The merger will create one of the biggest airlines in the country with a market share of close to a third.
The residual entity of Kingfisher Airlines will retain the ground handling and training business, it said in a statement.
However, the combine is ridden with combined losses of more than 20 billion rupees and has said it may place shares worth up to $300 million with private equity firms over the next two quarters.
Deccan reported a net loss of 1.91 billion rupees on revenues of 5.77 billion rupees in the quarter to December, hit by high fuel costs and cuthroat competition that kept fares low.
Spirits maker UB group holds about 49 percent in Deccan and the combined entity will be called Kingfisher Airlines.
Neither the valuation of Kingfisher Airlines nor the stake that UB Group will hold in Deccan after the share swap was immediately known.
It will operate the two brands -- low cost airline Deccan and full service carrier Kingfisher -- and have a combined fleet size of close 80 planes.
Besides the two brands have ordered more than 170 Airbus planes including wide-body aircraft for long-haul international routes.FLY OVERSEAS
The UB group bought a 26 percent stake in Deccan last May with an eye on overseas routes as Deccan would meet Indian regulations of five -years operation to fly abroad in August.
Deccan is likely to fly short-haul overseas destinations and Kingfisher the trans continental routes.
Kingfisher is already finalising plans to fly non-stop to U.S. to take on rivals such as state-run Air India and Jet Airways, which flies via Europe.
India's fast expanding airlines posted a combined loss of about half a billion dollars in the year to March 2007 and are resorting to stake sales and mergers to stay afloat.
SpiceJet has had several rounds of private equity funding, unlisted GoAir is likely to sell some stake. State-run Indian Airlines and Air India were merged and Jet bought unlisted Sahara Airlines.
