Iceland Fund Puts Heat on AMR

Iceland Fund Puts Heat on AMR
By DANA CIMILLUCA
September 27, 2007; Page A10

AMR Corp. has an unruly passenger on board.
FL Group, a $6 billion investment fund from Reykjavik, Iceland, sent a letter to the American Airlines parent's board on Tuesday urging the company to consider alternatives, including the spinoff of its AAdvantage frequent-flier program, to boost a stock that has fallen almost 50% since January.

FL Group said in the letter it has accumulated an 8.3% stake in the carrier. Previously, it had disclosed a stake of less than 6%.
FL Group says AAdvantage is worth about $6 billion. That is greater than the $5.4 billion market capitalization of all of AMR, based in Fort Worth, Texas, the world's biggest airline by passenger traffic.
"It's a no-brainer," said Hannes Smarason, chief executive of FL, in an interview. He also said AMR should consider offloading its aircraft-maintenance and -repair unit and its American Eagle regional airline. "It's a tough environment for the airlines now, and it's incumbent on the management and the board to find avenues where value can be created."

The fund has tried quietly engaging the company's management, but "we're not getting the response we're looking for."
An AMR spokesman said the company values input from shareholders. It declined to comment on specifics about FL, saying it typically doesn't comment on communications with holders. He added: "Our board and our senior management regularly give careful consideration to the best use of our strategic assets and the impact that those decisions might have in the long run for our shareholders."
Buffeted by surging fuel prices, AMR said late Friday that third-quarter revenue would fall short of analysts' forecasts. The stock, hurt also by fears of a slowing economy, plunged 14% to $20.77 on Monday, its worst percentage drop since April 21, 2003. In 4 p.m. composite trading on the New York Stock Exchange yesterday, the shares rose 22 cents to $21.77.
If AMR were to spin off the frequent-flier program, it would follow in the footsteps of Air Canada parent ACE. ACE's former frequent-flier unit, Aeroplan, has a market value of about $4 billion, double what it was originally worth. Australia's Qantas Airways Ltd. has said it is considering spinning off its frequent-flier program, and United Airlines parent UAL Corp. has said it is considering strategic options for its frequent-flier business.
FL specializes in airline investments. It used to own Icelandair and had a 16.9% stake in easyJet, the European low-cost carrier. It now has a 23% stake in Finnair, the Finnish carrier. Based on data from FactSet Research Systems, an 8.3% stake would make FL the No. 2 AMR holder, after Tontine Management LLC.
FL began accumulating the stake in the fall of 2006. In December, Mr. Smarason called the shares, which were trading at more than $30 each after a 37% 12-month run, "quite attractive."

• Shareholder Push: FL Group, which says it holds an 8.3% stake in AMR, is asking the airline to consider alternatives.
• Eyes on Miles: FL said spinning off frequent-flier business could add value.
• Tougher Skies: The move comes as U.S. airlines face the threat of higher fuel costs with little ability to pass them on to passengers.