Aer Lingus has confirmed it is in talks with Abu Dhabi based Etihad Airways with a view to setting up a code-sharing partnership between the two airlines.
It has also emerged that Etihad has bought a 2.987% stake in Aer Lingus.
The airline has told Aer Lingus that it does not intend to increase this stake, pending the outcome of the code-sharing talks.
Etihad has made no secret of its interest either in Ireland or Aer Lingus.
The airline, which is owned by the emirate of Abu Dhabi's sovereign wealth fund, has in the past indicated it would be a potential bidder for the Government's 25% stake in Aer Lingus were it to come on the market.
Last month during a visit to Dublin to renew Etihad's sponsorship of the All Ireland senior hurling championship, the company's chief executive James Hogan told RTE News that Etihad would consider any opportunity, including either a partnership or an investment in Aer Lingus, if it made commercial sense.
At last night's closing price of 98 cent the Government's shares in Aer Lingus were worth just over €130m. The value of that stake has increased by 25% since the start of the year.
Aer Lingus shares closed up 1.9% at $0.99.
Etihad now joins both the State and largest investor Ryanair on Aer Lingus' list of shareholders.
In a statement this morning, Aer Lingus said it views the code-sharing talks as a ''natural progression of its successful Greenfield cost reduction programme''. It added that there can be no certainty as to the outcome of the discussions.
In December, Etihad raised its stake in Air Berlin to nearly 30% from just under 3%, paying approximately €73m and lending the carrier $255 million. In return, Etihad received a code-share agreement giving it access to Air Berlin's dense European short-haul route network and to the German capital ahead of Emirates, one of the fastest-growing carriers in the world, which has been lobbying for years to get into Berlin.
The move by eight-year-old Etihad was an attempt to gain scale quickly as it bids to catch up to rivals such as Dubai government-owned Emirates and Qatar Airways.
Etihad purchase sign of confidence in airline - Varadkar
Transport Minister Leo Varadkar has said the possibility of Aer Lingus transferring maintenance jobs from Shannon to Dublin is a commercial arrangement for the company. He added that if things go to plan there would actually be a net increase of workers in the maintenance divisions at both locations.
Arriving at today's Cabinet meeting, the Minister said he can understand the concerns of workers but said the information out in the public doman may not be the full story. He added that he had been in touch with the chairman of the airline last night.
He also said the purchase of almost 3% of Aer Lingus shares by Etihad Airways was ''a good thing''. He said the move was a vote of confidence in the airline and in the country.
Ryanair has said that Etihad's purchase of Aer Lingus shares does not alter the future of Aer Lingus. It said this can only be decided when, and if, the Government sells its 25% stake.
''If this is sold to Etihad or to a financial investor, then it is inevitable that Aer Lingus will be broken up and some or all of its Heathrow slots lost to Ireland,'' Ryanair said in a statement.
Ryanair repeated its statement that it will work with who ever the Government sells its stake to. ''We would welcome any other financially strong airline/investor who acquires this stake,'' the statement added.