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February 12, 2009

Who's Afraid of Virgin America?

Branson
Let's hope his next costume
doesn't involve stripping bare. 

Photo: Virgin America

by Barbara S. Peterson

The Virgin Group and its frighteningly peripatetic chief, Richard Branson, have been hard to ignore this past week. In the space of a mere six days, they launched both a new airline, VAustralia, with fares as low as $549 roundtrip from Los Angeles to Melbourne (it's also flying to Sydney and Brisbane), and new transcontinental flights on Virgin America. (Fares from the new Boston terminal start at $109 one way with daily flights to SFO and LAX and they've got WiFi on every plane.) The linking of these two networks--VAustralia passengers will be able to connect with Virgin America at LAX--marks the first time travelers can circumnavigate the globe exclusively on Virgin-branded airlines.

So what's the matter with this picture? Other than yet another sighting of Branson in a silly costume, that is? Virgin America is losing money--quite a bit of it--a fact it was only just now forced to reveal under the Transportation Department's disclosure rules. Virgin had tried to keep the information under wraps, arguing that it's a private company, but the DOT didn't buy it.

The bad news didn't end with the revelation that the company lost $175 million in the first eight months of 2008, its first full year in business. It's original American investors, who, as majority owners, are essential to maintaining the airline's status as a U.S.-owned company, could cash out under their agreement with Branson, who has a minority stake. If they were to pull out, then Virgin would have to line up new investors or risk running afoul of the law, which requires 75 percent ownership by U.S. citizens. Worse, now a U.S. competitor is calling for an investigation of Virgin America's ownership and claiming it may have already broken the law. Alaska Airlines, which obviously didn't appreciate Virgin's entry into its Seattle stronghold, this week filed a petition that suggested Branson is far more than a passive investor.

Would it be such a crime if he were? This is the same argument that was used to hold up Virgin America's application for several years, and when the airline finally started, it had to make numerous concessions to its opponents, such as firing its first CEO, industry veteran Fred Reid, simply because Branson had hired him. When I asked Branson about this not long ago, he seemed quite frustrated: "It's like having a child but not being able to participate in its upbringing." In this age of globalization, such 1920s-era limits on foreign ownership strike many as archaic. On the other hand, globalization has gotten a bad name lately. Both airline unions and their managements oppose any change in the current limits, one of the rare issues on which they see eye-to-eye.

Should fliers care? Virgin America was voted the best domestic airline by Condé Nast Traveler readers last year and our correspondents who've tried it have been generally pleased. I've flown VA several times, and it should be noted that it has what many consider the only genuine first class in the market, with capacious seats, ample legroom, and top quality food. Not surprisingly, the airline industry would be happy to see Virgin America go away. Then again, with VA's fairly small slice of the market (it serves eight cities with 28 planes), what are they so afraid of?

What do you think, readers? Should the U.S. allow foreign ownership of its airlines and let Branson exercise full control of Virgin?

Further reading:
* More of Branson-ette
* Virgin America Joins the Space Race
* Branson's blog
* On the Fly: The airline industry

Comments

I think it really doesn't matter and shouldn't matter. There's such opaqueness in ownership of other industries from automotive, retail, etc. I know that Alaska Air filed a suit or complaint regarding the ownership of Virgin America. Why? Why not, instead improve their own airline and meet the market demand for such service? And so what if VA is losing money right now? They are trying to grow market share and provide travelers with the opportunity to experience their airline. We already know what Alaska is like.

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