Pending Thumbs Down 'Worst-Kept Secret In Washington'

The reaction to the federal government's probable rejection of Virgin America's application to fly has come fast and furious since the unofficial news emerged last week.
 
The rejection is particularly troubling to US Transportation Secretary Mary Peters, whose "open skies" agreement seeks opening aviation with the European Union.

Continental and other major US carriers objected to federal approval because, they say, part-owner and British citizen Richard Branson (below right) will exercise actual control of the new carrier. This would be contrary to US law, which requires control of airlines to rest with U.S. citizens, according to the San Francisco Chronicle.

In reviewing such proposals, DOT considers a law limiting foreigners to 25 percent of US airline voting equity and bars them from "actual control" of a US carrier.

Virgin America's Chief Executive Officer Fred Reid insists that Branson is just an investor and that the company is licensing the Virgin brand.

Reid told both the Wall Street Journal online edition and Bloomberg News last week that Virgin America had heard informally from contacts in the government that its application would be rejected and the news will be delivered next week - perhaps the slowest news week of the year.

Reid told Bloomberg that he expected the application eventually to be approved, but it was "theoretically possible" the government's objections could be so sweeping that the airline would not be able to get off the ground. Reid told Bloomberg that Virgin America could still take to the air sometime in 2007.
 
Aviation consultant Michael Roach, of Roach & Sbarra in San Francisco, also weighed in. "It is inconceivable to me DOT would make any other decision given the politics of the situation. The mood in Washington is moving toward protectionism, and the recent election increased that," Roach said.

On the other side, Gerald Bernstein, principal at the Velocity Group in San Francisco, an aviation consulting and communications company, said he was surprised to hear the Transportation Department could reject the application.
 
"There's really no reason for rejecting a good application," Bernstein said. "I would have thought this was a no-brainer and that (Virgin America) would have the ability to make this happen."

Henry Harteveldt, an airline analyst and head of the San Francisco office of Forrester Research, noted that Virgin America's application has received an unusually high degree of scrutiny, chiefly because of Branson's involvement.
 
"I believe there's a double standard being applied toward Virgin America," Harteveldt said. "This stems from the fact that Richard Branson is involved. It's not so much Mr. Branson himself. Toyota can open factories in this country and US banks buy branches overseas. But there's this belief that airlines are essential to national security."

US carriers especially covet greater access to London's Heathrow airport, which handles more international traffic than any airport in the world. Conversely, European carriers are eager to fly more freely in the United States, the world's biggest aviation market.
 
However, an open-skies pact has met with nationalistic and security concerns. Virgin America's application appears to have been swept up in this debate, Harteveldt said. Virgin America had completed the last formal step in the Federal Aviation Administration's (FAA) airline certification review - that of flight proving runs. The airline only awaits approval from the DOT before it can begin operations.

Branson's closely held Virgin Group Ltd. put up 25 percent of the initial $177 million investment to start Virgin America, as well as a $53 million loan. Virgin America officials say U.S. investment firms Black Canyon Capital in Los Angeles and New York-based Cyrus Capital Partners control 75 percent of the carrier, which has 169 employees, nine aircraft, and plans to implement service between San Francisco and New York's JFK.

Virgin America, billing itself as a 'new generation' low-fare airline, is based at San Francisco International Airport and has firm orders for 34 A319 and A320 passenger aircraft, according to PR Newswire.

FMI: www.virginamerica.com  www.dot.gov