Virgin America Inc. (NASDAQ: VA) is reaching out to potential buyers about a sale of the company, and is working with a financial adviser after receiving takeover interest, Bloomberg reported last week. The move is largely driven by the Burlingame, California-based  low-cost airline’s largest shareholders, the UK Virgin Group‘s affiliate VX Holdings LP, and New York hedge fund Cyrus Capital‘s affiliate Cyrus Aviation Holdings LLC.

On November 2014, Virgin America raised $306 million in an IPO priced at $23 a share, led by Barclays and Deutsche Bank, valuing the company at about $973 million.

Last Friday, March 24, the company’s shares closed at $34.17, with a total market capitalization of $1.51 billion.

Several major global private equity firms are likely to bid for the airline. “Private equity investors are familiar with different leverage options making them natural investors in the aircraft leasing space,” noted World Finance magazine.

“Given the prevalence of operating leasing, the benefits over aircraft ownership have been clearly recognized by airlines,” according to WF. “Since the early 1970s there has been an increasing trend for airlines around the world to rely on operating leasing as an alternate means to managing their financing and fleet requirements for commercial aircraft.”

Moreover, according to research by The Airline Monitor, air traffic has historically doubled every 15 years and is projected to have an average annual growth rate of 4.8 percent for the next 20 years, thereby doubling traffic again over the next 15 years. Air traffic has exceeded GDP growth by approximately 1.9 times over the past 40 years and the sector has been very resilient to external shocks.

“Private equity’s first meaningful airline foray was the leveraged buyout of Northwest Airlines in 1989 by Wings Holdings, an investment group organized by Al Checchi and Gary Wilson,” commented Rick Schifter, a senior adviser and former partner at private equity firm TPG, and board member of American Airlines Group, in an editorial opinion for The Wall Street Journal. “Northwest Airlines thereafter focused on controlling costs and improving customer service—steps which led to record profits in the late 1990s. Still, 9/11 had a devastating impact on the industry. The terrorist attacks, and the subsequent growth of low-cost carriers, forced Northwest into Chapter 11 in 2005. It emerged as an independent company and subsequently merged with Delta in 2008. The CEO of Delta at the time was Richard Anderson—a former CEO of Northwest in the Wings Holdings years.”

“The second major private-equity investment in the airline industry was by Air Partners. This group, formed by David Bonderman, Jim Coulter and Bill Price, took a controlling stake in Continental Airlines in April 1993. Eighteen months after that transaction closed, the airline was teetering on the edge of a third Chapter 11 filing,” said Schifter.

“Continental merged with United Airlines in 2010 and, although Continental was the smaller company, its CEO, Jeff Smisek, headed the merged company. Bonderman, Coulter and Price went on to establish the private-equity firm Texas Pacific Group, now TPG,” he added. “It is no coincidence that the CEOs of the three largest airlines today rose to prominence while their companies were controlled by private-equity firms.”

“Private equity investors have long been attracted to the investment rationales of operating lessors,” says Franklin L Pray, president and CEO of Intrepid Aviation. “For example, Cerberus Capital Management, a US based private equity firm, invested in Dutch-based commercial aircraft lessor AerCap, which it took public in 2006. AerCap has subsequently grown to be the largest aircraft lessor in the world through the acquisition of International Lease Finance Corporation (ILFC) from AIG. Cerberus successfully completed its exit from the investment in 2012.”

“Aircastle, another publicly traded commercial aircraft lessor, was founded by private equity firm Fortress Investment Group in 2004 and taken public in 2006,” Pray added.

“In 2006 Terra Firma, a UK based private equity firm, acquired AWAS for $2.5bn in cash plus the assumption of liabilities from Morgan Stanley,” he commented further. “In 2007 Terra Firma then further agreed to purchase Pegasus Aviation from the US private equity firm Oaktree Capital Management, and combined AWAS and Pegasus to create the new AWAS, then the world’s third-largest aircraft leasing business.”

“More recently, Avolon Aerospace Leasing, a lessor founded in 2010, backed by private equity firms Cinven, CVC Capital Partners and Oak Hill Capital Partners, successfully took the business public in December 2014,” said Pray.

