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British Airways and Iberia en route to Europe’s second largest airline group

International Airlines Group would be carrying 58 million pax annually

British Airways and Spanish carrier Iberia have taken a further step towards creating Europe's second-largest airline group after signing their long-awaited merger deal. The merger, which they expect to complete in late 2010, will yield an airline with 408 aircraft and carrying more than 58 million passengers a year.

BA hailed the deal as a good result for shareholders, customers and employees and said it would deliver annual cost savings of about £350m within five years. It is welcome good news for BA, which has revealed it lost up to £50m to strike action last month and has still not reached an agreement to end its dispute with cabin crew.

The terms of the merger are said to be consistent with a memorandum of understanding signed by the two airlines in November, when BA confirmed the deal would lead to some job losses. BA said the deal left it better equipped to compete with rivals and well-placed to participate in further consolidation in the global aviation industry.

The merger will create a new company, called International Airlines Group, under which the carriers will retain their current operations and continue to fly under their individual Iberia and British Airways brands.

BA chief executive Willie Walsh said: “The merged company will provide customers with a larger combined network. It will also have greater potential for further growth by optimising the dual hubs of London and Madrid and providing continued investment in new products and services.”

But Bob Atkinson, a travel expert at travelsupermarket.com, said it was difficult to see how the deal would benefit passengers, at least in the short to medium term.

“Any cost-saving benefits will only be felt by passengers if the businesses integrate quickly,” he added.

“But forcing through structural change and efficiency savings is exactly the challenge that has brought BA head-to-head with its staff and Unite in the current dispute; and the situation has the potential to be just as sticky in Spain.”

The merger is subject to approval by competition authorities, including the European Commission, and by the shareholders of both airlines. The agreement comes weeks after BA appeared to remove a potential stumbling block by agreeing a deal with unions to pay off its a £3.7bn pension deficit.

However, Iberia retains the right to terminate the deal if it deems the pension recovery plan “materially detrimental to the economic premises of the proposed merger”.

Rival airlines have expressed opposition to the agreement, with low-fare carrier Ryanair recently likening the merger to “two drunks trying to prop each other up”. Virgin Atlantic said the deal would increase BA's dominance at Heathrow Airport.