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British Airways and Iberia have agreed the basis for a proposed merger expected to be completed in late 2010, a BA spokesman has said.
The proposed merger would create an airline group with 419 aircraft which would fly to 205 destinations.
BA chief executive Willie Walsh said: "The merger will create a strong European airline well able to compete in the 21st century."
He added: "Both airlines will retain their brands and heritage while achieving significant synergies as a combined force."
The statement from BA said its board had agreed a binding memorandum of understanding with the board of Iberia. It sets out the basis for a proposed merger of the two companies which last year carried 62 million passengers and had joint revenues of approximately 15 billion euros in their last financial years.
The statement said the airlines believe "there is a compelling strategic rationale for the transaction which is expected to generate annual synergies (savings) of approximately 400 million euros and benefit both companies' shareholders, customers and employees".
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A BA spokeswoman could not rule out job cuts but said it was likely that most of the savings would be made through sharing services like IT and procurement. "Both airlines are already restructuring their business because of the current economic downturn," she said. "Both Iberia and British Airways are already rolling out programmes of cost savings which have involved job losses."
Last week BA announced a record pre-tax loss of £292 million for the six months to the end of September, the first time that the airline had recorded a first half loss.
Mr Walsh said the company had reduced costs by some £400 million after manpower was cut by 1,900 roles through reduced overtime, increased part-time working and voluntary redundancy. But he warned a further manpower reduction equivalent to 3,000 roles was planned by March next year.
The spokeswoman said Thursday night's announcement did not mean any additional job losses, on top of those already announced, were anticipated. A merger would create an airline carrying around 60 million passengers a year with a fleet of more than 400 aircraft. BA, which has a fleet of 246 planes, carried 33 million passengers last year, while Iberia carried 28.5 million travellers and has 174 aircraft.
