BA boss Willie Walsh on the merger
British Airways and Spain's Iberia are holding talks on a possible merger, the two airlines have said.
The firms said the British Airways and Iberia brands would be retained as part of a combined group under the plans.
BA boss Willie Walsh said the proposed merger would help the airlines in the current economic environment.
The companies said it would take several months to reach an agreement on the terms of the merger. The news boosted BA's share price by 6%.
Mr Walsh said the merger was an attractive proposition for BA, which, like other airlines, is struggling with sky-high fuel costs.
"The aviation landscape is changing and airline consolidation is long overdue," he said.
He said that it was too early to say whether the tie-up would result in job losses.
Iberia flies to 109 destinations and its Madrid hub acts as the European gateway to Latin America.
"A merger would be good news for our customers," said Iberia's chairman and chief executive Fernando Conte.
Howard Wheeldon, a city analyst with BGC Partners, told BBC News that the merger would allow BA and Iberia to reduce costs and "compete better in a difficult world".
Employs 22,000 staff
Carried 32 million passengers last year
Has 198 aircraft
Flies to 109 destinations
"The oil price will have hastened these talks, but it's all about looking forward," he said.
The proposed merger will follow the template set by Air France-KLM and allow both Britain and Spain to say they have a national carrier.
BA's close rival Virgin Atlantic said the merger could lead to less choice for consumers and push up ticket prices.
Virgin also expressed concern that the combined entity would control nearly half of all take off and landing slots at Heathrow airport.
Laurie Price, head of aviation strategy at Mott MacDonald, said that travellers may see fewer flights to certain destinations or larger aircraft used on certain routes.
"They will agree spheres of interest," Mr Price said.
"Iberia will likely concentrate on South America and Africa while BA will focus on the Middle and Far East," he added.
BA is bigger than its Spanish rival in stock market terms, with a market value of £2.9bn. By contrast, Iberia is worth 1.63bn euros (£1.3bn).
BRITISH AIRWAYS FACTS
Employs 42,000 staff
Carried 33 million passengers last year
Has 245 aircraft
Flies to 154 destinations
The two airlines have a 10-year history of co-operation and are both members of the Oneworld alliance.
Last year, BA considered a takeover move for Iberia in tandem with a number of private equity firms, but later pulled out of the plans.
BA acquired a 9% stake in Iberia in 1999 and recently increased its holding to 13.2%. Iberia recently bought a 2.99% stake in BA.
British Airways has been beset by problems in 2008.
In addition to high fuel prices, its pilots have threatened to strike over the launch of a new subsidiary and the opening of Terminal 5 was regarded as a disaster.
Staff at the new terminal were not able to get into work, thousands of bags were mislaid and flights were cancelled.