Iberia is Europe's leading carrier to Latin America, but it has been battling against increased competition from low-cost airlines and high-speed trains, labour disputes and Spain's deep economic crisis. It is bleeding cash as revenues fail to cover its high operating costs.

"Iberia is in a fight for survival and we will transform it to reduce its cost base so it can grow profitably in the future," IAG Chief Executive Willie Walsh said in a statement on Friday.

IAG's plans provoked an angry response in Spain, where pilots' union SEPLA and the two biggest general unions, the UGT and CCOO, threatened strike action.

IAG, which was formed by the 2011 merger of BA and Iberia, said it hopes the restructuring plan will improve profits by at least 600 million euros in the next three years.

The group posted a 96 percent fall in nine-month operating profit on Friday, to 17 million euros, pulled lower by high fuel costs and a 262 m i llion euro operating loss at Iberia.

British Airways, meanwhile, posted a nine-month operating profit of 286 million euros.

DOWNSIZING FLEET

In addition to the Iberia job cuts, IAG said that it would cut capacity in the airline's network by 15 percent in 2013, focusing on profitable routes and downsizing its fleet by 25 aircraft.

"Although radical changes are proposed at Iberia, this reflects the scale and extent of the problems there," Espirito Santo analyst Gerald Khoo said.

"The problems are systemic and pre-date the current economic crisis, and we continue to believe the market has underestimated the scale and nature of the challenge faced by Iberia."

IAG said it expects to make an operating loss of about 120 million euros in 2012, after trading losses related to its bmi subsidiary, which it bought this year, and exceptional items.

The group's shares, which have shed 40 percent of their value since its formation in January 2011, were trading 0.9 percent higher at 169.5 pence in London by 1342 GMT.

IAG held simultaneous meetings on Friday to present its new viability plan: one with investors in London and another with unions in Madrid, where Friday was a bank holiday.

Unions attacked the plan to cut Iberia's 21,000-strong workforce by 4,500 and discontinue parts of its maintenance and handling business.

"This plan completely depletes Iberia. If this is a consolidated group, why are all the sacrifices being made in Spain?," SEPLA representative Justo Peral said.

STRIKE THREAT

SEPLA, along with the UGT and CCOO unions, issued a statement threatening to strike, though Peral said that any action would be weighed carefully because of the ongoing arbitration process between IAG and the pilots' union.

IAG has been in conflict with SEPLA over pay and conditions for the past year. Tensions heightened after Iberia created low-cost carrier Iberia Express in March to compete with budget rivals such as Ryanair (RYA.I) and easyJet (EZJ.L) on shorter routes.

The Spanish government appointed an arbitrator but the situation has yet to be resolved.

This has resulted in uncertainty over IAG's ability to continue to grow Iberia Express and may have prompted IAG's decision on Thursday to launch a bid to buy the rest of low-cost airline Vueling (VULG.MC).

IAG also plans to reduce salaries for Iberia's remaining 15,000 workers by between 25 and 35 percent, unions said.

Unemployment in Spain has reached a record high of 25 percent as large companies such as Telefonica make drastic job cuts as they grapple with the country's prolonged recession.

IAG has set a January 31 deadline to reach an agreement with the unions over the Iberia job cuts, aiming to finish the process by the summer 2013 tourist season.

"We are trying to give Iberia a future. We have the cash to make these changes now and cannot delay this any further," Iberia Chief Executive Rafael Sanchez-Lozano told investors. (Additional reporting by Clare Kane and Tomas Gonzalez; Editing by David Goodman)

• A Permanent Economic Emergency