Comment 2 for bug 1589690

From Canonical internal support team:
After a bit of investigating (including my own trial and error) I believe this is working as intended. I think the key take away here is we need to define the purpose of the '--location' option.

"Distribution tree installation source" <--

You'll notice in the debug information that after mounting the iso it's trying to reach a MANIFEST, which it's not going to find in the directory structure of the .iso... but it will find via a proper distribution tree.

[Tue, 14 Jun 2016 17:59:06 virt-install 22411] DEBUG (urlfetcher:306) mount cmd: ['/bin/mount', '-o', 'ro,loop', '/media/external/passport/iso/trusty-server-amd64.iso', '/var/lib/libvirt/boot/virtinstmnt.hgKkVy']
[Tue, 14 Jun 2016 17:59:06 virt-install 22411] DEBUG (urlfetcher:463) Finding distro store for location=/media/external/passport/iso/trusty-server-amd64.iso
[Tue, 14 Jun 2016 17:59:06 virt-install 22411] DEBUG (urlfetcher:485) Prioritizing distro store=<class 'virtinst.urlfetcher.UbuntuDistro'>
[Tue, 14 Jun 2016 17:59:06 virt-install 22411] DEBUG (urlfetcher:268) local hasFile: Couldn't find /var/lib/libvirt/boot/virtinstmnt.hgKkVy/current/images/MANIFEST

Now, with that information handy I was able to get your configuration to work two different ways.

1. By dropping the kernel arguments and options, and changing '--location' to '--cdrom' You don't have access to pass arguments to the the kernel/initrd via the install ISO. (AFAIK)

2. You could keep your configuration as is, and change --location to http://us.archive.ubuntu.com/ubuntu/dists/xenial/main/installer-amd64/