By Aleksandar Vasovic and David French
BELGRADE/DUBAI, June 17 (Reuters) - The United Arab Emirates' (UAE) Etihad Airways has signed a preliminary agreement with the Serbian government over a possible equity investment in the Balkan country's loss-making JAT Airways.
Serbia is looking to offload loss-making state enterprises, including JAT, pharmaceuticals firm Galenika and the Zelezara Smederevo steel mill in a bid to keep its budget deficit at about 4.7 percent of gross domestic product (GDP) and secure growth of around 2 percent this year.
Previous attempts to sell JAT have failed due to lack of interest from prospective buyers.
Etihad, which has been expanding rapidly, did not specify the value of the potential deal, nor how much of a stake it could take in JAT, adding any transaction would be subject to a due diligence process and regulatory approvals.
"The two airlines will now intensify discussions about collaborative efforts to further integrate their networks and help JAT Airways achieve efficiency, build revenue and reduce costs," Etihad chief executive James Hogan told a news conference in Belgrade.
In April, Etihad and JAT agreed to share route-booking codes but stopped short of an equity tie-up.
Earlier this year, the Serbian government said it was ready to take on 170 million euros ($227 million) of JAT's debt, which in 2012 stood at 3.68 billion dinars ($43.1 million), pay leases for six new aircraft from EADS's Airbus and secure severance payments for redundant workers.
Hogan said a minority equity investment could help JAT to secure savings through pilot and crew training and fuel costs, as well as through procurement and maintenance agreements for common engine types.
"These are early days, but we are ... looking forward to explore the possibility of a much deeper strategic commercial partnership with JAT Airways," he said.
JAT currently operates 10 Boeing 737-300s and four ATR 72-200 turboprop aircraft on 30 routes within Europe and to the Middle East.
Partnership with Etihad is part of Serbia's bid to secure investments from sovereign lenders outside the recession-hit euro zone - the main trading partner of the European Union candidate country.
Serbia has already borrowed from Russia, China and the UAE. This year, it has secured a $400 million sovereign loan from the UAE for agriculture investment and agreed more than $400 million in investment by the Al Dahra agricultural firm based in the emirate.