British Airways and Iberia have sealed their long-awaited merger, which will see the two flag carriers integrate operations by the end of the year. They are expected to save up to £350 million annually from the £5bn deal, and will trade as a holding company called International Airlines Group.

The new company will be called International Airlines Group, but the BA and Iberia brands will continue to operate as normal.

BA chief executive Willie Walsh, who is also the chief executive-designate of the new airline, said the merger would be good for customers.

“The merged company will provide customers with a larger combined network. It will also have greater potential for further growth by optimising the dual hubs of London and Madrid and providing continued investment in new products and services,” he said.

Both BA and Iberia are expected to report heavy losses this year, with BA predicted to announce its heaviest annual loss since privatisation in 1987.

The merger will also allow the company to compete more effectively with other European giants including Air France-KLM and Germany’s Lufthansa.

Iberia’s chairman and chief executive Antonio Vazquez said the merger was important for the future of the airline industry.

“This is an important step in the process towards creating one of the world’s leading global airlines that will be better equipped to compete with other major airlines and participate in future industry consolidation,” he said.

The airlines are also regarded as a good match, having few overlapping routes.

They expect the deal to formally complete by December though issues regarding BA’s pension liability need to be resolved. Its two final-salary pension schemes have a combined deficit of £3.7bn, which it needs to cut.

Under today’s agreement, Iberia still has the option to walk away from the deal if BA’s plan for pension recovery is not considered satisfactory.

Plans for a tie-up between the two carriers date back long before the current troubles in the airline industry.

The two airlines first began working together in 1999 following the privatisation of the Spanish flag-carrier.