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Virgin America Is American After All

Alaska Airlines has long contended that Virgin America is not really an American carrier. Virgin America, as everyone knows, is an extension of Richard Branson's Virgin brand, and Alaska challenged the carrier's U.S. citizenship on the grounds that it did not have a majority U.S. ownership stake.

The Department of Transportation (DOT), however, has finally put an end to the dispute. The AP reports that, "The [DOT] said Friday that Virgin America remains a U.S. citizen and remains under the actual control of U.S. citizens. Under U.S. law, foreign ownership in a U.S. air carrier is limited to 25 percent of the voting interest in the carrier."

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As for Branson's Virgin brand, "The Virgin Group ... is a minority holder in Virgin America. DOT said the Virgin Group holds a 25 percent equity stake in Virgin America."

Alaska filed its petition almost a year ago, and quite frankly, it was a bit of a ridiculous theory from the start. If Virgin America was found to be operating with too much foreign ownership, the airline would have lost its certification as a domestic carrier and the DOT would have forced it to shut down. It seems unlikely that Virgin America would flout such a fundamental rule, considering the severe consequences of doing so.

Plus, Alaska was clearly motivated at least in part by a desire to take a few swipes at a competitor and—who knows—maybe ground it entirely. Virgin America has spent a fair amount of time (and probably money) responding to charges of illegitimacy, and I'm sure that suits Alaska just fine.

But for Virgin America, Alaska's charges highlight some underlying vulnerabilities that will haunt it in the coming years. As a carrier with such a large and well-known foreign ownership stake, Virgin America is very limited in where it can look for investment. Namely, it is limited to domestic investors, since its foreign stake is pretty much maxed out. Whereas a domestic airline like JetBlue can look to a carrier such as Lufthansa for partnership and minority ownership, Virgin America must keep its focus more or less stateside. This dilemma has already caused difficulties and, as the unfavorable economic climate drags, will not make things easier on this small, cash-poor start-up.

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