Air India - The Virgin Airways Saga

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Background Note Contd...

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 offing were email and Internet services. Upper class passengers were provided laptop power leads with every seat, and headsets to reduce noise in the cabin.

Besides commercial cooperation on cargo services, yield management, and product development, the arrangement with Branson would give AI's staffers access to cabin crew training. However, analysts felt that once VA started its operations, it would be an all-out fight to lure passengers and AI would be the worst sufferer. As VA promised to offer tickets at 15 per cent less than BA, a Delhi-London VA ticket would be cheaper than A-I's.

The Deal

In 1999, the ministry of civil aviation said that it was willing to consider an agreement between VA and A-I that would benefit both carriers. The agreement was to include a code-sharing arrangement or sharing of A-I flight quotas. The entry of VA on the London-India routes was likely to bring down the fares on the sector.

In December 1999, VA signed an agreement with A-I to fly three services a week on a code share basis between Delhi and London from July 2000. The arrangement with A-I was for five years and apart from the initial three flights a week, frequencies, it had agreed to give away the remaining three to V-I by 2001.⁴ VA and A-I would share seats on each other's routes and VA would operate flights to the UK on routes not covered by A-I.

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3] Chairman of Virgin Atlantic Airways.
4] Under the terms of the U.K./India air services agreements, both Indian and British airlines had the right to operate 16 flights per week. Air India operated only 10 of their permitted total, while BA operated all of the U.K.’s frequencies.