US endorses Virgin America ownership

Washington DC
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Virgin America has prevailed in convincing US regulators that its new ownership structure meets citizenship requirements of the USA, despite attempts by rival Alaska Airlines to persuade the Transportation Department that the carrier failed the ownership litmus test.

After an arduous campaign to convince regulators that it was majority-owned by US interests prior to its launch in 2007, Virgin America in 2009 informed regulators of a significant shift in its ownership that prompted a regulatory review of the new structure. Key in both instances was the assurance the Virgin Group held the mandatory 25% voting share allowed for foreign entities in US airlines.

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Alaska Airlines and some US unions argued for a public inquiry of Virgin America's ownership after reports surfaced that two original hedge fund investors in the carrier sold their rights back to the Virgin Group. But ultimately the US government dismissed those protests, concluding Virgin America met all regulatory citizenship requirements.

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The stake held by Black Canyon Capital and Cyrus Capital in Virgin America's majority shareholder VAI has been altered. Now VAI is largely owned by Cyrus Aviation, which is run by Cyrus Capital. VAI MBO Investors, which comprises current and new board members, now owns a 20% stake in VAI. Its investors include current board members Donald Carty and Samuel Skinner and new members: Virgin America chief David Cush and Dallas-based investor Robert Nickell. VAI's other investors include an entity that holds a 16.7% stake to distribute to employees if the carrier participates in an initial public offering and a small holding by the airline's management group. The Virgin Group stake of 25% remains unchanged.

Under the new scheme Virgin Group will also relinquish former rights it had in granting Virgin America to engage in certain business decisions and transactions, including the modification of some contracts and asset sales. Despite the new restrictions, Virgin Group has still pledged $63.4 million in debt financing to Virgin America, but says Cyrus Aviation, in addition to supplying the airline $5 million in debt, is also purchasing $15 million of the debt supplied by the Virgin Group. This means a net pledge of $48 million in debt financing supplied by Virgin Group.

The new financing pledge, in addition to warrants granted to Virgin Group by Virgin America, were ultimately of no concern to US regulators in completing its ownership review. They have concluded Virgin America meets all citizenship requirements and believe that since many "of the new US investors are contributing personal assets, they will have a greater incentive to actively participate in the strategic decisions of Virgin America".