REYKJAVIK, Iceland, Sept. 27 /PRNewswire/ -- 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
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 $4 billion.
FL Group CEO Hannes Smarason commented: "FL Group has significant
experience in the airline sector and strongly believes that there are
strategic alternatives which should be considered to increase shareholder
value. After taking a close look at the company over an extended period of
time, our suggestions include monetizing assets, such as AAdvantage, that
can be used to reduce debt or return capital to shareholders. We believe
that there is no time to lose given the recent developments in the market
The full text of the letter is attached below.
About FL Group
FL Group is an international investment company focusing on two areas
of investment. The majority of its operations are run through the Private
Equity and Strategic Investment division which can take stakes in listed
and private companies as well as lead private equity buy-outs. The Capital
Markets division is a proprietary trading desk focused on taking short-term
positions, primarily in equities, bonds and currencies.
With its head office in Reykjavik and offices in London and Copenhagen,
FL Group invests in companies worldwide, with a special focus on Europe. FL
Group is listed on the OMX Nordic Exchange in Reykjavik (OMX: FL). At the
end of the second quarter 2007, FL Group's total assets amounted to ISK
319.6 billion (US$ 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 http://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.
Director Corp. Communications
Tel: +354 591 4400 / 354 899 9352
Michael Buckley / Stan Neve
Tel: +1 212 333-3810
Anita Scott / Elena Shalneva
Tel: +44 20 7404 5959
FULL TEXT OF SEPTEMBER LETTER FROM FL GROUP TO BOARD OF DIRECTORS OF
The Board of Directors
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
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.
SOURCE FL Group