May 19, 2007

Virgin America Can Start Flying, Retain Chief for Now

Virgin America Inc., a new low-cost carrier backed by U.K. billionaire Richard Branson, won final approval to begin U.S. flights and keep Chief Executive Officer Fred Reid for six months.

The airline can start flying once it gets needed safety permits and makes agreed-upon changes, the U.S. Transportation Department said today. The agency eased a March ruling that Reid had to leave immediately because he may be ``beholden'' to foreign interests. Reid, 56, was hired by Branson in 2004.

Flights by Virgin America would help meet Branson's goal of expanding his Virgin brand in the world's largest airline market. The Burlingame, California-based carrier plans to begin with New York-San Francisco flights and then expand.

``They were relentless,'' Robert Mann of R.W. Mann & Co., an airline consultant based in Port Washington, New York, said of Virgin America. ``They persisted until the end and they got most of what they wanted.''

Virgin America may begin flights by ``mid-summer,'' Reid said in an interview, declining to be more specific. Virgin America applied for U.S. certification in 2005, with Branson's closely held Virgin Group Ltd. putting up 25 percent of the initial $177 million investment as well as a $53 million loan.

Regulators backed Virgin America's claim that earlier changes met requirements for 75 percent control and ownership by U.S. citizens. The airline had pledged to drop Virgin Group from a board seat and put Virgin Group shares under a U.S. trustee.


``We're thrilled,'' Reid said. ``We've had people working on this up to four years. We want to get on the playing field and show the American public what we can do.''

The airline also agreed to remove Virgin Group's veto power over some contracts and expenditures, amend loan agreements with Virgin Group, and revise the Virgin trademark to ensure the U.S. carrier can operate independently of Branson's U.K.-based Virgin Atlantic Airways. U.S. regulations bar foreigners from ``actual control'' of a domestic airline.

``It's tough to think of a company that has done as much to meet our standards for becoming a commercial airline,'' Transportation Secretary Mary Peters said in a statement. ``Anyone who has doubts about the future of commercial aviation in this country should take a close look at one company's efforts to compete.''

Reid, a San Francisco native and former Delta Air Lines Inc. president, said in January he would be willing to leave Virgin America if his ties to Branson concerned U.S. officials. The Transportation Department said in its ruling he could serve as a consultant for three months after giving up the CEO's post.

``There's really no point in debating it now,'' Reid said. ``I do want to express some gratitude that the DOT has extended my ability to not only be there for the conception but for the birth'' of the carrier.


Virgin America will start flying in a California market where competition recently has increased. JetBlue Airways Corp. began flights from San Francisco this month and has said it may add more California cities to its system. Southwest Airlines Co., the largest low-fare carrier, will return in August to San Francisco International Airport after a 20-year absence.

``There's going to be a battle royal out there and consumers will be the beneficiaries,'' Mann said.

Virgin America plans to add service to Las Vegas, Los Angeles, San Diego and Washington Dulles, after starting with the New York-San Francisco route.

Airline Opponents

Continental Airlines Inc., US Airways Group Inc., AMR Corp.'s American Airlines and Delta fought U.S. approval of the potential new rival. Continental argued Aug. 2 that since Reid ``was hired by, and is clearly beholden to, the Virgin Group'' he couldn't qualify as a citizen under U.S. law.

Continental also asserted that London-based Virgin Group conceived, financed and designed Virgin America, and hand-picked its fleet and key personnel.

Reid, who also served as Delta's chief operating officer for three years, was president and chief operating officer of Deutsche Lufthansa AG from 1997 to 1998. Don Carty, former CEO of AMR Corp.'s American Airlines, is Virgin America's chairman.

Issues of foreign control led the Transportation Department to deny Virgin America's initial application on Dec. 27. Virgin later proposed changes to meet the U.S. ownership test, including additional financial backing from U.S. investors. It also removed foreign investors from two funds that make up the majority of its U.S. ownership.

The U.S. investors include Cyrus Capital Partners of New York, with $52 million, and Black Canyon Capital in Los Angeles, with $46 million.

By Mary Schlangenstein. Contact:


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