British Airways and Iberia in merger talks

By John Bowker and Ben Harding

LONDON/MADRID (Reuters) - British Airways and Spain's Iberia are in talks to create the world's third-biggest airline, which could form the basis of a three-way transatlantic tie-up and trigger a fresh wave of industry deals.

The carrier said on Tuesday the two would spend several months discussing terms of an all-share merger that would create an airline worth a combined $8.4 billion (4.2 billion pounds), flying to over 200 destinations and which would significantly expand BA's presence in the expanding Latin American market.

News of the deal shot Iberia shares 21 percent higher, while BA stock rose 6 percent.

BA Chief Executive Willie Walsh and Iberia Chairman Fernando Conte told a news conference in Madrid the new firm would operate as two separate brands but benefit from cost savings, greater buying power and higher revenue synergies thanks to a larger network.

"This creates a much stronger airline, capable of competing in a much changed environment in the airline industry," said Walsh.

The BA chief also confirmed the two carriers were still in talks with U.S. carrier American Airlines about a transatlantic agreement.

"Over the medium term, they should reap significant rewards in terms of both synergies ... and also in terms of maximising revenues," said NCB analyst Neil Glynn of the proposed deal.

"It also possibly brings a three-way transatlantic arrangement closer between BA, Iberia and American Airlines."