Friday, April 3, 2009

Oberstar on Virgin America

Rep. James Oberstar has finally weighed-in on the matter of Virgin America's citizenship.  In a letter to U.S. Transportation Secretary Ray LaHood, Oberstar questioned the airline's citizenship status and called for a public inquiry into the matter.  As discussed previously on the blog here and here, Alaska Airlines has already petitioned the U.S. Department of Transportation to open a public proceeding into Virgin America's citizenship following news reports that the carrier's primary U.S. investors--two hedge funds--sold back their stake to the U.K.-based Virgin Group, effectively leaving the latter as the sole owner.  Virgin America has disputed this claim to the extent that it insists that 75% of its voting shares are still held by U.S. citizens (presumably the hedge funds).

The question of the hour, as a number of observers have pointed out, is whether those shares are still owned by U.S. citizens.  In other words, do the U.S. citizens controlling at least 75% of the voting shares still have a financial stake in them?  As Rep. Oberstar states in his letter:

If the [former U.S. owners] have no further stake in the success of the company, there is serious question as to whether their continued title to the shares is sufficient grounds for them to be considered the owner of the stock, for the purpose of the statutory requirement that a U.S. carrier must have 75 percent of its voting stock owned or controlled by persons that are citizens of the United States.  If the Virgin Group has all of the financial interest in the stock, it would seem to be the owner for purposes of the citizenship requirement.

In its March 23 filing before the DOT, Virgin America did not deny that the U.S. hedge funds had sold back their financial iinterest in the carrier's voting stock to the Virgin Group.  Rep. Oberstar believes "[i]f Virgin had been able to make this denial, it presumably would have done so, since this would be a strong, if not irrefutable, argument for denial of the requests for an investigation." 

With this degree of high profile scrutiny being placed on Virgin America, it is unlikely that the airline will be able to stave off a public investigation much longer.  The climate for latitude from the DOT is not good.  Rep. Oberstar and other members of Congress have already begun publicly scrutinizing the DOT for what they see as an overly permissive granting of antitrust immunity to airline alliances.  With legislation pending which could sunset all antitrust immunity within three years and begin an investigatory process which could lead to the DOT losing its immunization powers altogether, the pressure is certainly on for the agency to fall in line with the regulatory (and some would say protectionist) temperament on Capitol Hill.  If that's the case, then Sir Richard Branson's bold endeavor to finally penetrate the restricted U.S. air transport market may be at its end.

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With the lack of overall profitability of US airlnes since deregulation compared to foreign carriers over a similar period (see IATA Economics Briefing 2005 October), one would think something isn't quite right with our domestic breed. I'd say it's about time to consider a change in the law. Anyway what airline have you been on recently that comes close to comparing. Further, with the lack of profitablity and the current capital crisis it may be wise to ease our foriegn competition laws to let in potential buyers for our always bankruptcy prone airlines. It seems a world away from the days when TWA was taken over by AA. What happens if one of the few legacy carriers dies with n one able to buy it domestically? Do we just pretend Atlanta and the entire spoke system eminating from it didn't matter.

Anyway - I like Virgin. Ironically, the only time I flew of was a friend on a one way companion thing. I flew Alaska home and they are complaining. If it wasn't for that Virgin flight Alaska wouldve never seen the green from my wallet.

Posted by: T joey | Apr 3, 2009 11:21:41 PM

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