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British Airways and Spanish airline Iberia are in merger talks with both companies hoping consolidation will help them ride out the current crisis in the industry.

Both boards unanimously support the proposed all-share merger, which would see both firms bought at the same time by a holding company.

The new company would be listed on both the FTSE 100 and the Madrid stock exchange, with both brands retained.

The airlines have worked closely together for years within the oneworld alliance and already own shares in each other.

British Airways' chief executive, Willie Walsh, said: "The aviation landscape is changing and airline consolidation is long overdue.

"The combined balance sheet, anticipated synergies and network fit between the airlines make a merger an attractive proposition, particularly in the current economic environment."

Budget airline Ryanair yesterday predicted the current tough conditions in the sector, caused by lower consumer confidence and high fuel prices, would lead to a wave of consolidation this year.

Those who cannot adjust will go bust, the carrier warned.

British Airways acquired a nine per cent shareholding in Iberia in 1999 and recently increased its shareholding to 13.15 per cent, while Iberia has recently acquired a 2.99 per cent direct shareholding in British Airways.

Iberia has also increased its financial exposure to a further 6.99 per cent through contracts for difference - an agreement to exchange the difference in a share's value between the time a contract is opened and the time it is closed - linked to British Airways' share price.

The airlines' shareholdings reinforce the mutual interest of both companies in each other, the companies said in a statement.

The deal will require approval from the EU, but both companies said they are confident of this.