Tentative Finding Requires Changes In Order To Meet Citizenship Test For US Carrier Status

Virgin America would have to revise its ownership, corporate structure and associated agreements to be 75 percent owned and actually controlled by U.S. citizens before it can receive an operating certificate, the U.S. Department of Transportation (DOT) said Wednesday, 12/27, in tentatively denying the company’s application.

Under the Federal Aviation Act, to be certificated as a U.S. airline, a company must first show that it is actually controlled by U.S. citizens, that the president and two-thirds of the board of directors are U.S. citizens, and that at least 75 percent of the voting interest is owned or controlled by U.S. citizens. The Department recently withdrew a proposed rule that would have amended its interpretation of the statute’s “actual control” requirement so as to allow additional foreign investment.

In its show-cause order, the Department tentatively concludes that Virgin America’s close relationship with the U.K.-based Virgin Group indicates that the carrier is not under the actual control of U.S. citizens. The order cites the Virgin Group’s and its executives’ pervasive involvement in the creation of Virgin America, the funding Virgin Group provided to the carrier, various interlocking financial agreements, and the Virgin Group’s ability to influence decisions of the carrier’s board. The Department also said that the restrictive name-brand licensing agreement between Virgin Group and the airline impedes the carrier’s independent decision-making authority. However, the Department’s tentative decision reflects its review of the specific terms of the Virgin America licensing agreement, and DOT emphasized that properly structured licensing or franchise agreements between U.S. and international carriers are now, and will continue to be, permissible.

The Department also tentatively found that less than the required 75 percent of voting interest in Virgin America is owned or controlled by U.S. citizens, with most of its voting equity held by companies that are majority-owned by non-U.S. citizens.

In order for an application to be granted, Virgin America would have to demonstrate that it is independent of the Virgin Group and other non-U.S. citizens, and that at least 75 percent of its voting equity is held by U.S. citizens.

On July 12 the Department found the company’s application to be complete. DOT’s tentative decision follows an extensive review of Virgin’s heavily contested submissions and public comments.

Virgin America may file an objection to the proposed decision within 14 calendar days. Answers to objections will be due seven business days afterward. The show-cause order and other documents in the case may be found on the applicable section of the DOT website.

FMI: http://dms.dot.gov, docket OST-2005-23307.