British Airways and Spanish airline Iberia have announced a preliminary agreement to merge from late 2010, following 16 months of negotiations.
The merger will create the worldÔÇÖs biggest airline, with 419 aircraft flying to 205 destinations around the world. It will combine BAÔÇÖs strong presence in North America, Asia Pacific and Africa with IberiaÔÇÖs strength in Latin America.
The agreement also gives BA the opportunity to expand out of Madrid if the move to create a third runway at Heathrow were to be blocked.
BA customers will gain access to up to 59 new destinations, including 13 in Latin America, while IberiaÔÇÖs will gain up to 98 new destinations.
Under the terms of the deal, Iberia will take a 45 per cent stake and BA a 55 per cent stake in the new company.
The merger is expected to receive regulatory approval but Iberia is entitled to pull out if BA cannot resolve its £3 billion pension deficit problem.
It is thought the merger could save the two companies ┬ú358 million (Ôé¼400 million) after five years.
Iberia's chairman Antonio Vazquez will take the same role at the new company, while Willie Walsh will become its chief executive.
Commenting on the deal, V├ízquez said: ÔÇ£This agreement is a giant step in the history of both Iberia and British Airways. We are laying the foundations of what will be one of the most important airlines in the world, a real global airline.
ÔÇ£I believe that, thanks to this transaction, which is the most important in the European airline industry in recent years, we are more prepared than ever to face future challenges.ÔÇ£
Walsh added: ÔÇ£The merger will create a strong European airline well able to compete in the 21st century.
ÔÇ£Both airlines will retain their brands and heritage while achieving significant synergies as a combined force.ÔÇØ
The deal has been structured in much the same way as the Air France-KLM merger, where both airlines maintain their national identities, operating companies and brands. The new firm will be headquartered in London but registered in Madrid.
The agreement follows BAÔÇÖs announcement of a first-half loss of ┬ú292 million in the six months to the end of September.
Iberia has also recently announced a net lossÔÇöof Ôé¼182 million in the nine months to the end of September, compared with a profit of Ôé¼51.1 million during the same period a year ago.
Both airlines are also currently negotiating with staff over strike action.
Fears of jobs losses have already been raised, but neither airline has yet commented on whether this is likely to happen.
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