Cathay's Philippine Airlines Pullout Positive-Analysts

Today
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 confirmed yesterday 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 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 that 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 analysis said a fully restructured PAL could have provided a boost to Cathay's traffic on trans-Pacific routes and strengthen Hong Kong's position as a regional hub.

A radical restructuring of PAL would, however require full man management control, they said.

Cathay said negotiations had broken down because of differences on issues such as management control and valuation.

"As negotiations continued we did not feel that we would be able to effectively exercise control," said Cathay's spokeswornan Quince Chong.

Cathay chief executive David Turnbull said last month that Cathay made a provisional offer for PAL of P3 billion to P4 billion and the offer would include a group or foreign investors.

PAL said on Wednesday a local group had committed to infuse $90 million of the $150 million needed for its rehabilitation. PAL said it had resumed talks with a potential foreign investor that it declined to identify.

Analysts said it was too early to rule out a tie-up between Cathay and PAL.

Philippine President Joseph Estrada said talks for a tie-tip between Northwest Airlines Corp. and PAL had fizzled out but he was confident the government could convince Cathay to remain at the negotiating table. Reuters