Regulation Policy

Old Federal Rule Nixes Airline Competition

Richard Branson, founder of the British companies known as Virgin Group, wants to start a new low-cost airline at New York's Kennedy International Airport. But he has run up against a 72-year-old federal restriction which prevents foreigners from controlling domestic airlines.

Federal law states that 75 percent of the voting interest in a domestic airline must be owned or controlled by U.S. citizens. Branson says the Virgin brand is so important to him that he "would be reluctant to go ahead unless we could have direct control."

  • From Kennedy, the airline would eventually serve 15 U.S. cities, mainly in the East -- the region least served by Southwest, the country's dominant low-cost airline.

  • Legal experts say the restrictions, which grew out of maritime law, are so entrenched -- and established air carriers so committed to maintaining them -- that they have never before been seriously challenged.

  • Although Branson recently backed away from the venture, he says he is still committed to starting the new discount carrier -- tentatively called Virgin America.

  • But lifting the restrictions would probably take years and require an act of Congress.

The issue is being raised at a time when Congress and the Clinton administration are complaining about lack of competition in the airline industry.

"When low-fare players come into a market it stimulates the marketplace and I would think that the U.S. government would welcome that," Branson says. "Americans complain about the Japanese and their protectionism. Yet you still have these archaic rules that have no rational reason to exist in this day and age," he adds.

Source: Laurence Zuckerman, "Virgin's Chief Battling Law on Ownership of U.S. Airlines," New York Times, June 17, 1998.

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