LONDON/MADRID British Airways Plc and Spain's Iberia IBLA.MC 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 UK 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, flying to over 200 destinations and which would significantly expand BA's BAY.L 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 AAMR.N 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."
Both Walsh and Conte had previously stressed the need for more consolidation among European airlines, as they fight the twin threats of soaring fuel costs and falling consumer demand.
A deal would end British Airways' 16-month chase for Iberia.
Last March's approach by BA, in concert with private equity group TPG, ended in failure after Iberia's biggest shareholder Caja Madrid scuppered a deal. A source close to the matter said on Tuesday savings bank Caja Madrid now supported a tie-up.
BA's 8.4 percent shareholder Standard Life also backed the deal.
Air France and Dutch carrier KLM merged in 2004 to become the world's biggest carrier, while a string of airlines such as privately owned bmi are seen as future targets.
BA's Walsh said the move was not a life-saving tie-up, but made sense in current market conditions.
"I don't see this as a matter of survival, but as two strong companies coming together. We do not see this as the end game but as the start of a new era," he told reporters. "The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition."
Walsh said the opportunity provided by the new Open Skies pact, which has freed up restrictions on carriers flying between the United States and European hubs, had prompted a deal.
"(This is a) consequence of liberalisation of the aviation industry. Hand in hand with liberalisation is the need for consolidation," he said.
The combined group would have revenue of 16.5 billion euros -- around 60 percent of that from BA -- nearly 450 aircraft, and would enable the two to better compete with larger rivals Air France-KLM and Lufthansa. The former had turnover of over 24 billion euros last year.
Walsh said the current proposal was "very different" from last year's 3.4 billion euro bid, which at 3.6 euros a share was more than double Iberia's share price shortly before Tuesday's announcement.
"A year in this industry is a long time," said Walsh. "This is a much more exciting development than the previous discussions."
BA has been a shareholder of Iberia since its privatisation nearly 10 years ago and owns 13.15 percent of the Spanish carrier. Iberia has a 2.99 percent direct stake in BA on top of exposure to 6.99 percent via contracts for difference linked to BA's share price, which closed at 248.5 pence on Tuesday.
BA said both parties were confident of securing regulatory approval, adding that the European Union had already allowed the duo to cooperate widely and that regulators in Spain and France had reacted positively to news of a possible merger.
However, a spokesman for BA rival Virgin Atlantic was critical. "This potential merger will only fuel BA's dominance at Heathrow ... We all know that dominant players offer less choice and push up ticket prices," he said.
BA and Iberia would control nearly 45 percent of take-off and landing slots at Heathrow, the core hub for flights between Europe and the United States.
Morgan Stanley (MS.N) and UBS AG UBSN.VX are advising Iberia IBLA.MC and British Airways BAY.L, respectively, a banking source close to the deal said.
For a DEALTALK on the merger plan, click on [nL9719078]
For a chronology of the BA-Iberia relations [nL9341228]
For a factbox, click on [nL9356282]
For more on the likely deal structure, click [nL9374553]
(Additional reporting by Mark Potter and Elena Moya in London and Sarah Morris and Robert Hetz in Madrid; Editing by Will Waterman)