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Fri, Feb 27, 2009

Virgin America Looks For New Capital

Initial US Investors May Opt To Get Out Now

For all its apparent success, Virgin America faces a tough issue unique among US domestic airlines.

High fuel prices were a major culprit in the airline's loss of $227 million in its first year, but lots of other airlines also lost money. The problem for Virgin America lies in its ownership structure, which threatens its ability to continue operating legally.

US law requires airlines here to have US citizens own at least 51 percent of the company, and exercise at least 76 percent of voting shares. To be eligible for its US certificate, Virgin America limited involvement by Sir Richard Branson's Virgin Group, and found two US venture firms to buy the rest of its stock.

USA Today reports those agreements allow Black Canyon Capital and Cyrus Capital Partners the option of demanding Virgin Group buy them out with interest.

Given the current state of the economy, that's looking more and more likely. But since Virgin Group can't own more than 24 percent and stay legal, that's a regulatory problem.

Virgin America recently hired investment banker Lazard Group to search for new US investors. While the airlines says it's simply being prudent, industry consultant Mike Boyd sees writing on the wall.

"If you're one of those hedge funds, you take your guaranteed profit now and run," he said.

Analysts believe long-term success for Virgin America will require service into more US cities, but the airline has only 28 Airbus A320s in its fleet, with only four more on order, to be delivered in 2011. It will also face entrenched competitors in many markets.

Boyd says the airline's only hope is to cut operating costs. If execs can achieve that, and stay within ownership and control laws, Boyd says, "They've got a good chance of being OK."

FMI: www.virginamerica.com

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