“Private equity has provided capital to the industry when the public markets were not prepared to do so, whether to help carriers emerge from Chapter 11 (Continental and America West), to start up a new business (JetBlue in 1999), to strengthen the regional jet model (Republic Airways in 1998), or to transform a business model (Spirit Airlines in 2006),” concluded Schifter.

Virgin America, known for its fancy aircraft interiors, including on-board WiFi, interactive video displays and purple lighting, licenses its brand from billionaire Sir Richard Branson’s Virgin Group. However, the British entrepreneur is only permitted to own a minority stake under 25% in the American airline.

U.S. law requires that domestic airlines remain under the control of U.S. citizens, with no more than 25% of the voting stock being held by foreign citizens. As a matter of policy, the U.S. Department of Transportation’s (DOT) reviews any proposed ownership changes of over 10 percent of the voting stock of any U.S.-domiciled airline.

Virgin America was tentatively cleared for take-off by the DOT in 2007, and was subsequently given full clearance in 2010, after ruling that the airline and its new ownership structure “will remain fully compliant with U.S. ownership laws.”

On March 16, 2015, Virgin America filed an S-1 registration with the SEC, disclosing the intention of its largest shareholders, Virgin Group’s affiliate VX Holdings LP, and Cyrus Capital’s affiliate Cyrus Aviation Holdings LLC, to sell 4,852,942 shares of the company in a secondary offering led by Barclays and Deutsche Bank. Prior to the offering, the Virgin Group and Cyrus held 48% of Virgin’s voting common stock and 56.2% of its total equity interests.

New York-based hedge fund Cyrus Capital Partners LP and affiliates, have been the airline’s principal U.S. investors since 2010. As of December 31, 2015 Cyrus Capital Partners held a 23.8% interest in Virgin America, down from 29% prior to the March 2015 S-1 offering.

Cyrus Capital Partners, previously known as Och-Ziff Freidheim Capital Management until 2005, was founded in 1999 by Stephen Cyrus Freidheim, a former managing director and partner at Bankers Trust Company of New York, where he headed its Capital Management Group from 1993 to 1999. He serves as an independent director of Virgin America since 2006. He also held leadership roles at Nomura Securities International and Peabody & Co. Inc., and is a member of The Council on Foreign Relations. He earned a B.A. in Economics from Yale University, and was the president of the Yale Alumni Association of Greenwich.

His father Cyrus F. Freidheim, Jr. is also a member of Virgin America’s board of directors since 2006. From 2006 to 2009, Cyrus F. Freidheim, Jr. served as CEO and president of Sun-Times Media Group Inc., a parent company of Sun-Times News Group (formerly Conrad Black’s Hollinger International Inc.), which filed for chapter 11 bankruptcy protection in March 2009. Previously, he served as CEO and president of Chiquita Brands International Inc., and held various leadership roles at management consulting firm Booz Allen & Hamilton Inc., including president of BoozAllen International.

Cyrus Capital Partners is an SEC registered investment adviser with offices in New York and London. The firm has approximately $4 billion in assets under management. Cyrus invests on a global basis in securities and loans issued by corporates and sovereigns. It invests across the entire capital structure of companies, takes long and short positions in debt, equity and derivative instruments traded publicly and over the counter, directly structures capital solutions for companies, and leads capital raises. Cyrus is an active investor that is deep value-focused and experienced in legal and process-oriented opportunities.

Cyrus seeks to generate high absolute returns over a full credit and business cycle. The Cyrus team is comprised of professionals with skill sets including bankruptcy and restructuring, industry, legal, private equity, capital structure, derivatives, trading, and capital markets. The Flagship Cyrus Funds are currently hard closed.

Launched in 2007, Virgin America has a fleet of 60 Airbus single-aisle aircraft consisting of 10 Airbus A319s and 50 Airbus A320s. As of December 31, 2015, it provided services to 23 airports in the United States and Mexico. The company was formerly known as Best Air Holdings, and changed its name to Virgin America in November 2005. San Francisco International Airport is Virgin America’s main hub, but the airline also has focus city hubs at Los Angeles International Airport and Dallas Love Field.

Virgin America has captured a host of travel industry best-in-class awards, including “Best Domestic Airline” in both Condé Nast Traveler’s Reader’s Choice Awards, and Travel + Leisure’s World’s Best Awards, for the past eight consecutive years. As of 2016, Virgin America is the only airline in the United States with a 4-Star Skytrax airline rating.

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