Etihad Airways' parent is aiming to tie up with fellow United Arab Emirates carrier Air Arabia to establish its own budget operator.
The two airlines are set to create a joint-venture company which will operate as a low-cost carrier, says Etihad Aviation Group.
Branded 'Air Arabia Abu Dhabi' the airline would be based in the UAE capital.
Etihad Aviation Group says it will "complement" the operations of Etihad Airways, and serve a "growing" low-cost market.
Sharjah-based Air Arabia already has separate budget operations in Egypt and Morocco, branded under its name.
Rival operator Emirates has formed a close co-operation with budget airline Flydubai, although Flydubai has emerged as a hybrid operator catering to business-class as well as economy customers.
"Abu Dhabi is a thriving cultural hub with a clear economic vision built on sustainability and diversification," says Etihad Aviation Group chief Tony Douglas.
"By partnering with Air Arabia and launching Abu Dhabi's first low-cost carrier, we are serving this long-term vision."
He says the joint venture "supports" the company's transformation programme. "We look forward to the launch of the new airline in due course," adds Douglas.
Air Arabia Group chief Adel Ali says the new airline will be "capitalising on the expertise" of both operators.
No details have yet been disclosed regarding fleet size, aircraft type or route network, nor has a launch date for operations been given.
Air Arabia uses a fleet of Airbus A320-family jets for its budget network.