Thursday, February 12, 2009

Virgin America: Like Deja Vu All Over Again

The last time negotiators from the United States and European Union were busy trying to finalize a far-reaching aviation agreement, Sir Richard Branson's brainchild Virgin America was looking down the barrel of intense scrutiny concerning its ownership structure.  Now, with second-stage talks underway between the U.S. and EU, Virgin America could find itself back before the U.S. Department of Transportation to show that it remains owned and controlled by U.S. citizens.  Rival carrier Alaska Airlines is asking the DOT to conduct "a careful and ongoing review" of Virgin America, stating that "[s]ince the issuance of their certificate, Virgin America's structure and operations have clearly changed; however, there is a lack of public information about those changes or how they may impact its citizenship status."  Alaska Airlines further pointed to "[r]ecent questions about Virgin's ownership status establish[ing] a compelling need for a transparent review of its continuing compliance with [U.S. law]."  In its petition to the DOT (Docket No. OST-2009-23307), Alaska Airlines cites substantial cash infusions (allegedly including the British Virgin Group), the possibility of two major U.S. investors pulling out, and a possible plan to create a "time share" ownership structure to satisfy U.S. citizenship rules as "important and potentially disturbing changes" to Virgin America which warrant reinvestigation.

The aeropolitical backdrop to this pending investigation should not be discounted.  After failing to win DOT approval to begin operating services in December 2006, Virgin America's fortunes changed in March 2007 following a number of alterations to its ownership structure and its willingness to comply with further DOT demands.  This aboutface by the DOT came just days before the EU Council of Transport Ministers was scheduled to finalize the terms of the U.S./EC Air Transport Agreement, though the DOT's decision forewent any explicit mention of that fact.  Arguably, the DOT's approval stands on its own merits.  Even a cursory reading of the proceedings reveals a careful analysis of Virgin America's ownership structure, and the subsequent conditions imposed on the carrier (including the removal of CEO Fred Reid) were substantive.  What Alaska Airlines appears to be questioning (albeit indirectly) is the DOT's commitment to do more than simply rubberstamp contentious applications as a means of advancing U.S. international aviation policy. 

A new investigation could go either way at this point.  But surely the DOT realizes that an unfavorable result for Virgin America won't sit well across the Atlantic.  Between the Obama Administration's apparent unwillingness to yield on foreign ownership restrictions and the recently proposed federal legislation which could threaten international airline alliances, the U.S. has done nothing to show its EU partners that it is willing to move forward on air transport liberalization.  From the EU's perspective, there should be no issue with Virgin America's citizenship; the ownership and control rules are dinosaurs which have no place in a deregulated industry.  So long as they remain and the right of Virgin America to fly hangs in the balance, the EU (and especially the UK) will be well-entitled to its discontent with U.S. aviation policy.  Will this antipathy finally culminate in the EU (or its individual Member States) suspending rights under the 2007 Agreement?  A decision in Virgin America's favor will only maintain the status quo; a finding against it could further tip the scales towards suspension and set international air transport liberalization back a decade.

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