Struggling airlines British Airways and Iberia have agreed the preliminary terms of their merger to create the world’s third biggest carrier.
The proposed merger will result in the creation of a new holding company - TopCo - that will own both the existing airlines.
The new airline group would have 419 aircraft and fly to 205 destinations. It will also hold around 44% of the take-off and landing slots at Heathrow this winter – a position which will rile rival Virgin.
BA chief executive Willie Walsh has denied that BA's level of cabin service will be affected, or reduced to Iberia's level. Both airlines will also retain their seperate brands.
British Airways shareholders will receive one new ordinary share in TopCo for every existing British Airways ordinary share held, while Iberia shareholders will receive 1.0205 new ordinary shares for every existing Iberia ordinary share.
This would give BA a 55% stake with Iberia holding the other 45% in the enlarged group. TopCo would have its main listing in the UK although it will be registered in Spain. While the headquarters will be based in London, the majority of board meeting and all shareholder meetings will take place in Madrid.
BA chief executive Willie Walsh has maintained that a merger is necessary for the survival of the airlines. The move will save the both airlines €400 million a year.
He said: "The merger will create a strong European airline well able to compete in the 21st century. Both airlines will retain their brands and heritage while achieving significant synergies as a combined force."
Walsh will take on the same role in the enlarged group while Iberia chairman Antonion Vasquez will be the chairman.
Both airlines have taken a heavy knock in the recession with job losses and cost cuts incurring the wrath of employees. In September, BA reported an interim pre-tax loss of £292 million while Iberia reported a net loss of €182 million in the nine months to the end of September – down from a profit of €51.1 million a year earlier.
The two airlines have long been considering a merger, with talks initially starting in July last year.
It still requires the go-ahead from the European Commission, although this is likely to be granted given the merger between Air France and KLM back in 2004.
BA’s pension deficit could, however, be a major sticking point. Its two final salary schemes are performing poorly with the surplus in one scheme fell from £860 million to £27 million, and the deficit in the other scheme ballooning from £1.2 billion to £2.7 billion in the past six months.
There are concerns Iberia will pull the plug on the deal unless these deficits are addressed.
If all goes to plan, the deal is expected to be completed in late 2010.