Can AMR (AMR) keep its stock price aloft by jettisoning its well-known American Eagle division? On Nov. 28 the parent of American Airlines announced it was considering a sale or spin-off of the regional airline in a transaction it hopes to complete next year. AMR shares jumped 7%, to nearly $22, on the news.
All airlines are wrestling with the twin devils of surging oil prices and their own slumping stock prices. In late September, AMR shares took a dive after the Fort Worth company announced rising fuel and other costs would take a bigger bite than expected out of 2007 profits. Three days later FL Group, an investment firm based in Iceland, sent AMR management a letter requesting it take more dramatic steps to boost its share price, including the possible spin-off of its frequent-flier program. AMR shares had fallen more than 50% this year, among the worst performances in the industry. FL Group holds a 9% stake in AMR, the largest U.S. airline.
AMR is not alone in considering such moves. United Airlines' parent UAL (UAUA) is also talking about spinning off its frequent-flier program and aircraft maintenance operations, while possibly maintaining a stake in the operations. Bear Stearns (BSC) analyst Frank Boroch determined that if United spun out its real estate holdings, maintenance unit, and frequent-flier program, the pieces would be worth a total of $80 a share, compared to the current price of $41.
The idea of deconstructing a business isn't as far-fetched at it sounds. Airlines have already spun off their reservation systems and the travel reservation site Orbitz Worldwide (OWW). ACE Aviation Holdings (ACEAF), parent of Air Canada, created three publicly traded affiliates: Aeroplan, its frequent-flier program; Jazz, its regional airline; and Acts, its maintenance unit.
AMR also has a history of divestitures. In the late 1990s it sold AMR Combs, which provided private jet services, and AMR Services, which handled things like cargo loading and ticketing at airports. Its Sabre reservation system, separately traded for years, was taken private in a $5 billion buyout last year by TPG Capital and Silver Lake Partners.
Carving up the airlines may have investment bankers salivating, but not every industry executive is sold on the idea. "We're going to evaluate it," Scott Kirby, president of U.S. Airways, told BusinessWeek when asked about spinning off his company's frequent-flier program. "We're skeptical. We're interested in keeping loyalty tied to the airline." Likewise, officials at AMR—which pioneered the mileage industry in 1981 with its AAdvantage program—have said they would evaluate such a move cautiously.
American Eagle is an obvious place to start. Many other airlines have already sold or spun off their regional affiliates, among them Continental's ExpressJet Holdings (XJT) and Northwest's Pinnacle Airlines (PNCL). Delta Air Lines (DAL) sold its Atlantic Southeast Airlines regional unit in 2005, and is considering whether to sell or spin off Comair, its last wholly owned regional subsidiary.
Regional carriers serve smaller cities and feed passengers into the larger airline hubs. By operating independently they can solicit business from multiple airlines and thus improve their profitability. That allows them to offer lower rates for connecting passengers to the larger airlines. Utah-based SkyWest Airlines (SKYW), for example, operates as a Delta Connection carrier in Salt Lake City and a United Express carrier in Los Angeles.
A-Tisket, a-Tasket, a "Basket of Assets"
American Eagle is expected to generate $2.3 billion in revenues this year—about 10% of America's total. It operates 300 aircraft and serves 150 cities with 1,700 daily flights in the U.S., the Caribbean, and Mexico. James Higgins, an analyst at Soleil-Solebury Research, figures the business is worth about $1.15 billion, or $4 for every AMR share. He also estimates the company's frequent-flier operation is worth $25 a share; its money management arm, American Beacon, $7 a share; and its maintenance operations $1 per share. That's 1.5 times the company's current share price.
In an evening note to clients, Bear Stearns' Boroch put Eagle's high value at $1.38 billion and said the decision represents "management's commitment to the market to pursue shareholder-friendly actions."
Beverly Goulet, AMR's vice-president of strategic planning and treasurer, declined to comment on valuations but says the company is considering all its options. "We've got quite a nice basket of strategic assets that we give attention to," says Goulet. "Eagle was one of the first items that we identified."