Pilots were strictly sticking to their scheduled work hours because Iberia had not employed sufficient staff over the Christmas period this had led to delays and cancellations, a source at pilots union SEPLA told Reuters.

Thirteen of its 900 or so flights scheduled for Wednesday were cancelled, a spokesman for the airline told Reuters, taking to 116 the total number of flights cancelled since last Friday when negotiations over pilots’ terms and conditions broke down.

An Iberia spokeswoman said the pilots’ case did not stand up because their workload had in fact decreased in recent months.

“What has changed in the last three months to now? There has been practically no change, there are actually less flights.”

Union representatives met Iberia management again on Wednesday, but the result of the meeting was not known.

The flexible ticket plan does not cover Iberia flights operated by other companies as they are unaffected by the dispute.

Passengers have until Jan. 11 to change the ticket or ask for a refund. New tickets are valid until June 30. (Reporting by Carlos Ruano and Ben Harding; Editing by Richard Hubbard)

Both Qantas (other-otc: QUBSF – news – people ) and Iberia (other-otc: IBRLF – news – people ) seem to have adopted a “my-deal-or-your-deal” stance since Tuesday, when British Airways (other-otc: BAIRY – news – people ) responded to press speculation by confirming it is in talks with Qantas. On Monday, Qantas Chief Executive Alan Joyce said that “only one” of the proposed mergers could take place, and noted that there were still “significant hurdles” to overcome for a successful Qantas-BA tie-up.

British Airways obviously does not agree, though a spokesman for the airline refused to offer fresh comment. The British carrier is still officially pursuing both potential mergers, and is reportedly even trying to woo Iberia shareholder Caja Madrid into backing a Spanish-British-Australian entity. Iberia Chief Executive Fernando Conte was kept in the dark about BA’s plans with Qantas, which has added to tensions around the negotiating table. (See “Tension Brews Between BA, Iberia.”)

Although BA seems to be giving Qantas priority at the moment, Iberia has a 9.9% stake in the British Airline that may prove vital in approving any Qantas deal.

Shares of British Airways soared 10.1%, or 15.60 pence (23 cents), to 170.0 pence ($2.52), during afternoon trading in London. Leading shares in Europe were up some 7.0%, but the prospect of a BA-led global airline has buoyed investor sentiment in the stock: Qantas, Iberia and American Airlines all represent three different pockets of the world, and BA says there is “no overlap” between them.

The urgency of the economic environment may help BA’s chances, however. Despite the reluctance of Qantas and Iberia to accept a three-way merger, or to bear the brunt of BA’s pension liabilities, they have little room for negotiation. Fixed costs are high, travel demand is crippled and lucrative business profits are hard to find.

“Iberia needs a merger, and Qantas does, too,” said Stephen Furlong, an analyst with Davy Stockbrokers. “It’s hard to say who’s got the upper hand at this point.” He said Qantas was facing fresh competition from upstart Middle Eastern airlines like Emirates, which is reportedly seeking approval from the Australian government to fly between Australia and the U.S.

Federal Transport Minister Anthony Albanese said yesterday that Qantas had to remain Australian-owned for national security reasons.

He cited bilateral aviation agreements — for example, the arrangement with Japan restricting landing rights to a “51 per cent Australian-based airline” — as well as the importance of a national carrier during emergencies, such as last week’s shutdown of Bangkok’s international airport.

“There are national security issues, particularly for an island continent located on the globe where Australia is, for having a national airline,” Mr Albanese told the ABC Television’s Inside Business program.

The minister noted, as well, that he had been able to pick up the telephone last week and ask Qantas chief executive Alan Joyce for extra flights out of Thailand.

It is understood, however, that any Qantas-BA deal would involve a dual-listed company structure that would comply with the act, which requires Qantas to be based here and have two-thirds of its board seats occupied by Australians, including the chairman’s position.

Qantas has yet to start lobbying the Government about the transaction, preferring to wait until the proposed merger terms are finalised, which is unlikely before Christmas.

Share market trading over the past 12 months suggests Qantas would be the senior merger partner by a ratio of 55:45.

The airline’s recent 2009 profit downgrade to about $500 million has, however, narrowed the gap to 52:48.

Mr Joyce and his BA counterpart Willie Walsh met in Hong Kong midway through last week.

Instead of making headway with the merger, they spent most of their time responding to an early leak of their merger plans to the media.

Both parties have done due diligence but the process has not been completed, although $US500 million ($771 million) in synergy benefits have been identified. One source said the major unresolved issues were the airlines’ relative values, a pound stg. 2 billion ($4.5 billion) deficit in the pound stg. 16 billion BA pension scheme and BA’s outlook given its heavy exposure to a downturn in trans-Atlantic flying because of the global financial crisis.

On the upside for BA, the performance of its new Terminal 5 at London’s Heathrow Airport had been “encouraging”, the source said.

The structure of the deal is understood to be fairly well advanced, and will approximate that of BHP Billiton-DLC.

In the current dislocation of debt markets, both parties are keen to avoid any trigger for a refinancing.

A potential spanner in the works, though, is the fate of BA’s scrip merger discussions with Iberia. Last July, the airlines said their boards “unanimously” supported the talks.

In an embarrassing revelation, Iberia chief executive Fernando Conte said last week he had not known that BA had been conducting parallel negotiations with Qantas.

Qantas sources said the involvement of Iberia did not necessarily kill a Qantas-BA deal.

The Spanish airline, though, could only be introduced to a three-way merger after a Qantas-BA deal took off first.

The reason was that a BA-Iberia deal would be a full merger, including board seats for Iberia directors.

A merger of that entity with Qantas would make it hard to comply with the Qantas Sale Act and its board requirements.

plans to cut 1,000 jobs as part of a three-year plan from
January, a Spanish
newspaper reported on Wednesday.

The cuts, which would be on a voluntary basis, would affect more than 10 per cent of its handling unit of around 9,000 people under a 2009-2011 plan the airline plans to announce in the coming days, the newspaper Cinco Dias said.

The airline predicted seat capacity would drop by 1.0 to 2.0 per cent during the period, including a fall of 7.0 per cent on domestic routes and 5.0 per cent in European routes. Capacity on intercontinental routes, mostly to the Americas, would rise 1.0 per cent.

Iberia, which has a total of workforce of about 17,000 employees, said last month that its third-quarter earnings plunged nearly 80 per cent due soaring fuel prices and weak demand.

British Airways said on Tuesday that its tie-up talks with Iberia were continuing, as it explored “a potential merger” with Australian rival Qantas Airways as part of a broad tie-up in the struggling aviation sector.

On the Madrid stock market, Iberia shares were down 5.29 per cent at 1.97 euros at around 0950 GMT in a market that was off 1.65 per cent.