Etihad Airways could acquire Europe’s third largest low-fare airline, Air Berlin if the deal goes through.

If the deal proceeds, Etihad would be the first to accomplish a takeover across continents, after talks between British Airways and Qantas failed last week. In addition to its commercial limitations, the airlines would face regulatory hurdles such as bilateral air service agreements and subsequent traffic rights issues. It is therefore unclear if outright majority ownership of Air Berlin is feasible particularly since the airline already has a strong 31.2% foreign ownership component. Air Berlin’s biggest shareholders include U.S./Russian investor Len Blavatnik (18.94%), Hans-Joachim Knieps (9.59%) and JPMorgan Chase (4.97%). The free float is at 65.71%.

Both airlines have strong growth ambitions that have not yet paid off. Etihad, launched in late 2003 as the new national airline of Abu Dhabi, currently operates 39 widebodies. It has also placed orders for 35 Boeing 787s, 10 777s, and 55 Airbus jets, a combination of A320s, A350XWBs and A380s. In the past, Hogan said that the airline is expected to see its first profit in 2010, but that goal is getting more elusive as a result of the global recession. While Etihad does not publish detailed financials, company sources say it has posted a loss in excess of $1 billion in 2007. But, as an Abu Dhabi government-owned entity, the airline has been able to access funding for its expansion, most recently new loans for two more A340-600s. Its business model – much like Emirates’ – is geared toward connecting long-haul markets in Europe, the U.S., Asia and Africa through the Abu Dhabi hub. But unlike Emirates, Etihad is developing a more regional network with its new A320 fleet, too.

Air Berlin still expects a small profit in 2008 in spite of the high fuel prices in the first three quarters and the sour economy. But excess capacity, the complicated acquisitions of former rivals LTU and DBA, and a costly expansion on business traveler-oriented long-haul routes that was terminated earlier this year due to mounting losses, are huge impediments. Air Berlin’s financial situation has been the subject of much speculation, and if the market continues to decline as expected, its situation seems bleak. On the other hand, its network and slot holdings, as well as a long-established relationship with German tour operators, are seen as valuable assets.