Qantas Airways will acquire 22.5 percent of Air New Zealand In a deal that caps nearly a year of talks between the two airlines.
The deal announced Monday calls for Qantas to invest as $272 million into the New Zealand airline, which is 82 percent owned by the government after a bailout last year.
The Qantas purchase will allow the airlines to rationalize their operations and international services to form a strong Australasian airline group, Air New Zealand said.
"This is a major decision that will shape the future of Air New Zealand ... and an initiative which will bring tremendous economic gain to New Zealand," Air New Zealand chairman John Palmer said.
The combined operations would be controlled by the New Zealand carrier. Qantas will assume two seats on Air New Zealand's board.
The two airlines dominate the New Zealand and Australian domestic markets and air travel between the two nations. They also carry nearly 90 percent of the traffic to and from Los Angeles.
The airlines have been talking about a closer relationship all year after the New Zealand government bailed out the national carrier with a $495 million injection last December.
The deal faces approval by New Zealand's Commerce Commission and the Australian Competition and Consumer Commission. The airlines would have to prove to the two regulators that some level of competition would remain to keep fares down.
Earlier Monday, the New Zealand Stock Exchange suspended trading in Air New Zealand shares amid speculation of the announcement.