BA's merger with Iberia will make it No 3 in Europe

British Airways has agreed to a plan for a US$7 billion ($9.5 billion) merger with Spanish carrier Iberia Lineas Aereas de Espana, ending more than a year of talks on a tie-up aimed at fighting a slump in travel and closing the gap with competitors.

Under the all-share deal, BA shareholders will get one share in the combined company for every existing share they hold in BA and Iberia investors will get 1.0205 shares in the enlarged company for every Iberia share they hold.

"There is a compelling strategic rationale for the transaction, which is expected to generate annual synergies of approximately €400 million ($811 million), and benefit both companies' shareholders, customers and employees," the companies said.

The merger will create a global carrier better able to compete with larger rivals Air France-KLM Group and Deutsche Lufthansa.

It will meld BA's network of US routes with Iberia's Latin America services to extend the UK company's leading position in the lucrative transatlantic market and consolidate its status as Europe's third-largest airline.

Under the agreement, British Airways investors will own about 55 per cent of the business, which will be led by Willie Walsh, the UK carrier's chief executive.

The airline will be registered in Madrid, with its main offices in London.

The agreement is subject to regulator and shareholder approvals and Iberia will be entitled to terminate the deal "if the outcome of the discussions between British Airways and its pension trustees is not, in Iberia's reasonable opinion, satisfactory", the companies said.

The merger is planned to be completed next year.

The two airlines said in July last year that they were in talks about an all-share merger. Negotiations have been delayed by disputes over the balance of control between the two companies and the size of BA's pension-fund deficit.

The transaction will require regulatory approval from the European Union, which sent antitrust complaints in September to the carriers and to AMR's American Airlines regarding a proposed three-way alliance on routes across the Atlantic.

Spending cuts from the merger may help the companies revive earnings that have been hurt by the global slide in air travel.

British Airways had a record £217 million ($491 million) loss in the six months through September as sales slumped, and is pushing back aircraft orders and increasing job cuts to trim costs.

"It reminds me of two drunks leaning on each other," said Michael O'Leary, chief executive of Ryanair, Europe's largest discount carrier. "If you put one high-fare loss-making airline together with another high-fare loss-making airline, you will get an airline with higher fares making much bigger losses."

Iberia is scheduled to report third-quarter figures. Airlines may lose a combined US$11 billion this year, according to the International Air Transport Association.

Air France created Europe's biggest airline by passenger traffic with its €700 million purchase of KLM Royal Dutch Airlines in 2004. The Paris-based company also has a 25 per cent stake in Alitalia, Italy's biggest airline.

- BLOOMBERG