Finnish airline Finnair Oyj (FIA1S.HE) said Thursday it is in talks with possible partners to create a new Nordic low-cost carrier from scratch to take on fast-growing rival Norwegian Air Shuttle ASA (NAS.OS) and feed passengers to its long-haul network.

Finnair is currently in talks with several potential partners to form a joint venture to expand in the Nordic countries, a move aimed at improving profitability in the company's loss-making European network, Chief Executive Mika Vehvilainen said in an interview Thursday.

"We are primarily competing with companies like [Deutsche] Lufthansa (LHA.XE) and Air France-KLM (AF.FR) and they are all benefiting from relatively large home markets. Finland is a small country so we see that we should treat all of Scandinavia as our home market and increase our presence," Vehvilainen said.

Finland's flagship carrier flies between Europe and Asia via Helsinki but growth is limited because of Finnair's small home base. The airline currently flies to and from Scandinavia destinations and Finland, but it does not compete on routes between Scandanivian cities outside Finland.

At the same time, increased competition from budget airlines and high oil prices have put pressure on Finnair's European operations as they have at other air carriers in the region.

The company reported a wider loss for the fourth quarter Thursday of EUR32.6 million compared with a loss of EUR5.7 million a year earlier. The Finnish carrier wants to improve competitiveness by cutting annual costs by EUR140 million by 2014.

Finnair's strategic shift follows the collapse of Hungary's national carrier Malev and Spanish carrier Spanair last month. Lufthansa, Air France-KLM, and unprofitable Scandinavian carrier SAS AB (SAS.SK) have recently embarked on new restructuring programs to lower costs.

"One way to get more competitive fast is to start a new airline with a completely different [cost] framework than we have today," said Vehvilainen. Iberia, the Spanish wing of International Consolidated Airlines Group (IAG.LN), plans just such a move in its home market.

Norwegian's recent $21.54-billion order for 222 new Boeing Co. (BA) and Airbus jetliners "shows that there are other people who thinks there's room for more growth in Scandinavia," he said.

Vehvilainen said Norwegian Air Shuttle is not one of Finnair's potential partners--it's rather the new joint venture's main competitor.

He said he was surprised by the level of interest potential partners have shown in the idea of a new Nordic carrier which could be operational in the first half of 2013.

The new airline will fly Boeing 737 or Airbus 320 aircraft within the Nordic and Baltic region. It won't compete with Flybe Nordic, a regional carrier flying smaller planes that Finnair has set up with U.K. airline FlyBE Group PLC (FLYB.LN), Vehvilainen said.

Finnair has a code-sharing agreement with Air Berlin (AB1.XE). The German carrier declined to comment on the possibility of joint-venture talks.

Ryanair Holdings (RYA.DB), Europe's largest budget carrier which has identified the Nordic region as one its growth areas, also declined to comment on the possibility of a tie-up with Finnair. Officials at FlyBE weren't immediately available to comment. The main carriers in the Baltic region are Airbaltic Corp. and Estonian Air, both small airlines.

Finnair shares closed down 3.8% at EUR2.53 Thursday.

(Kirsten Bienk contributed to this article)

-By Christina Zander, Dow Jones Newswires; +46-8-5451-3104; christina.zander@dowjones.com