Are frequent fliers about to fly solo? Airline loyalty programs may soon become stand-alone businesses as struggling carriers consider unlocking the growth potential of these highly profitable units. "Separating the frequent-flier plan from the airline could drive short-term appreciation in airline shares 20 to 27 percent," says Morgan Stanley analyst William Green.
So far, United, Northwest, Delta, and USAir have said they are considering such spin-offs. American is feeling the heat from an Icelandic investment firm, FL Group, which has €4 billion under management and is an 8.3 percent owner of American. So far the airline has not made a direct comment about splitting off its mammoth AAdvantage program, the largest in the industry, with 57 million members. But in its third-quarter earnings report the company said it is studying all options to increase shareholder value, including separating its four subsidiaries (American Eagle, Beacon Advisors, the AAdvantage program, and a maintenance unit).
American is the only major U.S. carrier to dodge bankruptcy, but its share price fell to $21 in October from $40 last January. To FL Group, this bolsters the argument for the spin-off. It points to the separation of Air Canada's Aeroplan program as a potential model for American. Aeroplan's share price has more than doubled since its 2005 initial public offering, and its market cap now exceeds Air Canada's.
But loyalty programs are seen by carriers as inherently valuable, in part because they provide a cushion against the cyclicality and volatility of the business. Indeed, the fact that Air Canada's stock has lost half its value since it parted ways with Aeroplan (as part of a postbankruptcy strategy) gives American and other airlines pause.
Robbert Van Batenburg, head of research at Louis Capital Markets, believes that even if such spin-offs pose risks, airlines may have little choice. With their aging fleets and precarious financial positions, he says, "they may be forced to monetize."