NEW YORK – In a blow to rival low-cost airlines, transportation regulators have ruled that Virgin America Inc., the offshoot of Richard Branson’s British airline, has kept up its status as a carrier controlled by U.S. citizens, clearing the way for its expansion.
Competitors, led by Alaska Airlines, had challenged Virgin’s U.S.-citizen status following media reports early last year that Branson’s Virgin Group owned virtually all of Virgin America’s voting securities. Under U.S. rules, domestic-operating airlines must be 75% owned by U.S. citizens.
But in a letter dated Friday, the Transportation Department said Virgin does meet its standard to be a U.S.-certified carrier, with 75% of the airline owned by VAI Partners LLC, a Delaware limited-liability company, and 25% owned by Branson’s Virgin Group.
Further, Virgin America will expand its board to nine from eight to include Chief Executive David Cush, a U.S. citizen, according to the agency’s letter. Only two board members are non-U.S. citizens.
Analysts said the move was widely expected and would allow Virgin America to increase its domestic footprint.
The cloud of citizenship status potentially stalled plans for adding aircraft and new routes, while legal fees may have tied up funds they could have been using for promotion, according to Forrester Research analyst Henry Harteveldt.
“At the very least, [Virgin management] can now focus on running the company and growing their business without worrying about the status of their citizenship, and people can go back to work and not worry about future employment,” he said.
Virgin is relatively small, with just 100 daily flights and around 1,500 employees. Using San Francisco as its hub, it flies routes to Boston, Ft. Lauderdale, Fla., New York, Seattle and several other domestic destinations.
With passenger growth in the U.S. essentially stagnant, airlines have to grow their revenue by poaching market share from others, typically by undercutting their fares.
“Virgin America is a threat,” said Next Generation Equity Research analyst Dan McKenzie. “A small carrier can have a big impact, particularly when it first goes into a new market. … Wherever Virgin America has gone, pricing has come under pressure.”
For legacy carriers, they typically move out of markets where they have to compete with more than one budget carrier, reducing overall seat capacity.
Virgin America competes directly with Alaska, JetBlue Airways Corp. and Southwest Airlines Inc., as well as some of the big carriers such as UAL Corp.’s United Airlines, which also has a San Francisco hub.
Challenges to its U.S.-owned status began soon after its first application to fly back in 2005. The carrier faced opposition from local carries and their labor unions that suffered from years of airfare wars, amid a fiercely competitive business environment.
“With this behind us, we intend to focus on what we do best: injecting new competition into markets as we grow, creating new jobs and delivering an unrivalled guest experience,” said Cush, Virgin America’s chief executive, in a statement.
Virgin is set to receive $63.4 million in additional funding from New York-based Cyrus Aviation Investor LLC, which holds a 55.5% interest in VAI Partners, and a $5 million infusion from Virgin Group. CAI affiliates will provide an additional $15 million in debt refinancing.
“These new influxes of capital not only show Virgin America’s ability to obtain the capital necessary to meet the financial-fitness standard, but also demonstrate that it is not dependent on Virgin Group for capital to finance its ongoing operations,” Susan Kurland, the assistant secretary for aviation and international affairs, wrote in the agency’s letter.
Further, the carrier expects to obtain between $250 million and $350 million in third-party aircraft refinancing for 2010 and additional financing in 2011.
“We are heartened to see the Department of Transportation has required further investment by U.S. entities and other significant changes to their governance structure as a condition to the department’s conclusion that Virgin America” is U.S.-controlled, said Keith Loveless, general counsel for Alaska Airlines, owned by Alaska Air Holdings.
However, Loveless added he was also disappointed the government chose to conduct a review that he said was done behind closed doors and without public comment.