BA to merge with Spanish airline

Although both airlines will retain their identities, the deal - still to be approved by shareholders - will effectively create a giant new European airline.

BA chief executive Willie Walsh said it was "far too early" to say if the deal, likely to take several months to conclude, would result in any job losses. But he thought the move would not lead to any slimming down of the two airlines which, between them, boast nearly 450 aircraft and fly to more than 250 destinations.

BA's rival airline Virgin Atlantic said the merger would increase BA's "dominant" position at Heathrow Airport and that fares would go up. But Mr Walsh said he thought the deal would actually lead to more consumer choice, not less.

Speculation had been mounting over BA's plans for a closer alliance with Iberia, particularly at a time when carriers have been hit by the sky-high fuel prices and by the economic downturn.

BA signalled nearly five years ago that it was interested in a merger with the Spanish carrier and was previously part of a consortium looking at bidding for the group. BA already owns a 13.15% stake in Iberia and has held shares in the Spanish carrier since 1999. Iberia recently bought a 2.99% holding in BA with whom it already has a joint marketing codeshare agreement on 30 flights.

BA said both airline brands would be retained under the deal as part of a new enlarged group, which would be listed on London's FTSE 100 Index and the Madrid stock exchange.

Mr Walsh said the two companies were a good fit and that consolidation in the airline industry was "long overdue".

He went on: "The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment. We've had a successful relationship with Iberia for a decade and are confident that both companies' shareholders would benefit from the proposed tie-up."

Iberia's chairman and chief executive Fernando Conte said: "A merger would be good news for our customers and enhance our existing relationship. We've worked together for nearly 10 years and a tie-up would build on that success."