Wednesday, January 3, 2007

US DOT Proposes To Deny Operating Certificate For Virgin America - Carrier Does Not Satisfy US Citizenship Requirement

On December 27, 2006 the US DOT issued a proposed decision that, if finalized, would deny potential new-entrant Virgin America the operating certificate that the carrier needs to being flying. The DOT found that Virgin America’s president and at least two-thirds of the officers and directors are US citizens, satisfying one of the statutory tests for showing that a US air carrier is a US citizen. However, the two other statutory tests for proving US citizenship were not satisfied, as less than 75 percent of Virgin America’s voting equity is held by US citizens and the carrier was found to be "actually controlled" by foreign citizens (the Virgin Group and Sir Richard Branson).  Virgin America is expected file a formal objection to the finalization of the decision by January 10, 2007.

Despite the fact that Virgin America’s current corporate structure appears to clearly run afoul of the existing US citizenship requirements, this situation provides another example of how competition and consumer benefits can be stifled by the restrictive laws pertaining to foreign ownership and control of US airlines.  According to an article in the San Francisco Chronicle, Virgin America has raised "$177 million in startup capital, hired a staff of 169 people, rented offices near [San Francisco International Airport] and ordered 33 planes."  The airline had also waited for over a year for a decision on its application for an operating certificate.  If Virgin America cannot begin operations, many of these costs could become "stranded costs" and investors and consumers will be deprived of the economic welfare benefits that an operating airline would provide.

The DOT’s recent decision not to proceed with a rule that would have liberalized the definition of "actual control" to allow more participation by foreign investors in some aspects of US airline operations was a missed opportunity that potentially could have created significant economic benefits for US airlines.  At the very least, if the rule changes had been combined with a finalized US-EU open skies agreement, Virgin America would have a more clearly defined road map for meeting the "actual control" standard than the current "totality of the circumstances" test.

Additional Resources:

1) Full text of DOT order

2) Slate.com article criticizing U.S. laws restricting foreign ownership of U.S. airlines

3) Chicago Tribune editorial criticizing U.S. laws restricting foreign ownership of U.S. airlines

January 3, 2007 | Permalink | Comments (3) | TrackBack (0)