1. Are advanced AVE reservations recommended?
2. Any preferences between Vueling and Spanair?
3. Lastly -- our international departure flight is out of Madrid, but we need to fly to Madrid from Barcelona that same morning to pick up the flight. Does a Spanair domestic flight arrive at a different terminal at the same airport (Barajas) or some totally different part?

Thanks.

1-Yes
2-Vueling is normally cheaper, but both are good and reliable companies.
3-Spanair leaves from terminal 2 in Madrid and I think it arrives at terminal 1 in Barcelona, but you can easily check that on their web page.

Barajas has 4 terminals. You have to find out from which terminal your international flight is leaving..
also, you may have to recheck your luggage...

Pay heed to Danon's post. Beware of connecting the same morning.. give yourselves PLENTY of time. When you know the terminals, come back and we can advise BEFORE you do this.

Of course.. if there is a glitch.. and you miss the international connection, will this be a huge problem to you?

I have learned not to trust these situations. For myself, there is too much stress involved should anything happen.
I would probably spend my last night at an airport hotel in Madrid or the last flight in and have a leisurely morning.

International flights depart from T1 and T4S, depending on your carrier. The early Spanair flights from Barcelona to Madrid are at 07:00, 07:30, 08:00 and 08:30 (1hr 20min). Spanair uses Terminal 2 in Madrid.

As already noted, since you are not flying on one ticket, you will have to collect you luggage and then go to your airlines ticket counter to check in and receive your boarding pass. I would allow at least 3 hours if you're flying out of T4S. A minimum of 2 hours if departing from T1. You may want to allow a little more time if you are not flying 1st class, or are not a preferred frequent flyer card holder.

Vueling is now code sharing with Iberia.