In its third petition this year, Alaska Airlines renewed its request the U.S. Department of Transportation schedule a public hearing in it’s on going review of Virgin America’s citizenship status. The petitions come at a time when Congress is making protectionist moves against such aviation practices as airline alliances. The latest petition, coming after three months of department deliberations, cites the fact that Virgin America has yet to refute press reports questioning its citizenship.

The request results from the intention of Alaska’s two major investors – Cyrus Capital Partners L.P. and Black Canyon Capital LLC, the two U.S. hedge funds – intention to exercise their puts that surrendered back to the British Virgin Group all of the economic rights traditionally associated with being a shareholder, according to House Transportation and Infrastructure Committee Chair James Oberstar. The funds announced their intention six months ago.

Alaska calls Virgin’s use of the two investment groups “rent-a-citizen,” despite the fact that in order to sell their 75% stake in Virgin America, they must find replacement U.S. investors which will likely be difficult given the volatility of airline stocks and the fact that Wall Street is looking ahead to the fall/winter season with trepidation based on a resurgence of the H1N1 virus.

Indeed, the Alaska petition for a public hearing into Virgin America’s citizenship status is backed by Washington State Senator Patty Murray, who chairs the Senate Transportation, Housing and Urban Development and Related Agencies Committee.

DOT Inspector General Calvin Scovel III also supports the petition, saying the “controversial citizenship proceedings should be opened for public review.” Federal law requires U.S.-based air carriers to be U.S. citizens, with at least 75% of voting interests owned and controlled by U.S. citizens.
Also supporting the petition are the Air Line Pilots Association, Association of Flight Attendants-CWA and Aircraft Mechanics Fraternal Association, no surprise given the animosity between Virgin Group Chair Richard Branson and unions.

“It also appears, based on the limited publicly available information and the absence of any statement to the contrary, that the Department now considers voting rights stripped of any economic interests to satisfy U.S. citizenship requirements or has provided Virgin America a ‘grace period’ in which to find replacement U.S. investors,” said Oberstar. “Either scenario raises difficult statutory and policy issues. If the equity funds have no further stake in the success of the company, there is a serious question as to whether their continued title to the shares is sufficient grounds for them to be considered as the owner of the stock. 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. If the Department finds that the equity funds have disposed of their financial interest, then I strongly urge the department to conduct a public proceeding to examine the question of Virgin America’s citizenship.

“I find it significant that in its answers opposing these petitions, Virgin America does not deny that has been a sale or other transfer of financial interest in the stock,” Oberstar continued. “If 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 requests for an investigation.”

Senator Murray expressed concern in July, citing the Wall Street Journal report that, while U.S. investors have retained title, that does not necessarily mean control. “Title, alone, absent any economic interest in the share would not appear to satisfy the U.S. citizenship requirements,” she wrote in early July.

Virgin America's Chief Executive David Cush stated that David Cush told Dow Jones Newswires the Burlingame, CA-based airline still has the same ownership. "Any story saying that 76 percent of voting shares have been sold back to the Virgin Group and are being held by the Virgin Group is an inaccurate story," he said.

In its DOT filing, Virgin America noted that the initial citizenship investigation was the longest and costliest in DOT history. Conspicuously absent in those proceedings was Alaska Airlines, it said, who did not join the list of airlines protesting its initial application for a certificate of public convenience. The Alaska petitions, it suggests, is nothing but sour grapes now that Virgin America has become a formidable competitor on Seattle-California routes.

“There is nothing new in this petition and nothing has changed with the company's ownership structure to date,” it said. “We're a U.S. company that has created over 1,500 new jobs since we launched, captured a list of the major survey-based travel awards, and lowered fares and improved service in the markets we've entered. We remain fully compliant with the law and in constant communication with the DOT.”

Virgin America issued a statement early this month saying DOT was “comfortable” with its citizenship status and yesterday released a statement saying Alaska’s assertions was an attempt to raise unfounded concerns over citizenship.

It is those statements that particularly irk Alaska which said Virgin America is “acting as a defacto DOT spokesperson” in citing closed door meetings with the department and suggesting it was satisfied with the changes taking place in the ownership of the airline.
For its part the department has been studiously avoiding any statement while the case is under review, saying only that it continues to review the Alaska petition. It has given Virgin until the end of the year to find replacement investors.

Alaska is also objecting to the dearth of real facts in the case which has been largely “pieced together from scattered news reports.” Alaska indicated that the current ownership status “is more controversial than Virgin America’s initial ownership structure, which the department’s initial decision tentatively concluded, after multiple rounds of public comments, did not satisfy U.S. citizenship requirements.”

“Virgin America’s CEO has selectively disclosed in news reports that the company contemplates a small number of U.S. citizen owners whose total investment would approximate the same amount contributed in 2007 by the two former U.S. fund owners indicate that the Cyrus fund would likely be among the new owners,” it continued. “What the news reports do not reveal is whether the new ownership structure will involve the same multi-layered ‘put structure plus other guarantees’ which were integral to the initial investments by Cyrus and Black Canyon and virtually removed any element of risk normally associated with ownership.

Alaska cited Virgin America’s several hundred million in accumulated losses in just two years of operation, saying that it has nearly run out of cash on several occasions requiring debt infusions from British Virgin Group. “It is reasonable to assume that the Virgin Group will offer a ‘put-centric, risk-free,’ plus-plus structure, thus further straining the statute’s U.S. citizen ownership requirements. The corollary statutory requirement that actual control over a U.S. carrier remain vested in the U.S. citizens would similarly be strained by a ‘put-centric, zero-risk’ hedge fund capital infusion.”