Iberia is setting up a new subsidiary for short- and medium-haul routes. The airline, Iberia Express, will be based in Madrid and is aimed at turning the loss-making short-haul business back into profitability.

The move was approved by the board of Iberia’s parent International Airlines Group (IAG) at a meeting on Thursday.

The airline will start operations in the summer of 2012 and will initially fly four Airbus A320s. The fleet will increase to 13 units by the end of next year. The aircraft will all come from Iberia’s current fleet. The carrier stated that its new subsidiary will hire employees at market rates, but that the decision will have no impact on terms and conditions of Iberia’s existing workforce.

The company hopes that Iberia Express will be able to operate at lower costs, particularly through the more efficient use of aircraft. Iberia Express is planned to fly domestic and European routes from Madrid and will also feed its parent’s long-haul network.

Iberia’s short-haul business has been loss making for years, like at most other European network carriers, and the airline has been indicating the move for some time. The decision is likely to cause union opposition, as aircraft are taken away from Iberia’s mainline fleet to be operated by pilots at lower wages.

The airline has also been moving to a more integrated relationship with its Barcelona-based low fare unit Vueling, which has also started code-sharing with Iberia and other Oneworld airlines. Iberia stated that the decision to launch the Express unit will have no effect on Vueling.