Branson's Virgin America gets grounded (cont.)

By Peter Elkind, Fortune editor-at-large

The airlines, which see Branson's well-manicured hand behind every move Virgin America makes, pulled out all the stops. In one filing, Continental even likened the financial structure supporting Virgin to the shady web of partnerships behind Enron.

The resistance is perhaps understandable: With fuel prices falling and the number of full flights rising, the industry is set to make a solid profit in 2007 after hemorrhaging money for years. The last thing it needs is another low-cost rival.

Reid says the big carriers are employing protectionist arguments to keep a potent new competitor on the ground. Promising lower fares, better service, and more than 1,000 new jobs, Virgin America has won widespread support in California, ranging from Governor Arnold Schwarzenegger to the San Francisco Giants.

"In the old school of airlines, we're everybody's nightmare," says Reid. "They want to kill a powerful new airline in its infancy. Maybe they need to pay attention to what their customers are saying about their level of service."

Continental spokesman David Messing responds that his airline is merely seeking to require Virgin to comply with existing laws lest it gain an unfair advantage by having unlimited access to foreign capital. "Putative low-fare carriers come and go," says Messing. "We compete with them quite well. There have been many of them that haven't had the same issue of foreign ownership and control, and the welcome mat is out."

In fact, Congress is the real bogeyman in blocking Virgin America's path. Arguing that it would increase the flow of capital to a troubled industry, the DOT has been trying for years to relax the industry's antiquated foreign-ownership rules, only to face a bipartisan political outcry warning that any change poses a threat to national security and U.S. jobs.

Complaining that bureaucrats were usurping congressional authority, lawmakers - in the time-honored way of Washington - threatened to cut department funding. Struck on the head with this two-by-four, the DOT officials late last year withdrew a proposal to allow more involvement by foreign investors whose countries signed "open skies" agreements giving American carriers better access to their own markets.

Nonetheless, with his revised proposal, Reid believes Virgin America's uphill battle for DOT approval is winnable. "I cannot conceive of a reason to deny this application," he says. Just in case, he's trying to turn up the heat with a populist outcry. The airline's Web page is collecting online petition signatures and offering coffee mugs, stickers and T-shirts bearing the slogan LET VA FLY. But for the time being, Virgin America remains locked in a bureaucratic holding pattern.


Virgin America attempts to fly again

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