British Airways (BA) and Spain's Iberia are in talks to create the world's third-biggest airline, Reuters reports.
BA has announced it would spend the next few months discussing the terms of an all-share merger that would create an airline worth a combined US$8.4 billion.
BA has been a shareholder of Iberia since its privatisation nearly a decade ago, owning 13.15 percent of the Spanish carrier. Iberia has a 2.99 percent direct stake in BA.
The merger would significantly increase BA's presence in the expanding Latin American market.
Following news of the talks, BA stock rose six percent, Iberia share rose 21 percent.
If merged, the new firm would operate the airlines as two separate brands.
The two carriers are still in talks with US carrier American Airlines about a transatlantic agreement.
BA chief executive Willie Walsh said the opportunities provided by the open skies pact had freed up restrictions on carriers flying between the United States and European hubs, which had helped to prompt the deal.
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