British Airways' parent group IAG has announced plans to ditch 25 aircraft and 4,500 jobs from its struggling Spanish airline Iberia as the directors said it was waging a "fight for survival".

International Airlines Group's chief executive, Willie Walsh, said cutting more than one in five jobs at the airline was "critical for Iberia and the future of Spain". He said the national flag carrier needed to be strong and profitable in order to "create jobs and boost tourism, a key driver of Spain's recovery".

Underlining his determination to push through the cuts, Walsh has set a deadline of 31 January, by when he wants IAG to have reached agreement with the unions. Without that, he said, deeper cuts and a more radical reduction in the size of Iberia operations would result. This would be necessary in order to "safeguard the company's future".

The proposed cutbacks would stem Iberia's cash losses by the middle of next year, the group said. By then Iberia's network capacity would be slashed by 15%. Five long-haul and 20 short-haul aircraft are to go. IAG's turnaround plan also involves imposing permanent pay cuts on some of the 15,500 workers who remain at Iberia.

Walsh's remarks were released on Friday morning at the same time as IAG reported an operating profit of €17m (£13.6m) for the nine months to the end of September. BA posted a €286m operating profit while Iberia contributed a €262m operating loss. The busy third quarter brought underlying group operating profit of €270m, down from €363m for the same period in 2011. The company said it had suffered from rising fuel costs and the deteriorating Spanish economy.

Walsh insisted BA's sponsorship of the London Olympics had been a success, claiming it had generated significant "premium leisure demand by encouraging holidaymakers to trade up to premium cabins". However, the IAG boss said business travel demand, as expected, had been depressed by this one-off event.

Echoing Walsh's determination to drive reform at Iberia, the divisional chief executive, Rafael Sánchez-Lozano, said: "Iberia is in a fight for survival. It is unprofitable in all its markets. We have to take tough decisions now to save the company and return it to profitability. Unless we take radical action to introduce permanent structural change the future for the airline is bleak. However, this plan gives us a platform to turn the business around and grow.

"The Spanish and European economic crisis has impacted on Iberia, but its problems are systemic and pre-date the country's current difficulties. The company is burning €1.7m every day. Iberia has to modernise and adapt to the new competitive environment as its cost base is significantly higher than its main competitors in Spain and Latin America.

"Time is not on our side. We have set a deadline of 31 January to reach agreement with our trade unions. We enter those negotiations in good faith. If we do not reach consensus we will have to take more radical action which will lead to greater reductions in capacity and jobs."