Open Skies & Virgin America

The US department of transportation (DOT) ruled on Dec 27th that the UK is a security risk and therefore British owned Virgin America Airlines is not allowed to fly within the US between San Francisco and New York. How flights originating in the US to other US destinations in the US posed security risks to the US was of course not explained (probably because the idea is ridiculous). They did not actually say "security risk" but what else could a law requiring 75% US ownership to fly within the US mean? The expressed concern was over "foreign ownership".

Bloomberg picked up the story in Virgin America's Bid to Start Flights Denied by U.S.

Dec. 27 (Bloomberg) -- Virgin America Inc., a startup airline partly owned by U.K. billionaire Richard Branson, won't be able to begin flights because of U.S. government concerns about foreign ownership.

Before it can start service, Virgin America must revise its corporate structure to show U.S. citizens own and control at least 75 percent of the company, the U.S. Transportation Department said today. Branson's closely held Virgin Group Ltd. put up 25 percent of the initial $177 million investment to start Virgin America, as well as a $53 million loan.

The decision is a victory for U.S. rivals that opposed the Virgin America bid as well as for organized labor, which feared job losses.

Broader Implications

The ruling may hurt U.S. efforts to open aviation markets worldwide to additional competition. Analysts have said Branson could use the denial to argue that the European Union shouldn't expand access to London's Heathrow airport, as the U.S. wants.

The Transportation Department, in reviewing the airline proposal, had to consider a law that limits foreigners to 25 percent of U.S. airline voting equity and bars them from "actual control" of a U.S. carrier.

U.S. rivals of Virgin America, including Continental Airlines Inc., AMR Corp.'s American Airlines, Delta Air Lines Inc. and US Airways Group Inc., have said in filings that the startup carrier doesn't meet the ownership test.

Continental said Aug. 2 that since Reid "was hired by, and is clearly beholden to, the Virgin Group" he cannot qualify as a citizen under U.S. law. Continental also argued that the Virgin Group conceived, financed and designed Virgin America, and hand- picked its fleet and key personnel.

The Virgin America case is sensitive for Transportation Secretary Mary Peters because her agency has urged opening markets for more aviation competition worldwide. The U.S. is pressing for an "Open Skies" agreement with the EU to lift decades-old curbs on where carriers can fly.

I sure wish they would let me toss out a few questions on these interviews.
It would go something like this.

Mish: Are you saying the UK poses a security risk to the US?
DOT: No that is not what we mean to imply.
Mish: Is Branson, the CEO of Virgin America, a security risk to the US?
DOT: Uh... No we are not saying that either.
Mish: Does the fact that Virgin America is British owned make it easier for contraband or weapons to be smuggled aboard flights originating in the US?
DOT: No
Mish: Are all international flights into the US majority owned by US citizens?
DOT: No. Many countries have plane flights into the US.
Mish: Is that a bigger security risk than Virgin America wanting to fly from San Francisco to New York?
DOT: Uh... I have to go now.

This is not a victory for US airlines, organized labor, free trade, taxpayers, or anyone else other than ISOH (International Society of Hypocrites), led by none other than the USA and EU. The stunning irony is impossible to miss. The U.S. is pressing for an "Open Skies" agreement with the EU to lift decades-old curbs on where carriers can fly.

Presumably Continental, Delta, American, etc and organized labor benefited from this action. That is the "seen" perceived benefit. The "unseen" consequence is hundreds of people who are denied a job, restaurants and hotels that do not benefit from increased travel, customers denied the benefits of increased competition, and fuel services and mechanics that do not benefit from servicing another airline. It would not surprise me in the least to see the EU to use this as an excuse to continue to fight "Open Skies". The odd thing is, the first to allow "Open Skies" would benefit even if the other didn't.

I can not think of a better post than this to encourage everyone to pick up a copy of "Economics for Real People - An Introduction to the Austrian School" by Gene Callahan. It is not a long winded rant about gold. In fact gold is only briefly mentioned a couple of times. Nor it is based on complicated formulas. Nor is it a book on any deflation/inflation scenarios. It is an easy and entertaining introduction to Austrian Economics with practical examples, some fictional and some recent real life economic examples. I was going to provide some excerpts from the book but I changed my mind. Just find or buy a copy, read it, and embrace the ideas presented.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/