A large AMR Corporation (NYSE: AMR) shareholder, FL Group, urged the company to immediately consider strategic alternatives that could significantly increase shareholder value. The firm said alternatives include the separation of American Airlines' frequent flyer loyalty program from the main business. The firm said their conservative analysis indicates that the unbundling of AAdvantage could lead to value creation of more than $4 billion.
A Copy of the Letter:
September 27, 2007 An FL Group Announcement
FL Group urges American Airlines to consider all options to enhance shareholder value
- Proposes spin-off of the AAdvantage Frequent Flyer program -
Reykjavik, Iceland, September 27, 2007 - FL Group, one of American Airlines' largest shareholders, wrote to the Board of Directors of AMR Corporation (NYSE: AMR) on Tuesday urging the company to immediately consider strategic alternatives that would significantly increase shareholder value. These include the separation of American Airlines' frequent flyer loyalty program, AAdvantage, the world's oldest and largest frequent flyer program, from the main business.
AMR's share price has fallen almost 50% since January 2007, costing AMR shareholders close to $5 billion. While the industry environment remains challenging for all airline companies, FL Group believes that opportunities remain to unlock shareholder value and that the AMR management team and board of directors should actively pursue all such opportunities. Simply blaming high fuel costs and investor sentiment is not a sufficient response.
AMR's structure as a fully integrated legacy carrier and the lack of detailed financial information provided by the company on its various business units mean that the profitability of each individual business unit is not clearly understood by investors. Based on publicly available information, FL Group has performed a conservative analysis of AMR's business units and believes there is significant hidden shareholder value to be unlocked. In particular, FL Group believes that unbundling AMR's AAdvantage ("AAD") Frequent Flyer program could increase shareholder value by more than $4 billion.
FL Group CEO Hannes Smárason commented: "FL Group has significant experience in the airline sector and strongly believes that there are strategic alternatives which should be considered to increase shareholder value. After taking a close look at the company over an extended period of time, our suggestions include monetizing assets, such as AAdvantage, that can be used to reduce debt or return capital to shareholders. We believe that there is no time to lose given the recent developments in the market place."
The full text of the letter is attached below.
About FL Group
FL Group is an international investment company focusing on two areas of investment. The majority of its operations are run through the Private Equity and Strategic Investment division which can take stakes in listed and private companies as well as lead private equity buy-outs. The Capital Markets division is a proprietary trading desk focused on taking short-term positions, primarily in equities, bonds and currencies.
With its head office in Reykjavik and offices in London and Copenhagen, FL Group invests in companies worldwide, with a special focus on Europe. FL Group is listed on the OMX Nordic Exchange in Reykjavik (OMX: FL). At the end of the second quarter 2007, FL Group's total assets amounted to ISK 319.6 billion (US$ 5.1 billion). Its market capitalization at the end of August 2007 was ISK 208 billion (US$ 3.4 billion). More information is available on www.flgroup.is
In the airline industry, FL Group has made a series of successful investments including the acquisition of Sterling Airlines, Scandinavia's largest low-cost airline. Sterling is now a part of Northern Travel Holding, a major Scandinavian travel group formed in January 2007 where FL Group has a 32% share. FL Group has also built a 23% stake in Finnair, the Finnish Flag Carrier. FL Group is the former sole owner of Icelandair, the Icelandic Flag Carrier, and a former owner of a 16.9% stake in easyJet, one of Europe's largest low-cost airlines.
FULL TEXT OF SEPTEMBER LETTER FROM FL GROUP TO BOARD OF DIRECTORS OF AMR/AMERICAN AIRLINES
The Board of Directors AMR Corporation 4333 Amon Carter Boulevard Fort Worth, TX 76155
Attention: Gerald J. Arpey Chairman, President and CEO AMR Corporation/American Airlines
VIA EMAIL AND OVERNIGHT DELIVERY
Reykjavik, September 25, 2007
Ladies and Gentlemen,
As you are undoubtedly aware, FL Group is one of the largest shareholders of AMR Corporation, currently holding 8.25% of the company's outstanding common shares. FL Group is also a highly experienced player in the airline industry, with a strong track record of value creation in the sector through its investments in easyJet, Sterling Airlines, Icelandair and Finnair. We generally hesitate from approaching the board of directors regarding value creation strategies, preferring to speak directly with management. However, subsequent to our conversations with members of the AMR management team, we are not aware of any specific plans that management may have to enhance shareholder value. This, when taken with the company's recent disappointing and surprising earnings guidance, has meant that we now feel compelled to write to you directly.
