I know Ross already asked, but can you post a picture?
It will help see how bad off (or not so bad) the phal is, and see what can be done.
As for what to do with the keiki, I use a much simpler method than king_of_orchid_growing. I don't use the moss and mount. I let it grow, and once the keiki has a few leaves and, most importantly, 3 or more roots that are at least 1cm, I cut it the spike on each side of it and pot it up. I try to pot when a new root is starting, and give it fairly high humidity for a few weeks for it to adjust to its new way of living.
If the plant is really in bad shape, yes, you probably should cut the spike. Btw, have you had a look at the roots in the pot to see if they're good?