Etihad Airways has just agreed to invest in Air Serbia and will soon add a stake in Jet Airways to its portfolio. Now it is looking at another investment—in LOT Polish Airlines— but the fate of Etihad affiliate Air Berlin shows that the road to financial success can be very long.

The Abu Dhabi-based carrier has been following a strategy of growing quickly through acquisitions to catch up with its older and larger rival, Emirates. In addition to its European partners Air Berlin and Aer Lingus, it has stakes in Virgin Australia (which it plans to increase) and Air Seychelles. Etihad is also waiting for regulatory approval to complete its purchase of a 25% stake in Jet Airways of India.

The strategy is controversial; many of the additions to Etihad's portfolio are in need of deep restructuring and network benefits appear limited. Etihad argues it can realize significant synergies on the cost side through joint purchasing and in other areas. Aer Lingus says its code-sharing deal with Etihad has been more successful than anticipated.

According to industry sources, Etihad is looking at the next step. It is understood to be in negotiations with the Polish treasury about an equity investment in LOT. The negotiations are already at an advanced stage, they say, but could still take several months to be finalized. There have also been rumors about talks with Alitalia, with which Etihad has just expanded a code-sharing agreement.

Poland has unsuccessfully tried to dispose of LOT in several privatization campaigns over many years. Last year's unexpected €38 million ($50 million) loss (against a profit forecast) triggered the latest initiative, which could finally succeed.

LOT will not comment and an Etihad official says that “we never comment on rumors and speculation.” The Polish treasury states that “seeking an investor for LOT is in progress.” The ministry points out that a change in Polish law now allows the government to sell a majority stake in the airline and that “is a new aspect and an opportunity for effective completion of the process.” The treasury also hints that “the involvement of a non-EU investor in LOT is also possible in the current legal status. Parties to the transaction, however, are bound to develop legal mechanisms to ensure that LOT preserves the status as a community (EU) carrier.”

Given its previous investment pattern, it is unlikely that Etihad would seek a majority stake in LOT, which would complicate matters further. According to industry sources, the Abu Dhabi-based airline is looking at acquiring a large minority stake. Currently, the Polish treasury holds 68% of the shares, the government- owned TFS Silesia Regional Economic Fund has 25%, and employees control 7%. In the case of Air Serbia, Etihad went for 49%. It settled for 29% of Air Berlin to avoid total foreign ownership in the airline exceeding 50%.

Last year, Turkish Airlines was close to buying a stake in LOT, but backed out at the last minute.

Complicating the matter is the government's recent support for LOT. The airline received a €100 million short-term bailout package from the Polish treasury late last year to avoid bankruptcy. This has since been approved by the European Commission. LOT asked for another €88 million in June, with the conditional support of Poland's new finance minister, Wlodzimierz Karpinski, who also said “this is the last attempt to rescue LOT.” Approval of the second bailout is still pending.

However, an Etihad investment in the airline could actually make that approval easier because the Polish government could argue they needed the investment to prepare LOT for the sale, and acted as a private investor would under normal market conditions. The European Commission generally does not consider such an investment as state aid.

Meanwhile, Air Berlin is still in deep-restructuring mode, 18 months after Etihad rescued it from what looked like imminent demise. However, its equity remained a negative €116 million at the end of June. Air Berlin is trying to address this problem by selling off more assets and has signed a letter of intent with Minsheng Commercial Aviation, a new Chinese lessor, for a sale-and-leaseback deal for a mix of up to 11 Boeing 737s and Airbus A320s. It hopes this deal will reduce its net debt from €706 million to €540 million, although it will also increase future lease payments. Of Air Berlin's current fleet of 147 aircraft, only 28 are owned; that number would go down to 17.

According to CEO Wolfgang Prock-Schauer, Air Berlin also will not rule out further capital measures once the airline's Turbine restructuring program shows results. Etihad would have to participate as the largest shareholder and pump in even more money if it does not want to see its stake diluted.

Turbine aims at cutting €200 million in costs this year, and Prock-Schauer says that target is likely to be achieved. Substantial improvements are expected from the third quarter onward. However, with slower-than- expected bookings in July and August because of unusually good weather in Europe this summer, Prock-Schauer cautions that it will be more challenging to reach a breakeven result on the operating profit level for the full year.

Separately, Etihad has confirmed plans to buy a 49% stake in Serbian national carrier, Jat Airways: the airline will be rebranded Air Serbia. As part of the agreement, Etihad plans to inject a total of $100 million to recapitalize Air Serbia. The Serbian government will match that investment.

Following the expected regulatory approval, Etihad plans to convert a $40 million loan into equity on January 1, 2014, giving it 49% of Air Serbia. While the Serbian government will continue to own a majority stake, the airline will be run under a five-year management contract given to Etihad, which plans sweeping changes to the company's structure and network.