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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

     
þ   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For fiscal year ended December 31, 2003.
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
Commission file number
  1-8400.

AMR Corporation


(Exact name of registrant as specified in its charter)
     
Delaware   75-1825172

 
 
 
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. Employer Identification No.)
     
4333 Amon Carter Blvd.
Fort Worth, Texas
   
76155

 
 
 
(Address of principal executive offices)   (Zip Code)
     
Registrant’s telephone number, including area code
  (817) 963-1234

Securities registered pursuant to Section 12(b) of the Act:

     
Title of each class   Name of exchange on which registered

 
 
 
Common stock, $1 par value per share
  New York Stock Exchange
9.00% Debentures due 2016
  New York Stock Exchange
7.875% Public Income Notes due 2039
  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

NONE


(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o.

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2003, was approximately $1.7 billion. As of February 20, 2004, 159,584,639 shares of the registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Form 10-K incorporates by reference certain information from the Proxy Statement for the Annual Meeting of Stockholders to be held May 19, 2004.



 


TABLE OF CONTENTS

PART I
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
Deferred Compensation Agreement-John W. Bachmann
Deferred Compensation Agreement-Edward A. Brennan
Deferred Compensation Agreement-David L. Boren
Deferred Compensation Agreement-Armando M. Codina
Deferred Compensation Agreement-Earl G. Graves
Deferred Compensation Agreement-Ann M. Korologos
Deferred Compensation Agreement-Michael A. Miles
Deferred Compensation Agreement-Philip J. Purcell
Deferred Compensation Agreement-Joe M. Rodgers
Deferred Compensation Agreement-Judith Rodin
Deferred Compensation Agreement-Roger T. Staubach
1998 Long-Term Incentive Plan, as Amended
Current Form of Stock Option Agreement
Current Form of Deferred Stock Award Agreement
2003-2005 Performance Unit Agreement
Executive Termination Benefits Agreement-R. Reding
Executive Termination Benefits Agreement-J. Beer
Employment Agreement-William K. Ris, Jr.
Computation of Ratio of Earnings to Fixed Charges
Significant Subsidiaries
Consent of Independent Auditors
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification Pursuant to Section 906


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PART I

ITEM 1. BUSINESS

AMR Corporation (AMR or the Company) was incorporated in October 1982. AMR’s operations fall almost entirely in the airline industry. AMR’s principal subsidiary, American Airlines, Inc. (American Airlines), was founded in 1934. On April 9, 2001, American Airlines (through a wholly owned subsidiary, TWA Airlines LLC (TWA LLC)) purchased substantially all of the assets and assumed certain liabilities of Trans World Airlines, Inc. (TWA), the eighth largest U.S. carrier. American Airlines, including TWA LLC (collectively, American), is the largest scheduled passenger airline in the world. At the end of 2003, American provided scheduled jet service to approximately 150 destinations throughout North America, the Caribbean, Latin America, Europe and the Pacific. American is also one of the largest scheduled air freight carriers in the world, providing a wide range of freight and mail services to shippers throughout its system.

In addition, AMR Eagle Holding Corporation (AMR Eagle), a wholly-owned subsidiary of AMR, owns two regional airlines, which do business as “American Eagle” — American Eagle Airlines, Inc. and Executive Airlines, Inc. (Executive) (collectively, the American Eagle carriers). American also contracts with three independently owned regional airlines, which do business as the “American Connection” (the American Connection carriers). The American Eagle carriers and the American Connection carriers provide connecting service from eight of American’s high-traffic cities to smaller markets throughout the United States, Canada and the Caribbean.

AMR Investment Services, Inc. (AMR Investment), a wholly-owned subsidiary of AMR, is responsible for the investment and oversight of assets of AMR’s employee benefit plans, as well as its short-term investments. It also serves as the investment manager of the American AAdvantage Funds, a family of mutual funds with both institutional and retail shareholders, and provides customized fixed income portfolio management services. As of December 31, 2003, AMR Investment was responsible for management of approximately $30.2 billion in assets, including direct management of approximately $14.3 billion in short-term fixed income investments.

A. Recent Events

The events of the past several years have had a material adverse impact on the Company’s finances. The Company incurred operating losses of $0.8 billion, $3.3 billion and $2.5 billion for the years ended December 31, 2003, 2002 and 2001, respectively. The Company incurred net losses of $1.2 billion, $3.5 billion and $1.8 billion for the years ended December 31, 2003, 2002 and 2001, respectively.

These losses reflect, among other things, a substantial decrease in the Company’s revenues, which began in early 2001. The revenue decrease has been driven by a number of factors, some of which the Company believes will persist indefinitely or permanently. These factors include: (i) a steep fall-off in the demand for air travel, particularly business travel, primarily caused by weakness in the U.S. economy, (ii) reduced pricing power, resulting mainly from greater cost sensitivity on the part of travelers, especially business travelers, increasing competition from low-cost carriers (LCCs) and the continuing increase in pricing transparency resulting from the use of the Internet and (iii) the aftermath of the terrorist attacks of September 11, 2001, which accelerated and exacerbated the trend of decreased demand and reduced industry revenues.

In response to decreased demand following the events of September 11, 2001, the Company reduced its operating schedule by approximately 20 percent and reduced its workforce by approximately 20,000 jobs. Subsequent to these reductions, the Company determined that achieving $4 billion in annual capacity-independent cost savings was necessary to offset the revenue decline and initiated the following restructuring activities to realize this goal:

  In 2002, the Company announced a series of initiatives to reduce its annual costs by $2 billion. These initiatives are being implemented through 2005, and involve: (i) scheduling efficiencies, including the de-peaking of certain of its hubs, (ii) fleet simplification, (iii) streamlined customer interaction, (iv) distribution modifications, (v) in-flight product changes, (vi) operational changes and (vii) headquarters/administration efficiencies. As a result of the initiatives, the Company reduced an estimated 7,000 jobs by March 2003.

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  In February 2003, American asked its employees for approximately $1.8 billion in annual savings through a combination of changes in wages, benefits and work rules. In April 2003, American reached agreements with its three unions and also implemented various changes in the pay plans and benefits for non-unionized personnel, including officers and other management. In addition, the Company and American reached concessionary agreements with certain vendors, lessors, lenders and suppliers (collectively, the Vendors, and the agreements, the Vendor Agreements), resulting in approximately $200 million in annual cost savings. Generally, under the terms of these Vendor Agreements, the Company or American receives the benefit of lower rates and charges for certain goods and services, and more favorable rent and financing terms with respect to certain of its aircraft.

In the second quarter of 2003, in conjunction with some improvement in the U.S. economy, the Company’s revenue environment began to improve, as reflected in higher unit revenues (revenue per available seat mile) in May through December 2003, when compared to May through December 2002, respectively. Even with this improvement, however, the Company’s revenues remain depressed relative to historical levels. The Company therefore needs to see continued improvement in the revenue environment, additional cost reductions and further productivity improvements before it can return to sustained profitability at acceptable levels.

In 2003, the Company announced the Turnaround Plan, a four tenet plan designed to achieve sustained profitability.

  Lower Costs To Compete: As discussed above, one of the Company’s critical goals is to reduce costs by $4 billion annually, including $2 billion from strategic initiatives, $1.8 billion from labor cost savings and $200 million from vendors, suppliers and creditors. Progress toward this goal helped the Company achieve a significant year-over-year decline in costs per available seat mile in the fourth quarter of 2003 and in 2003 as a whole. If not for rising fuel prices, the Company’s progress in reducing costs would have been even more significant. The Company has returned underused gate space, consolidated terminal space, de-peaked its Chicago and Dallas/Fort Worth hub schedules (with its Miami hub to be de-peaked in 2004), closed a reservations center, reduced the size of its St. Louis hub, accelerated the retirement of certain aircraft, and improved aircraft utilization across its fleet.
 
  Fly Smart, Give Customers What They Value: This tenet focuses on customer service and revenue production, with emphasis on improving the Company’s relative revenue performance compared to others in the airline industry. Actions in this area include adding seats to American’s Boeing 757 and Airbus A300 fleets and restructuring the hubs at Chicago, Dallas/Fort Worth and St. Louis. Another step is expanding alliances. The Company’s progress includes a domestic codeshare with Alaska Airlines, governmental approval of codesharing with British Airways, the addition of SWISS International to the oneworld alliance, and the recently announced codeshare linkage with Mexicana (which, subject to governmental approvals, will be launched in April 2004).
 
  Pull Together, Win Together: Fostering greater cooperation than ever with employees, the Company has launched an unprecedented level of openness with employee groups and labor unions. The Company’s President and Chief Executive Officer holds regular “Town Hall"-style meetings with employees, and its Chief Financial Officer meets monthly with union leaders to discuss the Company’s financial results with them in much the same way as he briefs AMR’s Board of Directors. In addition, the Company has engaged a firm that works to bring union groups and management together, to help to promote a philosophy of active involvement.
 
  Build A Financial Foundation For Our Future: The Company ended the fourth quarter of 2003 with $2.6 billion in unrestricted cash and short-term investments and $527 million in restricted cash and short-term investments. The Company had $1.3 billion in unrestricted cash and short-term investments and $550 million in restricted cash and short-term investments at the close of the first quarter of 2003. From April 1 to December 31, 2003, cash flows from operations totaled $1.1 billion. The Company has also been able to sell some non-core assets, such as its stakes in Worldspan, a computer reservations company; Hotwire, a discount travel website company; and a portion of its stake in Orbitz, a travel planning website.

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The Company believes that it has sufficient liquidity to fund its operations, including capital expenditures and commitments. However, to maintain sufficient liquidity over the long-term as the Company continues to implement the Turnaround Plan and seeks to return to sustained profitability at acceptable levels, the Company will need continued access to additional funding. In addition, the Company’s ability to return to sustained profitability at acceptable levels will depend on a number of risk factors, many of which are largely beyond the Company’s control. Some of the risk factors that have had and/or may have a negative impact on the Company’s business and financial results are discussed in Risk Factors under Item 7. In particular, if the revenue environment deteriorates beyond normal seasonal trends, or the Company is unable to access the capital markets, it may be unable to fund its obligations and sustain its operations in the long-term.

B. Competition

Major Competitors The domestic airline industry is fiercely competitive. Currently, any U.S. air carrier deemed fit by the U.S. Department of Transportation (DOT) is free to operate scheduled passenger service between any two points within the U.S. and its possessions. Most major air carriers have developed hub-and-spoke systems and schedule patterns in an effort to maximize the revenue potential of their service. American operates five hubs: Dallas/Fort Worth (DFW), Chicago O’Hare, Miami, St. Louis and San Juan, Puerto Rico. Delta Air Lines (Delta) and United Air Lines (United) also have hub operations at DFW and Chicago O’Hare, respectively. The American Eagle carriers increase the number of markets the Company serves by providing connections at American’s hubs and certain other major airports — Boston, Los Angeles, Raleigh/Durham and New York’s LaGuardia and John F. Kennedy International Airports. The American Connection carriers provide connecting service to American through St. Louis. American’s competitors also own or have marketing agreements with regional carriers which provide similar services at their major hubs and other locations.

On most of its domestic non-stop routes, the Company faces competing service from at least one, and sometimes more than one domestic airline including: AirTran Airways, Alaska Airlines, America West Airlines, ATA Airlines, Continental Airlines (Continental), Delta, Frontier Airlines, JetBlue Airways, Northwest Airlines (Northwest), Southwest Airlines, United and US Airways, and their affiliated regional carriers. Competition is even greater between cities that require a connection, where the major airlines may compete via their respective hubs. In addition, the Company faces competition on some of its routes from carriers operating point-to-point service on such routes. The Company also competes with all-cargo and charter carriers and, particularly on shorter segments, ground transportation. On all of its routes, pricing decisions are affected, in large part, by the need to meet competition from other airlines.

International Air Transportation In addition to its extensive domestic service, the Company provides international service to the Caribbean, Canada, Latin America, Europe and the Pacific. The Company’s operating revenues from foreign operations were approximately 27 percent of the Company’s total operating revenues in 2003 and 28 percent of the Company’s total operating revenues in 2002 and 2001. Additional information about the Company’s foreign operations is included in Note 14 to the consolidated financial statements.

In providing international air transportation, the Company competes with foreign investor-owned carriers, state-owned carriers and U.S. airlines that have been granted authority to provide scheduled passenger and cargo service between the U.S. and various overseas locations. The major U.S. air carriers have some advantage over foreign competitors in their ability to generate traffic from their extensive domestic route systems. In many cases, however, foreign governments limit U.S. air carriers’ rights to carry passengers beyond designated gateway cities in foreign countries. To improve access to each other’s markets, various U.S. and foreign air carriers — including American - have established marketing relationships with other airlines and rail companies. American currently has marketing relationships with Aer Lingus, Air Pacific, Air Tahiti Nui, Alaska Airlines, British Airways, Cathay Pacific, China Eastern Airlines, Deutsche Bahn, EL AL, EVA Air, Finnair, Gulf Air, Hawaiian Airlines, Iberia, Japan Airlines, LanChile, Mexicana (planned launch in April 2004, subject to governmental approvals), Qantas Airways, SN Brussels, SNCF, Southern Winds, Swiss International Air Lines, TACA Group, the TAM Group, Thalys and Turkish Airlines. In the coming years, the Company expects to develop these programs further and to evaluate new alliances with other carriers.

