Icelandair Group has agreed to acquire Iceland-based rival Wow Air.

The flag-carrier will acquire the entire share capital of the budget airline as consolidation continues apace in the European aviation market.

Icelandair said the share purchase agreement is subject to shareholder approval.

Following the completion of the deal, Icelandair Group Wow Air shareholders will receive the equivalent of 5.4 per cent of the group’s shares.

The low figure is an illustration of the weak financial position of Wow Air and follows the collapse of Primera Air, which was also based in Iceland, last month.

Both Icelandair and Wow Air will continue to operate under separate brands.

The carriers, both based at Keflavik Airport near Reykjavik, have around a 3.8 per cent combined share of the transatlantic market.

“The acquisition creates opportunity for both companies to become even better prepared to provide international carriers with strong competition in the international airline market,” said Icelandair Group in a statement.

With rising oil prices and weak demand, both airlines have been seen as vulnerable.

Wow Air chief executive Skuli Mogensen, who founded the budget airline, added the carrier will have an “opportunity to grow and prosper” with Icelandair Group as its “strong backer”.

Icelandair flies from Gatwick, Heathrow, Manchester and Glasgow to Reykjavik.

Wow Air flies from Gatwick, Stansted and Edinburgh.