UPDATE 4-BA mulls convertible bond to boost balance sheet

* Rules out rights issue at current time, AGM told

* Defends protests on cabin crew pay, says keen to negotiate

* CEO says would not accept less than 53 pct of BA-Iberia

* Pension deficit worse; eyes revised funding plan

* Stock up 1.3 pct, outperforms FTSE 100

(Adds further CEO quotes from AGM, detail)

By John Bowker and Matt Scuffham

LONDON, July 14 (Reuters) - British Airways (BAY.L) said on Tuesday it was considering launching a convertible bond, not a rights issue, to shore up a balance sheet ravaged by the global aviation sector downturn.

BA Chairman Martin Broughton told shareholders at the group's annual general meeting that the timing was not appropriate for a rights issue, but the airline was looking at other options to improve its balance sheet.

"We are in discussions with our institutional investors, exploring opportunities in the convertible market, which we believe is the best way of increasing our cash reserves," Broughton said.

British Airways also told shareholders it was determined to reach agreement with cabin crew and ground staff over new pay and working conditions, and said merger talks with Spain's Iberia (IBLA.MC) would continue with hopes of winning a more than 53 percent split of the combined carrier. [ID:nLE402852]

After the meeting, Chief Executive Willie Walsh told reporters the airline was still on track to hit a target of 1 billion pounds in cash by March 2010, down from nearly 1.4 billion in March this year, not including proceeds of a bond.

"Liquidity is an important issue in the current environment. We are focused on cash," Walsh said.

A weekend news report had suggested BA had received support from some of its shareholders for a major rights issue, a move seen by analysts as an absolute last resort. [ID:nLD673849]

Airlines around the world have been suffering from what many consider the worst conditions ever due to falling passenger numbers in the face of global economic turmoil, and traditional carriers have faced intense competition from budget operators.

Budget airline Norwegian Air (NWC.OL) on Tuesday reported higher-than-expected second-quarter net profit. [ID:nLE317868]