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American is also a founding member of the oneworld alliance, which includes Aer Lingus, British Airways, Cathay Pacific, Finnair, LanChile, Iberia, and Qantas. On September 23, 2003, the alliance announced its intention for Swiss International Air Lines to join oneworld in 2004. The oneworld alliance links the networks of the member carriers to enhance customer service and smooth connections to the destinations served by the alliance, including linking the carriers’ frequent flyer programs and access to the carriers’ airport lounge facilities. Several of American’s major competitors are members of marketing/operational alliances that enjoy antitrust immunity. To the extent that American and British Airways, the largest members of the oneworld alliance, are restricted in their relationship because they lack antitrust immunity, the carriers are at a competitive disadvantage vis-à-vis other alliances that have antitrust immunity. On May 30, 2003, the DOT finalized an order giving American and British Airways permission to codeshare on a wide number of flights beyond the carriers’ gateways in the United Kingdom and the United States. On September 17, 2003, the carriers implemented their first phase of codeshare services and plan to expand this cooperation further in 2004.

Price Competition The airline industry is characterized by substantial price competition. Fare discounting by competitors has historically had a negative effect on the Company’s financial results because the Company is generally required to match competitors’ fares to maintain passenger traffic. During recent years, a number of new LCCs have entered the domestic market and several major airlines, including the Company, have implemented efforts to lower their costs. In addition, several air carriers have recently reorganized or are reorganizing under Chapter 11 of the United States Bankruptcy Code, including United and US Airways. In the past, air carriers involved in reorganizations have undertaken substantial fare discounting in order to maintain cash flows and enhance customer loyalty. Further fare reductions, domestic and international, may therefore occur in the future. If fare reductions are not offset by increases in passenger traffic, changes in the mix of traffic that improve yields (passenger revenue per passenger mile) and/or cost reductions, the Company’s operating results will be negatively impacted.

Distribution Systems The growing use of electronic ticket distribution systems provides the Company with an opportunity to lower its distribution costs. However, the continuous increase in pricing transparency resulting from use of the Internet has enabled cost-conscious customers to more easily obtain the lowest fare on any given route. The Company continues to expand the capabilities of its Internet website — AA.com — and the use of electronic ticketing throughout the Company’s network. In addition, the Company, along with United, Continental, Delta and Northwest, owns an interest in Orbitz, a travel planning website. Orbitz provides online access to airline, hotel, car rental and other travel services. The Company also has marketing agreements with other Internet travel services.

The majority of the tickets for travel on American and American Eagle are sold by travel agents. On March 18, 2002, American announced that it would no longer pay base commissions on tickets issued by travel agents in the United States, Puerto Rico, and Canada (which generally were five percent of the price of a ticket, capped at a maximum of $20 for a domestic roundtrip itinerary and $100 for an international roundtrip). As discussed in Item 3 Legal Proceedings, the Company is subject to legal challenges related to these changes. American continues, however, to pay certain commissions to travel agents in connection with special revenue programs. American believes that other domestic carriers also no longer pay base commissions on tickets issued by travel agents in the U.S., Puerto Rico and Canada, but pay certain commissions in connection with their own special revenue programs. Accordingly, airlines compete, not only with respect to the price of the tickets sold, but also with respect to the amount of special revenue program commissions that may be paid.

C. Regulation

General The Airline Deregulation Act of 1978, as amended, eliminated most domestic economic regulation of passenger and freight transportation. However, the DOT and the Federal Aviation Administration (FAA) still exercise certain regulatory authority over air carriers. The DOT maintains jurisdiction over the approval of international codeshare agreements, international route authorities and certain consumer protection and unfair competition matters, such as advertising, denied boarding compensation and baggage liability.

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The FAA regulates flying operations generally, including establishing personnel, aircraft and certain security standards. As part of that oversight, the FAA has implemented a number of requirements that the Company is incorporating into its maintenance programs. In 2003, the Company completed modifications to improve flight deck security on all fleet types. The Company is progressing toward the completion of over 100 airworthiness directives including McDonnell Douglas MD-80 metal-mylar insulation replacement, enhanced ground proximity warning systems, McDonnell Douglas MD-80 main landing gear piston improvements, Boeing 757 and Boeing 767 pylon improvements, Boeing 737 elevator and rudder improvements, inspections to monitor Airbus A300 vertical stabilizers and Airbus A300 structural improvements. Based on its current implementation schedule, the Company expects to be in compliance with the applicable requirements within the required time periods.

The Department of Justice (DOJ) has jurisdiction over airline antitrust matters. The U.S. Postal Service has jurisdiction over certain aspects of the transportation of mail and related services. Labor relations in the air transportation industry are regulated under the Railway Labor Act, which vests in the National Mediation Board (NMB) certain regulatory functions with respect to disputes between airlines and labor unions relating to union representation and collective bargaining agreements.

International International air transportation is subject to extensive government regulation. The Company’s operating authority in international markets is subject to aviation agreements between the U.S. and the respective countries or governments, and in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign governments. Moreover, alliances with international carriers may be subject to the jurisdiction and regulations of various foreign agencies. Bilateral agreements between the U.S. and various foreign governments of countries served by the Company are periodically subject to renegotiation. Changes in U.S. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of route authorities, or otherwise adversely affect the Company’s international operations. In addition, at some foreign airports, an air carrier needs slots (landing and take-off authorizations) before the air carrier can introduce new service or increase existing service. The availability of such slots is not assured and the inability of the Company to obtain and retain needed slots could therefore inhibit its efforts to compete in certain international markets.

Security In November 2001, the Aviation and Transportation Security Act (ATSA) was enacted. The ATSA created a new government agency, the Transportation Security Administration (TSA), which is part of the Department of Homeland Security and is responsible for aviation security. The ATSA mandates that the TSA provide for the screening of all passengers and property, including U.S. mail, cargo, carry-on and checked baggage, and other articles that will be carried aboard a passenger aircraft. The ATSA also provides for increased security in flight decks of aircraft and requires federal air marshals to be present on certain flights.

Effective February 1, 2002, the ATSA imposed a $2.50 per enplanement security service fee ($5 one-way maximum fee), which is being collected by the air carriers and submitted to the government to pay for these enhanced security measures. Additionally, for the years 2002, 2003 and 2004, air carriers are required to submit to the government an amount equal to what the air carriers paid for screening passengers and property in 2000. After 2004, this fee may be assessed based upon some other allocation. The Emergency Wartime Supplemental Appropriations Act, 2003 temporarily suspended the collection of these fees from June 1, 2003 to September 30, 2003.

In addition, the ATSA requires air carriers to honor tickets for suspended service on other air carriers that are insolvent or have declared bankruptcy within 18 months of the passage of the ATSA. The Vision 100 — Century of Aviation Reauthorization Act, enacted in December 2003, extends this provision to 36 months after the passage of the ATSA. To be eligible, a passenger must make arrangements with the air carrier within 60 days after the date on which the passenger’s air transportation was suspended. This feature of the ATSA could have a significant impact on the Company. If the Company is not reimbursed for honoring such tickets, the impact could be adverse.

Airline Fares Airlines are permitted to establish their own domestic fares without governmental regulation. The DOT maintains authority over international fares, rates and charges. In addition, international fares and rates are sometimes subject to the jurisdiction of the governments of the foreign countries which the Company serves. While air carriers are required to file and adhere to international fare and rate tariffs, substantial commissions, overrides and discounts to travel agents, brokers and wholesalers characterize many international markets.

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Airport Access The FAA has designated New York John F. Kennedy, New York LaGuardia, and Washington Reagan airports as high-density traffic airports. The high-density rule limits the number of Instrument Flight Rule operations — take-offs and landings — permitted per hour and requires that a slot support each operation. In April 2000, the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century (Air 21 Act) was enacted. It will eliminate slot restrictions at New York John F. Kennedy and New York LaGuardia airports in 2007. The Company does not expect the elimination of these slot restrictions will have a material adverse impact on the Company’s operations, or its financial condition, results of operations or cash flows.

Currently, the FAA permits the purchasing, selling, leasing or transferring of slots except those slots designated as international, essential air service or Air 21 Act slots. Trading of any domestic slot is permitted subject to certain parameters. Most foreign airports, including London Heathrow, a major European destination for American, also have slot allocations. Most foreign authorities do not permit the purchasing, selling or leasing of slots.

Although the Company is constrained by slots, it currently has sufficient slot authorizations to operate its existing flights and has generally been able to obtain slots to expand its operations and change its schedules. However, there is no assurance that the Company will be able to obtain slots for these purposes in the future because, among other factors, slot allocations are subject to changes in government policies.

In January 2004, American reached an agreement with the FAA whereby it agreed to reduce operations at Chicago O’Hare during certain peak times. The FAA announced that a similar agreement between the FAA and United was reached. American does not anticipate that this agreement with the FAA will have any material impact on its operations.

Environmental Matters The Company is subject to various laws and government regulations concerning environmental matters and employee safety and health in the U.S. and other countries. U.S. federal laws that have a particular impact on the Company include the Airport Noise and Capacity Act of 1990 (ANCA), the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or the Superfund Act). The Company is also subject to the oversight of the Occupational Safety and Health Administration (OSHA) concerning employee safety and health matters. The U.S. Environmental Protection Agency (EPA), OSHA, and other federal agencies have been authorized to promulgate regulations that have an impact on the Company’s operations. In addition to these federal activities, various states have been delegated certain authorities under the aforementioned federal statutes. Many state and local governments have adopted environmental and employee safety and health laws and regulations, some of which are similar to or stricter than federal requirements.

The ANCA recognizes the rights of airport operators with noise problems to implement local noise abatement programs so long as they do not interfere unreasonably with interstate or foreign commerce or the national air transportation system. Authorities in several cities have promulgated aircraft noise reduction programs, including the imposition of nighttime curfews. The ANCA generally requires FAA approval of local noise restrictions on aircraft. While the Company has had sufficient scheduling flexibility to accommodate local noise restrictions imposed to date, the Company’s operations could be adversely affected if locally-imposed regulations become more restrictive or widespread.

American has been named as a potentially responsible party (PRP) for contamination at the Double Eagle Superfund Site in Oklahoma City, OK. American’s alleged volumetric contributions are small when compared with those of other PRPs. American is participating with a number of other PRPs in a Joint Defense Group that is actively conducting settlement negotiations with EPA and state officials. The group is seeking a settlement on behalf of its members that will enable American to resolve its past and present liabilities at the Site in exchange for a one-time, lump-sum settlement payment. American expects that its payment will be immaterial.

American, along with most other tenants at the San Francisco International Airport (SFIA), has been ordered by the California Regional Water Quality Control Board to engage in various studies of potential environmental contamination at the airport and to undertake remedial measures, if necessary. SFIA is also seeking to recover its past costs related to the contamination from the tenants. American’s potential contribution is unknown, but is not expected to be material.

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Miami-Dade County (the County) is currently investigating and remediating various environmental conditions at the Miami International Airport (MIA) and funding the remediation costs through landing fees and various cost recovery methods. American and AMR Eagle have been named PRPs for the contamination at MIA. During the second quarter of 2001, the County filed a lawsuit against 17 defendants, including American, in an attempt to recover its past and future cleanup costs (Miami-Dade County, Florida v. Advance Cargo Services, Inc., et al. in the Florida Circuit Court). In addition to the 17 defendants named in the lawsuit, 243 other agencies and companies were also named as PRPs and contributors to the contamination. American’s and AMR Eagle’s portion of the cleanup costs cannot be reasonably estimated due to various factors, including the unknown extent of the remedial actions that may be required, the proportion of the cost that will ultimately be recovered from the responsible parties, and uncertainties regarding the environmental agencies that will ultimately supervise the remedial activities and the nature of that supervision. The Company is vigorously defending the lawsuit.

In 1999, American was ordered by the New York State Department of Environmental Conservation (NYSDEC) to conduct remediation of environmental contamination located at Terminals 8 and 9 at New York’s John F. Kennedy International Airport (JFK). American is seeking to recover a portion of the remediation costs from previous users of the Terminals 8 and 9 premises. In 2002, American began negotiating an order with NYSDEC for the remediation of a JFK off-terminal hangar facility. American does not expect the costs associated with this remediation to be material.

In 1996, American and Executive, along with other tenants at the Luis Munoz Marin International Airport in San Juan, Puerto Rico were notified by the Port Authority that it considered them potentially responsible for environmental contamination at the airport. In 2003, the Port Authority requested that American, among other airport tenants, fund an ongoing subsurface investigation and site assessment. American denied liability for the related costs. No further action has been taken against American or Executive.

American Eagle Airlines, Inc. has been notified of its potential liability under New York law at an inactive hazardous waste site in Poughkeepsie, New York. Pursuant to an Administrative Order on Consent entered into with NYSDEC, American Eagle is implementing a final remedy to address contamination at the site. The costs of this final remedy are not material.

The Company does not expect these matters, individually or collectively, to have a material impact on its financial condition, results of operations or cash flows.

D. Labor

The airline business is labor intensive. Wages, salaries and benefits represented approximately 40 percent of the Company’s consolidated operating expenses for the year ended December 31, 2003. The average equivalent number of employees of the Company’s subsidiaries for the year ended December 31, 2003 was 96,400.

