Virgin America, the low-cost start-up airline with ties to British entrepreneur Richard Branson, will have to ditch its chief executive and restructure its ownership to win final approval to operate, U.S. officials said Tuesday.
The Transportation Department said "fully executed" changes to Virgin America's corporate structure, as promised by the carrier, would satisfy a law requiring domestic airlines be controlled by U.S. citizens.
"The tentative decision does not change current U.S. airline investment law or its application," the Transportation Department said in a statement.
The ownership issue led the government in December to reject Virgin America's initial application.
Virgin America then offered several steps, including replacing its chief executive, Fred Reid. Regulators said Reid's "longstanding association with foreign investors" had raised concerns about who would control the new carrier.
Reid is a veteran airline executive who held overseas posts with AMR's American Airlines and was chief operating officer of Germany's Lufthansa. He is also a former president of Delta Air Lines.
Transportation regulators in December also cited the pervasive involvement of Branson's flagship Virgin Group and its executives in creating Virgin America, and found the new carrier would probably be controlled by Branson and his interests.
In response, Virgin America said it would amend loan agreements and remove certain powers of Virgin Group; revise its trademark to ensure independence from British-based Virgin Atlantic and establish a voting trust to administer Virgin Group's equity interest in the airline.
Virgin Group committed $88.4 million in debt and equity financing -- slightly less than one-half of the company's start-up financing of $177.3 million.
Virgin America, based in San Francisco, said it is considering the government's decision but did not address Reid's fate. The airline wants to enter the market this year.
Reid has previously said no one person is more important than winning government operating approval.
"We worked very hard to address the department's initial concerns, and are pleased that they have recognized our extensive work and good faith commitment to meet and exceed those requirements," Reid said in a statement Tuesday.
A union representing flight attendants criticized the Transportation Department decision as a precedent that will open the door to foreign competition.
The Association of Flight Attendants-CWA said it was a gift to Europe to ensure approval of a landmark U.S.-European Union "open skies" agreement to expand the transatlantic air travel market.
EU transport ministers are set to meet Thursday to consider the proposal.