Virgin America application could fly into some turbulence
Eric Young
As Virgin America Inc. seeks federal approval to start flying, rivals likely will try to keep the new airline grounded.
Virgin America, the Burlingame-based airline that raised $177.3 million in startup capital this month, aims to be a low-cost domestic carrier in the mold of Southwest Airlines Co. and Jetblue Airways Corp. Those airlines and others could seek to block Virgin America as an unwanted competitor. Meanwhile, labor unions, fearful that Virgin America will not be sympathetic to their cause, might protest as well.
"It's inevitable" that Virgin America's plans will stir opposition, said Daniel Petree, dean of the business college at Embry-Riddle Aeronautical University.
Virgin America's application on Dec. 8 to gain necessary approvals from the U.S. Department of Transportation and Federal Aviation Administration started the clock on a 21-day period in which supporters or opponents could file comments.
Such comments rarely cause the government to turn down an application. But they can add costly delays, keeping a nascent airline grounded for months or even years.
Taking aim
The most likely target for Virgin America opponents is the airline's ownership, which rivals will contend allows illegal foreign control of a U.S. airline, said lawyers and academics who follow the industry. The United States limits foreign ownership of U.S. airlines, restricting voting interest to 25 percent.
To make the case that Virgin America is effectively controlled by foreigners, opponents could say that Virgin America was conceived by billionaire Briton Richard Branson; Branson's British holding company Virgin Group is investing nearly half of Virgin America's startup capital; and that two British citizens have been named to Virgin America's seven-member board of directors.
Virgin America Chairman Mark Lanigan declined to comment on possible opposition to the airline.
But in its application to the Department of Transportation, Virgin America said it meets U.S. ownership requirements. The airline said its principal investor, which controls 75 percent of voting rights, is U.S.-based VAI Partners LLC, an investment company formed by Black Canyon Capital LLC of Los Angeles and Cyrus Capital Partners LP of New York City, private equity firms that put up $88.9 million in startup cash. In addition, the airline said, the majority of its board members are U.S. citizens, as is its CEO and most other top executives.
Virgin America likely will find it easier to satisfy other Transportation Department criteria, which call for Virgin America to demonstrate strong financial backing and managerial experience. Virgin America's total startup capital tops $177 million, about one-third more than Jetblue when it launched five years ago. Virgin America's CEO, Fred Reid, is an airline industry veteran surrounded by an executive team that is also steeped in the airline business.
"I don't think anyone can fairly question the financial resources or managerial competence," said Kenneth Quinn, a former lawyer for the FAA who now has an aviation practice at Pillsbury Winthrop Shaw Pittman LLP.
Preparing for takeoff
Despite the likelihood of opposition, industry observers said they think Virgin America has a good chance to get federal approval.
"I know of less well-prepared and experienced start-ups who have been successful in getting licensed," said Petree.
On a few occasions the Department of Transportation has flexed its regulatory muscle to prevent an airline from starting service. The best-known case was in 1994 when the department rejected Frank Lorenzo's bid to begin operating a startup, ATX, citing past safety and regulatory problems at other airlines he operated.
But challenges can result in long delays before an airline can fly. Fedex Corp. and United Parcel Service Inc. urged federal regulators to stop freight carrier DHL from operating in the United States, arguing that it was controlled by Germany's post office. Regulators ruled in DHL's favor last year -- after an expensive, two-year legal battle.
The FAA approval process focuses on an airline's safety procedures and training. The FAA likely won't issue a final ruling on Virgin America until after the Transportation Department has issued a tentative approval of the airline's plans.
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