Abu Dhabi's Etihad Airways is in talks with Virgin Atlantic to join the UK carrier's bid for Lufthansa AG's British unit bmi, two sources familiar with the matter said on Monday.
The Gulf carrier, which is pushing aggressively to spread its wings in the UK and beyond, is also discussing a possible stake in Virgin Atlantic, said one source.
"Discussions have been ongoing on this (partnering for bmi bid) and a possible stake in Virgin," said an Abu Dhabi source close to the deal who asked not to be named.
Etihad and Virgin Atlantic declined to comment.
Etihad was earlier reported to have expressed interest in Virgin Atlantic, which hired Deutsche Bank to assess the market for a possible alliance with rival carriers or a sale.
Based in the oil-rich capital city of the United Arab Emirates, Etihad has been expanding rapidly and already flies to 86 destinations. Its chief executive James Hogan has said the unlisted carrier, which began operations in 2003, would be profitable in 2012.
The carrier is competing fiercely with other big regional airlines like neighbouring Dubai's flagship carrier Emirates and Qatar Airways, all of which are expanding.
Etihad cannot pursue a bid alone due to foreign ownership issues. The Financial Times reported that the Abu Dhabi-based carrier and Virgin Atlantic had held talks for a partnership if the UK carrier were to bid for bmi.
"The news is credible, I wouldn't question it," another top Abu Dhabi source told Reuters.
German airline Lufthansa has said it is considering finding a partner for bmi and has mandated bankers to sound out a potential sale. Airlines are keen to get hold of bmi's coveted takeoff and landing slots at London's Heathrow airport.
Asked if Etihad would take a stake in bmi, the first source said: "It depends on the outcome of the bid."
Virgin Atlantic Chief Executive Steve Ridgway said last week the group is still keen on buying bmi despite waning growth across the aviation industry.
Bmi controls about 10 percent of the take-off and landing slots at Heathrow, the world's second-busiest airport, making it second there only to IAG-owned British Airways (BA), which has around 45 percent of the slots.
"Organic growth can be sensible and prudent but it does take time – Emirates has spent 25 years building to its current position," said Sudeep Ghai, a partner at London-based Athena Aviation.
"For younger airlines like Etihad with a weaker 'me too' market position the risk is being squeezed out of markets by the pace of consolidation and deepening of global alliances."
The threat of alliances by global carriers may compel Gulf airlines to carve out a defensible niche, said Ghai.
Etihad has also approached the Irish government to buy its 25 percent stake in national carrier Aer Lingus, the FT reported. .
Etihad declined to comment on the report.
