British Airways today announced plans for a merger with Spanish airline and long-term partner Iberia.
BA said both brands would be retained under the deal as part of a new enlarged group, which would be listed on London's FTSE 100 Index and the Madrid stock exchange.
The boards of both airlines have unanimously supported the tie-up, although shareholders will still need to approve the deal.
A fresh wave of consolidation has been expected among European airlines seeking to fight the twin threats of soaring fuel costs and falling consumer demand. Air France and Dutch carrier KLM became Europe's biggest carrier by merging earlier this decade.
BA shares soared as investors cheered news of the merger talks.
BA chief executive Willie Walsh said the two companies were a good fit and that consolidation in the airline industry was "long overdue".
"The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment," he said.
"We've had a successful relationship with Iberia for a decade and are confident that both companies' shareholders would benefit from the proposed tie-up."
BA already owns a 13.15 per cent stake in Iberia after increasing its shareholding in recent months.
Speculation had been mounting over BA's plans for a closer alliance with Iberia.
The airline signalled nearly five years ago that it was interested in a merger with the Spanish carrier and was previously part of a consortium looking at bidding for the group.