Emirates described the partnership as going "beyond code-sharing" and is aimed at simplifying the feeding of passenger traffic between the two airlines at Dubai International.
The new partnership will include joint network planning, coordinated schedules and the frequent flyer programmes will be aligned though both airlines will remain independently managed, the joint statement said. They expect to be serving 240 destinations as a combined operation by 2022, with a total fleet of 380 aircraft.
The new agreement comes as Emirates' profits fell by more than 80 percent to $340 million in the last fiscal year due in part to a slump in demand and U.S.travel restrictions.
Emirates in particular has been hit by currency fluctuations, geopolitical uncertainty and USA travel restrictions leading it to post an 82 percent drop in profit in May, its first decline in five years.
"Both airlines have grown independently and successfully over the years and this new partnership will unlock the huge value that the complementary models of both companies can bring to consumers, each airline and to Dubai".
Emirates and flydubai will also align airport systems and operations at their hub at Dubai International Airport, the world's busiest for international travel.
Sheikh Ahmed said: "This is an exciting and significant development for Emirates, flydubai, and Dubai aviation". The current combined network comprises 216 unique destination points. Emirates, the largest airline in the Middle East, flies to 157 destinations with 259 planes, while low-priced airline Flydubai reaches 95 destinations with 58 planes.
The partnership will be rolled out over the coming months, with the first enhanced code-sharing arrangements to come into effect during the final quarter of 2017.