British Airways and Iberia, the Spanish flag carrier, announced today that they are seeking a merger that would create one of Europe's largest airlines.

BA, which owns 13.15 per cent of Iberia, partnered with TPG, the private equity firm, last year in an attempt to buy the Spanish airline but the deal fell through.

The combination of BA and Iberia would create a carrier that is dominant on the North and South Atlantic routes. BA has traditionally been strong on routes from Heathrow to the US while Iberia has strong links with South America.

Willie Walsh, British Airways’ chief executive, said: “The aviation landscape is changing and airline consolidation is long overdue.

"The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment. We’ve had a successful relationship with Iberia for a decade and are confident that both companies’ shareholders would benefit from the proposed tie-up."

Iberia said today that it had acquired 2.99 per cent of BA and had "financial exposure" to a further 6.99 per cent, although it did not explain how these shares were held.

Shares in BA rose 6.3 per cent to 249p today.

BA is set to announce its first-quarter results on Friday and analysts expect the airline to give a more precise estimate on its likely profitability this year.

Martin Broughton, chairman of BA, gave warning two weeks ago that the carrier would struggle to make a profit as high oil prices have eroded margins.

Analysts believe BA may cut its profit estimate from break even to £50 million, down from £875 million last year.

The first quarter may look particularly bad as oil hit a record high during the period and BA will also have to factor in additional costs from its move to Heathrow's Terminal 5.

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