British Airways and Iberia have signed a definitive merger agreement after two years (acknowledged) of complex negotiations.

When the merger becomes a reality, probably towards the end of 2010, it will mean the creation of a mega-corporation with 508 aircraft, which annually has about 58 million passengers, which still leaves it flying in the wake of some of it’s European rivals.

The merger of the two “flag-carriers” will place the merged airline in fourth place in Europe in terms of passenger numbers after Ryanair, Lufthansa Group and Air France-KLM. It is expected there will be a reduction in aircraft over at least the first couple of years post merger though, as the combined airlines pools resources and make better utilisation of the existing fleet.

The main goal of the merger is of course reducing operating costs, which after five years shall be reduced by around £400 million annually according to analysts today.

A joint holding company, International Airline Group (IAG) has been formed which will be headquartered in London, but registered in Spain. The holding company will own British Airways and Iberia as operating companies. BA shareholders will own 55% of the holding company and get an IAG share for each share BA, while Iberia’s shareholders receive 45% of shares in the holding company and receives 1.0205 IAG shares per Iberia share.

In addition to the deal being pending approval from relevant authorities and the respective shareholders there must be a solution to British Airways pension fund deficit which currently suffers from a deficit of 3.7 billion pounds. Iberia has a specific get out clause should a solution not be found.

British Airways CEO Willie Walsh will continue as CEO of the merged company, while Iberia’s chairman, Antonio Vazquez, the CEO of the joint company.

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