Austrian’s supervisory board is prepared to shut the carrier down and start a new airline in its place if negotiations with its pilots do not lead to a satisfactory agreement, sources with knowledge of the situation tell Aviation Week.

With negotiations between the airline and employee representatives expected to continue up until a Thursday board meeting, the board is preparing decisions to either approve a new contract or start preparations for a new carrier, the sources say.

As part of the plan, Austrian’s current employees would be laid off as the airline unwinds, but offered jobs at the new company. Austrian declined to comment.

Austrian, bought by Lufthansa in 2009, has been in restructuring mode for years following severe losses as a former state-owned company. Austrian CEO Jaan Albrecht decided to transfer all flight operations to the carrier’s regional affiliate, Tyrolean, in 2012 after negotiations about a new collective bargaining agreement failed. Austrian pilots still receive the same pay, but lost significant amounts of their expected future retirement benefits. The pilots subsequently sued the airline, arguing their previous collective bargaining agreement was still valid and the transition from Austrian to Tyrolean was illegal.

The European Court of Justice is expected to rule on Thursday that the old contract is still valid in principle, but it is unclear whether the ruling will apply to the retirement provisions, and whether Austrian will be compelled to compensate employees for benefits lost. 

The matter is also further complicated by a second lawsuit, over the operational transition, still pending in front of a Vienna court. A ruling will not be reached before the end of the year and could be challenged by either side, potentially delaying a final decision until 2016.

However, Austrian (and parent Lufthansa) made clear that the previous conditions are unacceptable and that the airline will no longer be funded on these grounds. Sources close to the talks say that position has been made clear in the negotiations.

Three outcomes are now possible. Ideally, the airline and its employees will reach an agreement before the Sept. 11 board meeting. They would then sign a new collective agreement, which the board would have to approve. Alternatively, the board could decide to launch preparations for a new airline, fully owned by Lufthansa, that would hire staff under its own proposed conditions as Austrian is shut down in parallel. That decision may still not mean Austrian will not survive as a later agreement between workers and the company may still be possible.

Lufthansa took control of Austrian amid sharp criticism that turning the carrier around could be impossible. Because of the transition to Tyrolean and some integration benefits, Austrian was able to return to operating profit in 2013 after six loss-making years. It expects to reach a similar result in 2014, although that is lower than initially planned.