Negotiations on a deal to sell off Air Southwest have reached an advanced stage with the airline's parent company facing increasing financial pressure to sell.

Sutton Harbour Holdings has been in talks with suitor Eastern Airways since it announced that it was putting its loss-making Plymouth airline on the market in late May.

A Sutton Harbour spokesman for the company said that discussions had now reached "a crucial stage".

An aviation industry source said a deal was likely to be completed within the next two to three weeks, with the prospect of its operations being scaled back in order to make the business viable.

A combination of the recession, extreme weather at the start of the year and the volcanic ash crisis resulted in the airline making a £3.94 million loss.

Sutton Harbour Holdings has previously said that disposing of the airline will see it incur "a significant loss".

Leases for two of the airline's five planes come up for renewal shortly, meaning that if a deal is not agreed, Air Southwest could find itself having to negotiate prohibitively expensive new arrangements to keep the planes in the air.

Three regional airlines are understood to have considered making an offer for Air Southwest — Humberside-based Eastern Airways, Exeter-based Flybe and Guernsey-based Blue Islands.

Of those, only Eastern remains in the frame. The airline already works with Air Southwest in an arrangement designed to allow the Plymouth airline access to the Global Distribution System of which Eastern is part.

When it was announced in February, the deal was described as the first stage of "an evolving relationship" between the two companies.

The recession has hit Plymouth-based Sutton Harbour Holdings hard, with its share price dropping from a high of 160p in September 2007 to 40p.

The company is keen to cut its links with the volatile aviation sector so that it can focus on its core regeneration and marine activities.

Sutton Harbour also owns a 150-year lease on Plymouth City Airport. Tim Jones, chairman of the Devon and Cornwall Business Council, said that if a buyer wasn't found for the airline, he had concerns about the future of the airport.

"My absolute, informed opinion is that Plymouth needs to retain its airport link. It may be that today it isn't viable but you cannot look at airports as short-term assets. This is one prominent, golden asset that Plymouth has got to hang on to because there will never be another airport if Plymouth loses the one it has — the costs would be astronomical."

Regional airlines have struggled during the recession, with Irish airline Aer Arran the latest casualty after it announced last week that it was entering into examinership — a provision in Irish law aimed at helping companies experiencing financial difficulties by protecting them from creditors while they restructure.

Douglas McNeill, equity analyst specialising in transport and travel at stockbrokers Charles Stanley, said a deal with Eastern Airways "would make a lot of sense".

"It would be helpful for Air Southwest to be part of a large group," he added.

A spokesman for Sutton Harbour Holdings said: "It is company policy not to comment on this type of speculation."

A spokesman for Eastern Airways said it did not wish to comment.