The majority of these employees are represented by labor unions and covered by collective bargaining agreements. Relations with such labor organizations are governed by the Railway Labor Act. Under this act, the collective bargaining agreements among the Company’s subsidiaries and these organizations generally do not expire but instead become amendable as of a stated date. If either party wishes to modify the terms of any such agreement, it must notify the other party in the manner described in the agreement. After receipt of such notice, the parties must meet for direct negotiations, and if no agreement is reached, either party may request the National Mediation Board (NMB) to appoint a federal mediator. If no agreement is reached in mediation, the NMB may declare at some time that an impasse exists, and if an impasse is declared, the NMB proffers binding arbitration to the parties. Either party may decline to submit to arbitration. If arbitration is rejected by either party, a 30-day “cooling off” period commences. During that period (or after), a Presidential Emergency Board (PEB) may be established, which examines the parties’ positions and recommends a solution. The PEB process lasts for 30 days and is followed by a “cooling off” period of 30 days. At the end of a “cooling off” period, unless an agreement is reached or action is taken by Congress, the labor organization may strike and the airline may resort to “self-help”, including the imposition of any or all of its proposed amendments and the hiring of new employees to replace the striking workers.

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In April 2003, American reached agreements with its three major unions — the Allied Pilots Association (the APA), the Transport Workers Union of America (AFL-CIO) (the TWU) and the Association of Professional Flight Attendants (the APFA) (the Labor Agreements). The Labor Agreements substantially reduced the labor costs associated with the employees represented by the unions. In conjunction with the Labor Agreements, American implemented various changes in the pay plans and benefits for non-unionized personnel, including officers and other management (the Management Reductions). The Labor Agreements will not become amendable until 2008.

The Air Line Pilots Association (ALPA), which represents American Eagle pilots, reached agreement with American Eagle effective September 1, 1997, to have all of the pilots of the American Eagle carriers covered by a single collective bargaining agreement. This agreement lasts until October 31, 2013. The agreement provides to the parties the right to seek limited changes in 2004, 2008 and 2012. If the parties are unable to agree on the limited changes, they also agreed that the issues would be resolved by interest arbitration, without the exercise of self-help (such as a strike). ALPA and American Eagle negotiated a tentative agreement in 2000, but that agreement failed in ratification. Thereafter, the parties participated in interest arbitration. The interest arbitration panel determined the limited changes which should be made and these changes were appropriately effected. The Company expects to begin negotiations under the agreement in the first quarter of 2004.

The Association of Flight Attendants (AFA), which represents the flight attendants of the American Eagle carriers, reached agreement with American Eagle effective March 2, 1998, to have all flight attendants of the American Eagle carriers covered by a single contract. The agreement became amendable on September 2, 2001. However, the parties agreed to commence negotiations over amendments to the agreement in March 2001. The mediation assistance of the NMB was requested and mediation commenced in November 2003; mediated negotiations continue. The other union employees at the American Eagle carriers are covered by separate agreements with the TWU, which were effective April 28, 1998, and were amendable April 28, 2003. American Eagle and the TWU have commenced negotiations. American Eagle cannot predict the result of the mediation or these negotiations.

The non-union employees formerly with TWA LLC have been integrated into American’s work force. With respect to the integration of unionized employees formerly employed by TWA LLC, American reached integration agreements with the APA (with respect to pilot integration) and the APFA (with respect to flight attendant integration). American and the TWU participated in arbitration and resolved certain unionized ground employee integration issues in late February and early March 2002. In early April 2002, the NMB declared American and TWA LLC a single carrier for labor relations purposes and designated American’s incumbent unions as the collective bargaining representatives of the relevant work groups at both American and TWA LLC. Since American’s unions thereafter represented the relevant employees at both carriers, the integration mechanisms applicable to the unions at American could then begin to be effected. The integration of the unionized work groups is occurring in accordance with those mechanisms.

E. Fuel

The Company’s operations and financial results are significantly affected by the availability and price of jet fuel. The Company’s fuel costs and consumption for the years 2001 through 2003 were:

                                 
            Average   Percent of
    Gallons           Cost Per   AMR’s
    Consumed   Total Cost   Gallon   Operating
Year
  (in millions)
  (in millions)
  (in cents)
  Expenses
2001     3,461     $ 2,888       81.4       13.5  
2002     3,345       2,562       76.2       12.3  
2003     3,161       2,772       87.7       15.2  

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The impact of fuel price changes on the Company and its competitors depends on various factors, including hedging strategies. The Company has a fuel hedging program in which it enters into jet fuel, heating oil and crude oil swap and option contracts to dampen the impact of the volatility of jet fuel prices. During 2003, 2002 and 2001, the Company’s fuel hedging program reduced the Company’s fuel expense by approximately $149 million, $4 million and $29 million, respectively. As of December 31, 2003, the Company had hedged, with option contracts, approximately 21 percent of its estimated first quarter 2004 fuel requirements, 16 percent of its second quarter 2004 estimated fuel requirements and six percent of its estimated fuel requirements for the remainder of 2004. The Company’s credit rating, as discussed in Liquidity and Capital Resources under Item 7, has limited its ability to enter into certain types of fuel hedge contracts. A further deterioration of its credit rating or liquidity position may negatively affect the Company’s ability to hedge fuel in the future. See the Risk Factors under Item 7 for information regarding fuel.

Additional information regarding the Company’s fuel program is also included in Item 7(A) — Quantitative and Qualitative Disclosures about Market Risk and in Note 7 to the consolidated financial statements.

F. Frequent Flyer Program

American established the AAdvantage frequent flyer program (AAdvantage) to develop passenger loyalty by offering awards to travelers for their continued patronage. The Company believes that the AAdvantage program is one of its competitive strengths. AAdvantage members earn mileage credits for flights on American, American Eagle and certain other participating airlines, or by using services of other program participants, including bank credit card issuers, hotels, car rental companies and phone service companies. American sells mileage credits and related services to the other companies participating in the program. American reserves the right to change the AAdvantage program at any time without notice and end the program with six months notice.

Mileage credits can be redeemed for free, discounted or upgraded travel on American, American Eagle or participating airlines, or for other travel industry awards. Once a member accrues sufficient mileage for an award, the member may book award travel on American. Most travel awards are subject to capacity controlled seating. Mileage credit does not expire, provided a customer has any type of qualifying activity at least once every 36 months.

American uses the incremental cost method to account for the portion of its frequent flyer liability incurred when AAdvantage members earn mileage credits by flying on American or American Eagle. American’s frequent flyer liability is accrued each time a member accumulates sufficient mileage in his or her account to claim the lowest level of free travel award (25,000 miles) and the award is expected to be used for free travel. American includes fuel, food, and reservations/ticketing costs in the calculation of incremental cost. These estimates are generally updated based upon the Company’s 12-month historical average of such costs. American also accrues a frequent flier liability for the mileage credits that are expected to be used for travel on participating airlines.

Revenue earned from selling AAdvantage miles to other companies is recognized in two components. The first component represents the revenue for air transportation sold and is valued at current market rates. This revenue is deferred and recognized over the period the mileage is expected to be used, which is currently estimated to be 28 months. The second revenue component, representing the marketing products sold and administrative costs associated with operating the AAdvantage program, is recognized immediately.

At December 31, 2003 and 2002, American estimated that approximately 9.3 million free travel awards were expected to be redeemed for free travel on American and American Eagle. In making the estimate of free travel awards, American has excluded mileage in inactive accounts, mileage related to accounts that have not yet reached the lowest level of free travel award, and mileage in active accounts that have reached the lowest level of free travel award but which are not expected to ever be redeemed for free travel on American or participating airlines. The Company’s total liability for future AAdvantage award redemptions for free, discounted or upgraded travel on American, American Eagle or participating airlines and unrecognized revenue from selling AAdvantage miles to other companies was approximately $1.2 billion (and is recorded as a component of Air traffic liability in the consolidated balance sheets), representing 18.8 percent and 16.2 percent of AMR’s total current liabilities, at December 31, 2003 and 2002, respectively.

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The number of free travel awards used for travel on American and American Eagle in 2003 and 2002 was 2.5 million and 2.6 million, respectively, representing approximately 7.8 percent and 8.1 percent of passengers boarded, respectively. The Company believes displacement of revenue passengers is minimal given the Company’s load factors, its ability to manage frequent flyer seat inventory, and the relatively low ratio of free award usage to total passengers boarded.

G. Other Matters

Seasonality and Other Factors The Company’s results of operations for any interim period are not necessarily indicative of those for the entire year, since the air transportation business is subject to seasonal fluctuations.

The results of operations in the air transportation business have also significantly fluctuated in the past in response to general economic conditions. In addition, fears of terrorism or war, fare initiatives, fluctuations in fuel prices, labor actions, weather and other factors could impact this seasonal pattern. Unaudited quarterly financial data for the two-year period ended December 31, 2003 is included in Note 15 to the consolidated financial statements.

No material part of the business of AMR and its subsidiaries is dependent upon a single customer or very few customers. Consequently, the loss of the Company’s largest few customers would not have a materially adverse effect upon the Company.

Insurance The Company carries insurance for public liability, passenger liability, property damage and all-risk coverage for damage to its aircraft.

As a result of the September 11, 2001 events, aviation insurers significantly reduced the amount of insurance coverage available to commercial air carriers for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events (war-risk coverage). At the same time, these insurers significantly increased the premiums for aviation insurance in general.

The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines until August 31, 2004 covering losses to employees, passengers, third parties and aircraft. In addition, the Secretary of Transportation may extend the policy until December 31, 2004, at his discretion. However, there is no assurance that it will be extended. If the U.S. government does not extend the policy beyond August 31, 2004, the Company will attempt to purchase similar coverage with narrower scope from commercial insurers at an additional cost. To the extent this coverage is not available at commercially reasonable rates, the Company’s results of operations would be negatively affected. In addition, in the event commercial insurance carriers further reduce the amount of insurance coverage available to the Company, or significantly increase its cost, the Company’s operations and/or financial position and results of operations would be adversely affected.

Other Government Matters In time of war or during a national emergency or defense oriented situation, American and other air carriers can be required to provide airlift services to the Air Mobility Command under the Civil Reserve Air Fleet program (CRAF). The Air Mobility Command, which runs CRAF, activated Stage I of CRAF as part of the U.S. government’s build-up for military action in Iraq during 2003. Stage I of CRAF was in effect from February 8, 2003 until June 18, 2003. American provided five airplanes, including three 777s and two 767-300s, with crews for Stage I of CRAF, which did not significantly impact its operations. In the event the Company has to provide a substantial number of aircraft and crew to the Air Mobility Command, its operations could be adversely impacted.

Available Information The Company makes its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 available free of charge under the Investor Relations page on its website, www.amrcorp.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. In addition, the Company’s code of ethics, which applies to all employees of the Company including the Company’s Chief Executive Officer (CEO), Chief Financial Officer (CFO) and Controller, is posted under the Investor Relations page on its website, www.amrcorp.com. The Company intends to disclose any amendments to the code of ethics, or waivers of the code of ethics on behalf of the CEO, CFO or Controller, under the Investor Relations page on its website, www.amrcorp.com.

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ITEM 2. PROPERTIES

Flight Equipment — Operating

Owned and leased aircraft operated by the Company at December 31, 2003 included:

                                             
                                        Average
                Capital   Operating           Age
Equipment Type
  Seating Capacity
  Owned
  Leased
  Leased
  Total
  (Years)
American Airlines Aircraft*
                                           
Airbus A300-600R
  266/267     10             24       34       14  
Boeing 737-800
  142     67             10       77       4  
Boeing 757-200
  168/176/188     84       9       47       140       9  
Boeing 767-200 Extended Range
  158     4       11       1       16       17  
Boeing 767-300 Extended Range
  212/213     40       7       11       58       10  
Boeing 777-200 Extended Range
  223/236/245     45                   45       3  
Fokker 100
  87     14             24       38       11  
McDonnell Douglas MD-80
  129/131     148       72       142       362       15  
 
       
 
     
 
     
 
     
 
     
 
 
Total
        412       99       259       770       11  
 
       
 
     
 
     
 
     
 
     
 
 
AMR Eagle Aircraft
                                           
ATR 42
  46     13                   13       12  
Bombardier CRJ-700
  70     19                   19       1  
Embraer 135
  37     39                   39       4  
Embraer 140
  44     59                   59       1  
Embraer 145
  50     52                   52       4  
Super ATR
  64/66     40             2       42       9  
Saab 340B/340B Plus
  34     9       13       25       47       10  
 
       
 
     
 
     
 
     
 
     
 
 
Total
        231       13       27       271       7  
 
       
 
     
 
     
 
     
 
     
 
 

*   American Airlines aircraft totals include 60 McDonnell Douglas MD-80s on the TWA LLC operating certificate.

Of the operating aircraft listed above, one capital leased Boeing 767-200ER, 18 owned McDonnell Douglas MD-80s, ten operating leased McDonnell Douglas MD-80s and 11 operating leased Saab 340Bs were in temporary storage as of December 31, 2003.

In 2003, AMR Eagle agreed to sell 19 ATR 42 aircraft, with deliveries beginning in June 2003 and ending in December 2004 and American agreed to sell 14 Fokker 100 aircraft, with deliveries beginning in September 2003 and ending in August 2004. As of December 31, 2003, six ATR 42 and nine Fokker 100 aircraft have been delivered.

