Advertising
  • News
  • Networks
  • Regulatory
  • OPINION: Virgin America and the flaws in foreign-ownership laws

OPINION: Virgin America and the flaws in foreign-ownership laws

A sad irony lost in the commotion over Virgin America's announced sale to Alaska Air Group is the critical and unfortunate role played by government restrictions on foreign ownership of airlines.

Ownership restrictions are necessary, it is argued, because national transportation systems can't be entrusted to foreigners. Only citizens, by this reasoning, are righteous stewards of a robust and safe airline network.

In this case, however, the minority foreign owners – the Richard Branson-backed Virgin Group – seemed reluctant to sell a small but increasingly competitive low-cost carrier to a larger company with deeper pockets. Instead, the deal appeared to be at least tacitly endorsed by Virgin America's citizen-owners – a collection of US-based hedge funds.

The merits of Alaska Airlines' generous $2.6 billion bid to Virgin America's biggest shareholders are obvious. A hedge fund exists to maximize profits for investors, who could hardly ask for better economic conditions in which to sell an airline than today's.

But the deal highlights the fallacy of linking citizenship to any sense of patriotic governance. Since the late 1930s, the USA has required that American citizens own at least 75% of the voting shares of a publicly traded airline. As in many other countries, that protectionist rule has survived the airline industry upheavals caused by deregulation and consolidation. The likes of the EU and Brazil are now moving to loosen such restrictions, as domestic economic problems increase pressure on airlines dealing with artificial constraints imposed on sources of capital.

Virgin America always offered a tantalising test case of a US-based airline with management and branding strategy inspired by a foreign organisation.

In 2006, the US Department of Transportation rejected Branson's initial ownership structure for Virgin America, which would have left the start-up effectively in his financial control via a series of US-based subsidiaries. A few months later, the DOT accepted Virgin America's revised ownership structure, under which Branson's Virgin Group would hold only 22% of the shares and little influence on corporate decision-making.

Virgin America managed to emerge from the global financial collapse in 2008 smaller than originally planned, but with a strong product that provided a valued alternative to its US-based competition. If Branson, a foreigner, were allowed control, Virgin America would likely still be focused on growing slowly into a West Coast equivalent of JetBlue.

In this case, we see how ownership restrictions can have unintended consequences, such as allowing hedge funds to hijack governance structure over an otherwise committed foreign owner. Unless airlines are allowed greater access to sources of capital, the Virgin America example is likely to be repeated.

Advertising
Related Content
Advertising
What's Happening Around "Virgin America"