Ok, so serial port problem is common for Xen kernels

Solution:
add bolded config parameters to grub.conf
kernel /xen.gz-2.6.18-8.el5 console=vga xencons=ttyS16 console=ttyS16
module /vmlinuz-2.6.18-8.el5xen ro root=/dev/VolGroup00/LogVol00 rhgb quiet xencons=tty