British Airways’ parent company, IAG, is spending €1bn (£864bn) to buy up another Spanish airline: Air Europa.

The carrier that IAG has targeted serves 69 destinations, and is strongest between Madrid and Latin America.

In 2018, Air Europa made an operating profit of €100m on revenue of €2.1bn from 11.8 million passengers. It serves many “niche” destinations in South America, including Asunción in Paraguay, Medellín in Colombia and Iguazú on the border of Argentina and Brazil.

The deal will boost connectivity for IAG across the Atlantic. It will also sharply reduce competition, so the buyer is likely to have to surrender slots at Madrid before the deal is allowed to go through.

IAG already owns the Spanish “flag carrier”, Iberia, as well as the Barcelona-based budget airline Vueling.

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Competitors such as Air France and Lufthansa may be able to acquire extra slots in the Spanish capital.

One aim of the deal is to make Madrid “a true rival to Europe’s four largest hubs: Amsterdam, Frankfurt, London Heathrow and Paris Charles de Gaulle”.

Luis Gallego, chief executive of Iberia, will take over the running of Air Europa “as a standalone profit centre within Iberia”.

He said: “This is of strategic importance for the Madrid hub, which in recent years has lagged behind other European hubs. Following this agreement, Madrid will be able to compete with other European hubs on equal terms.”

At present Heathrow handles around 80 million passengers a year, with its three main Continental rivals around 70 million each. Madrid handled 58 million passengers in 2018.

Willie Walsh, chief executive of IAG, 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.

“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.”

The Irish carrier – for which Mr Walsh was once a pilot, and later chief executive – is forging ahead under its own identity. But IAG’s ​pan-European budget carrier, Level, and possibly Vueling, may be assimilated under the Air Europa brand.

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The deal is a blow to the Skyteam alliance, as Air Europa’s network will move to the rival Oneworld alliance.

The prospect of a more powerful player across the Atlantic will potentially put more pressure on Norwegian, which rejected a £1bn bid from IAG and is now heavily indebted. Norwegian has recently expanded into Latin America.

The Air Europa acquisition is all cash and will be funded by external debt. Completion is expected to take place in the latter half of 2020.