Talks between Jet Airways and Etihad Airways about a comprehensive tie-up, including the possibility of the latter taking an equity stake in the Indian carrier, are continuing and an agreement could be reached by end-2012.
Negotiations have been ongoing for several weeks in London, where Jet's chairman Naresh Goyal is based, and in Etihad's home, Abu Dhabi, regarding a marketing and sales partnership.
This could see the airlines sign a deal that would lead to Jet putting its passengers on to Etihad's African, Middle Eastern, European and American network. Etihad, in return, will transfer its passengers on to Jet's domestic Indian and Asian network, say two sources familiar with the negotiations.
The two also plan to coordinate their schedules, and jointly sell and market their services, they add.
A separate deal could see Etihad take an equity stake of around 24% in Jet, although one sticking point could be the sale price owing to fluctuations in the Indian airline's share price.
Jet officials are saying that the share price does not reflect the true value of an airline that, they argue, is the best run in India and has the best growth potential in the full-service market segment.
Both agreements must also receive Indian regulatory approval, although that will be easier after New Delhi eased its rules in September to allow foreign airlines to buy up to 49% of its carriers.
The sources say that the Indian government could, however, be worried about the possible implication of the Jet-Etihad alliance on state-owned Air India, which they have been propping up via multiple bailouts. There are also concerns that the Jet-Etihad deal could become a political hot potato in the lead-up to elections in India.
Regardless, Etihad and Jet could come to an agreement as early as end-December and this could take effect around mid-2013 if the approvals come through.
Etihad has been expanding via equity investments in airlines such as Virgin Australia, Air Berlin, Air Seychelles and Aer Lingus.
India, however, is seen as an important market amid its global expansion as it tries to compete with the growing reach of Dubai-based rival Emirates.
Jet has been tottering for several years as a result of the damaging competition in the Indian domestic market and the ill-timed purchase of Air Sahara - which was later rebranded JetLite and has now been absorbed into its Jet Konnect subsidiary.
Over the last year, however, the airline has revamped its operations and focused on the full-service market amid the withdrawal of troubled Kingfisher Airlines from the segment. That has allowed it to return to profitability, and it is applying to the Indian government for permission to join Star Alliance.