Virgin America’s application to start a low-cost air carrier was tentatively denied by the United States Department of Transportation Wednesday.
The startup airline must change its ownership, corporate structure and business agreements to show that it is truly controlled by U.S. citizens as required by law, rather than by British interests affiliated with billionaire Sir Richard Branson and his Virgin Group of companies, the department said.
If Virgin does not make those changes, it may not exist as a commercial passenger airline, jeopardizing some 3,000 jobs the Burlingame company was estimated to bring to the Bay Area, as well as San Francisco International Airport’s chance to score a low-cost carrier to compete with the Oakland and San Jose airports.
Virgin America spokesman Gareth Edmondson-Jones called the announcement a “long awaited step in our certification process” and said the firm disagreed with the ruling, but intended to use it as a roadmap for addressing the DOT’s issues by Jan. 10. Executives still intend to run an airline and not pull the plug on the startup, Edmondson-Jones said. The firm went public last week with expectations that DOT would deny its application, after months of silence from the federal department.
“We still obviously hope to launch in the spring, but we still need to respond to the DOT,” Edmondson-Jones said.
Branson’s companies are a minority owner, and are licensing the Virgin brand to the airline and providing pre-startup debt finance. The airline is majority-owned by much quieter U.S. investors, represented by Mark Lanigan of Black Canyon Capital LLC of Los Angeles and Nicholas Singer of Cyrus Capital Partners LLP in New York, Virgin America maintained. It was too much for the DOT, which said that the close relationship with the Virgin Group shows Virgin America is not controlled by United States citizens.
Domestic competitors Continental Airlines Inc. (CAL) and other U.S. airlines said in filings to the DOT that Virgin America was not U.S.-controlled.
“We believe the DOT reached the right conclusion when it determined that Virgin America is controlled by foreigners,” Continental spokesman David Messing said. “As we have consistently said, Continental is not opposed to the Congress examining alternatives to the current law prohibiting foreign control of U.S. air carriers. However, until the law is changed, all U.S. carriers or prospective carriers must comply with current law.”
Bay Area business organizations had aggressively courted Virgin America to pick San Francisco as its headquarters.
“The people that are running Virgin America are really smart people,” said Christine Leslie, VP of the San Mateo County Economic Development Association. “I have to believe that with their experience and their smarts if they are going to be able to find a solution for this.”