British Airways today confirmed it is exploring a potential merger with Qantas Airways via a dual-listed company structure and said discussions with Iberia – announced in July – are continuing.

BA shares took flight after the announcement, up 16.8p, or 12.3%, to 156.9p as many agree the shares have been looking good value for a while and this deal shows BA is sticking to its aim to be a key player in consolidation.

The news comes amid speculation that BA's pension deficit is likely to make pricing a deal with Iberia difficult.

Commentators say a deal between two of the major players makes strategic sense given rising concerns that the downturn in the global economy is likely to weigh on demand for flights, especially long-haul journeys.

Qantas Airways said last week it will shelve its domestic expansion plans, ground more aircraft and vary flight patterns of the existing as it tried to cut costs after warning its annual pretax profit will slide by about two-thirds to $500 million.

'The recession is dampening demand after a period where cash reserves were put under strain from high fuel prices. The benefit of lower prices is not being felt yet because of hedging and currency effects,' said Douglas McNeill, analyst at Blue Oar Securities. 

He said consolidation is one way of addressing these issues. However, he said any deal - with Qantas or Iberia or with both airlines - is unlikely to reduce costs in the short term.

BA already shares routes and costs with Qantas and Iberia, but McNeill said further down the line cost cutting would be made as a combined group looked to buy new planes or update IT systems.