Etihad Airways and Air Arabia agreed to jointly set up Abu Dhabi’s first low-cost airline to capitalise on growing demand for budget travel and back the capital’s tourism ambitions, the carriers said.

The new airline, dubbed “Air Arabia Abu Dhabi”, will operate out of Abu Dhabi International Airport and will bolster Etihad’s turnaround plans, according to a statement on Wednesday.

“This exciting partnership supports our transformation programme and will offer our guests a new option for low-cost travel to and from Abu Dhabi, supplementing our own services,” said Tony Douglas, group chief executive of Etihad Aviation Group. “We look forward to the launch of the new airline in due course.”

The move is Etihad’s first major partnership after it retreated from a strategy of inorganic growth through minority stake investments in global airlines. It has shifted its focus on point-to-point traffic rather than carrying globetrotting passengers between continents.

Etihad began a five-year turnaround plan in 2017 – when Mr Douglas was appointed – that has reduced overhead costs, dropped unprofitable routes, cut jobs and restructured Airbus and Boeing plane orders.

There were no further details available on when the new airline will start operations, the size of respective stakes held by Air Arabia and Etihad, the amount of investment or the size of fleet.

Emirates, the world’s biggest long-haul airline, has already forged closer ties with its sister low-cost carrier flydubai.

Air Arabia, the UAE’s sole listed carrier, has two UAE hubs in Sharjah and Ras al Khaimah as well as regional bases in Egypt and Morocco, where it operates joint ventures. The new Abu Dhabi carrier will become the UAE’s fifth airline and its third low-cost operator.

The new airline’s board of directors, consisting of members nominated by Etihad and Air Arabia, will steer the company’s independent strategy and business mandate, the statement said.

Analysts said the airline could help Abu Dhabi tap into air travel demand by low-income workers to more destinations in markets such as India, Pakistan and the Philippines.

For Etihad, the new airline offers the opportunity to test new markets and transfer unused capacity from their Airbus A320 and A330 jets, said Diogenis Papiomytis, Frost & Sullivan director of aerospace.

“Etihad is going through transformation … this will be the perfect vehicle to pass on costs, assets [and] staff that won’t work in the confines of a full-service airline” to the new low-cost carrier, he said.

The fact that both airlines operate within the UAE, where rival flydubai has close ties to Emirates, will also be beneficial, he said.

The partnership makes sense at a time when the International Air Transport Association is forecasting slower growth for the aviation industry amid concerns of a global economic recession, Mr Papiomytis said.

There is room for growth in “emerging markets such as Pakistan, India, North Africa, Russia, the CIS and East Europe – regions that have immense potential yet are underserved”, said Mark Martin, founder and chief executive of Martin Consulting.

The new budget carrier may also help feed traffic to onward destinations on Etihad’s long-haul flights, said George Ferguson, Bloomberg Intelligence’s senior aerospace analyst.

Etihad, which is working on narrowing three years of consecutive losses, expects to turn profitable by 2023, its chief commercial officer Robin Kamark said earlier this month.

Abu Dhabi Airports said the new low-cost carrier is a milestone in the capital’s aviation industry.

“We are confident in the incredible opportunities available to low-cost carriers interested in working with us to take advantage of our excellent connectivity throughout the Middle East, Europe, Africa, Asia and the Americas,” said Bryan Thompson, chief executive of Abu Dhabi Airports.