Cathay - PAL Deal Unlikely to Take Off, Say Experts

Philippine Daily Inquirer

Monday, December 7, 1998

PRESIDENT Estrada is desperately trying to resurrect talks between Cathay Pacific Airways and troubled Philippine Airlines, but the divide between the two sides may be too great, analysts said.

Hong Kong-based Cathay pulled out of talks to take a stake in PAL on Wednesday, citing irreconcilable differences over management control and valuation of the debt-ridden carrier.

Mr. Estrada, who has campaigned personally to keep PAL in the air, appealed to both sides on Saturday to reconsider and said he was confident they would return to the negotiating table.

“I am not giving .up easily,” he said during a regular radio program.

But sources privy to the abandoned talks told Reuters that the differences were deep-rooted and there would be little point in resuming discussions.

One source said there appeared to be little trust between the two sides, despite Cathay's conditional commitment to invest up to $100 million in return for a stake of around 40 percent in the airline and management control.

Another source, who was close to the Cathay team in the discussions, said the present sharehold­ers of PAL presented the biggest stumbling block. Filipino-Chinese tycoon Lucio Tan is the largest shareholder of the beleaguered airline.

Difficult place

"The Philippines is a difficult place at the best of times, even if we had a cast-iron, rock-solid local partner,” the source said. ”The airline industry is very political, very high-profile and everybody is involved in it. The only way you can possibly do it here is with an absolutely rock-solid partner, and I’m afraid these guys just don't qualify."

A source within PAL said the talks fell apart because Cathay wanted complete management con­trol but no legal liability.

"Cathay wants to have absolute authority on all decisions, does not want to consult existing management and wants immunity from all legal issues arising from the conduct of the business," the source said.

"It is unfair because other shareholders would be the only ones facing [possible] legal cases while Cathay is the one controlling manage­ment," the source added.

Despite Mr. Estrada's entreaties, Cathay officials have not responded favorably yet.

'We are not having talks with them (PAL), the talks are over," Peter Foster, Cathay's Director of Operations for Taiwan and the Philippines, told Reuters on Friday.

"However, we obviously have good contacts with the government, including obviously the executive branch, and we will maintain the con­tact," he added.

PAL debt plan

PAL for its part, is going ahead with restruc­turing program which is scheduled to be submitted to the Securities and Exchange Commission today.

Airline Executive Vice President Manolo Aquino told Reuters on Saturday that one plan would seek debt forgiveness from creditors.

He added the rehabilitation plan would specify the terms and conditions of the debt forgiveness and restructuring, not how much of the loans would be forgiven.

PAL, Asia's oldest airline, owes some $52 billion to 9,000 creditors, including suppliers, airline offi­cials said earlier.

Aquino said PAL was seeking to find a foreign partner, but nothing had come to fruition yet.

"With a foreign partner, definitely it would give a wider spread of market reach in terms of customers, in terms of destination. And with that particular tie-up or synergies with the for­eign partner, definitely the rehab plan can only be enhanced," Aquino said.

However a foreign partner is not enough to shield PAL from the slump in the airline business due to the Asian financial crisis.

"The business environment has not changed, it's very competitive out there...That's going to be difficult for us because unlike the others who have a strong capital base, we are going through this rehabilitation," Aquino said.

"That's going to be the difficulty for us over the next few years" Reuters