Fred Reid, the veteran Delta Air Lines and Lufthansa executive who has spent nearly two years in investor roadshows seeking funding for Virgin’s venture, emerged just before Christmas with enough funding in hand to grab the public eye.
Airline bankruptcies, the oil shock and merciless competition may have made some bankers wary, but with $177.3 million committed to its start-up, Virgin America will be the most strongly capitalised US launch yet, with deeper pockets than JetBlue Airways. And chief executive Reid vows it will be an airline that people love when it starts flights, possibly late in 2006.
He insists the capital structure fully complies with US rules on foreign investment in air carriers and stresses that the Virgin America application is unrelated to proposed changes in Transportation Department rules on ownership and control. “This is something we have been working on for a long time,” says Reid. “It just took longer than we thought.” Many observers have viewed Branson’s vow to start a US airline as a direct challenge to the nation’s ownership regime, but Reid says that is not the case.
Of the total capital, $90 million is from VAI Partners, a US investment group funded by Black Canyon Capital and Cyrus Capital Partners. The two funds are run by veterans of large Wall Street companies, including defunct investment bank Drexel Burnham Lambert. About $30 million comes from companies owned by Branson. The rest is debt held by Virgin companies.
Virgin America has a licensing and branding pact with the Branson companies, and the application for an operating certificate is certain to face close regulatory scrutiny.
Virgin plans to have 17 new Airbus A319s and A320s flying within its first year. It has agreements for 33 of the narrowbodies in all, financed by Airbus and GE, which would supply the engines. Reid would name only one route, between one of the three New York airports to San Francisco, where it would use San Francisco International airport. This is the type of market Virgin will target, says the carrier, as it aims for “major metropolitan areas nationwide where it believes there is significant, unmet demand for quality, value-oriented service”.
The San Francisco Bay Area is the nation’s fourth-largest origin-and-destination market, Virgin says in its Transportation Department application, but because this airport lacks low-cost, low-fare service, it suffered “a dramatic loss of traffic in recent years as local passengers drive to Oakland or San Jose rather than pay the higher prices at San Francisco”. The New York City area is similar, it says – only 16% of departures from New York’s three airports are offered by low-cost carriers, and so “legacy carriers there continue to charge high fares – there is still plenty of room for an airline such as Virgin America to provide quality, value-oriented service to the people of New York”.
San Francisco is now Virgin America’s corporate base as well as its flight centre. It had planned on separate headquarters in New York. Reid will not explain the change, but says: “With our plan, our business model and this funding, we’ll be profitable with oil at almost any cost. We’re building an airline people are going to love.” ■
DAVID FIELD/WASHINGTON
Source: Airline Business
