Lufthansa (LH, Frankfurt International) and Etihad Airways (EY, Abu Dhabi International) are considering a merger a report in Italian newspaper Il Messaggero has said citing unspecified sources.

According to the report, management from the German and Emirati carriers have been meeting over the past few weeks to discuss the possibility of Etihad acquiring a stake of "between 30 and 40%" in the German carrier group via a capital increase. Once completed, the second phase would entail a complete merger of the two airlines.

Though neither party confirmed the talks, if true and should a final agreement be signed, it would be next step in a growing partnership between the two historical rivals that commenced late last year with the signing of a longterm lease agreement between Air Berlin (1991) (Berlin Tegel), in which Etihad holds a majority 29% stake, and the Lufthansa Group. Under the deal, Air Berlin agreed to wet-lease up to forty A319 and A320s to Lufthansa Group's Eurowings (EW, Düsseldorf) and Austrian Airlines (OS, Vienna) units on long-term contracts beginning this summer. Etihad and Lufthansa also inked a codeshare agreement covering Lufthansa's flights from Frankfurt International to each of Bogotá and Rio de Janeiro International, and Etihad's flights from Abu Dhabi International to each of Frankfurt and Munich.

Etihad has been seeking a solution to its poorly performing European investments without the need to make additional recapitalizations. Though backed by the wealthy Emirate of Abu Dhabi, the Etihad Aviation Group has not been immune to the changing global economy and the impact of low oil prices and increased competition. Last month, it confirmed it would be undertaking an unspecified number of lay-offs to ease its wage bill.

In Air Berlin's case, the Wall Street Journal has indicated Etihad is unwilling to pour anymore money into the ailing German carrier given that German law requires shareholders that have reached a 30% stake in a firm to make a mandatory takeover offer. Adding to that, Lufthansa Group CEO Carsten Spohr told the Handelsblatt newspaper earlier this month that the chances of Lufthansa Group's complete takeover of the remains of Air Berlin were very slim given its high billion-euro debt portfolio, high operating costs, and likely objections from German regulators.

In Alitalia's case, Etihad faces a similar conundrum in that it cannot inject fresh capital into the Italian airline as doing so would put its shareholding over the European Union-prescribed threshold of 49% for non-EU ownership. Etihad acquired a 49% stake in Alitalia in August 2014 for EUR387.5 million but, as with Air Berlin, has yet to see a comparable return on its investment.

At around the same time that it was finalising its Air Berlin deal with Lufthansa, so reports in the Italian media began to circulate of secretive talks wherein Etihad was also attempting to lure Lufthansa into becoming a shareholder in struggling Alitalia (AZA, Rome Fiumicino).

Under that plan, again carried by Il Messaggero, the Lufthansa Group was to have acquired a 45% stake in Alitalia. Once the Germans had entered Alitalia's shareholding, a cash call would have been held to the tune of EUR400-500 million. The report claimed that non-participating shareholders, including banks, would see their current stakes diluted thus concreting the German/UAE hold on the Italian national carrier with a 45/45 shareholding each.