British Airways (BA) and Iberia tonight agreed the basis for a proposed merger expected to be completed in late 2010, a BA spokesman said.

The proposed merger would create an airline group with 419 aircraft which would fly to 205 destinations.

Willie Walsh, BA chief executive, said: “The merger will create a strong European airline well able to compete in the 21st century. Both airlines will retain their brands and heritage while achieving significant synergies as a combined force.”

Iberia called it a “binding agreement; aimed at creating one of the world’s largest airline groups. It said the deal for a definitive tie-up is expected to be signed in the first quarter of 2010, though it would still need regulatory and shareholder approval.

Iberia said it also would be able to pull out of the agreement if it deems any final deal between BA and the administrators of its deficit-ridden pension fund unsatisfactory. BA's pension black hole is thought to be as much as £3billion.

The announcement comes after the board of Iberia, the Spanish airline, today approved the merger.

At the board meeting, Iberia agreed the new airline will have its financial headquarters in London.

The merged BA-Iberia carrier will be chaired by Antonio Vazquez, the current chairman of Iberia. Willie Walsh, BA's chief executive, will retain his role at the merged group. It is not clear what position Martin Broughton, BA’s chairman since 2004, will hold within the merged operation if the UK airline board approves the combination. "

Shares in BA closed up 6.6 per cent to 213.2p before the announcement was made, while Iberia’s stock increased 10.32 per cent to €2.19.

The airlines have been in talks about a merger since last July but there have been a number of sticking points.

These included BA's anticipated pension deficit of £3 billion and how much each set of shareholders should own of the combined group.

Both airlines will continue to operate under their existing brands within a parent company.

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