British Airways and its Oneworld partner Iberia have reached an agreement to merge the two carriers.
The memorandum of understanding, which follows months of discussions, will create a carrier with 419 aircraft and 205 destinations.
BA says that it expects the merger to be completed in late 2010.
It says the tie-up is based on a "principle of parity at board and management level".
Between them the two airlines carried 62 million passengers in 2008 with combined revenues of €15 billion ($22 billion). The carriers expect the deal to generate synergies of €400 million per year.