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British Airways and Iberia expect to merge by the end of next year after reaching agreement on the plan.
Months of speculation ended when a joint statement on Thursday night said the boards of the two airlines had agreed a binding memorandum of understanding setting out the basis for a proposed merger.
The statement said amalgamation would produce annual savings of around 400 million euros (£358.3 million) which a BA spokeswoman said were expected to come from joint IT and procurement rather than job losses additional to those already announced.
Last week when the airline announced a record pre-tax loss of £292 million for the six months to the end of September, chief executive Willie Walsh warned manpower would be reduced by the equivalent of 3,000 roles by March next year.
He said it had already reduced costs by some £400 million after 1,900 jobs were cut through reduced overtime, increased part-time working and voluntary redundancy.
Mr Walsh - who will become group 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."
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The proposed merger would create an airline group with 419 aircraft which would fly to 205 destinations.
The statement said the airlines believe "there is a compelling strategic rationale" for the merger which it said would benefit shareholders, customers and employees.
BA shares rose almost 8% on Thursday as speculation increased about an imminent announcement.