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Flight Equipment — Non-Operating

Owned and leased aircraft not operated by the Company at December 31, 2003 included:

                                 
            Capital   Operating    
Equipment Type
  Owned
  Leased
  Leased
  Total
American Airlines Aircraft
                               
Boeing 757-200
                9       9  
Boeing 767-200
    9                   9  
Boeing 767-200 Extended Range
    4                   4  
Fokker 100
    9                   9  
McDonnell Douglas MD-80
                3       3  
 
   
 
     
 
     
 
     
 
 
Total
    22             12       34  
 
   
 
     
 
     
 
     
 
 
AMR Eagle Aircraft
                               
Embraer 145
    10                   10  
Saab 340B/340B Plus
    5       42             47  
 
   
 
     
 
     
 
     
 
 
Total
    15       42             57  
 
   
 
     
 
     
 
     
 
 

In the fourth quarter of 2003, the Company decided to permanently retire its nine owned Boeing 767-200s and four owned Boeing 767-200ERs, which were previously in temporary storage. The Company has no plan to return these aircraft to service and is investigating disposition opportunities.

In addition, in early 2004, American agreed to sell 18 Fokker 100 aircraft (nine of which are operating aircraft as of December 31, 2003), with deliveries beginning in March 2004 and ending in November 2004.

AMR Eagle has leased its 10 owned Embraer 145s not operated by the Company to Trans States Airlines, Inc.

The Company is actively marketing its remaining owned non-operating aircraft and does not anticipate bringing these aircraft back into service.

For information concerning the estimated useful lives and residual values for owned aircraft, lease terms for leased aircraft and amortization relating to aircraft under capital leases, see Notes 1 and 5 to the consolidated financial statements.

Lease expirations for the leased aircraft included in the preceding table of operating flight equipment as of December 31, 2003, are:

                                                 
                                            2009
                                            and
Equipment Type
  2004
  2005
  2006
  2007
  2008
  Thereafter
American Airlines Aircraft
                                               
Airbus A300-600R
                            3       21  
Boeing 737-800
                                  10  
Boeing 757-200
    3                   15       6       32  
Boeing 767-200 Extended Range
                            2       10  
Boeing 767-300 Extended Range
    1       4       2             3       8  
Fokker 100
    20                               4  
McDonnell Douglas MD-80
    3       15             1       12       183  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    27       19       2       16       26       268  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
AMR Eagle Aircraft
                                               
Super ATR
    2                                
Saab 340B/340B Plus
          7       12       11       8        
 
   
 
     
 
     
 
     
 
     
 
     
 
 
 
    2       7       12       11       8        
 
   
 
     
 
     
 
     
 
     
 
     
 
 

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Substantially all of the Company’s aircraft leases include an option to purchase the aircraft or to extend the lease term, or both, with the purchase price or renewal rental to be based essentially on the market value of the aircraft at the end of the term of the lease or at a predetermined fixed amount.

Ground Properties

The Company leases, or has built as leasehold improvements on leased property: most of its airport and terminal facilities; its maintenance and training facilities in Fort Worth, Texas; its principal overhaul and maintenance bases at Tulsa International Airport (Tulsa, Oklahoma), Kansas City International Airport (Kansas City, Missouri) and Alliance Airport (Fort Worth, Texas); its regional reservation offices; and local ticket and administration offices throughout the system. American has entered into agreements with the Tulsa Municipal Airport Trust; the Alliance Airport Authority, Fort Worth, Texas; the New York City Industrial Development Agency; and the Dallas/Fort Worth, Chicago O’Hare, Newark, San Juan, and Los Angeles airport authorities to provide funds for constructing, improving and modifying facilities and acquiring equipment which are or will be leased to the Company. The Company also uses public airports for its flight operations under lease or use arrangements with the municipalities or governmental agencies owning or controlling them and leases certain other ground equipment for use at its facilities.

For information concerning the estimated lives and residual values for owned ground properties, lease terms and amortization relating to ground properties under capital leases, and acquisitions of ground properties, see Notes 1 and 5 to the consolidated financial statements.

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ITEM 3. LEGAL PROCEEDINGS

On July 26, 1999, a class action lawsuit was filed, and in November 1999 an amended complaint was filed, against AMR Corporation, American Airlines, Inc., AMR Eagle Holding Corporation, Airlines Reporting Corporation, and the Sabre Group Holdings, Inc. in the United States District Court for the Central District of California, Western Division (Westways World Travel, Inc. v. AMR Corp., et al.). The lawsuit alleges that requiring travel agencies to pay debit memos to American for violations of American’s fare rules (by customers of the agencies): (1) breaches the Agent Reporting Agreement between American and AMR Eagle and the plaintiffs; (2) constitutes unjust enrichment; and (3) violates the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). The certified class includes all travel agencies who have been or will be required to pay money to American for debit memos for fare rules violations from July 26, 1995 to the present. The plaintiffs seek to enjoin American from enforcing the pricing rules in question and to recover the amounts paid for debit memos, plus treble damages, attorneys’ fees, and costs. The Company intends to vigorously defend the lawsuit. Although the Company believes that the litigation is without merit, a final adverse court decision could impose restrictions on the Company’s relationships with travel agencies, which could have an adverse impact on the Company.

On May 13, 1999, the United States (through the Antitrust Division of the Department of Justice) sued AMR Corporation, American Airlines, Inc., and AMR Eagle Holding Corporation in federal court in Wichita, Kansas (United States v. AMR Corporation, et al, No. 99-1180-JTM, United States District Court for the District of Kansas). The lawsuit alleged that American unlawfully monopolized or attempted to monopolize airline passenger service to and from Dallas/Fort Worth International Airport (DFW) by increasing service when new competitors began flying to DFW, and by matching these new competitors’ fares. The Department of Justice sought to enjoin American from engaging in the alleged improper conduct and to impose restraints on American to remedy the alleged effects of its past conduct. On April 27, 2001, the U.S. District Court for the District of Kansas granted American’s motion for summary judgment, and on July 3, 2003, the 10th Circuit Court of Appeals affirmed. The Department of Justice did not seek to have the case reviewed by the U.S. Supreme Court.

Between May 14, 1999 and June 7, 1999, seven class action lawsuits were filed against AMR Corporation, American Airlines, Inc., and AMR Eagle Holding Corporation in the United States District Court in Wichita, Kansas seeking treble damages under federal and state antitrust laws, as well as injunctive relief and attorneys’ fees (King v. AMR Corp., et al.; Smith v. AMR Corp., et al.; Team Electric v. AMR Corp., et al.; Warren v. AMR Corp., et al.; Whittier v. AMR Corp., et al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp., et al.). Collectively, these lawsuits allege that American unlawfully monopolized or attempted to monopolize airline passenger service to and from DFW by increasing service when new competitors began flying to DFW, and by matching these new competitors’ fares. Two of the suits (Smith and Wright) also allege that American unlawfully monopolized or attempted to monopolize airline passenger service to and from DFW by offering discounted fares to corporate purchasers, by offering a frequent flyer program, by imposing certain conditions on the use and availability of certain fares, and by offering override commissions to travel agents. The suits propose to certify several classes of consumers, the broadest of which is all persons who purchased tickets for air travel on American into or out of DFW from 1995 to the present. On November 10, 1999, the District Court stayed all of these actions pending developments in the case brought by the Department of Justice (see above description). In the light of the decision by the 10th Circuit Court of Appeals in the Department of Justice case (see immediately preceding paragraph), the plaintiffs in these class actions have dismissed their claims.

On May 17, 2002, the named plaintiffs in Hall, et al. v. United Airlines, et al., pending in the United States District Court for the Eastern District of North Carolina, filed an amended complaint alleging that between 1995 and the present, American and over 15 other defendant airlines conspired to reduce commissions paid to U.S.-based travel agents in violation of Section 1 of the Sherman Act. The plaintiffs are seeking monetary damages and injunctive relief. The court granted class action certification to the plaintiffs on September 17, 2002, defining the plaintiff class as all travel agents in the United States, Puerto Rico, and the United States Virgin Islands, who, at any time from October 1, 1997 to the present, issued tickets, miscellaneous change orders, or prepaid ticket advices for travel on any of the defendant airlines. The case is stayed as to US Airways and United Air Lines, since they filed for bankruptcy. American is vigorously defending the lawsuit. Defendant carriers filed a motion for summary judgment on December 10, 2002, which the court granted on October 30, 2003. Plaintiffs have appealed that order to the 4th Circuit Court of Appeals, and that appeal remains pending. A final adverse court decision awarding substantial money damages or placing restrictions on the Company’s commission policies or practices would have an adverse impact on the Company.

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Between April 3, 2003 and June 5, 2003, three lawsuits were filed by travel agents some of whom have opted out of the Hall class action (above) to pursue their claims individually against American Airlines, Inc., other airline defendants, and in one case against certain airline defendants and Orbitz LLC. (Tam Travel et. al., v. Delta Air Lines et. al., in the United States District Court for the Northern District of California — San Francisco (51 individual agencies), Paula Fausky d/b/a Timeless Travel v. American Airlines, et. al, in the United States District Court for the Northern District of Ohio Eastern Division (29 agencies) and Swope Travel et al. v. Orbitz et. al. in the United States District Court for the Eastern District of Texas Beaumont Division (6 agencies)). Collectively, these lawsuits seek damages and injunctive relief alleging that the certain airline defendants and Orbitz LLC: (i) conspired to prevent travel agents from acting as effective competitors in the distribution of airline tickets to passengers in violation of Section 1 of the Sherman Act; (ii) conspired to monopolize the distribution of common carrier air travel between airports in the United States in violation of Section 2 of the Sherman Act; and that (iii) between 1995 and the present, the airline defendants conspired to reduce commissions paid to U.S.-based travel agents in violation of Section 1 of the Sherman Act. These cases have been consolidated in the United States District Court for the Northern District of Ohio Eastern Division. American is vigorously defending these lawsuits. A final adverse court decision awarding substantial money damages or placing restrictions on the Company’s distribution practices would have an adverse impact on the Company.

On April 26, 2002, six travel agencies filed Albany Travel Co., et al. v. Orbitz, LLC, et al., in the United States District Court for the Central District of California against American, United Air Lines, Delta Air Lines, and Orbitz, LLC, alleging that American and the other defendants: (i) conspired to prevent travel agents from acting as effective competitors in the distribution of airline tickets to passengers in violation of Section 1 of the Sherman Act; and (ii) conspired to monopolize the distribution of common carrier air travel between airports in the United States in violation of Section 2 of the Sherman Act. The named plaintiffs seek to certify a nationwide class of travel agents, but no class has yet been certified. On November 25, 2002, the District Court stayed this case pending a judgment in Hall et. al. v. United Airlines, et. al. (see above description). In light of the decision of the court in Hall et. al (discussed above), the plaintiffs voluntarily dismissed this action.

On April 25, 2002, a Quebec travel agency filed a motion seeking a declaratory judgment of the Superior Court in Montreal, Canada (Voyages Montambault (1989) Inc. v. International Air Transport Association, et al.), that American and the other airline defendants owe a “fair and reasonable commission” to the agency, and that American and the other airline defendants breached alleged contracts with the agency by adopting policies of not paying base commissions. The motion was subsequently amended to add 40 additional travel agencies as petitioners. The current defendants are the International Air Transport Association, the Air Transport Association of Canada, Air Canada, American, America West Airlines, Delta Air Lines, Grupo TACA, Northwest Airlines/KLM Airlines, and Continental Airlines. American is vigorously defending the lawsuit. Although the Company believes that the litigation is without merit, a final adverse court decision granting declaratory relief could expose the Company to claims for substantial money damages or force the Company to pay agency commissions, either of which would have an adverse impact on the Company.

On May 13, 2002, the named plaintiffs in Always Travel, et. al. v. Air Canada, et. al., pending in the Federal Court of Canada, Trial Division, Montreal, filed a statement of claim alleging that between 1995 and the present, American, the other defendant airlines, and the International Air Transport Association conspired to reduce commissions paid to Canada-based travel agents in violation of Section 45 of the Competition Act of Canada. The named plaintiffs seek monetary damages and injunctive relief and seek to certify a nationwide class of travel agents. Plaintiffs have filed a motion for class certification, but that motion has not yet been decided. American is vigorously defending the lawsuit. A final adverse court decision awarding substantial money damages or placing restrictions on the Company’s commission policies would have an adverse impact on the Company.

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On August 14, 2002, a class action lawsuit was filed against American Airlines, Inc. in the United States District Court for the Central District of California, Western Division (All World Professional Travel Services, Inc. v. American Airlines, Inc.). The lawsuit alleges that requiring travel agencies to pay debit memos for refunding tickets after September 11, 2001: (1) breaches the Agent Reporting Agreement between American and plaintiff; (2) constitutes unjust enrichment; and (3) violates the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). The as yet uncertified class includes all travel agencies who have or will be required to pay moneys to American for an “administrative service charge,” “penalty fee,” or other fee for processing refunds on behalf of passengers who were unable to use their tickets in the days immediately following the resumption of air carrier service after the tragedies on September 11, 2001. The plaintiff seeks to enjoin American from collecting the debit memos and to recover the amounts paid for the debit memos, plus treble damages, attorneys’ fees, and costs. The Company intends to vigorously defend the lawsuit. Although the Company believes that the litigation is without merit, a final adverse court decision could impose restrictions on the Company’s relationships with travel agencies which could have an adverse impact on the Company.