A Time to Act
AMR's share price has dropped some 50% since January 19th 2007. Given the close to $5 billion this has cost AMR shareholders, we believe serious consideration of strategic alternatives is long overdue. Instead of blaming the company's poor share price performance on external factors such as "fuel prices" and "intense competition," we believe that it is now time for AMR to act. We therefore urge AMR's management and Board of Directors to consider all options to enhance shareholder value and outline a clear path forward for value creation.
AMR's structure as a fully integrated legacy carrier means that the profitability of its individual business units is not easily understood by investors and analysts. AMR holds different businesses that are less cyclical and have more favorable growth prospects than a pure aviation play, but its share price remains saddled with a blended valuation multiple that fails to capture those growth prospects. The fact that AMR does not disclose detailed financial information on its various business units results in difficulty capturing individual unit value and likely exacerbates the pure play valuation discount.
AMR is an industry leader in terms of size and scale, but given the factors outlined above, and the difficult industry environment, we believe the company will find it very challenging to outperform its competitors over the long term. We strongly urge AMR's management to aggressively evaluate strategic alternatives to generate shareholder value.
Significant opportunities for value creation at AMR exist that are both practical and actionable. In short, FL Group believes significant value potential can be unlocked by unbundling AMR's ancillary business units, whose revenues are currently being valued at mainline airline multiples instead of multiples that correspond with their particular business lines. In our view, the separation of AMR's business units, such as the AAdvantage Frequent Flyer program, is potentially more than just a zero-sum game. Unbundling can eliminate a valuation discount, especially in complex corporate structures such as legacy carriers, and can also lead to greater management focus and improved operational performance. In this specific case, we believe the AAdvantage Frequent Flyer program is the AMR business unit with the most value upside, although other AMR units could also unlock value.
The frequent flyer/loyalty industry is attractive due to strong profitability, stable cash flow and growth rate potential. AAdvantage's size and market position provides an excellent platform for future growth and industry leadership. Our analysis suggests a value upside of over $4 billion from unbundling AAdvantage. Given the limited financial information available to us on AAdvantage, the valuation is based on conservative assumptions taking into account available performance metrics from other frequent flyer programs. In addition, the concept of unbundling has already been proven to generate value. One need only examine Aeroplan, the loyalty program spun off by Air Canada's parent ACE, to find a successful example. Since 2004, Aeroplan has grown rapidly and analysts expect the company to grow revenue by almost 100% from 2004 to 2008. We recognize there are differences between the U.S. and Canadian airline sectors; nevertheless, we believe the case for enhanced value is clear and has already been proven. Since its IPO in June 2005, Aeroplan's stock performance has significantly outperformed the North American airline sector.
While we urge AMR to commit to a strategic review to monetize AAdvantage's value for shareholders, we happen to believe that AMR should keep effective control of AAdvantage in the short-to-medium term and that an outright sale is less advantageous at the present time. AAdvantage could instead be separately listed with a limited free float to be distributed to a mix of original and new shareholders. This type of multi-step spin-off would provide operational benefits to AMR and allow the company to fine-tune the intra-company relationship. Such a gradual process would also have the benefit of allowing AMR to capture the full value of AAdvantage as investors become more familiar with a pure "frequent flyer/loyalty" play. Regardless of any difference of opinion over these mechanics, we should be able to agree that AMR's stock is undervalued and poorly reflects the success and growth potential of AAdvantage; and that the Board, management and shareholders should look for ways to capture that hidden value.
A Call to Action
Any realistic assessment of a spin-off, as described above, must acknowledge that there are risks involved. But leadership is about evaluating those risks and making prudent choices. A separated AAdvantage will impact AMR's performance; however, we believe that the ongoing partnership could be properly managed and that the net effect would substantially increase shareholder value. As stated above our conservative analysis indicates that the unbundling of AAdvantage could lead to value creation of more than $4 billion.
We strongly encourage you to look at the opportunity to unlock shareholder value by spinning-off AAdvantage as outlined above. At an absolute minimum, 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. We are more than prepared to assist AMR in any way to achieve that end.
We look forward to your prompt response demonstrating a serious evaluation of these matters.
Yours sincerely, Hannes Smárason CEO FL Group