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Branson, Rejected or Not, May Win in U.S. Airline Bid (Update3)

By John Hughes

Dec. 5 (Bloomberg) -- Billionaire Richard Branson's bid to start an American airline may help Virgin Atlantic Airways Ltd., the U.K. carrier he controls, regardless of the decision by U.S. authorities on his proposal.

U.S. approval of Virgin America, the planned startup, would give Branson domestic routes in the world's biggest aviation market. Rejection may let him keep rivals off the U.S.-U.K. routes where Virgin Atlantic is the second-largest airline.

``If Virgin's domestic application ends up not being approved, or being delayed another year or two, it's going to be hard for the U.S. to make a big push on opening the markets in the U.K.,'' said Ed Faberman, former deputy chief counsel for the U.S. Federal Aviation Administration.

A decision on Virgin America's bid may come this month, said a person familiar with the matter who didn't want to be named because the timing hasn't been announced.

Branson's closely held Virgin Group Ltd. put up 25 percent of the initial $177 million investment to start Burlingame, California-based Virgin America, as well as a $53 million loan. Virgin America officials say U.S. investment firms Black Canyon Capital in Los Angeles and New York-based Cyrus Capital Partners control 75 percent of the carrier.

Virgin America, which plans to start flying between New York and San Francisco, recruited Fred Reid, a former Delta Air Lines Inc. president, to be chief executive officer and Donald Carty, former chairman and CEO of American Airlines parent AMR Corp., to be chairman.

Airline Opponents

Continental Airlines Inc., American Airlines and US Airways Group Inc. oppose Virgin America's bid. The startup doesn't meet rules limiting foreigners to 25 percent of U.S. airline voting equity and barring them from having ``actual control,'' the U.S. rivals said in government filings.

Virgin America filed its plan with the U.S. Transportation Department a year ago this week, and Branson predicted in January the new airline would be flying in six to nine months. Those hopes were dashed when the department put off a decision while it pored over additional information requested from Virgin America, including ownership details.

``There is a possibility'' the application will be denied, though Virgin America may get a list of changes needed to win approval, JetBlue Airways Corp. CEO David Neeleman said today. He was responding to a question at an investor conference at airline headquarters in New York.

Virgin America, if approved, eventually might try to send passengers to Virgin Atlantic, said Faberman, the former FAA official. That would let Branson share in the revenue going to alliance partner Continental, which funnels travelers from 19 U.S. cities to Virgin Atlantic, said Faberman, a partner with Wiley Rein & Fielding LLP in Washington and head of a trade group for small U.S. carriers.

Independent Carrier

A Virgin America spokesman, Gareth Edmondson-Jones, said it was too soon to speculate on any alliance with London-based Virgin Atlantic. ``The purpose of Virgin America is to be a damn good airline in its own right,'' he said. Branson declined to be interviewed for this story.

``There is no managerial or operational link between Virgin Atlantic and Virgin America,'' said Paul Charles, the U.K. airline's director of corporate communication.

Virgin Atlantic said in June that its fiscal-year profit more than doubled after the airline attracted more business travelers. Profit before tax and one-time items rose to 41.6 million pounds ($76 million) in the year ended Feb. 28, from 20.1 million pounds a year earlier. Sales climbed 17 percent to 1.91 billion pounds.

Access to Heathrow

Under a pending U.S.-EU aviation agreement, more U.S. carriers could fly to London's Heathrow airport. A 1977 U.S.- U.K. treaty limits U.S.-Heathrow routes to Virgin Atlantic, British Airways Plc, American and UAL Corp.'s United Airlines.

Rejection of Virgin America would let Branson argue that the U.K government should oppose the agreement because the U.S. didn't open its market to him, said Charles Hunnicutt, who was an assistant transportation secretary under President Bill Clinton. A ``no'' vote from any EU nation would sink the accord.

Killing the aviation agreement would block more competition on the U.S.-U.K. routes, where Virgin Atlantic trails only British Airways in passenger traffic.

Heathrow accounted for two-thirds of U.S.-U.K. traffic in 2004, Dresdner Kleinwort Wasserstein Securities LLC said in a report in April. Heathrow fares average $523 to and from the U.S., compared with $446 to and from London's Gatwick airport, according to the U.S. Bureau of Transportation Statistics.

That's a premium ``any corporation would be loath to sacrifice,'' said Hunnicutt, now a partner at Troutman Sanders LLP in Washington.

Prospects for Treaty

The aviation treaty is unlikely to advance anyway, said Rigas Doganis, a London-based consultant and former chairman of Olympic Airlines. ``The fundamental issues are much bigger than just Branson,'' Doganis said.

The U.S. today scuttled a proposed rule to give foreign investors more control over domestic airlines, dimming prospects for the treaty. Europeans had made the investor rule a condition for completing the ``Open Skies'' treaty with the U.S.

EU Transport Commissioner Jacques Barrot ``expressed disappointment and regretted this decision,'' the European Commission said. The U.S. and EU will hold talks ``on an urgent basis'' early next year, according to a Commission statement.

Virgin Atlantic and British Airways benefit from the continued treaty stalemate, said Dorothy Robyn, a former senior aviation adviser to Clinton.

The U.K. ``always puts a price on access to Heathrow, but the price is invariably one that the U.S. is unable to pay,'' said Robyn, a principal with the Washington consulting firm Brattle Group. ``They put a condition we couldn't possibly meet in order to maintain the status quo that benefits the British carriers.''

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