Spanish low-cost airlines Vueling and Clickair have agreed to merge, Vueling said on Monday, in a move to create a carrier better equipped to tackle stiff competition and high fuel costs.
In a statement to the stock exchange regulator, Vueling said its board had approved a deal signed between the two airlines' main shareholders whereby Vueling would absorb Clickair through a capital increase.
The new company would trade under the name Vueling and continue to be headquartered in Barcelona, Vueling said.
Spanish flagship airline Iberia, which controls 80 percent of unlisted Clickair, would be a major shareholder in the new airline along with Nefinsa and Inversiones Hemisferio, which had agreed to remain in the company for two years, Vueling said.
Iberia would be the main industrial partner in the merged company under the agreement. Earlier, a source close to the situation said Iberia would own 45 percent of the new airline.
Vueling's biggest shareholder, Hemisferio, the investment vehicle of Spain's Lara family, will hold some 15 percent, the source said, while regional airline Air Nostrum -- now holding 20 percent of Clickair -- will control just over 10 percent.
He said further details of the merger deal would be released on Tuesday.
The deal -- which the pair have spent months negotiating -- will give much-needed pricing power in Spain's crowded airline market which was struggling to make profits even before this year's sharp rise in the oil price.
Iberia had previously hoped to further consolidate the sector by acquiring SAS-owned Spanair but pulled out of the contest last month.
Vueling and Clickair have been competing in an increasingly crowded market that also includes Iberia, Air Europa, Spanair, new high-speed trains between Madrid and Barcelona and more competition on European and now domestic routes from Ryanair and easyJet.
The boss of Clickair, Alex Cruz, is expected to be named chief executive of the combined company, the source said.
A combined company would have just short of 50 planes that, on a pro-forma basis, flew 10.7 million passengers last year.
Vueling's shares have crashed from a high of 47 euros last February to just 5.48 euros now as it issued two profit warnings despite fast increasing passenger traffic. Cut-throat competition had forced it to slash fares.
The stock rose 6.2 percent on Monday before trading in Vueling and Iberia's shares was suspended at 1232 GMT pending the stock exchange announcement.
The Vueling-Clickair merger now has several hurdles to clear. In a separate statement on Monday, Iberia said it would seek an exemption to stock exchange rules that force any company buying more than 30 percent of a firm to make an offer for its entire share capital.
"The feeling is that they will get the exemption because they are not going to exercise management of the company," the source said.
Spain's competition commission will then have to decide whether the new company poses a threat to domestic competition.