British Airways has begun merger talks with Iberia, the Spanish national carrier, in a deal that will create Europe’s largest airline.

The merger was billed by both as the coming together of equals, but aviation analysts were in no doubt that BA will be the dominant partner. With combined passenger numbers of more than 60 million a year, BA-Iberia would overtake Lufthansa, Air France-KLM and Ryanair to become Europe’s premier airline.

The merger would also create a carrier that is strong on the North and South Atlantic crossings alike, a dominance that reflects the colonial histories of Britain and Spain.

Willie Walsh, the chief executive of BA, said: “We are working together to create a new European airline that can compete with the best globally.” No details of the merger have been given but the brands will remain separate.

BA will retain its British focus and its strong transatlantic ties to the United States, and Iberia will remain based in Madrid. However, there are likely to be some cuts to overlapping routes between Britain and Spain. BA may move some South American flights to Madrid and the number of direct flights to Spain could be cut.

Virgin Atlantic said that it opposed the merger as it would give BA even more control over Heathrow. It also claimed that BA’s fares might rise.

BA controls 42 per cent of landing slots at Heathrow, the world’s busiest international airport, and Iberia would give it a further 2.5 per cent – equivalent to all of Virgin’s slots. A spokesman for Virgin said: “We all know that dominant players offer less choice and push up ticket prices. Passengers will be worse off as the two airlines combine the worst of Spanish practices.”

Mr Walsh and his counterpart, Fernando Conte, are expected to spend the next couple of months negotiating details such as where the airline’s headquarters will be, who will run the company and how the route networks can be combined. If the deal goes ahead, BA will represent more than two thirds of the value of the combined company and is therefore expected to have a greater influence in determining the culture and structure of the airline.

The merger has been triggered by the rapidly rising price of oil, which has put airlines around the world under severe financial pressure. BA has given warning that it may only break even this year and Iberia lost €28.3 million (£22.3 million) in the first three months of this year as its fuel bill rocketed. By merging, the carriers would be able to gain economies of scale from bulk-buy-ing fuel, aircraft and maintenance. There may also be job losses in the combined workforce of 64,000 if the two carriers cut flights between Britain and Spain. BA has wanted to do a deal with Iberia for many years and has been a shareholder in the carrier for almost a decade. It tried to buy the airline last year in partnership with a private equity firm but this fell through.

Iberia’s largest shareholder, the Caja Madrid savings bank, said yesterday that it supported the merger. Iberia’s share price rose 20 per cent yesterday and BA’s rose 6 per cent.

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