is a wonderful tool for that. Sucks to be the US taxpayer, though.)
They’re an American company. Just live with the competition Alaska Airlines (and other litigators), please.
Alex wrote:
Any airline operating in the US is going to employ Americans. The question is, has Virgin America created “new” jobs. Sure, the threw up some additional seat miles, but into a market that I would argue didn’t need more capacity. Competition sure, but capacity?
Since 2007 my guess is that overall traffic has gone down, not up, on the routes VA flies. So, some people work for VA now but how many jobs has UA, AA, etc. shed? I’d think it’s a wash overall.
If “American” jobs is what really matters the equipment VA flies should be your main concern. Personally I endorse free markets and think an airline should be free to buy whatever aircraft they like. That said, Boeing employs one heck of a lot more Americans than Airbus does. Just sayin.
While I agee that Virgin America’s product is excellent, let’s remember what the issue is really about here. Ensuring that “americans” control the management of US airlines. By outsourcing control of how a US airline is run, you effectively allow outsource control decisions regarding “american” jobs.
This law requiring foreign investors to not control more than 25% of an airline is founded on the need for the US military to use US Air Carriers for airlift – in the case of wars. The program is called the Civil Reserve Air Fleet – and essentially is a safety meausre to ensure that a foreign investor does not “control” decisions of US Air Carriers to support US Policy and National Security needs. Sort of important in these multinational times we live in to always ensure our National Security is at the forefront of decisions.
Oh, and the US Carriers do very well financially supporting the Civil Reserve Air Fleet requirements of the US Military.