British Airways in talks with IndiGo for alliance - source

An IndiGo Airlines A320 aircraft is parked on the tarmac at Bengaluru International Airport in Bangalore March 7, 2012.

LONDON (Reuters) - British Airways is in talks with India's biggest carrier, IndiGo, over a ticketing and baggage sharing agreement, a source with direct knowledge of the discussions said on Tuesday.

Known as an interline agreement, it allows customers from two airlines to buy connecting flights on one ticket. Such pacts are often precursors to code-share agreements, in which carriers sell tickets on each other's airline.

The arrangements increase revenue because airlines can offer more destinations, while keeping a lid on costs, as they don't need to service all the planes themselves.

Earlier on Tuesday, the Wall Street Journal reported a potential alliance between British Airways, owned by International Airlines Group (ICAG.L), and IndiGo, and said the two airlines also discussed a possible investment by IAG into IndiGo's parent.

"IAG has no plans to invest in any Indian carriers at this time," a spokesman told Reuters. An IndiGo spokeswoman said reports of an alliance with British Airways are untrue.

Based outside New Delhi in Gurgaon, IndiGo was founded by Rahul Bhatia's InterGlobe Enterprises, an aviation and travel services firm, and former US Airways (LCC.N) CEO Rakesh Gangwal.

The Indian aviation market, burdened by billions of dollars in debt and high costs of operations, has been abuzz with talks of partnerships with global carriers since India relaxed investment rules in September.

Jet Airways (JET.NS), India No. 2 carrier, is in talks with Abu Dhabi's Etihad Airways to sell a stake, while smaller rival SpiceJet (SPJT.BO) is also talking to foreign carriers over a potential investment.

(Reporting by Rhys Jones; Additional reporting and writing by Anurag Kotoky in NEW DELHI; Editing by Kate Holton and Louise Heavens)