Rod Eddington, British Airways chief executive, was due to fly into Heathrow from Australia this morning poised to announce shortly that the airline is to enter negotiations with KLM, the Dutch flag carrier, on an alliance or merger.

The talks could create the world's third largest airline (by passenger kilometres flown) behind United Airlines and American Airlines. With half an eye still on the US and the North Atlantic, where BA makes most of its money, Mr Eddington has decided that he must look to consolidate in Europe where BA loses all its money.

There are clear advantages for BA in pressing ahead with a merger with KLM, in which it would be the senior partner, despite the hurdles a deal still faces. It would also strengthen the hand of Aer Lingus as an attractive flotation proposition because it has a strategic alliance with BA.