British Airways and Iberia, the Spanish flag carrier, have announced a deal to create Europe’s largest airline.

The merger by the two loss-making companies is expected to set off another round of cost-cutting at both to save £360 million a year. Jobs are likely to be lost at head offices in London and Madrid, in maintenance facilities and in the sales forces.

The combined airline will carry 62 million passengers a year, making it Europe’s largest, although the budget company Ryanair is expected to exceed that figure this year.

BA will be incorporated in Madrid and chaired by a Spaniard, Antonio Vázquez. However, the headquarters and stock market listing will be in London and Willie Walsh, BA’s chief executive, will head the merged group. BA and Iberia will continue to pay taxes to their respective governments.

Iberia’s board of directors in Madrid agreed the terms of the deal yesterday and BA’s directors signed the deal last night, ending 16 months of talks over who should run the combined airline and how much shareholders should own. A holding company will be set up and the two airlines will continue to operate as separate entities within it.

Passengers are unlikely to notice much difference initially but integration could mean Spanish crew and pilots working on BA flights and new menus designed to appeal to Spanish and British tastes.

The most significant impact will be financial since the larger company will be able to strike better deals when buying fuel, aircraft and other supplies. BA lost £292 million in the six months to September 30; Iberia lost £224 million in the first half of the year.

Mr Walsh has said that his airline needs to save money if it is to survive. He has already stripped £400 million of costs from the business and 4,900 jobs will go by next March.

“This is a deal that is driven by what is needed in the boardroom rather than on the runway,” Doug McVitie, managing director of Arran Aerospace, an aviation consultancy, said. “This deal allows BA and Iberia to lean on each other’s shoulders during these tough times.”

The combined airline will also hope to generate additional revenue by offering passengers an expanded route network. BA is strong on transatlantic routes from Heathrow and on routes east to Asia, while Iberia is strong into Africa and South America.

BA shareholders will own 56 per cent of the new group and Iberia will get the rest. Investors showed enthusiasm for the deal yesterday as BA’s share price climbed 15p, or 7.5 per cent, to 215p and Iberia was up 12 per cent.

The combined airline will be worth £4.5 billion, just behind Lufthansa, which is Europe’s most valuable airline at £4.6 billion.

Mr Walsh said: “This will be good for our passengers, as it will open 59 new destinations for BA customers and 96 new destinations for Iberia. This deal confirms BA as one of Europe’s, and the world’s, leading airlines.”

Gert Zonneveld, aviation analyst at Panmure Gordon, the firm of stockbrokers, said: “Any savings produced by this merger will be welcome, even if it is just a penny. If Willie Walsh has a real go at it, there is a fair chance of getting decent savings out of this.”

Graham Brady, a Conservative member of the Treasury Select Committee, said: “The decision of an iconic British company to relocate its headquarters to Spain is a graphic illustration of how Labour’s high-tax, high-regulation regime is standing in the way of economic recovery.”

For Spaniards, the merger was seen as a bad move with BA struggling in a hostile market. One person, who called himself Armageddon, said on the website of El Pais newspaper: “British Airways is totally ruined. Only the Titanic has more holes than the pension plan of BA.”

Jose Manuel Rita Moure, writing to the same newspaper, said: “We continue losing our principal business values. We are going to end up as doormen for the worst there is.”

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