Iberia’s cabin crew and pilots have emerged as potentially prime cost-cutting targets for Willie Walsh, the new chief of a merged British Airways-Iberia.

According to union sources in Madrid, cabin crew at the Spanish flag carrier earn an average of €50,000 (£44,600) compared with BA’s average of £29,900 and Virgin Atlantic’s average of £14,000.

Iberia’s pilots are also well remunerated with average pay of about €190,000 compared with BA’s average of £107,600. Spanish pilots also receive a 7.5 per cent bonus every three years.

Cost cutting is one of the main reasons behind the £4.5 billion merger. The deal, announced late on Thursday, will create Europe’s largest airline by passenger numbers, carrying 62 million people a year.

Mr Walsh said yesterday that jobs could be lost as a result of the merger and that he hoped to save €400 million a year within five years of the deal completing. Most of the savings will come from removing duplicated functions such as head offices, maintenance and salesforces.

Mr Walsh, who is chief executive of BA, may see high salaries at Iberia as a further cost-saving opportunity. He has stripped £400 million of costs from BA in the past six months. He extracted a pay cut from BA’s pilots and is imposing working practice changes on the airline’s 14,000 cabin crew from Monday. More than 3,000 crew will move to part-time work and a further 1,000 will take voluntary redundancy.

In addition, Mr Walsh is proposing a two-year pay freeze for crew, reduced holidays and cuts to the allowances for working on long-haul flights. New employees will start on different contracts and be paid less.

Unite, the union, will begin a ballot of its members on Monday in response to these measures. If they vote in favour of industrial action, BA could face strikes from December 21.

Unite said yesterday that it would not support the merger unless it was given assurances that there would be no further job losses.

BA lost £292 million in the six months to the end of September and Iberia lost £295 million in the first nine months. The airlines are on track to lose a combined £600 million this year.

Iberia said it would be addressing its losses by mimicking some of BA’s cost-reduction strategy. It has proposed a hiring freeze until 2012, a two-year salary freeze and early retirement for cabin crew over 55.

Spanish unions have threatened strike action over the proposals and are instead demanding a 4 per cent pay rise.

Under the terms of the proposal, BA and Iberia will continue to operate as separate airlines under a new umbrella company. TopCo will be incorporated in Spain and its chairman will be Antonio Vázquez, the chief executive and chairman of Iberia.

Mr Walsh will become chief executive of TopCo, which will have its headquarters and listing in London. BA hopes to sign a formal merger agreement in the first quarter of next year and complete the deal by the end of 2010.

However, the merger could still fall apart as Iberia has a get-out clause if BA cannot address its pension fund deficit, which is estimated to have grown to about £3 billion.

If BA fails to come to an agreement with the 12 trustees of its pension fund on how to deal with the deficit, Iberia could pull the plug or renegotiate the deal.

John Ralfe, an independent pension consultant, said the BA pension fund trustees had the power to derail the deal. “This is not a done deal. They have their fingers on the nuclear button.” However, he said that the trustees had been co-operative with the company, last summer sacrificing £330 million of guarantees for the benefit of BA. “They don’t have a terribly good record of taking a tough line,” he said.

Mr Walsh said: “The pension fund deficit is an issue for the BA operating company to resolve and we are not unduly concerned by it.”

BA shareholders will own 55 per cent of the new company and this will rise to 56 per cent when the cross-shareholdings are cancelled out. When BA and Iberia first began talking 16 months ago, the split was 70:30 to BA shareholders based on the relative market capitalisations of the two companies. BA has been hit harder by the downturn and also has the pension fund weighing over its valuation.

BA’s share price rose 2p to 217p yesterday while Iberia’s fell €0.07, or 3 per cent, to €2.15.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax