Cathay and Northwest Both Quit PAL Talks

International Herald Tribune

Thursday, December 3, 1998

Asia/Pacific

MANILA —Cathay Pacific Airways Ltd. and Northwest Airlines Inc. have broken off talks to buy a stake in Philippine Airlines Inc., the debt-strapped carrier said Wednesday, leaving it in search of another partner to save it from collapse.

Cathay, the Hong Kong-based carrier, said it had withdrawn from negotiations to buy a controlling stake because of fundamental disagreements over management control, job cuts and other issues.

The chief financial officer of the Philippine flag carrier, Jaime Bautista, also said talks with another potential investor, Northwest Airlines Inc., "fizzled out" after Cathay reached a preliminary agreement Nov. 10 to buy a 40 percent stake and take management control of the airline.

But Philippine Airlines said late Wednesday that it was resuming talks with an unidentified foreign investor. The airline also said that an unidentified local group was offering to infuse $90 million of the $150 million the airline says it needs to reorganize and make itself viable. 

Some analysts said Northwest or Cathay might resume negotiations, seeking more favorable terms.

Still, an analyst said the carrier, which is the oldest in Asia and which stopped flying briefly in September, could well be forced to shut down for good.

"It doesn't surprise me at the end of the day," said Ian Wild of SG Securities in Hong Kong, “that people should look closely at Philippine Airlines and decide that the existing business is irretrievable.”

"The inevitable may end up happening," he said. "The Philippine Airlines company may well disappear."

Analysts and officials said the sticking point in the talks with Cathay was the Hong Kong airline's intention to dismiss a large number of PAL's 8,000 workers. 

Cathay said that there were also differences over the valuation of the airline and over management control.

In September, during the brief shutdown of Philippine Airlines, the carrier's biggest labor union agreed to accept a management offer of 20 percent equity in exchange for a 10-year freeze on strikes and labor bargaining.

That agreement allowed the airline to resume flying. Cathay later provisionally agreed to invest up to $100 million in the airline in return for management control and up to 40 percent of equity.

(Reuters, Bloomberg)