Virgin America's response to the U.S. Transportation Dept.'s tentative rejection of its application to launch service curried some favor with the agency, but DOT is taking the carrier up on its offer to remove CEO Fred Reid, which it set as one of many stipulations to win final approval to launch flights in the U.S.

DOT said Virgin America's substantial changes in leasing and loan agreements, restructuring of its board and creating a trust to oversee Virgin Group's 25% equity in the airline, coupled with new conditions required by DOT, allow Virgin America to meet the agency's citizenship requirements.

Virgin America told DOT in January the board would remove Reid "should DOT find that necessary" to allay concerns about the carrier's ties to the Virgin Group (DAILY, Jan. 18).

"We tentatively find that the applicant's replacement of Mr. Reid as CEO and board member with a U.S. citizen who has no prior affiliation with the Virgin Group would substantially remedy our concerns over the independence of the applicant's management from the Virgin Group," DOT said.

As a condition of gaining approval, Virgin America must confirm Reid's termination of employment within 90 days of the carrier's obtaining its certificate, and any follow-on consulting work must end within 180 days of his removal.

DOT is also requiring changes to Virgin America's licensing deal with the Virgin Group. Virgin America told DOT that nothing in the license agreement prohibits the carrier from flying outside the Virgin Group brand as long as it doesn't use the Virgin Group trademark and continues to pay royalties in full. DOT countered that there's no reason why Virgin America's operations independent from the Virgin Group should be subject to royalties. "Payment of 'royalties' on revenues not derived from use of the brand name would undermine the applicant's independence," according to DOT.

Also included in DOT's stipulations for approval is a requirement that U.S. directors on Virgin America's board separately approve the appointment or replacement of the trustee overseeing Virgin Group's shareholdings in Virgin America and amending the voting trust agreement to require that the trustee vote it shares proportionally to other shareholders on issues that, "in the opinion of the U.S. investor directors, creates a conflict of interest between the interests of the Virgin Group and that of U.S. shareholders."

DOT set up a 21-day comment period for its latest findings in Virgin America's efforts to launch operations. American, Continental, Delta, United, US Airways, the Allied Pilots Association and ALPA have strongly opposed Virgin America's plan to start low-cost flights from San Francisco.