Two of South America's biggest airlines, Brazil's TAM Linhas Aereas and Chile's LAN have announced merger plans that aims to create the largest carrier in Latin America, Latam Airlines.

With this merger, Latam will have combined revenues of over $8 billion, and fly to 115 destinations in 23 countries and also compete for the region's booming demand for passengers and cargo.

The news sent shares in TAM soaring 30 per cent on the Sao Paulo stock market. LAN shares leapt nearly 8 per cent in Santiago.

The Latam Airlines Group would be created via an all-stock transaction, the companies said in a statement.

If the transaction is approved by shareholders and regulators, the combined airline would rank as the world's 11th biggest in terms of passenger traffic serving 46 million passengers annually.

LAN's chief executive Enrique Cueto will be the CEO of Latam Airlines, while TAM's deputy chairman Mauricio Rolim will be the chairman of the combined company.

As part of the agreement, TAM shareholders will receive 0.9 shares of LAN for every TAM share in the form of Brazilian depositary receipts.

TAM will then delist its shares in Sao Paulo and in New York. Also both the airlines will maintain their logos on aircraft in each country, the companies said.

Latam will retain its listings on the Santiago stock exchange and the New York Stock Exchange and would seek to list on Sao Paulo's Bovespa.

The new company will be 'a global player for sure,' said Caio Pereira Dias, an analyst with Santander Investimento in Sao Paulo. He called the proposed transaction a 'tremendous deal' for LAN, and 'extremely good' for TAM.

The proposal comes at a time when millions of people in Brazil, Chile and elsewhere around the region are joining the middle class and starting to fly thanks to robust economic growth that has outperformed most of the developed world in recent years.