The boards of British Airways and Iberia have approved an agreement for a proposed merger to be completed late next year. The merger would take the form of new holding company that would own the two carriers. According to the merger plan, British Airways would own 55 percent of the new company, to be called TopCo, and Iberia would own 45 percent. The merged company's financial headquarters would be in London, and the chairman would be Antonio Vazquez, currently chairman of Iberia. The CEO would be Willie Walsh, now the chief executive officer of British Airways.

The new airline group would have 419 aircraft and fly to 205 destinations. In 2008, British Airways and Iberia carried 62 million passengers. According to their latest financial year, their joint revenues are approximately 15 billion euros. The airlines believe there is a compelling strategic rationale for the transaction, which is expected to generate annual synergies of approximately 400 million euros, and benefit both companies’ shareholders, customers and employees. The new group will combine the two companies’ leading positions in the U.K. and Spain and enhance their strong presence in the international long-haul markets, while retaining the individual brands and current operations of each airline.

Under the terms of the agreement, the airlines will create a new holding company that will own both the existing airlines and whose shareholders will be the current British Airways and Iberia shareholders. British Airways shareholders will receive one new ordinary share in TopCo for every existing British Airways ordinary share held by them and Iberia shareholders will receive 1.0205 new ordinary shares for every existing Iberia ordinary share held by them. On the basis of this exchange ratio, and after cancellation of the treasury shares held by Iberia and prior to the cancellation of the cross-shareholdings held by British Airways and Iberia in each other, British Airways shareholders will hold 55 percent of TopCo and Iberia shareholders will hold 45 percent.

Iberia also would be able to pull out of the agreement if any final deal between British Airways and the administrators of its deficit-ridden pension fund is not satisfactory for Iberia. This has been a stumbling point in merger talks that began in July 2008.

TopCo will be a Spanish incorporated company registered in Madrid, Spain. The majority of board meetings and all shareholder meetings will take place in Madrid. As at completion of the merger, TopCo will be tax resident in Spain. The operating and financial headquarters of the combined group will be located in London, which shall contain the principal management functions of the combined group. A further management office will be located in Madrid.

“We are laying the foundations of what will be one of the most important airlines in the world, a real global airline,” said Vázquez. The merger would give customers connections to 205 destinations and strengthen the oneworld alliance. British Airways’ customers will gain access to up to 59 new destinations, of which 13 will be in Latin America, while Iberia’s customers will gain up to 98 new destinations across the British Airways network. The airlines say the merger means passengers would get better frequencies and connections, more competitive prices, access to more VIP lounges and enhanced frequent flyer benefits. The merger should create what Iberia called a highly complementary network fit worldwide, in particular combining British Airways’ strong presence in North America, Asia-Pacific and Africa with Iberia’s strong Latin American presence. It will optimize the dual hubs of London and Madrid. It should provide annual synergies of approximately 400 million euros at budgeted exchange rates by the end of the fifth year after the completion of the merger at a cash cost of up to 350 million euros. The synergies will be incremental to the existing value from the airlines' joint business between the U.K. and Spain. Approximately one third of the synergies are expected to be revenue related (joint selling, network and revenue management benefits), with the balance coming from cost synergies in areas such as IT, fleet, maintenance and back office functions. For more information, visit www.iberia.com or www.ba.com.

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