Note that (in order to be valid XML) your XML data needs a root node and that your attribute values should be quoted, i.e. your data file should look more like this:
<!-- data.xml -->
<instances>
<instance ab='1'>
<a1>aa</a1>
<a2>aa</a2>
</instance>
<instance ab='2'>
<b1>bb</b1>
<b2>bb</b2>
</instance>
<instance ab='3'>
<c1>cc</c1>
<c2>cc</c2>
</instance>
</instances>
Now you can use XPath with xmlstarlet to get exactly what you want:
xmlstarlet sel -t -m '//instance' -c "./*" -n data.xml
This produces the following output:
<a1>aa</a1><a2>aa</a2>
<b1>bb</b1><b2>bb</b2>
<c1>cc</c1><c2>cc</c2>
If you're not concerned with having properly formatted XML and you just want to parse a text file that looks roughly like the one you've presented, then you can definitely accomplish what you want just using shell-scripting and standard command-line tools. Here is a Bash script that produces the desired output:
#!/bin/bash
# extract_instance_elements.bash
# Keep track of whether or not we're inside of an "instance" element
instance=0
# Loop through the lines of the file
while read line; do
# Set the instance flag to true if we come across an opening tag
if echo "${line}" | grep -q '<instance.*>'; then
instance=1
# Set the instance flag to false and print a newline if we come across a closing tag
elif echo "${line}" | grep -q '</instance>'; then
instance=0
echo
# If we're inside an instance tag then print the child element
elif [[ ${instance} == 1 ]]; then
printf "${line}"
fi
done < "${1}"
You would execute it like this:
bash extract_instance_elements.sh data.xml