U.S. airlines are feeling pressure from aggressive investors and a slowing economy to boost their sagging share prices and raise cash by selling or spinning off some assets, including their prized frequent flier programs.
FL Group, an Icelandic investment group that is the second-largest shareholder in AMR, parent of No. 1 American Airlines, is publicly urging the company to spin off its pioneering AAdvantage frequent flier program, which it estimates is worth about $6 billion on a stand-alone basis. AMR’s total market capitalization is only about $5.5 billion. A spin-off would involve distribution of new, separate stock to current AMR shareholders.
American spokesman Tim Smith confirmed receipt of the FL Group’s letter. He declined to comment on what actions the company’s board might take.
Meanwhile, the board of UAL, parent of No. 2 United, is considering the possible spin off or sale of assets including its Mileage Plus frequent flier plan and all or part of its aircraft maintenance division.
Jean Medina, a United spokeswoman, confirmed that her company’s board discussed “portfolio optimization” at its annual strategy meeting last week in San Francisco, including possible action on the frequent flier program. She declined to say what the airline will do or when.
Air Canada’s parent, ACE Holdings, spun off its Aeroplan frequent flier plan in 2005. Since then, Aeroplan’s market value has nearly doubled to about $4 billion.
Both American and United have been building up their cash reserves this year, and American also has been using some of its $2 billion in free cash flow to reduce debt. Other carriers, most notably discount king Southwest, also have been taking steps such as issuing new shares of stock to raise their cash reserves as a hedge against the next cyclical slowdown.
In the five years ended in 2005, U.S. carriers lost $42 billion, and most were caught with too little cash when that downturn began.
In a recent letter sent to AMR’s board, which was first reported in The Wall Street Journal, Hannes Smarason, CEO of the Reykjavik-based FL Group, urged American to spin off the AAdvantage program because it is the AMR business unit with the most unrecognized value.
FL Group began accumulating AMR stock last November and December, when share prices were much higher than now. Shares closed Friday at $22.29, or 46 percent below its 52-week high last January.
At one point last spring, it was AMR’s largest shareholder. At the time, it publicly urged American participate in consolidation, figuring that that would drive its share price higher.
But hopes of airline consolidation faded earlier this year after Delta Air Lines, then in Chapter 11 bankruptcy, turned back a hostile takeover bid from US Airways.