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. It's a blow to Branson's plan to funnel U.S. passengers to his trans-Atlantic carrier and expand the Virgin brand in the world's largest travel market.

``What could salvage this for Virgin America is owners with obvious independence,'' said airline consultant George Hamlin of Morten Beyer & Agnew in Arlington, Virginia.

Virgin America officials say U.S. investment firms Black Canyon Capital in Los Angeles and New York-based Cyrus Capital Partners control 75 percent of the carrier.

``While we disagree with this tentative order, we respect the department's decision,'' Virgin America said in a statement. ``We remain committed to getting our wings.'' The company said it use the order as a road map to resolve the concerns and will respond to the Transportation Department by Jan. 10.

The department said that ``Virgin America's close relationship with the U.K.-based Virgin Group indicates that the carrier is not under the actual control of U.S. citizens.'' The department cited ``various interlocking financial agreements'' with Virgin Group.

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.

Virgin America Chief Executive Officer Fred Reid said in an interview Dec. 22 that he expected the rejection. Changes in its structure may allow the Burlingame, California-based carrier to start service next year, Reid said last week.

Airline Set to Go

The carrier has 169 employees, nine aircraft and plans to start service with a flight between San Francisco and New York. Donald Carty, former chairman and CEO of American Airlines parent AMR Corp., is Virgin America's chairman. The Federal Aviation Administration has approved the carrier as safe to fly, Virgin America said Dec. 22.

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.

Heathrow Access

Under that agreement, which is still pending, more U.S. carriers could fly to London's Heathrow airport. A 1977 U.S.-U.K. treaty limits U.S.-Heathrow routes to Virgin Atlantic, British Airways Plc, American and UAL Corp.'s United Airlines. A ``no'' vote from any EU nation would sink the accord.

Killing the agreement would block more competition on the U.S.-U.K. routes, where Virgin Atlantic trails only British Airways in passenger traffic. Prospects for a deal suffered Dec. 5 when Peters withdrew a proposed rule to give foreign investors more control over U.S. airlines. Europeans had made the investor rule a condition for completing ``Open Skies.''

To contact the reporter on this story: Eric Torbenson in Dallas at etorbenson@bloomberg.net; John Hughes in Washington at jhughes5@bloomberg.net

Last Updated: December 27, 2006 16:49 EST