In December 1999, India's national carrier, Air India (A-I) signed an agreement with Virgin Atlantic Airways1 (VA) by which VA would fly three flights on the Delhi-London route on a code-sharing2 basis with A-I. This was hailed as a significant development for the ailing A-I. The code sharing arrangement was expected to trigger off a price war in the Delhi-London route where British Airways (BA) was a dominant player. According to the agreement, VA would fly three more flights a week on this route by 2001. In July 2000, VA started off with two flights a week on Thursdays and Saturdays from Delhi. It planned to have a third flight by October 2000. However, till late 2001, VA was still flying two flights.
A-I did not seem ready to allow VA fly the third flight because A-I too had a flight from Delhi on Monday, the day VA wanted to fly from Delhi. Meanwhile, the Government of India (GoI) granted rights to BA to fly three more flights per week from Kolkata to London.
This was in violation of the bilateral pact signed between Britain and India according to which BA and A-I were allowed to fly 16 flights a week to each other's country. BA was already flying 16 flights a week-seven from Delhi, seven from Mumbai and two from Chennai. In late 2001, VA was severely affected by the downturn in the global aviation industry. VA was finding it difficult to sustain its operations in India with only two flights a week. VA had made it clear that unless it was allowed to increase the frequency to three, its exit from India would be a distinct possibility. Background Note
A-I was registered as Air India International in 1948. Later in 1962, the word 'International' was dropped and from March 1994, the airline began functioning as Air-India Limited. In 2000, A-I's network covered 44 destinations (Refer Exhibit I). In addition, A-I had a code sharing arrangement with a number of foreign airlines. These included Air France, Swiss Air, Bellview Airlines, Austrian Airlines, Asiana Airlines, Scandinavian Airlines, Singapore Airlines, Aeroflot, Air Mauritius, Kuwait Airways and Emirates. In the late 1990s, as part of its disinvestment programme, the GoI decided to divest 40% stake in A-I and began looking for a strategic partner. The strategic partner would take up 40% stake with only a 26% cap to foreign airlines. Ever since it began operations in 1984, VA focused on international routes. After the airlines maiden flight, from London's Gatwick airport to Newark on the outskirts of New York, Richard Branson3 added several lucrative routes to his kitty. Till 1999, VA's route network in the Asian region included Heathrow-Tokyo-Heathrow, Heathrow-Hong Kong-Heathrow and Heathrow-Shanghai-Heathrow. The airline had code-share agreements with Continental Airlines, Malaysian Airlines, and British Midland. In |the late 1990s, Branson was targeting the lucrative Delhi-London route. Every year an estimated 0.3 million passengers traveled from Delhi to London, which was nearly 40 per cent of the total outbound traffic from India. The only available direct route codes were held by BA and A-I. As a result passengers were forced to take circuitous routes |offered by airlines like Emirates and Royal Jordanian which made them wait for hours at distant airports. Branson's efforts to woo A-I started in 1997.
He said, "Air-India was once famous for its service and I'd like to think that as well as competing with Air-India we can share with it our experience of making Virgin Atlantic the success it is today." Analysts felt that A-I would learn from VA's innovation in hospitality.
VA was the first airline to offer a TV monitor with every seat (in every class). It offered in-flight beauty therapy including the services of masseurs, ice-cream cones during in-flight movies and a chauffeured motorcycle service to airports. Also in the...