The US Department of Transport (DoT) uses state of the art microscopes to find barriers to keep Virgin America out of the US market. The newly found airline has already taken delivery of nine Airbus A320 aircraft, but is still waiting for an operating license. As I pointed out in an earlier post, the US airline industry suffers from inefficiencies and protective regulations. The case of Virgin America is another example.

Virgin America has to comply with a rule that limits foreign ownership of US airlines to 25%. Yesterday’s ruling of the DoT states that not all 75% of the remaining assets are controlled by US citizens. The Virgin companies have invested 25% of the equity and most of the debt. The rest of the capital is provided by two US private equity investors and a Caribbean-registered, but UK-based fund. The latter seems to be a problem.

Apparently some of the US airlines are not very good at flying commercially. The industry needs to be protected by Uncle Sam from oversees competitors. If not, foreign competitors would push the incumbents out. They use ‘chapter 11’ bankruptcy protection to rationalise debt and to push through deals with labour unions. At the next economic low there will surely be a new list of applicants for protection.

What is the point in offering services when you are not competitive? You are either not good at what you do or you need to charge too much for doing it. In both cases it makes you a loser. By asking for protection you acknowledge that you are weak. Protectionism is for industries or nations in decline. It is the signal for competitors to keep on pushing. In the end, all fortresses can be taken. By destruction that is.