July 20 (Bloomberg) -- Virgin Blue Holdings Ltd. is courting a Middle East airline to become a cornerstone investor as it seeks options to recapitalize the business amid increased competition and an industry slowdown, the Australian said.

Virgin Blue, Australia’s No.2 airline, may be forced to seek additional capital either through an equity raising or by inviting new investors on to its register, the newspaper said, citing market speculation. Virgin Blue didn’t respond to calls to comment on a potential alliance with a Middle East airline, the newspaper reported.

The company may have held talks with one Middle East airline, possibly its new code-share partner Emirates, the newspaper said, without citing anyone. Other potential solutions to its capital needs could include a partnership with private equity firms or with Air New Zealand Ltd., it reported.

To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net

Last Updated: July 19, 2009 17:42 EDT