Despite being popular, hip, and backed by billionaire Sir Richard Branson, Virgin America suddenly finds itself with an uncertain future. Following a $227 million loss during its first 12 months, Virgin's hedge fund investors, which own approximately 75% of the airline, are considering a retreat. And believe it or not, that's worse than it sounds.
Not only would Virgin have to pay back the investors' money plus 8 percent interest, but according to Dan Reed at USA Today, "Virgin America's rivals claim that [Virgin America] would violate U.S. law that says airlines operating domestic routes in the USA must be 51% owned by Americans who have 76% voting control." Essentially, if Virgin loses too many of its American investors, the airline is no longer American enough to operate here.
And while neither of the two main investors have stated their plans, Virgin has already begun searching for replacement investors just in case.
How likely is it that Virgin will lose its investors? Well, despite the airline's popularity and relative success, it hasn't exactly been making money so far. CEO David Cush said Virgin could turn slight quarterly profits this year "unless things deteriorate more than they already have," and doesn't project a full-year profit until 2010—if the economy improves. That's a lot of "ifs," and not exactly music to an investor's ears, especially in a recession. Airline industry consultant Mike Boyd of Boyd Group International told USA Today that "If you're one of those hedge funds, you take your guaranteed profit now and run."
So in short, the answer is: This actually could happen. My sense is Virgin will find a way out of this mess—a shrewd entrepreneur like Branson won't let a major business venture go down quietly—but it could happen. I guess no one is safe in a recession, even the cool kid.