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"Virgin America likely to be grounded"


 
Saturday, December 23, 2006

Virgin America likely to be grounded
Firm partly owned by British billionaire expects government to deny request
to fly; corrective steps a possible option
By John Hughes
The Contra Costa (CA) Times


Virgin America Inc., a U.S. airline partly owned by U.K. billionaire Richard
Branson, expects the federal government to reject its application to fly,
Chief Executive Officer Fred Reid said.

It's "theoretically possible" the denial will be so strong that
Burlingame-based Virgin America will fold, Reid said Friday in an interview.
It's more likely the U.S. Transportation Department will require corrective
steps that would allow the carrier to start service next year, he said.

The Virgin America case is sensitive for Transportation Secretary Mary
Peters because her agency has urged opening aviation markets. The United
States is pressing for an "Open Skies" agreement with the European Union to
lift decades-old flight limits.

The carrier's likely rejection is "the worst-kept secret in Washington,"
said aviation consultant Michael Roach of Roach & Sbarra in San Francisco.
"It is inconceivable to me DOT would make any other decision given the
politics of the situation."

Reid, 56, said Peters may release the decision between Christmas and New
Year's Day to "bury bad news." Virgin America has been left to "twist in the
wind" by the yearlong review of its application, Reid said.

Transportation Department spokesman Bill Mosley declined to comment on
Reid's remarks beyond saying, "We have not announced a timeline for a
decision."

"The mood in Washington is moving toward protectionism, and the recent
election increased that," Roach said.

On Dec. 5, Peters withdrew a plan to give foreign investors more control
over U.S. airlines in response to opposition from Congress and labor unions.
The action was a setback for the prospects of the "Open Skies" effort
because Europeans insisted on the proposal before approving the agreement.

Virgin America applied on Dec. 8, 2005, for permission to begin flights. The
request stalled amid opposition from U.S. airlines that would face more
competition and labor unions that feared job losses. Peters' agency delayed
the review until July, and then closed a public comment period Aug. 16.

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.

The carrier has 169 employees, nine aircraft and plans to start service by
flying between San Francisco and New York. The chairman is Donald Carty,
former chairman and CEO of American Airlines parent AMR Corp. The Federal
Aviation Administration approved the carrier as safe to fly, Virgin America
said Friday.

In reviewing Virgin America's proposal, the Transportation Department has to
consider a law that limits foreigners to 25 percent of U.S. airline voting
equity and bars them from "actual control" of a U.S. carrier.

U.S. rivals of Virgin America including Continental Airlines Inc., Delta Air
Lines Inc., US Airways Group Inc. and American have insisted in filings that
the start-up carrier doesn't meet the ownership test.

"Since Mr. Reid was hired by and is clearly beholden to the Virgin Group, a
United Kingdom citizen, Mr. Reid cannot qualify as a citizen," Continental
said in an Aug. 2 Transportation Department filing. Continental also argued
that London-based Virgin Group conceived, financed and designed Virgin
America and handpicked its fleet and key personnel.

Reid said Virgin America complies with U.S. law and that if Peters doesn't
think so, she should provide the carrier with a "road map" to compliance.

"For what appears to be political reasons, we seem to be getting stalled in
the water," he said. "The delay itself is a political statement and a form
of punishment."

Roach said Branson, 56, and his Virgin Atlantic Airways Ltd. share blame for
the likely rejection because they were too involved in the early
establishment of the U.S. carrier.

"That says to the staff of the DOT, 'This is a foreign operation,'" Roach
said. "Once you have that impression in your head, it's hard to overcome."

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