British Airways, Iberia approve merger agreement

British Airways and Iberia of Spain approved Thursday a preliminary agreement on a planned merger that would create a European aviation giant, the airlines said.

The new airline would have 419 aircraft and fly to 205 destinations, the companies said in a joint statement, ending months of negotiations on a merger to better compete in the recession-hit industry.

"The merger will create a strong European airline well able to compete in the 21st century," BA chief executive Willie Walsh said.

"Both airlines will retain their brands and heritage while achieving significant synergies as a combined force," he said.

Both loss-making airlines held separate board meeting talks throughout Thursday on a possible merger that would create a European aviation giant to rival Air France-KLM and Lufthansa.

A merger would create Europe's second biggest airline by stock market capitalisation, and third biggest by income, with around 60 million passengers per year, analysts have said.

British Airways will hold 55 percent of the new company, while Iberia will hold 45 percent, the statement said.

The merger would save the company 400 million euros (358 million pounds) a year. A BA spokeswoman could not rule out job cuts under the deal, but said it was likely that most savings would be made through sharing services like IT.

"Both airlines are already restructuring their business because of the current economic downturn," she said.

Walsh will be chief executive, and Iberia chairman Antonio Vazquez will be chairman of the new company to be based in London and listed on the London Stock Exchange, the statement said.

Analysts said passengers were unlikely to notice much difference initially, with the merger to be finalised by the end of 2010.

Vazquez hailed the agreement, saying they were "laying the foundations of what will be one of the most important airlines in the world, a real global airline."

"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," he said.

Both airlines have suffered heavy losses because of plunging demand for air travel in the fierce global economic downturn -- but it was unclear whether a merger would remedy the situation, analysts said.

"Both BA and Iberia have got their own problems. Both are loss-making and both have industrial issues to deal with," said John Strickland, aviation analyst at JLS Consulting.

"If they can get this in place for when the economy begins its recovery in 2010 or maybe 2011 then it will benefit both."

The merger still needed regulatory approval, he added.

BA customers would gain access to up to 59 new destinations, of which 13 will be in Latin America, while Iberia's customers would gain up to 98 new destinations across the BA network.

The pair announced in July 2008 that they were in talks for an all-share merger. But discussions have bogged down in differences over the balance of control and the size of BA's pension-fund deficit.

Iberia has the right to back out of the deal if the outcome of negotiations between BA and the administrators of its pension deficit is not "in Iberia?s reasonable opinion, satisfactory," the statement said.

The two airlines are seeking to merge at a time when the industry has been badly hit by a slump in passenger and cargo traffic.

BA last week announced more job cuts and posted a loss of 217 million pounds in the six months to September 30, compared with a loss of 49 million pounds during the same period of 2008.

Iberia plunged into the red in the second quarter with a loss of 72.8 million euros against a 21.2-million-euro profit in the second quarter of 2008. The Spanish carrier releases third-quarter earnings on Friday.