What short memories some of you have! BA had a short haul low-cost for a few years not very long ago, called GO. So that is not likely to happen again soon.
Iberia is the name of a peninsula, not an airline, so I fail to see how using the word could be deemed illegal. Does BA own the word British? No, as was so amusingly pointed out by BAF when they renamed the airline, 'British' some years ago, in response to the re-branding of BA and their claim to the word.
If IAG want a lo-co in Spain, it will happen and the more the Iberia pilots try to fight it, the less likely are they to get the jobs created. They will be filled by the many hundred of out of work pilots in the EU, all legally entitled to work in Spain.