Swiss has struggled to cut costs

The pair have drawn up a business plan for the integration of the companies, which is subject to approval from Lufthansa's supervisory board.

The Swiss firm's main shareholders also need to give their approval.

Lufthansa said if the approvals are obtained it will submit an offer to shareholders "based on the average share price of recent weeks".

Swissair successor

Rumours have circulated for almost two years that Swiss may merge with Germany's Lufthansa.

Swiss was created from the shell of collapsed predecessor Swissair in 2002, with the help of some 2.7bn Swiss francs ($3.6bn; �1.9bn) in fresh financing including some money from the state.

The company made a pre-tax profit of 20m euros in the final quarter of 2004, although the full year showed large losses.

Swiss almost joined the Star Alliance group of airlines, of which Lufthansa is a member, in 2003 before backing away.

It later repeated the performance with the Oneworld alliance which includes British Airways.