Cathay, which handles roughly a third of all passenger and cargo traffic passing through Hong Kong, said it rescinded the offer of increased pay and pension contributions when the pilots' union failed to agree to it before a midnight deadline.

The pilots have threatened disruptive action from Tuesday if their demands of improved pay and and conditions, including releasing details of their hours worked, are not met.

They have not yet specified their possible actions, but in 1999 they staged a "sickout" that cancelled hundreds of flights and forced Cathay to charter some 30 aircraft and crews from other airlines at a cost of HK$500 million (US$64 million).

"We are prepared to charter additional aircraft and rebook passengers on otherairlines. For the moment we will continue to operate normally and take bookings on future flights," Tony Tyler, Cathay's director of corporate development, told a news conference in the early hours of Sunday morning.

The airline said if industrial action did occur, it would most likely mean delays rather than cancelled flights. Passengers were advised to check the status of their flights before leaving for the airport.

Hong Kong's airport has been making preparations for possible action, including designating special parking areas for any Cathay planes that could be grounded due to lack of flight crews.

The rejection of the airline's offer by Hong Kong Aircrew Officers Association (HKAOA) means that Cathay's 700 most senior pilots face a three per cent pay cut from Sunday, the last instalment of cuts agreed to end the 1999 dispute.

The union, which represents about 1 200 of Cathay's 1 400 pilots, demanded the airline reverse the pay cuts and make significant improvements in rostering, the effect of which would be to hire more pilots.

In addition to an up-to 10,5 per cent increase, Cathay said it had offered overtime premiums of 2,5 times basic hourly pay and pension contributions equal to 15,5 per cent of the pay rise.

HKAOA general secretary John Findlay declined to comment on Cathay's withdrawal of its offer.

Cathay, which says its best paid pilots earn over US$400 000 annually in pay and benefits, has tried to portray the pilots as "holding Hong Kong hostage" over its demands.

The pilots union, which includes many expatriates among its highest-paid members, has generated little public sympathy for their cause, especially sincelocal Chinese junior pilot members receive no housing benefits and earn considerably less.

- Nampa-Reuters