Spanish carriers Vueling and Clickair have finalised talks to merge following intense competition in the market and spiralling fuel costs.

Vueling will absorb Clickair, which is 80% owned by flag carrier Iberia, through a capital increase and remain based in Barcelona.

With a crowded Spanish airline market, improved high speed rail links between major domestic hubs and rising oil prices, the move will stabilise an erratic period for the carriers. The new airline will have 50 aircraft and 10.7 million passengers and as the third largest airline in Spain will be better equipped to take on the likes of Easyjet and Ryanair who have been building up significant business to and from Spain.

The merger, which is still subject to competition commission approval, will see Iberia emerge as a major shareholder. Other sharehiolders include Nefinsa and Inversiones Hemisferio. It is thought  Clickair chief executive officer Alex Cruz will head up the new carrier.

By Dinah Hatch