On August 19, 2002, a class action lawsuit seeking monetary damages was filed, and on May 7, 2003 an amended complaint was filed in the United States District Court for the Southern District of New York (Power Travel International, Inc. v. American Airlines, Inc., et al.) against American, Continental Airlines, Delta Air Lines, United Airlines, and Northwest Airlines, alleging that American and the other defendants breached their contracts with the agency and were unjustly enriched when these carriers at various times reduced their base commissions to zero. The as yet uncertified class includes all travel agencies accredited by the Airlines Reporting Corporation “whose base commissions on airline tickets were unilaterally reduced to zero by” the defendants. The case is stayed as to United Air Lines, since it filed for bankruptcy. American is vigorously defending the lawsuit. Although the Company believes that the litigation is without merit, a final adverse court decision awarding substantial money damages or forcing the Company to pay agency commissions would have an adverse impact on the Company.

Miami-Dade County (the County) is currently investigating and remediating various environmental conditions at the Miami International Airport (MIA) and funding the remediation costs through landing fees and various cost recovery methods. American Airlines, Inc. and AMR Eagle have been named as potentially responsible parties (PRPs) for the contamination at MIA. During the second quarter of 2001, the County filed a lawsuit against 17 defendants, including American Airlines, Inc., in an attempt to recover its past and future cleanup costs (Miami-Dade County, Florida v. Advance Cargo Services, Inc., et al. in the Florida Circuit Court). In addition to the 17 defendants named in the lawsuit, 243 other agencies and companies were also named as PRPs and contributors to the contamination. American’s and AMR Eagle’s portion of the cleanup costs cannot be reasonably estimated due to various factors, including the unknown extent of the remedial actions that may be required, the proportion of the cost that will ultimately be recovered from the responsible parties, and uncertainties regarding the environmental agencies that will ultimately supervise the remedial activities and the nature of that supervision. The Company is vigorously defending the lawsuit.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of the Company’s security holders during the last quarter of its fiscal year ended December 31, 2003.

Executive Officers of the Registrant

The following information relates to the executive officers of AMR as of December 31, 2003 unless otherwise noted.

     
Gerard J. Arpey
  Mr. Arpey was elected Chief Executive Officer of AMR and American in April 2003. He served as President and Chief Operating Officer of AMR and American from April 2002. He served as Executive Vice President — Operations of American from January 2000 to April 2002, Chief Financial Officer of AMR from 1995 through 2000 and Senior Vice President of American from 1992 to January 2000. Prior to that, he served in various management positions at American since 1982. Age 45.
 
   
Daniel P. Garton
  Mr. Garton was elected Executive Vice President — Marketing of American in September 2002. He is also an Executive Vice President of AMR. He served as Executive Vice President — Customer Services of American from January 2000 to September 2002 and Senior Vice President — Customer Services of American from 1998 to January 2000. Prior to that, he served as President of AMR Eagle from 1995 to 1998. Except for two years service as Senior Vice President and CFO of Continental Airlines between 1993 and 1995, he has been with the Company in various management positions since 1984. Age 46.
 
   
James A. Beer
  Mr. Beer became the Senior Vice President and Chief Financial Officer of AMR and American in January 2004. Prior to that, he served as a Vice President of American from 1998 to December 2003 and has served in various management positions of American since 1991. Age 43.
 
   
Gary F. Kennedy
  Mr. Kennedy was elected Senior Vice President and General Counsel in January 2003. He is also the Corporation’s Chief Compliance Officer. He served as Vice President — Corporate Real Estate of American from 1996 to January 2003. Prior to that, he served as an attorney and in various management positions at American since 1984. Age 48.
 
   
Charles D. MarLett
  Mr. MarLett was elected Corporate Secretary in January 1988. He joined American as an attorney in June 1984. Age 49.

There are no family relationships among the executive officers of the Company named above.

There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any director or executive officer during the past five years.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company’s common stock is traded on the New York Stock Exchange (symbol AMR). The approximate number of record holders of the Company’s common stock at February 20, 2004 was 16,739.

The range of closing market prices for AMR’s common stock on the New York Stock Exchange was:

                                 
    2003
  2002
    High
  Low
  High
  Low
Quarter Ended
                               
March 31
  $ 6.95     $ 1.41     $ 29.05     $ 21.92  
June 30
    11.32       3.00       25.56       16.00  
September 30
    13.23       8.04       15.93       3.60  
December 31
    14.90       11.21       8.25       3.15  

In March 2003, Standard and Poor’s removed AMR’s common stock from the S&P 500 index.

No cash dividends on common stock were declared for any period during 2003 or 2002.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

                                         
(in millions, except per share amounts)
    20031
  20021,2
  2001 1,3
  2000
  1999
Total operating revenues
  $ 17,440     $ 17,420     $ 18,969     $ 19,703     $ 17,730  
Operating income (loss)
    (844 )     (3,330 )     (2,470 )     1,381       1,156  
Income (loss) from continuing operations before cumulative effect of accounting change
    (1,228 )     (2,523 )     (1,762 )     770       656  
Net earnings (loss)
    (1,228 )     (3,511 )     (1,762 )     813       985  
Earnings (loss) per share from continuing operations before cumulative effect of accounting change:
                                       
Basic
    (7.76 )     (16.22 )     (11.43 )     5.13       4.30  
Diluted
    (7.76 )     (16.22 )     (11.43 )     4.76       4.17  
Net earnings (loss) per share:
                                       
Basic
    (7.76 )     (22.57 )     (11.43 )     5.43       6.46  
Diluted
    (7.76 )     (22.57 )     (11.43 )     5.03       6.26  
Total assets
    29,330       30,267       32,841       26,213       24,374  
Long-term debt, less current maturities
    11,901       10,888       8,310       4,151       4,078  
Obligations under capital leases, less current obligations
    1,225       1,422       1,524       1,323       1,611  
Obligation for pension and postretirement benefits
    4,803       4,730       3,201       1,952       1,854  
Stockholders’ equity 4
    46       957       5,373       7,176       6,858  

1   Includes special charges and U.S. government grant. For a further discussion of these items, see Note 2 to the consolidated financial statements.
 
2   Includes a one-time, non-cash charge, effective January 1, 2002, of $988 million, net of tax, to write-off all of AMR’s goodwill. This charge resulted from the adoption of Statement of Financial Accounting Standards Board No. 142, “Goodwill and Other Intangible Assets” and is reflected as a cumulative effect of accounting change in the consolidated financial statements. For a further discussion of this item, see Note 11 to the consolidated financial statements.
 
3   On April 9, 2001, American (through its wholly owned subsidiary TWA Airlines LLC) purchased substantially all of the assets and assumed certain liabilities of Trans World Airlines, Inc. Accordingly, the 2001 financial information above includes the operating results of TWA LLC since the date of acquisition.
 
4   As of December 31, 2002, the Company recorded an additional minimum pension liability adjustment resulting in an after tax charge to stockholders’ equity of approximately $1.0 billion. The Company recorded a reduction to the additional minimum pension liability resulting in a credit to stockholders equity of approximately $337 million for the year ended December 31, 2003. Effective after the close of business on March 15, 2000, AMR distributed 0.722652 shares of Sabre Holdings Corporation (Sabre) Class A Common Stock for each share of AMR stock owned by AMR’s shareholders, thus distributing its entire ownership interest in Sabre. The dividend of AMR’s entire ownership in Sabre’s common stock resulted in a reduction to AMR’s retained earnings equal to the carrying value of the Company’s investment in Sabre on March 15, 2000, which approximated $581 million.

No cash dividends were declared on AMR’s common shares during any of the periods above.

Information on the comparability of results is included in Item 7, Management’s Discussion and Analysis and the notes to the consolidated financial statements.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Information

The discussions under Business, Properties and Legal Proceedings and the following discussions under Management’s Discussion and Analysis of Financial Condition and Results of Operations contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations or beliefs concerning future events. When used in this document and in documents incorporated herein by reference, the words “expects,” “plans,” “anticipates,” “believes,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements include, without limitation, the Company’s expectations concerning operations and financial conditions, including changes in capacity, revenues, and costs, future financing needs, overall economic conditions, plans and objectives for future operations, and the impact on the Company of its results of operations for the past three years and the sufficiency of its financial resources to absorb that impact. Other forward-looking statements include statements which do not relate solely to historical facts, such as, without limitation, statements which discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward-looking statements in this report are based upon information available to the Company on the date of this report. The Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise. The risk factors listed at the end of this Item, in addition to other possible risk factors not listed, could cause the Company’s actual results to differ materially from those expressed in forward-looking statements.

Overview

The events of the past several years have had a material adverse impact on the Company’s finances. The Company incurred operating losses of $0.8 billion, $3.3 billion and $2.5 billion for the years ended December 31, 2003, 2002 and 2001, respectively. The Company incurred net losses of $1.2 billion, $3.5 billion and $1.8 billion for the years ended December 31, 2003, 2002 and 2001, respectively.

These losses reflect, among other things, a substantial decrease in the Company’s revenues, which began in early 2001. The revenue decrease has been driven by a number of factors, some of which the Company believes will persist indefinitely or permanently. These factors include: (i) a steep fall-off in the demand for air travel, particularly business travel, primarily caused by weakness in the U.S. economy, (ii) reduced pricing power, resulting mainly from greater cost sensitivity on the part of travelers, especially business travelers, increasing competition from low-cost carriers (LCCs) and the continuing increase in pricing transparency resulting from the use of the Internet and (iii) the aftermath of the terrorist attacks of September 11, 2001, which accelerated and exacerbated the trend of decreased demand and reduced industry revenues.

In response to decreased demand following the events of September 11, 2001, the Company reduced its operating schedule by approximately 20 percent and reduced its workforce by approximately 20,000 jobs. Subsequent to these reductions, the Company determined that achieving $4 billion in annual capacity-independent cost savings was necessary to offset the revenue decline and initiated the following restructuring activities to realize this goal:

  In 2002, the Company announced a series of initiatives to reduce its annual costs by $2 billion. These initiatives are being implemented through 2005, and involve: (i) scheduling efficiencies, including the de-peaking of certain of its hubs, (ii) fleet simplification, (iii) streamlined customer interaction, (iv) distribution modifications, (v) in-flight product changes, (vi) operational changes and (vii) headquarters/administration efficiencies. As a result of the initiatives, the Company reduced an estimated 7,000 jobs by March 2003.

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  In February 2003, American asked its employees for approximately $1.8 billion in annual savings through a combination of changes in wages, benefits and work rules. In April 2003, American reached agreements with its three unions (the Labor Agreements) and also implemented various changes in the pay plans and benefits for non-unionized personnel, including officers and other management (the Management Reductions). In addition, the Company and American reached concessionary agreements with certain vendors, lessors, lenders and suppliers (collectively, the Vendors, and the agreements, the Vendor Agreements), resulting in approximately $200 million in annual cost savings. Generally, under the terms of these Vendor Agreements, the Company or American receives the benefit of lower rates and charges for certain goods and services, and more favorable rent and financing terms with respect to certain of its aircraft.

See Note 2 to the consolidated financial statements for information on the special charges associated with the Company’s ongoing restructuring activities.

In the second quarter of 2003, in conjunction with some improvement in the U.S. economy, the Company’s revenue environment began to improve, as reflected in higher unit revenues (revenue per available seat mile) in May through December 2003, when compared to May through December 2002, respectively. Even with this improvement, however, the Company’s revenues remain depressed relative to historical levels. The Company therefore needs to see continued improvement in the revenue environment, additional cost reductions and further productivity improvements before it can return to sustained profitability at acceptable levels.

In 2003, the Company announced the Turnaround Plan, a four tenet plan designed to achieve sustained profitability.

  Lower Costs To Compete: As discussed above, one of the Company’s critical goals is to reduce costs by $4 billion annually, including $2 billion from strategic initiatives, $1.8 billion from labor cost savings and $200 million from vendors, suppliers and creditors. Progress toward this goal helped the Company achieve a significant year-over-year decline in costs per available seat mile in the fourth quarter of 2003 and in 2003 as a whole. If not for rising fuel prices, the Company’s progress in reducing costs would have been even more significant. The Company has returned underused gate space, consolidated terminal space, de-peaked its Chicago and Dallas/Fort Worth hub schedules (with its Miami hub to be de-peaked in 2004), closed a reservations center, reduced the size of its St. Louis hub, accelerated the retirement of certain aircraft, and improved aircraft utilization across its fleet.
 
  Fly Smart, Give Customers What They Value: This tenet focuses on customer service and revenue production, with emphasis on improving the Company’s relative revenue performance compared to others in the airline industry. Actions in this area include adding seats to American’s Boeing 757 and Airbus A300 fleets and restructuring the hubs at Chicago, Dallas/Fort Worth and St. Louis. Another step is expanding alliances. The Company’s progress includes a domestic codeshare with Alaska Airlines, governmental approval of codesharing with British Airways, the addition of SWISS International to the oneworld alliance, and the recently announced codeshare linkage with Mexicana (which, subject to governmental approvals, will be launched in April 2004).
 
  Pull Together, Win Together: Fostering greater cooperation than ever with employees, the Company has launched an unprecedented level of openness with employee groups and labor unions. The Company’s President and Chief Executive Officer holds regular “Town Hall"-style meetings with employees, and its Chief Financial Officer meets monthly with union leaders to discuss the Company’s financial results with them in much the same way as he briefs AMR’s Board of Directors. In addition, the Company has engaged a firm that works to bring union groups and management together, to help to promote a philosophy of active involvement.

