British Airways and Iberia sign merger agreement

BA has been considering a merger with Iberia for some time

British Airways and Spanish airline Iberia have signed a deal to merge and create one of the world's biggest airline groups.

The merger, which was provisionally agreed in November last year, is expected to be completed by the end of this year.

In a statement, the two companies said the merger would benefit shareholders, employees and customers.

It is expected to save the airlines 400m euros ($533m; £350m) a year.

The new company will be called International Airlines Group, but the BA and Iberia brands will continue to operate as normal.

The company will have its headquarters in London, with BA shareholders retaining 55% ownership of the company.

Further consolidation

In total, the group will operate 419 aircraft, flying to more than 200 destinations, and carry a total of 62 million passengers a year, BA said.

TIMELINE: BA-IBERIA MERGER 1998: BA takes stake in Iberia as part of co-operation deal 2003: BA and Iberia begin working together on routes between the UK and Spain 2007: BA heads a consortium of investors in a takeover bid for Iberia 2007: BA withdraws its bid, arguing that the "friendly terms" essential to the bid were no longer there 2008: BA calls off merger talks with Australia's Qantas, boosting the chances of an Iberia merger instead 2009: BA and Iberia announce preliminary agreement on merger 2010: Merger deal is signed. The deal will go ahead subject to regulator and shareholder approval BA's Iberia tie-up nears lift-off

BA chief executive Willie Walsh said the merger would be good for customers.

"The merged company will provide customers with a larger combined network," he said.

Iberia's chairman and chief executive Antonio Vazquez said the merger was a key move.

"This is an important step in the process towards creating one of the world's leading global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation," he said.

The merger is seen as a chance for the two airlines to cut costs following two very tough years for the airline industry.

Both BA and Iberia are expected to report heavy losses this year, with BA predicted to announce its biggest annual loss since privatisation.

The airlines are also regarded as a good match, having few overlapping routes.

The merger will also allow the company to compete more effectively with other European giants including Air France-KLM and Germany's Lufthansa.

The signing of the merger deal follows reports on Wednesday that two US airlines - US Airways and United Airlines - were also in talks over a possible merger.

New alliances

Analysts welcomed the move in light of the current economic environment in which global airlines are struggling for survival.

"The merger makes huge sense for passengers and airlines alike. It will allow participating airlines to spread their cost base, something they desperately need to do," said Ashley Steel, global chair for transport and infrastructure at KPMG.

Aviation analyst Laurie Price gives his reaction to the deal

Along with other observers, Mr Steel said that the merger was a stepping stone towards a transatlantic alliance with American Airlines.

The new partners may even cast their net wider, said Stephen Furlong at Davy Stockbrokers: "The tie-up with American is the next thing on BA and Iberia's agenda now and this agreement brings that closer, but they are probably looking at European and Asian carriers too."

The Unite union, which represents thousands of BA workers, said it supported the deal, but "not at any cost".

"Mergers mean synergies, and synergies usually mean job losses and the levelling down of terms and conditions," said Steve Turner, Unite national officer for civil aviation.

He said workers must be consulted on any "key decisions" about their future.

BA is currently in negotiations with Unite to prevent further strikes by cabin crew, who went on strike for seven days last month over pay and working conditions.

Pension problem

BA and Iberia are expected to complete the merger by December, subject to approval from regulators and shareholders.

One stumbling block could be BA's pension problems. Its two final-salary pension schemes have a combined deficit of £3.7bn, which it needs to cut.

Last month, the airline agreed plans with unions to increase pension contributions to close the deficit.

But those plans still need to be agreed with pension trustees and the pensions regulator. They could yet insist that BA pays in more money to fill the deficit.

If Iberia is not happy with those demands, a specific clause in the contract allows it to call off the merger deal.

Plans for a tie-up between BA and Iberia date back long before the current troubles in the airline industry.

The two airlines first began working together in 1999 following the privatisation of the Spanish flag-carrier. BA currently has a 13% stake in Iberia.