(Bloomberg) -- Brazilian carrier Azul SA and the principal shareholder for rival Gol Linhas Aereas Inteligentes SA reached an agreement to work toward a merger, potentially creating one of the largest airlines in Latin America.

Executives from Azul and Abra Group — Gol’s largest shareholder — signed a non-binding memorandum of understanding on Wednesday, opening talks for a merger process. If the companies can obtain regulatory approval — including overcoming antitrust hurdles — Azul and Gol would join forces as a single entity with a stock listed in Brazil, according to a copy of the memo, which was published after the market closed.

Manuel Irarrazaval, Abra’s chief financial officer, said the tie-up will create a stronger company while keeping the Gol and Azul brands operating separately. 

“A combination of these two companies will allow us to have a stronger airline sector in Brazil with better reach connecting to more remote locations,” he said, “but also making sure we have strong enough companies that will survive in the region and particularly in Brazil.”

The agreement follows years of upheaval in the Latin American airline industry. The Covid-19 pandemic forced some of the biggest carriers to restructure under the Chapter 11 bankruptcy process. While demand for travel has rebounded, companies have struggled to regain financial footing.

Gol declared bankruptcy last year and Azul spent almost six months negotiating with creditors in a restructuring process to slash its debt. Irarrazaval said the merger could only go forward after Gol has exited the bankruptcy process, which it aims to do in the second quarter. 

“We will have a very large combined company with a reasonable amount of leverage,” he said. “We can’t restructure these two companies and maintain a high leverage level.”

Both companies are listed in Brazil but maintain American depositary receipts that trade in New York. Shares of Azul have dropped some 51% in the past six months while Gol has gained 31.5%, according to data compiled by Bloomberg.

Abra would be the largest shareholder in the merged company, Irarrazaval said. The UK-based company is also the holding company for Colombia’s Avianca Holdings and counts Spanish carrier Wamos Air as a member.

Under the agreement, Azul will appoint the chief executive officer of the combined holding company while Gol will appoint the chairman. Several details, including the name of the new company, will be hashed out in the negotiating process. 

Irarrazaval declined to speculate on a time line for when the deal may be finalized as it will first need approval from Cade, Brazil’s antitrust body. A combined company would serve more than 200 destinations in the country and internationally. It would also be the largest carrier in Brazil by market share.

“The two are complementary,” he said. “Gol has very good coverage of the main cities while Azul has better reach into smaller cities around the country.” 

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