British Airways and Spanish airline Iberia say they have reached a preliminary deal for a merger expected to be completed in late 2010.
The merger, which must be approved by the European Commission, would create one of the world's biggest airlines, the BBC reports.
The airlines hope the deal will help them face one of the deepest recessions the industry has faced.
Under its terms, Iberia would take a 45% stake and BA, which last week reported a six-month pre-tax loss of £292 million, a 55% stake in the company.
Iberia says it can pull out if BA fails to resolve its pension deficit problem.
The airlines had been discussing the deal at separate board meetings.
The merger would create an airline with 419 aircraft flying to 205 separate destinations, and would save the two partners 400m euros (£358 million) in costs a year, they said.
Iberia's chairman Antonio Vazquez would take the same role at the new company, while Mr Walsh would become its chief executive.