British Airways and Spain's Iberia signed an $8 billion merger to create the world's third largest airline by revenue yesterday, bringing a tie-up with American Airlines a step closer.

The combined group, to be majority owned by BA shareholders, ends the British company's long pursuit of Iberia and positions the companies for further consolidation.

BA, Iberia and American, members of the Oneworld alliance, want to deepen the pact to take advantage of the US/EU "Open Skies" agreement, which liberalises trans-atlantic aviation.

"The tie-up with American is the next thing on BA and Iberia's agenda now and this agreement brings that closer but they are probably looking at European and Asian carriers too," said Davy Stockbrokers analyst Stephen Furlong.

"There are too many airlines in the world and bigger will be better in the future. BA will hope that this is the start of many more tie-ups."

Iberia boss Antonio Vazquez, who will be chairman of the new company, to be known as the International Airlines Group, said the combined firm would "be better equipped to compete with other major airlines and participate in future industry consolidation."

BA and Iberia target annual synergies of about £350 million by the end of the fifth year as one company.

By 0835 GMT, BA shares were down 0.50 per cent at 237 pence and while Iberia shares lost 1.4 per cent to €2.5. The merger will create a company with a combined market capitalisation of $8 billion and will give the two loss-making airlines the scale they need to ride out the industry downturn and compete with larger rivals Lufthansa and Air France and budget carriers such as Ryanair.

According to details hammered out last November, BA shareholders stand to receive 55 per cent of the new company and Iberia shareholders 45 per cent. When the deal is finalised however, the two airlines' cross-shareholdings will be cancelled, giving BA 56 per cent and Iberia 44 per cent.

Each airline will appoint seven members to the board. BA chief executive officer Willie Walsh will be CEO of the new company.

The new firm, to be headquartered in London with annual revenues of around $20 billion, combines BA's strong position in Europe-to-North America with Iberia's Latin American business.

The agreement comes after recent strikes by BA cabin crew in a dispute over pay and jobs, which cast doubt over BA's future.

The merged entity, which will fly with 408 aircraft and 200 destinations by the end of 2010, could cut less profitable short-haul flights and compete better on the routes it retains.

Factbox: Beatles, Picasso helped write BA-Iberia history

Here is some history on the airlines, whose liveries became associated with some of the 20th century's best-known icons.

British Airways

• In 1919, British Airways' forerunner Aircraft Transport and Travel (AT&T), launched the world's first daily international scheduled air service between London and Paris.

• In 1924, Britain's four main airlines, which had by then evolved into Instone, Handley Page, The Daimler Airway and British Marine Air Navigation Company, merged to form Imperial Airways Limited.

• Imperial Airways and British Airways were nationalised in 1939 to form British Overseas Airways Corporation (BOAC).

• Post-war, BOAC continued to operate long-haul services, and shorter routes were flown by a new airline, British European Airways (BEA). The Beatles song "Back in the USSR" (released in 1968) begins with the line "Flew in from Miami Beach BOAC."

• The airlines came together as British Airways in 1974.

• BA began Concorde services in 1976, ushering in over two decades of supersonic travel for the rich and famous.

• Lord King, dubbed Margaret Thatcher's favourite businessman, was appointed Chairman in 1981 to restore the company to profitability and prepare it for privatisation.

• In 1993 BA apologised to Richard Branson over a dirty tricks campaign against his Virgin Atlantic Airways.

• In 2000 BA halted Concorde operations after the loss of an Air France jet near Paris. It flew again in July 2001 before economic fallout from September 11 attacks in the United States forced both BA and Air France to end services from Oct 2003.

• BA announced a plan in October 2009 to cut 1,700 staff in Britain and implement a two-year freeze in basic pay for cabin crew. A bitter clash with unions saw cabin crew stage 2 strikes.

Iberia

• Iberia was founded in 1927 by Horacio Echeberrieta, becoming Spain's first airline. It started as an air mail transport service between Madrid and Barcelona. King Alfonso XIII was a passenger on the inaugural flight.

• Other famous passengers over the decades included Eva Peron, Mikhail Gorbachev, Maria Callas and Salvador Dali.

• Among those to feature on the passenger lists of both Iberia and BA's forerunners were the Beatles and John Paul II.

• In its early years Iberia was forcibly merged with other airlines for a period of state ownership under Primo de Rivera, but became a domestic airline after the Civil War, only to be nationalised once more in 1944 under Franco.

• In 1946 it opened air links from Europe to South America.

• In 1981 Iberia flew Picasso's iconic war painting Guernica from New York to its final home in Spain.

Sources: Reuters/BA/Iberia/www.flights-from-heathrow.com.