British Airways and Spanish airline Iberia have signed a deal to merge and create one of the world's biggest airline groups.
The merger, which was provisionally agreed in November last year, is expected to be completed by the end of this year.
In a statement, the two companies said the merger would benefit shareholders, employees and customers.
It is expected to save the airlines 400m euros ($533m; £350m) a year.
The new company will be called International Airlines Group, but the BA and Iberia brands will continue to operate as normal. The company will have its headquarters in London, with BA shareholders retaining 55% ownership of the company. In total, the group will operate 419 aircraft, flying to more than 200 destinations, and carry a total of 62 million passengers a year, BA said.
BA chief executive Willie Walsh said the merger would be good for customers. "The merged company will provide customers with a larger combined network," he said.
Iberia's chairman and chief executive Antonio Vazquez said the merger was a key move. "This is an important step in the process towards creating one of the world's leading global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation," he said.
According to BBC, the merger is seen as a chance for the two airlines to cut costs following two very tough years for the airline industry. Both BA and Iberia are expected to report heavy losses this year, with BA predicted to announce its biggest annual loss since privatisation. The airlines are also regarded as a good match, having few overlapping routes. The merger will also allow the company to compete more effectively with other European giants including Air France-KLM and Germany's Lufthansa. The signing of the merger deal follows reports on Wednesday that two US airlines - US Airways and United Airlines - were also in talks over a possible merger.
Analysts welcomed the move in light of the current economic environment in which global airlines are struggling for survival. "The merger makes huge sense for passengers and airlines alike. It will allow participating airlines to spread their cost base, something they desperately need to do," said Ashley Steel, global chair for transport and infrastructure at KPMG.
The two airlines first began working together in 1999 following the privatisation of the Spanish flag-carrier. BA currently has a 13% stake in Iberia.