BRITISH AIRWAYS is to merge with the Spanish carrier Iberia, ending more than a year of talks. The merger is aimed at fighting a slump in travel and closing the gap with competitors.

Under the all-share deal , British Airways 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 [$643 million], and benefit both companies’ shareholders, customers and employees,” a statement issued by the airlines said.

The merger will create a global carrier better able to compete with its larger rivals Air France-KLM Group and Deutsche Lufthansa. It will merge BA’s network of US routes with Iberia’s Latin America services to extend the British company’s leading position in the lucrative trans-Atlantic 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 chief executive of BA. The chairman of Iberia, Antonio Vazquez, will become chairman of the enlarged company and the airline will be registered in Madrid, with its main offices in London.

The combination with Iberia is Mr Walsh’s second attempt at merging British Airways with an overseas carrier. Talks on a tie-up with Qantas collapsed in December after the companies failed to agree on the division of control in the partnership.

Thursday’s 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 statement 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 in September sent competition complaints to the carriers and to American Airlines regarding a proposed three-way alliance on routes across the Atlantic.

”The BA-Iberia merger will increase BA’s dominance at Heathrow, with 44 per cent of take-off and landing slots this winter,” its British rival Virgin Atlantic said.

”It is impossible for any other airline to replicate their scale. Regulators in Europe and the US need to be alert to BA’s growing dominance through proposals such as its monster monopoly with American Airlines, proposals which will not be in the consumer interest.”

Spending cuts from the merger may help the companies revive earnings hurt by the global slide in air travel. British newspapers warned yesterday of further job losses at the two airlines.

British Airways had a record £217 million ($386 million) loss in the six months to 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, the chief executive of Europe’s largest discount carrier, Ryanair.

”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’s third-quarter figures are about to be released. The International Air Transport Association says airlines may lose a combined $US11 billion ($11.8 million) this year.

Air France created Europe’s biggest airline by passenger traffic with its €700 million purchase of KLM in 2004. It also has a 25 per cent stake in Alitalia, Italy’s biggest airline.

Lufthansa ranks second after growing through the purchase of the smaller carriers Swiss International Air Lines, Austrian Airlines and Britain’s BMI, which has the second-biggest holding of take-off slots at Heathrow Airport in London, the main base of British Airways. It also has a stake in Brussels Airlines, the main Belgian carrier.

British Airways, by contrast, has completed two purchases this decade. It bought L’Avion, a French business-class carrier with one route, for £54 million in mid-2008 and took over the franchise operator British Regional Airlines in March 2001.