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  Build A Financial Foundation For Our Future: The Company ended the fourth quarter of 2003 with $2.6 billion in unrestricted cash and short-term investments and $527 million in restricted cash and short-term investments. The Company had $1.3 billion in unrestricted cash and short-term investments and $550 million in restricted cash and short-term investments at the close of the first quarter of 2003. From April 1 to December 31, 2003, cash flows from operations totaled $1.1 billion. The Company has also been able to sell some non-core assets, such as its stakes in Worldspan, a computer reservations company; Hotwire, a discount travel website company; and a portion of its stake in Orbitz, a travel planning website.

The Company believes that it has sufficient liquidity to fund its operations, including capital expenditures and commitments. However, to maintain sufficient liquidity over the long-term as the Company continues to implement the Turnaround Plan and seeks to return to sustained profitability at acceptable levels, the Company will need continued access to additional funding. In addition, the Company’s ability to return to sustained profitability at acceptable levels will depend on a number of risk factors, many of which are largely beyond the Company’s control. Some of the risk factors that have had and/or may have a negative impact on the Company’s business and financial results are discussed in Risk Factors at the end of this Item. In particular, if the revenue environment deteriorates beyond normal seasonal trends, or the Company is unable to access the capital markets, it may be unable to fund its obligations and sustain its operations in the long-term.

LIQUIDITY AND CAPITAL RESOURCES

Cash, Short-Term Investments, Restricted Assets and Deposits

At December 31, 2003, the Company had $2.6 billion in unrestricted cash and short-term investments and $527 million in restricted cash and short-term investments. As of December 31, 2003, the Company had approximately $166 million in fuel prepayments and credit card holdback deposits classified as Other current assets and Other assets in the consolidated balance sheets.

Significant Indebtedness and Future Financing

During 2001, 2002 and 2003, the Company raised an aggregate of approximately $10.0 billion of financing to fund capital commitments (mainly for aircraft and ground properties) and operating losses. The Company expects that it will need to continue to raise capital until it has achieved acceptable levels of sustained profitability over a significant period of time. The Company’s possible future financing sources include: (i) a limited amount of additional secured aircraft debt (virtually all of the Company’s Section 1110-eligible aircraft are encumbered), (ii) debt secured by other assets, (iii) securitization of future operating receipts, (iv) sale-leaseback transactions of owned aircraft, (v) the potential sale of certain non-core assets, (vi) unsecured debt and (vii) equity and/or equity-like securities. However, the availability and level of these financing sources cannot be assured, particularly in light of the fact that the Company has fewer unencumbered assets available than it has had in the past. To the extent that the Company’s revenues deteriorate beyond normal seasonal trends or it is unable to access capital markets and raise additional capital, the Company may be unable to fund its obligations and sustain its operations in the long-term.

The Company’s significant indebtedness could have important consequences, such as (i) limiting the Company’s ability to obtain additional financing for working capital, capital expenditures, acquisitions and general purposes, (ii) requiring the Company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, (iii) making the Company more vulnerable to economic downturns, (iv) limiting its ability to withstand competitive pressures and reducing its flexibility in responding to changing business and economic conditions, and (v) limiting the Company’s flexibility in planning for, or reacting to, changes in its business and the industry in which it operates.

Credit Ratings

AMR’s and American’s credit ratings are significantly below investment grade. Additional reductions in AMR’s or American’s credit ratings could further increase its borrowing or other costs and further restrict the availability of future financing.

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Credit Facility Covenants

American has a fully drawn $834 million bank credit facility that expires December 15, 2005, which contains a liquidity covenant and an EBITDAR (generally, earnings before interest, taxes, depreciation, amortization and rentals, adjusted for certain non-cash items) to fixed charges (generally, interest and total rentals) ratio covenant. The required EBITDAR to fixed charges ratio is 1.1 to 1.0 for the three-month period ending March 31, 2004, and increases on a quarterly basis up to 1.5 to 1.0 for each four consecutive quarters ending after December 31, 2004. The liquidity covenant requires American to maintain a minimum level of $1.0 billion of unrestricted cash and short-term investments. The Company expects to be able to continue to comply with these covenants. However, it cannot be sure that it will continue to be able to do so through the expiration of the facility. Failure to do so would result in a default under this facility and a significant amount of American’s other debt.

Financing Activity

The Company, or its subsidiaries, issued the following debt during the year ended December 31, 2003 (in millions):

         
Enhanced equipment trust certificates (3.86% interest) (final maturity 2010)
  $ 255  
4.25% senior convertible notes due 2023
    300  
AA/Ft. Worth HQ securitization (7.2% effective interest) (final maturity 2010)
    98  
Various debt agreements related to the purchase of jet aircraft (effective interest rates ranging from 7.93% to 9.12%) (various maturities through 2013)
    554  
Various debt agreements related to the purchase of regional jet aircraft (effective interest rates ranging from 4.25% to 6.73%) (various maturities through 2020)
    473  
 
   
 
 
 
  $ 1,680  
 
   
 
 

See Note 6 to the consolidated financial statements for additional information regarding the debt issuances listed above.

In February 2004, American issued $180 million of Fixed Rate Secured Notes due 2009. These notes are secured by certain spare parts and bear interest at 7.25 percent. Also in February 2004, AMR issued, and American guaranteed, $324 million of 4.5 percent senior convertible notes due 2024.

Other Operating and Investing Activities

The improved revenue environment and the effects of the Company’s cost savings initiatives resulted in improved cash flow from operating activities in 2003. Net cash provided by operating activities during the year ended December 31, 2003 was $601 million, an increase of $1.7 billion over 2002. Included in net cash provided by operating activities in 2003 was the receipt of a $572 million federal tax refund and the receipt of $358 million from the U.S. government under the Emergency Wartime Supplemental Appropriations Act, 2003 (the Act), offset by $521 million of redemption payments under operating leases for special facility revenue bonds. Included in net cash provided (used) by operating activities during 2002 was the receipt of an approximately $658 million federal tax refund as a result of the utilization of the Company’s 2001 net operating losses (NOLs). The Company does not expect to receive significant additional federal tax refunds.

Capital expenditures during 2003 were $1.4 billion, $735 million of which were seller financed, and included the acquisition of nine Boeing 767-300ERs, two Boeing 777-200 ERs, 16 Embraer 140s, six Embraer 145s and 11 Bombardier CRJ-700 aircraft.

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During 2003, the Company sold its interests in Worldspan, a computer reservations company, and Hotwire, a discount travel website. The Company received $180 million in cash and a $39 million promissory note for its interest in Worldspan. It received $84 million in cash, $80 million of which was recognized as a gain, for its interest in Hotwire. In addition, during 2003, the Company sold a portion of its interest in Orbitz, a travel planning website, in connection with an Orbitz initial public offering and a secondary offering resulting in total proceeds of $65 million, and a gain of $70 million.

On April 9, 2001, TWA Airlines, LLC (TWA LLC), a wholly owned subsidiary of American, purchased substantially all of the assets of Trans World Airlines, Inc. (TWA) for approximately $742 million (which was funded from the Company’s existing cash and short-term investments) and the assumption of certain liabilities.

Working Capital

AMR (principally American) historically operates with a working capital deficit, as do most other airline companies. In addition, the Company has historically relied heavily on external financing to fund capital expenditures. More recently, the Company has also relied on external financing to fund operating losses.

Off Balance Sheet Arrangements

The Company has completed its evaluation of its interests in variable interest entities and determined that it holds a significant variable interest in, but is not the primary beneficiary of, certain trusts that are the lessors under 88 of its aircraft operating leases. These leases contain a fixed price purchase option, which allows American to purchase the aircraft at a predetermined price on a specified date. However, American does not guarantee the residual value of the aircraft. As of December 31, 2003, future lease payments required under these leases totaled $3.2 billion.

Special facility revenue bonds have been issued by certain municipalities primarily to purchase equipment and improve airport facilities that are leased by American and accounted for as operating leases. Approximately $1.8 billion of these bonds (with total future payments of approximately $4.8 billion as of December 31, 2003) are guaranteed by American, AMR, or both. Approximately $532 million of these special facility revenue bonds contain mandatory tender provisions that require American to make operating lease payments sufficient to repurchase the bonds at various times: $112 million in 2004, $104 million in 2005, $28 million in 2006, $100 million in 2007 and $188 million in 2008. Although American has the right to remarket the bonds, there can be no assurance that these bonds will be successfully remarketed. Any payments to redeem or purchase bonds that are not remarketed would generally reduce existing rent leveling accruals or be considered prepaid facility rentals and would reduce future operating lease commitments.

In addition, the Company has other operating leases, primarily for aircraft, with total future lease payments of $5.4 billion as of December 31, 2003. Entering into aircraft leases allows the Company to obtain aircraft without immediate cash outflows.

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Contractual Obligations

The following table summarizes the Company’s obligations and commitments as of December 31, 2003 (in millions):

                                         
    Payments Due by Year(s) Ended December 31,
                    2005   2007    
                    Through   Through   2009 and
Contractual Obligations
  Total
  2004
  2006
  2008
  Beyond
Operating lease payments for aircraft and facility obligations 1
  $ 13,431     $ 1,114     $ 2,046     $ 1,884     $ 8,387  
Firm aircraft commitments 2
    4,058       755       1,380       1,314       609  
Capacity purchase agreements 3
    325       95       139       91        
Long-term debt 4
    12,504       603       2,552       1,679       7,670  
Capital lease obligations
    2,359       325       512       411       1,111  
Other purchase obligations 5
    2,281       480       616       395       790  
Other long-term liabilities 6,7
    2,039       197       399       401       1,042  
 
   
 
     
 
     
 
     
 
     
 
 
Total obligations and commitments
  $ 36,997     $ 3,569     $ 7,644     $ 6,175     $ 19,609  
 
   
 
     
 
     
 
     
 
     
 
 

  1   Certain special facility revenue bonds issued by municipalities — which are supported by operating leases executed by American — are guaranteed by AMR and/or American. The special facility revenue bonds with mandatory tender provisions discussed above are included in this table under their ultimate maturity date rather than their mandatory tender provision date. See Note 5 to the consolidated financial statements for additional information.
 
  2   As of December 31, 2003, the Company had commitments to acquire: 36 Embraer regional jets and six Bombardier CRJ-700s in 2004; an aggregate of 38 Embraer regional jets in 2005 and 2006; and an aggregate of 47 Boeing 737-800s and nine Boeing 777-200ERs in 2006 through 2010. The Company has pre-arranged financing or backstop financing for all of its aircraft deliveries through June 2005 (42 aircraft in 2004 and 20 aircraft in 2005).
 
  3   The table reflects minimum required payments under capacity purchase contracts between American and two regional airlines, Chautauqua Airlines, Inc. (Chautauqua) and Trans States Airlines Inc. However, based on expected utilization, the Company expects to make payments of $162 million in 2004, $164 million in 2005, $166 million in 2006, $168 million in 2007, $170 million in 2008 and $854 million in 2009 and beyond. In addition, if the Company terminates its contract with Chautauqua without cause, Chautauqua has the right to put its Embraer aircraft to the Company. If this were to happen, the Company would take possession of the aircraft and become liable for lease obligations totaling approximately $21 million per year with lease expirations in 2018 and 2019. These lease obligations are not included in the table above. See Note 4 to the consolidated financial statements for additional information.
 
  4   Excludes related interest amounts.
 
  5   Includes noncancelable commitments to purchase goods or services, primarily construction related costs at the John F. Kennedy International Airport and information technology related support. The Company has made estimates as to the timing of certain payments primarily for construction related costs. The actual timing of payments may vary from these estimates. Substantially all of the Company’s purchase orders issued for other purchases in the ordinary course of business contain a 30-day cancellation clause that allows the Company to cancel an order with 30 days notice.
 
  6   Includes expected other postretirement benefit payments through 2013.
 
  7   Excludes a $2.9 billion accident liability, related to the events of September 11, 2001 and flight 587, recorded in Other liabilities and deferred credits, as discussed in Note 2 to the consolidated financial statements. This liability is offset in its entirety by a receivable, recorded in Other assets, which the Company expects to receive from insurance carriers as claims are resolved.

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In addition to the commitments summarized above, the Company is required to make contributions to its defined benefit pension plans. These contributions are required under the minimum funding requirements of the Employee Retirement Pension Plan Income Security Act (ERISA). The Company’s estimated 2004 minimum required contributions to its defined benefit pension plans are approximately $600 million. (This estimate assumes Congress passes legislation providing certain technical corrections to current ERISA funding requirements.) Due to uncertainties regarding significant assumptions involved in estimating future required contributions to its defined benefit pension plans, such as interest rate levels, the amount and timing of asset returns and the impact of proposed legislation, the Company is not able to reasonably estimate its future required contributions beyond 2004. However, based on the current regulatory environment and market conditions, the Company expects that its 2005 minimum required contributions will significantly exceed its 2004 minimum required contributions. Congress is also considering other legislation that, if passed, would further modestly reduce the Company’s 2004 minimum required contributions and significantly reduce its 2005 minimum required contributions.

