British Airways and Iberia have agreed a Memorandum of Understanding over a merger.

The airline’s have announced their aim as being “to create a new, leading European airline group…”

The combined company will have 419 aircraft flying to 205 destinations. In 2008, British Airways and Iberia carried 62 million passengers and, in their last financial years, their joint revenues are approximately €15 billion.

The merger is expected to be completed in late 2010 and will create a new holding company (TopCo) that will own both the existing airlines and whose shareholders will be the current British Airways and Iberia shareholders. with British Airways shareholders holding 55 per cent of TopCo and Iberia’s shareholders holding 45 per cent.

TopCo will be a Spanish incorporated company registered in Madrid, Spain. The majority of board meeting and all shareholders meetings will take place in Madrid. As at completion of the merger, TopCo will be tax resident in Spain. The operating and financial headquarters of the combined group will be located in London, which shall contain the principal management functions of the combined group. A further management office will be located in Madrid.

The combined business will be led by the group CEO, Willie Walsh, and a management team chosen equally from each airline. The group management team will initially comprise: Willie Walsh, Group CEO Rafael Sánchez-Lozano, CEO of Iberia OpCo Keith Willliams, CEO of British Airways OpCo Enrique Dupuy De Lôme, Group CFO Robert Boyle, Revenue Synergies Officer José Maria Fariza, Cost Synergies Officer

The press release outlines the following advantages from the merger:

  • Enhanced customer benefits with a larger combined network for passengers and cargo and continued investment in new customer products and services.
  • The combined group will offer its customers connections to 205 destinations and strengthen the oneworld alliance. British Airways’ customers will gain access to up to 59 new destinations, of which 13 will be in Latin America, while Iberia’s customers will gain up to 98 new destinations across the British Airways network. They will also be offered better frequencies and connections, more competitive prices, access to more VIP lounges and enhanced frequent flyer benefits.
  • Improved strategic position within the global aviation sector Highly complementary network fit worldwide, in particular combining British Airways’ strong presence in North America, Asia-Pacific and Africa with Iberia’s strong Latin American presence.
  • Greater potential for future growth by optimising the dual hubs of London and Madrid.
  • Enhanced scale and ability to compete with other major airlines and participate in future industry consolidation.
  • Annual synergies of approximately €400m at budgeted exchange rates are expected by the end of the fifth year after the completion of the merger at a cash cost of up to €350m. The synergies will be incremental to the existing value from the airlines’ joint business between the UK and Spain. Approximately one third of the synergies are expected to be revenue related (joint selling, network and revenue management benefits) with the balance coming from cost synergies in areas such as IT, fleet, maintenance and back office functions.
  • Strong group management team to maximize the combined group’s earnings potential and deliver synergy benefits while maintaining localised operational focus and accountability.