BRUSSELS MOVES TOWARD VETO OF AID FOR IBERIA AIRLINES

BRUSSELS MOVES TOWARD VETO OF AID FOR IBERIA AIRLINES

The European Union is poised to block a $1 billion subsidy to Iberia, Spain's state-owned airline.

The action is expected to provoke a political row with the government in Madrid while at the same time breathing life into the bloc's flagging "open skies" campaign.The European Commission, the EU's executive arm, has privately told the money-losing carrier that it must scale down the planned 130 billion peseta ($1.02 billion) state aid package.

At most, Iberia will be permitted to pocket 40 billion pesetas, which may only be used to finance 3,200 layoffs from the carrier's 24,000-strong payroll.

After an exhaustive seven-month inquiry, the commission has rejected a request to use Spanish taxpayers' cash to reduce some of Iberia's $3.7 billion of debts and will make sure that no money is used to subsidize operations.

The matter is seen as a major test of the commission's ability to end government handouts to technically bankrupt airlines, subsidies that are distorting competition in the run-up to of total deregulation of the EU air- transport market in early 1997.

The commission is committed to a year-old policy that limits airlines to a single infusion of government money. That effectively rules out Iberia, which got $1 billion of state aid in 1992.

The Iberia rescue was thrown into doubt recently when its pilots threatened to revoke an agreement to cut their pay. The deal with the pilots is a key part of the airline's restructuring plan.

The commission has made clear that failure to implement the plan would rule out any government subsidy, even to finance layoffs.

Iberia remains an attractive partner for other European carriers in spite of its poor financial position. Piet Bouw, chairman of KLM Royal Dutch Airlines, has mentioned it as a possible ally.