The creation of the world's largest airline is being plotted by two Irish chief executives who first worked together at their national carrier during the 1990s.

Willie Walsh, chief executive of British Airways, and Alan Joyce, his counterpart at Qantas, began their aviation careers at Aer Lingus but have since gone on to lead much larger airlines. The two men were not close at Aer Lingus but are understood to get on well now and, as a result, there is said to be strong momentum behind the BA-Qantas merger talks.

According to sources close to the airlines, Mr Joyce's Qantas approached BA several weeks ago with the proposal to merge. The deal would bring together two airlines that have a long history of co-operation and would give them a dominant position on the Heathrow-to-Sydney route. A combined BA-Qantas would control 43 per cent of this market and provide new opportunities to expand in Asia and Europe.

BA-Qantas would be dual-listed in London and Sydney in a similar way to other Anglo-Australian companies, such as BHP Billiton and Rio Tinto, the mining groups. BA hopes that this would allow it to comply with the Qantas Sale Act, which limits foreign ownership of the Australian airline. The present limit is 35 per cent, but the Australian Government proposed in a Green Paper yesterday that this should rise to 49 per cent.

Mr Walsh said: “We have to comply with the Qantas Sale Act and we believe that we will be able to address all those issues.”

BA bought a 25 per cent stake in Qantas when the Australian carrier was privatised in 1993. It sold the stake four years ago but the airlines retain a code-share agreement allowing them to co-operate on the Sydney flights.

The announcement of the merger talks yesterday surprised the aviation industry because BA is already in merger negotiations with Iberia, the Spanish carrier. BA said that these talks would continue, although the Spanish are thought to have learnt of the Qantas interest only in the past two days.

Analysts believe that BA's push for a deal with Qantas has come after the Iberia talks hit difficulties, particularly in relation to BA's £1.74 billion pension deficit. The Qantas deal would give BA a back-up in case the Iberia talks fail and may also force the Spanish to compromise on some of their demands if they want to take part in this potentially lucrative combination.

Stuart James, an analyst for Calyon, said: “BA may be playing hardball with Iberia over the terms of the BA-Iberia merger, to avoid having to agree to a weaker share split and to give itself a fall-back position.”

BA is also seeking regulatory clearance to expand its alliance with American Airlines. This is seen as a first step towards a merger with the Houston-based carrier should the US Government drop restrictions on foreign ownership. BA's activities have raised the possibility that it is pushing to create the first truly global carrier - a prospect that will terrify its rivals.

Doug McVitie, managing director of Arran Aerospace, an aviation consultancy, said: “A Qantas deal starts to give BA global reach and is a step on the road to creating a super-alliance between BA, AA, Iberia and Qantas. This could give BA dominance East and West and is a very interesting development for the industry.”

A global airline could take advantage of much larger economies of scale and would also be able to create a network so comprehensive that it would starve competitors of revenue.

Mr Walsh has argued that the economic downturn and resulting collapse in passenger numbers have made consolidation in the airline industry essential. However, Virgin Atlantic, which competes with BA on routes such as Heathrow to New York and Sydney, believes that such mergers are anti-competitive.

Steve Ridgway, chief executive of Virgin Atlantic, said: “During a downturn, there is no excuse for competition laws to be suspended. Regulators need to scrutinise these merger attempts like never before and ensure that consumers aren't disadvantaged by BA's attempts to become even more dominant, to the detriment of true competition.”

BA, AA, Iberia and Qantas are all members of the oneworld alliance, an air miles and cross-marketing initiative. BA's talks with these other carriers has raised the possibility that more oneworld members, such as Cathay Pacific, could ultimately join the merged company.

Mr Walsh said: “If we are successful putting BA, Qantas and Iberia together, that would not necessarily be the end of consolidation within oneworld.” The BA-Qantas deal has raised doubts among analysts, who question whether the merger would create sufficient synergies, given the huge distances separating the two airlines' home markets.

Andrew Lobbenberg, an aviation analyst at RBS, said: “We see more obvious scope for mergers within regions, both from a synergy and regulatory standpoint. In terms of potential synergies from a BA and Qantas merger, those benefits are less obvious to us than from a BA-Iberia combination.”

BA's share price rose 12.5 per cent, or 17.4p, to 157.1p yesterday.

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