FL Group, one of the largest shareholders in AMR Corp, has urged the board of the American Airlines parent to consider strategic alternatives, including spinning off its frequent-flyer program, to boost its flagging share price.

FL Group, an Icelandic private equity firm that owns 8.25 percent of AMR, said in a letter to the board that changes at the company were long overdue, given the 50 percent drop in the share price since January.

There is no time to lose, given the recent developments in the marketplace, FL Group Chief Executive Hannes Smarason said in a release.

The letter, disclosed on Thursday, was sent to the board on Tuesday, the day after AMR shares fell 12 percent after a disappointing revenue forecast stoked concerns of slowing demand, rising costs and weakening profits.

The stock rose more than 2 percent on Thursday.

Reykjavik-based FL Group, which owns Scandinavian discount airline Sterling Airlines and formerly owned Iceland's flagship carrier Icelandair, said it believed spinning off the AAdvantage frequent-flyer program could increase shareholder value by more than $4 billion.

AMR's market capitalization is about $5.4 billion.

Company officials weren't immediately available to comment.

Some industry experts said the move wouldn't address the cash-rich airline's high operating costs, which are its chief problem.

I don't know why they're trying to get them to spin it off, because they already have so much cash its ridiculous, said CreditSights analyst Roger King. It makes no sense to me.

UNREALIZED VALUE

FL Group's Smarason said AMR's structure obscured the profitability of the company's individual business units, some of which are more stable and have better growth prospects than an airline.

Compounding the problem, AMR does not disclose detailed financial information on its business units, he added.

To realize its potential, FL Group urged AMR to spin off business units to create value for shareholders.

We believe the AAdvantage Frequent Flyer program is the AMR business unit with the most value upside, although other AMR units could also unlock value, Smarason said in the letter to the board.

FL Group cited the successful spinoff of Air Canada's (ACa.TO: Quote, Profile, Research) loyalty program by parent ACE (ACEa.TO: Quote, Profile, Research). Aeroplan Income Fund (AER_u.TO: Quote, Profile, Research), which holds a minority stake in the program, posted a 55 percent rise in second-quarter profit on higher billings.

At Wednesday's close, Aeroplan shares had risen 50 percent in the last 12 months, while AMR had fallen 13 percent.

Loyalty programs generate revenue by selling loyalty points, mainly to credit card companies. Those revenues have been rising at a steady rate as credit card companies increasingly look to reward their customers.

We recognize there are differences between the U.S. and Canadian airline sectors, Smarason said. Nevertheless, we believe the case for enhanced value is clear and has already been proven.

While FL Group is urging a spinoff, the firm said AMR should keep effective control of the program in the near term to give the company and investors time to get comfortable with the new structure.

At an absolute minimum, said Smarason, 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.

AMR shares were up 47 cents, or 2.2 percent, at $22.24 in morning New York Stock Exchange trade.

(Reporting by Jeffrey Goldfarb and Chris Reiter in New York)

Iceland American Airlines