British Airways (BA) and Spain-based airline Iberia are set to create one of world's largest airlines after securing an agreement for the proposed merger of the two companies.

The merger, which is yet to be approved by the European Commission, will see the creation of a new Spain-based holding company - TopCo - to own both airlines, which will continue to operate under the existing brands.

BA shareholders will own 55 per cent of the new company under proposals for the merger, which can still be vetoed by Iberia if the UK-based airline is unable to resolve a shortfall in its pension scheme.

Willie Walsh, BA chief executive officer, would head up the new TopCo firm. He said: "The merger will create a strong European airline well able to compete in the 21st century. Both airlines will retain their brands and heritage while achieving significant synergies as a combined force."

Antonio Vázquez, chair and chief executive officer of Iberia, added: "It has been a long process where many people, both at British Airways and Iberia, have worked very hard to reach this agreement. But in the end it was worth it.

"This agreement is a giant step in the history of both Iberia and British Airways. We are laying the foundations of what will be one of the most important airlines in the world, a real global airline."