Germany's Lufthansa and Etihad Airways are in talks to possibly merge the two airlines, Italian newspaper Il Messaggero said in an unsourced report on Tuesday, boosting the German airline's share price.
According to the paper, managers from both companies have for weeks been examining the possibility of Etihad buying a 30-40 percent stake in Lufthansa through a sale of new shares to the Abu Dhabi state-owned airline.
In a second step, the two airlines would look at a full-blown merger, the paper said, adding that the parties would meet shortly to speed up the talks.
Any combination between the two would have an impact on loss-making Italian airline Alitalia, which is 49 percent-owned by Etihad and is in the midst of a major restructuring that will likely include job cuts and grounding of planes.
Lufthansa and Etihad declined to comment on what they described as "speculation".
Lufthansa shares were up 6 percent on Tuesday, topping the DAX index of largest German companies.
Lufthansa and Etihad last month signed a flight code-sharing deal after Lufthansa agreed to lease 38 crewed planes from Air Berlin,which is part-owned by Etihad.
Analysts reacted with scepticism to the report, citing the foreign ownership rules governing international traffic rights, and questioning what the benefits for Lufthansa would be.
In Europe an airline must by majority-owned by EU investors in order to maintain its traffic rights under international air service agreements. Lufthansa is currently almost 69 percent owned by German investors but 13 percent is in the hands of U.S. investors and a further 9 percent is owned by other nationalities.
In addition, if Etihad wished to buy more than 30 percent of Lufthansa, it would have to make an offer for the company as a whole according to German takeover rules.
Etihad's local rival Qatar Airways has built up a 20 percent stake in British Airways-owner IAG by purchasing shares on the open market. That has boosted links between Europe and the Asia-Pacific region. However, Credit Suisse said Lufthansa already had joint ventures with Singapore Airlines, Air China and All Nippon Airways covering the region.
Greater cooperation with Lufthansa could help Etihad, especially given the growth of Qatar Airways, CAPA-Centre for Aviation senior analyst Will Horton said.
"The rapid growth of Qatar Airways and its future expansion will make it harder and costlier for Etihad to stay relevant on its own - everything else aside," he said in an emailed comment.
There have previously been media reports that Italian shareholders in Alitalia are keen for Lufthansa to invest in the Italian carrier, along with speculation that Lufthansa could take on more of Air Berlin. However, Lufthansa executives have repeatedly said in recent weeks that they have their hands full integrating the Air Berlin planes into its operations as well as taking over Brussels Airlines.
"A Lufthansa/Etihad pseudo-merger, which is what is being suggested in the press today, presumably encompassing the whole of Alitalia and Air Berlin, looks rather implausible," Barclays analysts said in a note.