British Airways faces a deadline yesterday set by caterer Gate Gourmet to sign a more generous contract or risk its supplier of 80,000 in-flight meals a day placing its UK operations into bankruptcy administration.

One source close to the talks said BA had offered a further improvement on terms overnight in a bid to reach a deal after months of talks. A BA spokeswoman declined to comment on the new terms but said : “We are more optimistic about finding a solution with Gate Gourmet.” Workers at Gate Gourmet and about 1,000 at BA staged a walkout earlier this month which prompted the caterer to fire 670 workers, some of whom have been reinstated.

The Transport and General Workers Union (T&G), with deep roots at both firms, is demanding Gate Gourmet take back all the workers, a move which the loss-making catering firm has rejected. “Talks to sort out the labour issues resumed with Gate Gourmet under pressure to come to an agreement with the T&G or lose out on the potential of an improved contract,” a T&G spokesman said yesterday.

Gate Gourmet is calling for BA to improve its current contract with the caterer, which lasts until 2008, by 5 p.m. (1600 GMT) yesterday or face the risk of its UK operations going into administration.

BA had offered Gate Gourmet improved terms as well as a contract extension of two years to 2010 last month, but no deal has been signed. The feisty showdown reflects union resentment over Europe’s third-largest airline selling its catering operations to Gate Gourmet in 1997 and pressing for cheaper contracts since.

Current owners Texas Pacific Group, a U.S. private equity firm, are also frustrated after four consecutive years of loss in the UK. Gate Gourmet’s UK arm lost 22 million pounds ($39.68 million) last year and management says it is set to lose more in 2005 unless changes are made.

Rival UK airline Virgin Atlantic dropped Gate Gourmet in March, adding to the caterer’s troubles. BA, one of the world’s most profitable carriers, cannot turn to another caterer for an immediate solution if Gate Gourmet falters as no other has operations large enough at BA’s Heathrow Airport base in London to fulfil its needs. Gate Gourmet is the world’s second largest airline caterer, with 1,400 workers based at London’s Heathrow and about 1,100 elsewhere in the UK.

The airline has said it expects Gate Gourmet to continue to supply meals even if it is placed into administration and accountants brought in to lead restructuring of the firm. Yet some analysts say administration could increase the chances of more disruptions to meal service on BA and with that further damage the airline’s reputation.

Gate Gourmet resumed delivery of hot meals for BA’s outbound long-haul flights from London’s Heathrow Airport on Monday after a lapse of more than a week while in-bound flights still have none.