British Airways is in merger talks with the Australian airline Qantas in a deal that could create the world’s first global airline.

BA has also been discussing a merger with Iberia, the Spanish national carrier, and hopes to expand its alliance with American Airlines. The combination of the four would create the largest airline in the world which would be capable of carrying 198 million passengers a year – nearly six times BA’s current traffic.

Historically, the aviation industry has been highly fragmented, with each country trying to operate its own flag carrier and guard against competition.

However, airlines are seeking partners in an attempt to cut costs and expanding networks to attract more passengers. The industry has had a torrid year because of, first, record fuel costs and, now, declining passenger demand from slowing economies.

BA announced last month that its profits in the first six months of the financial year had fallen by 92 per cent to £52 million. Willie Walsh, the chief executive, said that consolidation was inevitable, adding that he wanted the British flag carrier to emerge as the world’s leading airline.

He said: “I’ve been vocal about the importance of consolidation in our industry. We know we work well with Qantas and I think this is an exciting step towards the creation of the first truly global airline.”

BA and Qantas have a long record of cooperation and a deal between them would deliver nearly half of the Heathrow-to-Sydney market.

BA bought a quarter share in Qantas when the Australian carrier was privatised in 1993. It subsequently reduced this to 18.25 per cent and sold out completely in 2004.

The airlines already operate an arrangement on flights to Australia that enables them to swap passengers between their aircraft. Mr Walsh said a merger would go much farther because it would open new routes to each carrier, increasing revenue.

Mr Walsh said: “If we put our network together, we can feed passengers to one another and get to destinations that we cannot get to alone. Together we can serve a much larger part of the globe.”

BA’s share price rose 17.4p to 157.1p yesterday – a gain of 12.5 per cent.

The merged company would be listed in London and Sydney but both brands would remain. No decision has been made about who would lead the organisation or where the headquarters would be. Mr Walsh added that it was too early to say whether there would be cuts to BA’s 43,000 work-force but the Unite union wants talks on the deal.

Last night Steve Ridgway, chief executive of Virgin Atlantic, said: “One day it’s Iberia, then it’s American and now Qantas. The only strategy BA seems to have is to lock up some of the busiest routes in the world, against the consumer interest.” Australian law limits foreign ownership of Qantas to 35 per cent but Canberra proposes to increase this to 49 per cent.

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