British Airways agreed to a $7 billion merger with Spanish carrier Iberia Lineas Aereas de Espana, ending more than a year of talks on a tie-up aimed at fighting a slump in travel and closing the gap with competitors.

Under the all-stock deal, British Airways investors will own about 55 percent of the business, to be led by Willie Walsh, the U.K. carrier's chief executive, the companies said. The merger won't be completed until late 2010 and can be called off by Iberia if BA fails to resolve pension-deficit issues.

British Airways needs a bigger network to compete with larger rivals Air France-KLM Group and Deutsche Lufthansa. The combination will meld the U.K. company's web of U.S. routes with Iberia's Latin America services, extending its leading position in the lucrative trans-Atlantic market and consolidating its status as Europe's third-largest airline.

``BA and Iberia will be stronger together than they are alone, particularly in terms of their networks,'' said Gert Zonneveld, an analyst at Panmure Gordon in London with a ``hold'' rating on British Airways.

According to a memorandum of understanding signed by the companies, British Airways investors will get one share in the combined entity for every existing share they hold and Iberia investors will get 1.0205 shares for each Iberia share.

SEPARATE BRANDS

The two carriers will continue as separate brands and operating divisions under a holding company registered in Madrid but with its main offices and primary stock-exchange listing in London. Iberia Chairman Antonio Vazquez will hold the same post at the new business, according to a statement released Thursday after markets closed.

The companies said ``there is a compelling strategic rationale for the transaction,'' which will create a carrier with 15 billion euros in sales and 62 million passengers based on 2008 figures. It will have 419 aircraft serving 205 cities.

JOB CUTS

An unspecified number of jobs will be cut as part of the combination, BA chief Walsh said in a Bloomberg Television interview, adding that the merger is a vital step in his carrier's efforts to catch up with Air France and Lufthansa.

The agreement is subject to regulatory and shareholder approval and the deal may be terminated ``if the outcome of the discussions between British Airways and its pension trustees is not, in Iberia's reasonable opinion, satisfactory.''

Virgin Atlantic Airways, BA's biggest competitor on long-haul flights, said the Iberia deal would increase its rival's dominance at Heathrow, giving it 44 percent of takeoff and landing slots based on this winter's schedule.

``It is impossible for any other airline to replicate their scale,'' Virgin said in a statement. ``Regulators in Europe and the U.S. need to be alert to BA's growing dominance through proposals such as its monster monopoly with American Airlines, proposals which will not be in the consumer interest.''

Spending cuts from the merger may help the companies revive earnings that have been hurt by the global slide in air travel.

British Airways had a record 217 million-pound loss in the six months through September as sales slumped, and is pushing back aircraft orders and increasing job cuts to trim costs.

Iberia Friday reported a third-quarter net loss of 16.4 million euros. Airlines may lose a combined $11 billion this year, according to the International Air Transport Association.

``It reminds me of two drunks leaning on each other,'' Michael O'Leary, CEO of Ryanair Holdings, Europe's largest discount carrier, said in an interview. ``If you put one high- fare, loss-making airline together with another high-fare, loss-making airline, you will get an airline with higher fares making much bigger losses.''

British Airways, Iberia and Fort Worth, Texas-based AMR agreed in August last year to create an alliance that would allow them to operate as a single carrier on routes linking the U.S., Canada and Mexico with destinations in Europe.

The companies want antitrust clearance to coordinate prices, capacity, schedules and routes, in addition to sharing revenue on flights between Europe and North America.