British Airways faces a deadline of today set by caterer Gate Gourmet to sign a more generous contract or risk losing its supplier of in-flight meals.
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 that prompted the caterer to fire 670 workers, some of whom have been reinstated.
The Transport and General Workers Union (T&G) 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 resume this morning 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 on Tuesday.
Gate Gourmet is calling for BA to improve its current contract with the caterer, which lasts until 2008, by 5 pm 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 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.
Gate Gourmet's UK arm lost £22 million last year and management says it is set to lose more in 2005 unless changes are made. Rival 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.