Analysts say Cathay's Walkout on PAL Not a Big Disappoinment

Malaya
Friday, December 4, 1998

HONG KONG — Cathay Pacific Airways Ltd's decision to walk out on Philippine Airlines Inc. (PAL) should not be a major disappointment since the proposed acquisition had brought mixed reviews from the start, analysts said.

Some analysts gave Cathay Pacific a nod of approval when the carrier on Wednesday confirmed it had abandoned negotiations for a stake in PAL. It would be tough to turn financially troubled PAL into a successful investment, they said.

"The turning around of PAL under any scenario would have been a major feat," said one analyst.

"I was never convinced that it was a good investment opportunity because the labor environment is very tough."

PAL is saddled with $2 billion in debt and reported a net loss of $154 million for the six months ended September 30.

PAL temporarily closed in September after a breakdown in talks between management and a Union. The carrier's employees agreed to management's offer of a 20 percent equity interest in the airline in return for a 10 year freeze on labor bargaining.

Analysts said it had never been certain that Cathay and PAL would tie the knot.

"We have factored nothing in so there is no change to our estimates," said Wendy Wong, aviation analyst at Merrill Lynch.

"If anything it could be slightly positive," she said, adding that Cathay may gain market share if PAL shuts down.

PAL would need radical surgery to be a favorable acquisition for Cathay, analysts said. The Philippine flag carrier would among other things need to slim down its operations and change its route network.

Some analysts said a fully restructured PAL could have provided a boost to Cathay's traffic on transpacific routes and strengthen Hong Kong's position as a regional hub. (Reuters)