Iberia has approved plans put forward by British Airways designed to alleviate its £3.7 billion pension deficit, bringing a proposed merger between the two one step closer to fruition.

While a cancellation of the deal was thought unlikely, a clause in the contract between the two allowed the Spanish flag-carrier to back out if the board remained unhappy over the size of the deficit.

In June this year British Airways outlined a recovery plan, with the airline to set aside at least £330m a year until 2026 in order to address any shortfall.

Announcing the decision Iberia said it had chosen “not to exercise its right to cancel the merger contract with British Airways in relation to the agreement reached between the latter and the trustees of its pension funds”.

“This decision represents another step forward in the merger process, which will be completed when the shareholders general meeting takes place, expected in November,” the airline added in a statement.

The executive European Commission gave the green light to the deal on July 14th.

Iberia chairman Antonio Vázquez approved the deal

International Airlines Group

While analysts suggest the pension deficit was the last major stumbling block for the proposed merger, it may just be the start for the new airline.

The merged businesses will form under an umbrella organisation called International Airlines Group (IAG), with BA chief executive Willie Walsh suggesting he had drawn up a list of 12 takeover targets.

Mr Walsh will become chief executive of IAG when the deal – which was announced in April this year - closes at the end of the year.

IAG will create Europe’s second-biggest airline by market value after Lufthansa, with BA shareholders holding 56 per cent of the combined company while Iberia investors will take a 44 per cent stake.

It is hoped the deal will allow IAG to exploit Iberia’s strong position in Latin America and BA’s presence in Africa, Asia and North America.