British Airways and Spain's Iberia have announced a preliminary agreement for a $7 billion merger to create the world's third-largest airline by revenue.
Under the deal, which the companies hope to close by the end of 2010, BA's chief executive Willie Walsh will head up the new company, while Iberia's chairman Antonio Vazquez will be chairman. Each airline will have seven members on the new 14-member board.
Shares in both firms rose this morning, building on yesterday's gains. By 0933 GMT, Iberia's shares were 2.4 per cent higher to €2.274, extending yesterday's 12 per cent gain, while BA was 2.5 per cent higher at 221 pence.
Once the merger is completed, BA shareholders will have 55 per cent of the combined firm, to be headquartered in London with 419 aircraft flying to 205 destinations, while Iberia shareholders are to get 45 per cent.
In a joint statement, BA and Iberia said the merger would provide "enhanced scale to compete with other major airlines and participate in future industry consolidation."
The new company will combine BA's strong position in Europe-to-North America traffic with Iberia's Latin American business, and will potentially be reinforced by a planned alliance with AMR Corp's American Airlines.
The deal will create a new holding company, which will own the two airlines. The two companies will have dual hubs in London and Madrid, and will keep their own licences, codes and brands for the first five years of the merger.
This mirrors the structure set up by Air France-KLM from the Franco-Dutch merger in 2004, which created a holding company plus two operational units to preserve national identities and bilateral international landing rights.
Ahead of the announcement of a deal, BA shares closed 7.5 per cent higher at 206.8 pence, while Iberia shares ended up 11.8 per cent at €2.22.
The merger would create an airline with annual revenues of £13.5 billion.
BA and Iberia target annual synergies of about €400 million by the end of the fifth year after the completion of the merger at a cash cost of up to €350 million.
BA's Mr Walsh has wanted to create an airline to rival Air France-KLM and Lufthansa, which has combined with Swiss International Airlines and Austrian Airlines in recent years.
The BA-Iberia deal would need regulatory clearance from the European Commission, but this would likely go through, following the precedent set by the Air France-KLM merger.
BA, which already owns 13.5 per cent of Iberia, has applied to US and European authorities for antitrust immunity to allow cost and revenue sharing on transatlantic routes with Iberia and American Airlines.
Iberia this morning reported a third-quarter loss as demand declined amid the country's worst recession in six decades.
The carrier had a net loss of €16.4 million, compared with profit of €30.3 million a year earlier, the Madrid-based company said today in a statement.
Sales dropped 20 per cent to €1.1 billion.
Revenue from ticket sales decreased 22 per cent to €892.7 million as Iberia reduced prices to attract clients and
as traffic declined 6 per cent in the quarter.
Meanwhile, passenger traffic fell 5.1 per cent last month from a year earlier.
Agencies