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American Airlines Mulls Sale of Fund Unit

AMR Corp. of Fort Worth, Texas, the parent company of American Airlines, is considering giving flight to its entire investment management unit, including its proprietary mutual fund unit.

The company has hired Salomon Smith Barney of New York to determine the value of its American Investment Services division, which manages a total of $27 billion. Those assets include $5 billion that the unit manages for large institutional clients such as credit unions and endowments, and $9 billion managed within its proprietary group of 15 American AAdvantage Funds.

The investment management unit also manages the pension fund assets of AMR Corp. employees, as well as $2 billion in cash for the public parent company.

"That's the first step in the sale of the business unit," said AMR spokesman Al Becker, in an interview. "When we get the [Salomon Smith Barney] report, we will then decide what's in the best interest of the company - to retain it, or sell it." Although it is not known when Salomon will complete its evaluation, the firm wants to get it done quickly, he added.

Becker confirmed reports that the airline's investment management division unit could fetch between $140 million and $190 million. "The unit has been profitable from day one, and has appreciative value," he said.

The impetus behind the potential sale of the asset management division is AMR's ongoing attempts to shave $3 billion in costs from the $20 billion financially troubled company over the next few years.

That AMR is mulling the sale of its investment management division doesn't come as a total surprise to airline analysts, who note that the entire airline industry has been under tremendous financial pressure, made worse since the events of Sept. 11. Many airlines are teetering on financial ruin, or have already filed for Chapter 11 bankruptcy protection while they restructure operations.

The goal is to shed those businesses that are not part of the core American Airlines business and are not vital to the future viability of the company, Becker said. Selling the entire investment management unit would be one way for AMR to divest itself of a profitable non-core business and gain cash from the sale.

Eye on the Sky

"This move, although taken under financial pressure, is consistent with the general trend of the large U.S. airlines, which have pulled back their limited moves toward diversification," said Philip Baggaley, managing director and senior airline industry analyst with Standard & Poor's in New York. Sometimes, diversification initiatives simply haven't panned out as expected. Other times, airlines decided they needed the cash to pay for initiatives tied to their core business, he added.

It is unlikely that AMR would consider selling only its mutual fund unit independently, Becker added. If AMR decides to put the unit on the auction block, bidders would be purchasing the whole enchilada, including the mutual fund unit, AMR's pension assets and cash, and its separate institutional accounts.

At the helm of AMR's mutual fund unit is Bill Quinn, who has been president of the unit since its inception 14 years ago, and currently serves as chairman of American Airline's credit union. Quinn is a 30-year AMR veteran.

Flying Solo

AMR's mutual fund unit is a bit of an anomaly. According to industry analysts, no other U.S. airline has its own investment management subsidiary, replete with mutual funds available to retail and institutional investors, as well as the corporation's own retirement plans.

"AMR is unique in that respect," said S&P's Baggaley.

The fund group is also one of a kind in that it compensates the four independent trustees who sit on the fund group's board of directors, and their spouses, with free air travel on American Airlines. The American AAdvantage Funds then compensate each trustee with payments that are equal to each individual's payable income tax on the assessed value of the free airline travel.

AMR separated out its investment management unit in 1986, then began offering its first four mutual funds one year later. Since then, the group has built out a diversified lineup of 15 funds which includes six actively managed equity funds, three equity index funds, three bond funds and three money market funds.

Many of the funds feature multiple managers, each of whom manages a portion of the fund. High-profile managers include Brandywine Asset Management, JPMorgan, The Boston Company Asset Management, Morgan Stanley Investment Management and Templeton Investment Counsel. But AMR manages the three money funds and one short-term bond fund internally.

Overall, the group has hung its reputation on providing low cost, no-load funds with top-name managers.

$10 Buys a Mile

Most of the funds offer multiple classes of shares catering to different audiences. In addition to an institutional share class for investors who can pony up a minimum of $2 million, AMR's PlanAhead class of shares is available to retail investors with a $2,500 minimum who purchase shares directly or through broker/dealers and financial planners. A separate AMR class of shares is offered only to investor in the tax-exempt retirement plans sponsored by AMR and its affiliates.

Perhaps most unusual is that the group also manages three American AAdvantage Mileage Funds' money market funds, so named because they award bonus American AAdvantage frequent flier miles. One mile is earned for every $10 that individual investors maintain in these funds. These money funds also offer Platinum Class shares to selected banks and broker/dealers, and Cash Management shares to large corporations and institutions that have significant assets to invest short-term.