Etihad Airways is to acquire a 40% stake in Air Seychelles as part of a strategic partnership alliance between the two carriers.
The Abu Dhabi carrier's investment of $20 million will be matched by an equal capital injection from the Seychelles government, with whom Etihad has signed a memorandum of understanding.
Etihad will also provide a shareholder's loan of $25 million to meet working capital requirements and support network development, the carrier said in a statement.
Under the deal, Etihad will increase frequency of flights between Abu Dhabi and Mahé from four per week to daily, and provide new services to the islands.
It will work in conjunction with Air Seychelles to develop a renewed fleet and network growth plan for the island-based carrier.
The airlines said they would sign a comprehensive codeshare agreement.
Joel Morgan, Seychelles minister of home affairs, environment, transport and energy, said: "The aviation industry is under enormous pressure right now, with small airlines especially vulnerable to global economic instability and ongoing oil price volatility.
"In this context, consolidation offers the best possible solution for Air Seychelles."
Etihad completed its acquisition of a 29% stake in Air Berlin, following regulatory approval from German and Austrian authorities, on 24 January.