UPDATE 4-Walsh hands over the controls after building British Airways parent IAG

* To be replaced by Iberia CEO Luis Gallego

* To step down in March, retire in June

* Has been CEO since IAG's formation in 2011

* Gallego credited with turning round Iberia

* IAG shares up 1.3%
(Adds comment, updates share price)

By Sarah Young

LONDON, Jan 9 (Reuters) - Willie Walsh, who created British
Airways' parent firm IAG by dragging old-fashioned flag
carriers into the modern-age of budget flying, is to retire and
will be replaced by Iberia boss Luis Gallego.

Gallego, credited with turning round IAG-owned Iberia since
taking over as CEO in 2014, will succeed Walsh on March 26, IAG
said on Thursday.

The appointment of Gallego meant there would be little
change of direction at IAG, analysts said. But he will be under
scrutiny replacing Irishman Walsh, one of the most high-profile
figures in British industry over the last 20 years, a dealmaker
who made his name standing up to unions and cutting costs.

He was BA chief executive before overseeing its merger with
Iberia in 2011, a deal that created an airline group which has
since outperformed rivals Air France and Lufthansa
, and sought to compete with budget disrupters Ryanair
and easyJet.

IAG chairman Antonio Vazquez said that Gallego, 51, was the
right candidate to lead IAG in the next stage of its
development, as did Walsh, 58, who had said in November that he
intended to retire as chief executive in the next two years.

"Luis has been a core member of the team and has shown true
leadership over the years and I have no doubt he will be a great
CEO of IAG," Walsh said in a statement.

Market reaction to the news was positive, with shares in IAG
trading up 1.3% at 626.4 pence at 1257 GMT.

Walsh, a former pilot who has spent his career in the
aviation industry, had "fantastic success at building IAG but
obviously promoting internally is seen as a positive. The market
regards his successor well," Goodbody analyst Mark Simpson said.

As CEO of Iberia, Gallego cut the airline's losses by half
in his first year in charge, and in his second year made Iberia
profitable after six years of operating losses.

"Luis has successfully turned Iberia around in his years in
charge and has much experience of the Willie Walsh/IAG
approach," said Jonathan Wober, analyst at CAPA-Centre for
Aviation.

Walsh's departure leaves Spanish executives dominant at the
top of the Anglo-Spanish group, as British Airways is run by
Spaniard Alex Cruz.

FACTBOX-A look at British Airways-owner IAG's new
first-in-command

SLASHER WALSH

Walsh took on the unions and slashed costs first at
Ireland's Aer Lingus, where he became CEO in 2001, and then at
British Airways, earning him the nickname Slasher Walsh in an
industry he once characterised as a "fight for survival".

It was at Aer Lingus where he formed the template for his
strategy, benefiting from a front-row seat to the rapid
expansion of budget rival Ryanair.

Walsh was much quicker than Air France-KLM and Lufthansa to
embrace budget flying. IAG bought short-haul carrier Vueling in
2015 and set up long-haul low-cost carrier Level in 2017.

Those strategies have helped fuel IAG's success. Its shares
are up 140% since 2011, compared to Lufthansa's flat performance
in the period, and a 29% fall in Air France's stock.

Walsh also bought Aer Lingus in 2015, and IAG is currently
in the process of a 1 billion euro ($1.1 billion) deal to buy
Spain's Air Europa.

IAG said that Walsh would step down from his role and the
board of IAG on March 26 before retiring on June 30. That will
come a year after IAG appointed a new CFO, Steve Gunning.

BREAKINGVIEWS-IAG dealmaking will outlast Willie Walsh
($1 = 0.9001 euros)
(Reporting by Sarah Young; additional reporting by Clara-Laeila
Laudette in Madrid and Noor Zainab Hussain in Bengaluru editing
by Kate Holton/Jason Neely/Susan Fenton)