The Asset Tail That Wags the Creating Dog

The frequent flyer program of American Airlines, AAdvantage, is currently worth more than the airline. According to an Icelandic investment fund, the program is worth $6 billion, about 1/2 a billion more than the airline, whose market cap is about $5.5 (which is $200,000 less than it's cash balance of $5.7b).

A September 28 article by AP's David Koenig tells the story.

This is similar to the situation faced by GM not long ago, when it's GMAC finance subsidiary was earning 5x more in profits than the manufacturing arm.

Nor is it much different than the plight of many small business owners, who, after operating for many years and then get ready to retire, find that the only asset of value is the real estate that they've been faithfully paying off for decades, while the business itself can't find a buyer.

GM sold a 51% stake in GMAC for $14 billion last year, giving it much-needed cash to invest in its turnaround (which, after reaching a deal with the UAW this week, is looking plausible).

Will American sell AAdvantage? Probably not. The company is not under financial or operating pressure, and American Chairman Gerard Arpey didn't express much interest in the idea.

From the standpoint of innovation, what's particularly interesting about all this is how value shifts to various different parts of the business depending on the context and situation. AAdvantage is a services business whose primary asset is its membership; the membership exists because the airline exists, but once the membership and the airline become separate entities, as they have, then the membership as an asset in itself can be monetized. Back in the late 1980s when AAdvantage was created, who would have thought that the values of the 2 assets could have switched as they have.

Given the stresses that airlines are currently under, and will continue to be under, creating subsidiary assets of significant value that extent the core operation into new areas is a meaningful innovation strategy, and one that companies will continue to pursue, even if most of them do it by accident.