AMR investor FL Group urges board to enact changes

NEW YORK/LONDON (Reuters) - FL Group FL.IC, one of the largest shareholders in AMR Corp (AMR.N), has urged the board of the American Airlines parent to consider strategic alternatives, including spinning off its frequent-flyer program, to boost its flagging share price.

FL Group, an Icelandic private equity firm that currently owns 9.1 percent of AMR, said in a letter to the board that changes at the company were long overdue, considering the 50 percent drop in the share price since January.

"There is no time to lose, given the recent developments in the marketplace," FL Group Chief Executive Hannes Smarason said in a press release.

In an interview with Reuters, Smarason said he would rally shareholder support for the FL Group plan if AMR did not respond in a timely manner, but he stopped short of issuing a deadline.

If AMR balks, "then we go to the next level," he said. "The next level is to engage other like-minded people on the issue ... to increase the heat in the kitchen."

"In terms of getting shareholders interested in this, I don't think that's going to be an issue," said Smarason. He said he has already received positive feedback on the letter from other shareholders.

In an e-mail statement, AMR said it values input from shareholders and regularly considers "the best use of our strategic assets and the impact that those decisions might have in the long run for our shareholders."

The company said it does not comment on "what we may or may not do in the future."

BULKY STRUCTURE

AMR has a more diverse structure than other U.S. airlines. It owns American Eagle, which flies regional routes for American -- a service that most airlines have contracted out to other carriers. It also owns investment advisory firm American Beacon Advisors.

FL Group, which says it has owned AMR shares for about a year, says the AAdvantage frequent-flyer program -- the oldest and largest loyalty program in the industry -- may be the jewel in the crown.

The Reykjavik-based firm, which owns Scandinavian discount airline Sterling Airlines and formerly owned Iceland's flagship carrier, Icelandair, said spinning off AAdvantage could increase shareholder value by more than $4 billion.

AMR's market capitalization is $5.4 billion.

The idea of spinning off assets isn't new but has gained momentum recently.

"Investors have been looking at that, especially as AMR's stock languishes," Calyon Securities analyst Ray Neidl said.

The FL Group letter, disclosed on Thursday, was sent to the AMR board on Tuesday, the day after AMR shares fell 12 percent following a disappointing revenue forecast that stoked concerns about slowing demand, rising costs and weakening profits.

But some industry experts said spinning off AAdvantage would not address the cash-rich airline's high operating costs, which are its chief problem.

"I don't know why they're trying to get them to spin it off, because they already have so much cash it's ridiculous," said CreditSights analyst Roger King. "It makes no sense to me."

AMR's management will also likely resist the idea. "At this point, I think AMR management would try and hold on to the structure the way it is," said Calyon's Neidl.

UNREALIZED VALUE

FL Group's Smarason said AMR's structure obscured the profitability of the company's individual business units, some of which are more stable and have better growth prospects than an airline.

Compounding the problem, AMR does not disclose detailed financial information on its business units, he added.

To realize its potential, FL Group urged AMR to spin off business units to create value for shareholders.

FL Group cited the successful spinoff of Air Canada's (ACa.TO) loyalty program by parent ACE (ACEa.TO).

Loyalty programs generate revenue by selling loyalty points, mainly to credit card companies. Revenue has been rising at a steady rate as credit card companies increasingly look to reward their customers. They can also sell marketing services to other companies through their access to millions of consumers.

Other airlines, including Australia's Qantas Airways Ltd (QAN.AX), are considering spinning off part of their frequent-flyer programs.

FL Group said AMR could spin off only part of AAdvantage in the near term, giving the company and investors time to get comfortable with the new structure.

"At an absolute minimum," said Smarason, "better disclosure of AAdvantage's financial results and a robust review of strategic alternatives will help convince shareholders that you view value creation as the key objective."

AMR shares were up 29 cents, or 1.3 percent, at $22.06 in midday New York Stock Exchange trade.