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Airlines Change Course With Spinoffs

But whether any of the carriers will actually move to unlock value remains to be seen.

Updated from 9:14 a.m. EDT

Not that long ago, consolidation was the favorite gabfest topic in the airline industry.

But after a series of merger bids fell through, think







US Airways




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, the buzz died down and the conversation gradually changed to something a bit less glamorous: spinoffs.

Though spinoffs don't necessarily generate the excitement of say, two big players joining forces, they could nonetheless play a role in reshaping the future of the industry, even if it's on a smaller scale.

Wall Street certainly appears to like the prospects, at least. Combined with falling oil prices, airline shares have gotten a boost amid the latest round of transaction talk. So far this month, the Amex Airline Index is up about 9%, while the

S&P 500

has risen around 2%.

The spinoff game was kick-started when Iceland's FL Group, the owner of roughly 9% of



, called for the company to shed its frequent-flier business. AMR is the parent of American Airlines, the world's biggest passenger carrier.

Then last Friday,


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CEO Glenn Tilton told employees that the company's five-year plan "includes unlocking the value of business units" such as maintenance and the frequent-flier program.

And in a report last week on



, Bear Stearns analyst Frank Boroch wrote that the airline "may consider spinning off non-mainline assets to drive shareholder value."

There is little reason to think that either AMR or Northwest -- both stocks are up about 13% for the month -- has any particular desire to spin off their frequent-flier programs, but the subject will likely get a full hearing as the airlines report their quarterly earnings this month.

United, though, is a different story, and Tilton's comments last week weren't his first on the matter. During a conference call in July, he said United would likely be interested "philosophically, if we think that there is an opportunity for us to unlock value that is in the assets such as a mileage program,

and at the same time perhaps have the opportunity to dramatically improve its performance as a business."

Give Tilton credit: He brings sizzle to the industry. Since joining United in 2002 after 32 years at Texaco, he has been among the biggest advocates for consolidation. However, as he said back in April, "consolidation is a strategic imperative in the industry,

but for me to be able to effect it, I need to have somebody agree with me."

A spinoff, by contrast, doesn't require an airline partner. All it takes is a banker to find a buyer. "Investment bankers want to separate out things that can look like


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or the software business, which are a lot more exciting than the smokestack airline industry," says consultant Robert Mann.

As for AMR, FL Group disclosed last December that it had acquired 5.98% of the airline's shares. By Feb. 22, it had 8.63%, and by Sept. 27, it had accumulated 9.1%, or 22.7 million shares, according to filings with the

Securities and Exchange Commission


While FL Group may be a wise investor, the timing of its AMR involvement has not been entirely fortuitous. In fact, AMR shares have generally declined ever since FL Group first disclosed its holdings. The shares closed Monday at $25.57, after reaching a 52-week-high of $41 in January.

Late last month, FL Group wrote to AMR suggesting that selling the frequent-flier program could unlock about $4 billion worth of shareholder value. "We believe that there is no time to lose," wrote FL Group CEO Hannes Smarason.

Although AMR responded only vaguely last week, CEO Gerard Arpey has repeatedly answered analysts' questions about spinoffs, and he has been far cooler to the idea than Tilton has.

In June 2006, during a Merrill Lynch conference, Arpey said: "We're not interested in expensive financial transactions that look like strategic transactions.

"We're mindful of the fact that we have these strategic assets, but we're also mindful of the fact we're running the business for the long run," he said. "We're running the business, for those of you who are shareholders, assuming you're going to be the same shareholders 10 years from now. And that we're still going to be running the place 10 years from now, and we're going to be looking at each other saying, 'Did we make the right decision for the long-term interest of the institution?'"

Meanwhile, in a research report issued Oct. 2, Boroch, the Bear Stearns analyst, wrote that Northwest's frequent-flier program, stakes in regional airlines and other assets could be worth $5 billion to $12 billion.

"Our full sum-of-the-parts analysis implies a share value range of $23-$51," he wrote. While the airline declined to comment, it is reasonable to assume that Wall Street analysts will offer CEO Doug Steenland plenty of opportunity to respond during this month's earnings call.