British Airways (BA) has inched closer to a amalgamation with Spanish national carrier Iberia after entering into an agreement with its pension trustees to neutralize its pensions deficit of pound 3.7 billion. The shortfall was said to be the last stumbling block holding up the merger discussions.

BA's two final-salary pension plans have a joint deficit of &pound3.7bn, which it needs to slash, In May 2010, the airline agreed plans with unions to raise pension contributions to end the deficit. Under the contract, the BA has reached with the pension trustees, BA would avoid closing the schemes and maintain its annual contributions at the current level of &pound330 million, plus agreed annual increases in line with inflation expectations averaging three per cent.

BA will make extra deficit contributions if its year-end cash balance surpasses &pound1.8 billion. The two plans will also be offered with &pound250 million of added security over the company's assets that would be payable in the event of British Airways' bankruptcy. It will now submit the plan to the UK Pensions regulator. Keith Williams, the BA chief financial officer, said, "The Pensions Regulator's initial response to the overall package has been positive and we look forward to receiving their confirmation that they have no objections once they have time to analyse the plan fully."

But, if Iberia is still negative about the pension recovery plan, it has the right to pull out of its planned merger with BA. The pensions shortfall is just one item on BA's list of problems. The company has made record losses for two years in a row, most recently reporting a &pound531 million loss in the year to the end of March. The pensions deal came a day after the Unite trade union kicked off plans for another strike ballot of cabin crew, which could see a third round of industrial action in August. The BA and Iberia entered into the deal to merge their operations in April 2010.

The new company, which will have its headquarters in London, will be called International Airlines Group, but the BA and Iberia brands will continue to operate as normal. In total, the new group will operate 419 aircraft, flying to more than 200 destinations, and carry a total of 62 million passengers a year. (With Inputs from Agencies)