Agreements with Lessors and Lenders

As discussed in Note 5 to the consolidated financial statements, the Company reached concessionary agreements with certain lessors in 2003. Certain of the Vendor Agreements provide that the Company’s obligations under the related lease revert to the original terms if certain events (Events) occur prior to December 31, 2005, including: (i) an event of default under the related lease (which generally occurs only if a payment default occurs), (ii) an event of loss with respect to the related aircraft, (iii) rejection by the Company of the lease under the provisions of Chapter 11 of the U.S. Bankruptcy Code or (iv) the Company’s filing for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. If any one of these Events were to occur, the Company would be responsible for approximately $24 million in additional operating lease payments and $11 million in additional payments related to capital leases as of December 31, 2003. This amount will increase to approximately $119 million in operating lease payments and $111 million in payments related to capital leases prior to the expiration of the provision on December 31, 2005. These amounts are being accounted for as contingent rentals and will only be recognized if they become due.

In addition, as part of the Vendor Agreements, American sold 33 Fokker 100 aircraft (with a minimal net book value), issued a $23 million non-interest-bearing note, payable in installments and maturing in December 2010, entered into short-term leases on these aircraft and issued shares of AMR common stock as discussed in Note 9 to the consolidated financial statements. In exchange, approximately $130 million of debt related to certain of the Fokker 100 aircraft was retired. However, the agreement contains provisions that would require American to repay additional amounts of the original debt if certain Events occur prior to December 31, 2005. As a result of this transaction, including the sale of the 33 Fokker 100 aircraft, and the termination of the Company’s interest rate swap agreements related to the debt that has been retired, the Company recognized a gain of approximately $68 million. If none of the Events occur, the Company expects to recognize an additional gain of approximately $37 million in December 2005.

Results of Operations

The Company’s 2003 results reflect a weak revenue environment, particularly in the first four months of the year. They also reflect the benefit of the Company’s cost reduction initiatives, especially the reduction in employee costs due to the Labor Agreements and Management Reductions that came into effect in the second quarter of 2003. The Company’s unit costs are now among the lowest of the major network air carriers, and the Company believes it is now better positioned to compete against low-cost carriers (LCCs). However, as discussed in the Overview to this Item, the Company needs to see continued improvement in the revenue environment, additional cost reductions and further productivity improvements before it can return to sustained profitability at acceptable levels.

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AMR’s net loss in 2003 was $1.2 billion, or $7.76 per share, an improvement of $2.3 billion over AMR’s net loss in 2002 of $3.5 billion, or $22.57 per share. The Company’s 2003 results include several special items which are discussed in detail in the notes to the consolidated financial statements, including (i) $358 million in security cost reimbursements received under the Act (see Note 2 to the consolidated financial statements), (ii) $407 million in special charges (see Note 2 to the consolidated financial statements), (iii) $150 million in gains on the sale of the Company’s investments in Hotwire and Orbitz (see Note 3 to the consolidated financial statements) and (iv) a $164 million reduction in previously accrued federal income taxes and related interest. In addition, the Company did not record a tax benefit associated with its 2003 losses. The Company’s 2002 results include a one-time, non-cash charge to record the cumulative effect of a change in accounting, effective January 1, 2002, of $988 million, or $6.35 per share, to write-off all of AMR’s goodwill upon the adoption of Statement of Financial Accounting Standards Board No. 142 “Goodwill and Other Intangible Assets” (see Note 11 to the consolidated financial statements), and special charges of $718 million (see Note 2 to the consolidated financial statements).

REVENUES

2003 Compared to 2002 The Company’s revenues were relatively flat year-over-year, increasing approximately $20 million, or 0.1 percent, to $17.4 billion. During the first four months of the year, yields (passenger revenue per available seat mile) and load factors were down year-over-year, due to the impact of the war in Iraq and SARS. In the latter part of the year, both yields and load factors improved year-over-year, as the impact of the war in Iraq and SARS faded, and the U.S. economy began recovering. However, even with the recent improvements, the Company’s unit revenues and yield are still depressed relative to historical measures.

For the full year, American’s passenger revenues decreased by 0.7 percent, or $108 million, to $14.3 billion, on a capacity decrease of 4.1 percent to 165 billion available seat miles (ASMs). American’s passenger load factor increased 2.1 points to 72.8 percent and passenger revenue yield per passenger mile increased by 0.4 percent, or 0.05 cents, to 11.91 cents, driving American’s passenger revenue per available seat mile (RASM) up by 3.3 percent, or 0.28 cents, to 8.67 cents. In 2003, American derived approximately 70 percent of its passenger revenues from domestic operations and approximately 30 percent from international operations. Following is additional information regarding Americans domestic and international RASM and capacity:

                                 
    Year Ended December 31, 2003
    RASM   Y-O-Y   ASMs   Y-O-Y
    (cents)
  Change
  (billions)
  Change
Domestic
    8.65       4.8 %     116       (6.6 )%
International
    8.72       0.0       49       2.7  
Latin America
    9.08       (0.1 )     24       2.0  
Europe
    8.53       1.6       21       3.0  
Pacific
    7.66       (6.8 )     4       5.3  

The Company’s Regional Affiliates include two wholly owned subsidiaries, American Eagle Airlines, Inc. and Executive Airlines, Inc. (collectively, AMR Eagle), and two independent carriers with which American has capacity purchase agreements, Trans States Airlines, Inc. (Trans States) and Chautauqua Airlines, Inc. (Chautauqua). In 2003, American had capacity purchase agreements with Chautauqua and Trans States for the full year. In 2002, American had a capacity purchase agreement with Chautauqua for the full year and a capacity purchase agreement with Trans States beginning in November 2002.

Regional Affiliates’ passenger revenues, which are based on industry standard mileage proration agreements for flights connecting to American flights, increased $88 million, or 6.1 percent, to $1.5 billion as a result of increased capacity and load factors. Regional Affiliates’ traffic increased 20.5 percent, or 940 million revenue passenger miles (RPMs), to 5.5 billion RPMs, while capacity increased 18.6 percent, or 1.3 billion ASMs, to 8.6 billion ASMs. This is somewhat offset by the elimination, in 2003, of a fee, paid to AMR Eagle by American, for passengers connecting to American flights.

Cargo revenues remained relatively flat with a decrease of 0.5 percent, or $3 million, to $558 million.

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Other revenues increased 4.4 percent, or $43 million, to $1.0 billion due to increases in (i) airfreight service fees due primarily to fuel surcharges, (ii) AAdvantage program fees, (iii) employee travel service charges, (iv) excess baggage fees and (v) ticket change fees coupled with changes to the Company’s change fee arrangements with travel agencies. These increases were offset somewhat by decreases in contract maintenance work that American performs for other airlines.

2002 Compared to 2001 Although traffic continued to increase on reduced capacity following the events of September 11, 2001, the Company’s 2002 revenues and yields were down materially year-over-year. In addition to the residual effects of September 11, the Company’s revenues continued to be negatively impacted by the economic slowdown, seen largely in business travel declines and changes in business traveler profiles; the geographic distribution of the Company’s network; and reduced fares due in part to increased competition from low-cost carriers. TWA LLC purchased substantially all of the assets and assumed certain liabilities of TWA on April 9, 2001. The results of operations of TWA LLC are included in the Company and American’s results of operations beginning on that date. The Company’s revenues decreased approximately $1.5 billion, or 8.2 percent, to $17.4 billion.

American’s passenger revenues decreased by 8.5 percent, or $1.3 billion, to $14.4 billion. American’s passenger load factor increased by 1.7 points to 70.7 percent while passenger revenue yield per passenger mile decreased by 9.3 percent, or 1.22 cents, to 11.86 cents, driving American’s RASM down by 7.2 percent, or 0.65 cents, to 8.39 cents. In 2002, American derived approximately 70 percent of its passenger revenues from domestic operations and approximately 30 percent from international operations. Following is additional information regarding Americans domestic and international RASM and capacity:

                                 
    Year Ended December 31, 2002
    RASM   Y-O-Y   ASMs   Y-O-Y
    (cents)
  Change
  (billions)
  Change
Domestic
    8.26       (8.8 )%     125       (1.0 )%
International
    8.72       (2.8 )     47       (7.2 )
Latin America
    9.09       (7.1 )     23       (3.3 )
Europe
    8.40       0.3       20       (7.9 )
Pacific
    8.22       6.5       4       (22.4 )

Regional Affiliates’ passenger revenues increased $3 million, or 0.2 percent, to $1.4 billion. AMR Eagle’s traffic increased 11 percent, or 409 million RPMs, to 4.1 billion RPMs, while capacity increased 1.9 percent, or 121 million ASMs, to 6.6 billion ASMs.

Cargo revenues decreased 15.3 percent, or $101 million, to $561 million primarily due to the economic slowdown and significant restrictions on cargo shipments for security reasons.

Other revenues decreased 10.1 percent, or $111 million, to $988 million due primarily to decreases in contract maintenance work that American performs for other airlines, and decreases in codeshare revenue and employee travel service charges.

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OPERATING EXPENSES

2003 Compared to 2002 The Company’s operating expenses decreased 11.9 percent, or $2.5 billion, to $18.3 billion and American’s mainline operating expenses per ASM decreased 8.9 percent to 10.15 cents, including the impact of special charges and the U.S. government grant. The decrease in operating expenses and operating expenses per ASM is largely due to the Company’s cost savings initiatives coupled with security cost reimbursements from the U.S. government and a decrease in special charges.

                                 
(in millions)   Year ended                
    December 31,   Change   Percentage        
Operating Expenses
  2003
  from 2002
  Change
       
Wages, salaries and benefits
  $ 7,264     $ (1,128 )     (13.4 )%     (a )
Aircraft fuel
    2,772       210       8.2       (b )
Depreciation and amortization
    1,377       11       0.8          
Other rentals and landing fees
    1,173       (25 )     (2.1 )        
Commissions, booking fees and credit card expense
    1,063       (100 )     (8.6 )     (c )
Maintenance, materials and repairs
    860       (248 )     (22.4 )     (d )
Aircraft rentals
    687       (153 )     (18.2 )     (e )
Food service
    611       (87 )     (12.5 )     (f )
Other operating expenses
    2,428       (287 )     (10.6 )     (g )
Special charges
    407       (311 )     (43.3 )     (h )
U.S. government grant
    (358 )     (348 )   NM     (i )
 
   
 
     
 
     
 
         
Total operating expenses
  $ 18,284     $ (2,466 )     (11.9 )%        
 
   
 
     
 
     
 
         

  (a)   Wages, salaries and benefits decreased due to lower wage rates and reduced headcount primarily as a result of the Labor Agreements and Management Reductions, effective in the second quarter of 2003.
 
  (b)   Aircraft fuel expense increased due to a 15.1 percent increase in the Company’s price per gallon of fuel (net of the impact of fuel hedging), somewhat offset by a 5.5 percent decrease in the Company’s fuel consumption.
 
  (c)   Commissions, booking fees and credit card expense decreased due primarily to commission structure changes implemented in March 2002.
 
  (d)   Maintenance, materials and repairs decreased due primarily to a decrease in airframe and engine volumes at the Company’s maintenance bases resulting from a variety of factors, including the retirement and temporary grounding of aircraft and a decrease in the numbers of flights. The Company expects maintenance, materials and repairs costs to increase as aircraft utilization increases and the benefit from retiring aircraft subsides, and as contractual rates in certain flight hour agreements for outsourced aircraft engine maintenance increase.
 
  (e)   Aircraft rentals decreased due primarily to the removal of leased aircraft from the fleet in prior periods as part of the Company’s restructuring initiatives and concessionary agreements with certain lessors, which reduced future lease payment amounts and resulted in the conversion of 30 operating leases to capital leases.
 
  (f)   Food service decreased due primarily to a decrease in the number of departures and passengers boarded and simplification of catering services.
 
  (g)   Other operating expenses decreased primarily due to decreases in (i) data processing expenses of $87 million due primarily to introducing further efficiencies into data processing environments resulting in reduced consumption, and negotiating more favorable terms with vendors; (ii) travel and incidental costs of $61 million due primarily to decreased overnight stays for pilots and flight attendants as a result of changes in the scheduling of flights, lower average hotel rates, work rule changes and lower per diems; (iii) insurance costs of $44 million due primarily to lower premiums, (iv) security costs of $31 million due primarily to the assumption of certain security services by the Transportation Security Administration (TSA) and the suspension of security services payments to the TSA from June 1, 2003 to September 30, 2003 and (v) contract maintenance work that American performs for other airlines of $29 million.

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  (h)   Special charges for 2003 included approximately (i) $341 million in aircraft charges offset by a $20 million credit to adjust prior accruals, (ii) $92 million in employee charges, (iii) $62 million in facility exit costs and a (iv) $68 million gain resulting from a transaction involving 33 of the Company’s Fokker 100 aircraft and related debt. Special charges for 2002 are described on the following page. See a further discussion of Special charges in Note 2 to the consolidated financial statements.
 
  (i)   U.S. government grant includes a $358 million benefit recognized for the reimbursement of security service fees from the U.S. government under the Act in 2003. See a further discussion of U.S. government grant in Note 2 to the consolidated financial statements.

2002 Compared to 2001 The Company’s operating expenses decreased 3.2 percent, or $689 million, to $20.8 billion. American’s mainline operating expenses per ASM decreased 1.5 percent to 11.14 cents, including the impact of special charges and the U.S. government grant. The decrease in operating expenses and operating expenses per ASM is largely due to cost savings initiatives implemented in late 2001 and 2002.

