British Airways owner IAG agrees £864m deal to buy Air Europa

The owner of British Airways has agreed a €1bn (£864m) takeover of Spain's third-largest airline, Air Europa.

International Airlines Group (IAG) already owns Spanish carrier Iberia and low-cost airline Vueling.

The Air Europa purchase marks the latest consolidation in an industry suffering the effects of intense fare competition and surging fuel bills.

The company said the all-cash deal aimed to close by the middle of next year, subject to regulatory clearances.

IAG said the move would reestablish its position as a leader in European air travel to the Latin America and Caribbean markets and bolster Madrid's hub airport status as it battles Amsterdam, London Heathrow and Paris Charles De Gaulle.

Air Europa flies to 69 destinations.

Willie Walsh, IAG chief executive, said: "Acquiring Air Europa would add a new competitive, cost effective airline to IAG, consolidating Madrid as a leading European hub and resulting in IAG achieving South Atlantic leadership, therefore generating additional financial value for our shareholders.

"IAG has a strong track record of successful acquisitions, most recently with the acquisition of Aer Lingus in 2015 and we are convinced Air Europa presents a strong strategic fit for the group."

IAG shares were trading more than 1.5% higher in response to the news.

The company told shareholders the acquisition would be expected to generate cost synergies across selling, general and administrative expenses, procurement, handling and distribution costs.

Just days ago, IAG blamed strike action at its British Airways arm for a hit to its latest earnings.

European airlines are looking to the west to achieve growth as fares are held back in the tougher market.

Low-cost operator Norwegian Air signed a partnership last month with JetBlue Airways to enable European passengers to book straight through to around 100 US cities.