                                 
(in millions)   Year ended                
    December 31,   Change   Percentage        
Operating Expenses
  2002
  from 2001
  Change
       
Wages, salaries and benefits
  $ 8,392     $ 360       4.5 %     (a )
Aircraft fuel
    2,562       (326 )     (11.3 )     (b )
Depreciation and amortization
    1,366       (38 )     (2.7 )        
Other rentals and landing fees
    1,198       1       0.1          
Commissions, booking fees and credit card expense
    1,163       (377 )     (24.5 )     (c )
Maintenance, materials and repairs
    1,108       (57 )     (4.9 )        
Aircraft rentals
    840       11       1.3          
Food service
    698       (80 )     (10.3 )     (d )
Other operating expenses
    2,715       (281 )     (9.4 )     (e )
Special charges
    718       (748 )     (51.0 )     (f )
U.S. government grant
    (10 )     846       (98.8 )     (g )
 
   
 
     
 
     
 
         
Total operating expenses
  $ 20,750     $ (689 )     (3.2 )%        
 
   
 
     
 
     
 
         

  (a)   Wages, salaries and benefits increased, primarily due to (i) higher salaries, largely offset by a decrease in the average number of equivalent employees and (ii) increases in the Company’s pension and health insurance costs, the latter reflecting rapidly rising medical care and prescription drug costs.
 
  (b)   Aircraft fuel expense decreased due to a 3.3 percent decrease in the Company’s fuel consumption and a 6.4 percent decrease in the Company’s average price per gallon.
 
  (c)   Commissions, booking fees and credit card expense decreased due primarily to a 7.8 percent decrease in passenger revenues and commission structure changes implemented in March 2002.
 
  (d)   Food service decreased due primarily to the Company’s reduced operating schedule and reductions in the level of food service.
 
  (e)   Other operating expenses decreased due primarily to decreases in contract maintenance work that American performs for other airlines, and decreases in travel and incidental costs, advertising and promotion costs, and data processing expenses, which were partially offset by higher insurance and security costs.
 
  (f)   Special charges for 2002 included approximately (i) $658 million related to aircraft charges, (ii) $57 million in employee charges and (iii) $3 million in facility charges. Special charges for 2001 included approximately (i) $1.2 billion related to aircraft charges, (ii) $115 million in facility charges, (iii) $71 million in employee charges and (iv) $43 million in other charges. See a further discussion of Special charges in Note 2 to the consolidated financial statements.
 
  (g)   U.S. government grant includes a $10 million and $856 million benefit recognized for the reimbursement from the U.S. government under the Air Transportation Safety and System Stabilization Act for 2002 and 2001, respectively. See a further discussion of U.S. government grant in Note 2 to the consolidated financial statements.

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OTHER INCOME (EXPENSE)

Other income (expense) consists of interest income and expense, interest capitalized and miscellaneous — net.

2003 Compared to 2002 Other expense decreased $66 million, or 12.5 percent, to $464 million due primarily to the following: Interest income decreased $16 million, or 22.5 percent, to $55 million due primarily to decreases in interest rates. Interest expense increased $18 million, or 2.6 percent, to $703 million resulting primarily from the approximately $903 million increase in the Company’s long-term debt, offset by an $84 million reduction in interest expense related to the agreement reached with the IRS discussed below. Interest capitalized decreased $15 million, or 17.4 percent, to $71 million due primarily to a decrease in purchase deposits for flight equipment. Miscellaneous-net increased $115 million to $113 million, due primarily to an $80 million gain on the sale of the Company’s investment in Hotwire and a $70 million gain related to an initial public offering by Orbitz, offset by the write-down of certain investments held by the Company during the first quarter of 2003.

2002 Compared to 2001 Other expense increased $244 million, or 85.3 percent, to $530 million due primarily to the following: Interest income decreased $39 million, or 35.5 percent, to $71 million due primarily to decreases in interest rates. Interest expense increased $147 million, or 27.3 percent, to $685 million resulting primarily from the increase in the Company’s long-term debt of approximately $2.7 billion. Interest capitalized decreased $58 million, or 40.3 percent, to $86 million due primarily to a decrease in purchase deposits for flight equipment.

INCOME TAX BENEFIT

2003 The Company did not record a net tax benefit associated with its 2003 losses due to the Company providing a valuation allowance, as discussed in Note 8 to the consolidated financial statements. Additionally, in 2003, the Company reached an agreement with the IRS covering tax years 1990 through 1995. As a result of this agreement, the Company recorded an $80 million tax benefit to reduce previously accrued income tax liabilities and an $84 million reduction in interest expense to reduce previously accrued interest related to the accrued income tax liabilities.

2002 The effective tax rate for the year ended December 31, 2002 was impacted by a $57 million charge resulting from a provision in Congress’ economic stimulus package that changes the period for carrybacks of NOLs. This change allows the Company to carry back 2001 and 2002 NOLs for five years, rather than two years under the previous law, allowing the Company to more quickly recover its NOLs. The extended NOL carryback did however result in the displacement of foreign tax credits taken in prior years. These credits are now expected to expire before being utilized by the Company, resulting in this charge.

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OPERATING STATISTICS

The following table provides statistical information for American and Regional Affiliates for the years ended December 31, 2003, 2002 and 2001.

                         
    Year Ended December 31,
    2003
  2002
  2001(*)
American Airlines, Inc. Mainline Jet Operations
                       
Revenue passenger miles (millions)
    120,328       121,747       120,606  
Available seat miles (millions)
    165,209       172,200       174,688  
Cargo ton miles (millions)
    2,000       2,007       2,130  
Passenger load factor
    72.8 %     70.7 %     69.0 %
Passenger revenue yield per passenger mile (cents)
    11.91       11.86       13.08  
Passenger revenue per available seat mile (cents)
    8.67       8.39       9.04  
Cargo revenue yield per ton mile (cents)
    27.87       27.73       30.80  
Operating expenses per available seat mile, excluding Regional Affiliates (cents) (**)
    10.15       11.14       11.31  
Fuel consumption (gallons, in millions)
    2,956       3,163       3,294  
Fuel price per gallon (cents)
    87.5       76.0       81.3  
Operating aircraft at year-end
    770       819       881  
Regional Affiliates
                       
Revenue passenger miles (millions)
    5,516       4,576       3,749  
Available seat miles (millions)
    8,597       7,248       6,515  
Passenger load factor
    64.2 %     63.2 %     57.5 %


(*)   On April 9, 2001, TWA LLC purchased substantially all of the assets and assumed certain liabilities of TWA. Accordingly, the 2001 financial information above includes the operating results of TWA LLC since the date of acquisition.
 
(**)   Excludes $1,757 million, $129 million and $7 million of expense incurred related to Regional Affiliates in 2003, 2002 and 2001, respectively. In 2003, this expense related to capacity purchase agreements with AMR Eagle, Trans States and Chautauqua for the full year. In 2002, this expense related to capacity purchase agreements with Chautauqua for the full year and Trans Sates beginning in November 2002. In 2001, this expense related to a capacity purchase agreement with Chautauqua beginning in April 2001.
 
Note:   Certain amounts have been reclassified to conform with the 2003 presentation.

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Government Assistance

In April 2003, the President signed the Act, which includes aviation-related assistance provisions. The Act authorized payment of (i) $100 million to compensate air carriers for the direct costs associated with the strengthening of flight deck doors and locks and (ii) $2.3 billion to reimburse air carriers for increased security costs, which was distributed in proportion to the amounts each carrier had paid or collected in passenger security and air carrier security fees to the Transportation Security Administration (the Security Fee Reimbursement). The Company’s Security Fee Reimbursement was $358 million (net of payments to independent regional affiliates) and was recorded as a reduction to operating expenses. In addition, the Act suspended the collection of the passenger security fee from June 1, 2003 until September 30, 2003 and authorized the extension of war-risk insurance through August 31, 2004 (and permits further extensions until December 31, 2004).

Outlook

Capacity for American’s mainline jet operations is expected to increase about six percent in 2004, despite removing aircraft from the fleet and reducing mainline departures. This is due to increased efficiencies, driven by three factors: (i) American operated with a low base number of flights in 2003 as a result of the war in Iraq and SARS, (ii) American is adding seats back to its Boeing 757 and Airbus A300 aircraft and (iii) as American realigns its mid-continent hubs and de-peaks its Miami schedule, its aircraft productivity levels will improve.

American’s goal is to improve its unit costs by 17 percent in the first quarter of 2004 compared to the first quarter of 2003, and by ten percent for the full year, compared to 2003. American will have a full year of labor savings from its Labor Agreements and Management Reductions and more fully realize the savings from its other strategic cost savings initiatives. However, there are significant cost challenges in 2004 that may affect its ability to achieve this goal, primarily from medical benefits costs, airport fees and maintenance, materials and repairs costs (due to flight hour agreement contractual rate increases and the benefit from retiring aircraft subsiding). In addition, the Company expects fuel prices to remain high during 2004. See “Risk Factors”.

Other Information

Environmental Matters Subsidiaries of AMR have been notified of potential liability with regard to several environmental cleanup sites and certain airport locations. At sites where remedial litigation has commenced, potential liability is joint and several. AMR’s alleged volumetric contributions at all but one of these sites are minimal compared to others. AMR does not expect these matters, individually or collectively, to have a material impact on its results of operations, financial position or liquidity. Additional information is included in Part C of Item 1 and Note 4 to the consolidated financial statements.

Critical Accounting Policies and Estimates The preparation of the Company’s financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company believes its estimates and assumptions are reasonable; however, actual results and the timing of the recognition of such amounts could differ from those estimates. The Company has identified the following critical accounting policies and estimates used by management in the preparation of the Company’s financial statements: accounting for long-lived assets, passenger revenue, frequent flyer program, pensions and other postretirement benefits, and income taxes.

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Long-lived assets — The Company has approximately $20 billion of long-lived assets as of December 31, 2003, including approximately $19 billion related to flight equipment and other fixed assets. In addition to the original cost of these assets, their recorded value is impacted by a number of policy elections made by the Company, including estimated useful lives and salvage values. In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets and the net book value of the assets exceeds their estimated fair value. In making these determinations, the Company uses certain assumptions, including, but not limited to: (i) estimated fair value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service and estimated salvage values. A change in the Company’s fleet plan has been the primary indicator that has resulted in an impairment charge. The Company recorded impairment charges related to its Fokker 100, Saab 340 and ATR 42 aircraft in 2001 and 2002. In 2003, the Company recorded an impairment charge related to its Airbus A300 aircraft as a result of accelerating the planned retirement of this fleet. In addition, in 2003, the Company recorded impairment charges related to its Boeing 767-200 aircraft and four of its Boeing 767-200ER aircraft as a result of permanently retiring these aircraft. Also in 2003, the Company analyzed its remaining Boeing 767-200ER aircraft and determined that these aircraft were not impaired based on anticipated future cash flows. See Notes 1 and 2 to the consolidated financial statements for additional information with respect to these impairment charges and each of the policies and assumptions used by the Company which affect the recorded values of long-lived assets.

Passenger revenue — Passenger ticket sales are initially recorded as a component of Air traffic liability. Revenue derived from ticket sales is recognized at the time service is provided. However, due to various factors, including the industry’s pricing structure and interline agreements throughout the industry, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized, including breakage. These estimates are generally based upon the evaluation of historical trends, including the use of regression analysis and other methods to model the outcome of future events based on the Company’s historical experience and are generally recognized at the time of sale. The Company’s estimation techniques have been applied consistently from year to year. However, due to changes in the Company’s ticket refund policy and changes in the travel profile of customers, historical trends may not be representative of future results.

Frequent flyer program — The Company uses a number of estimates in accounting for its AAdvantage frequent flyer program. Additional information regarding the Company’s AAdvantage frequent flyer program is included in Part F of Item 1 of this Report. Changes to the percentage of the amount of revenue deferred, deferred recognition period, percentage of awards expected to be redeemed for travel on participating airlines, cost per mile estimates or the minimum award level accrued could have a significant impact on the Company’s revenues or incremental cost accrual in the year of the change as well as in future years.

Pensions and other postretirement benefits — The Company’s pension and other postretirement benefit costs and liabilities are calculated using various actuarial assumptions and methodologies. The Company uses certain assumptions including, but not limited to, the selection of the: (i) discount rate, (ii) expected return on plan assets, and (iii) expected health care cost trend rate.

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These assumptions as of December 31 were:

                 
    2003
  2002
Discount rate
    6.25 %     6.75 %
Expected return on plan assets
    9.00 %     9.25 %
Expected health care cost trend rate:
               
Pre-65 individuals
               
Initial
    5.0 %     6.0 %
Ultimate (2005)
    4.5 %     4.5 %
Post-65 individuals
               
Initial
    11.0 %     12.0 %
Ultimate (2010)
    4.5 %     4.5 %

The Company’s discount rate is determined based upon the review of high quality corporate bond rates, the change in these rates during the year, and year-end rate levels. Lowering the discount rate by 0.5 percent as of December 31, 2003 would increase the Company’s pension and postretirement benefits liability by approximately $532 million and $169 million, respectively, and increase estimated 2004 pension and postretirement benefits expense by $66 million and $10 million, respectively.

The expected return on plan assets is based upon an evaluation of the Company’s historical trends and experience taking into account current and expected market conditions. The expected return on plan assets component of the Company’s net periodic benefit cost is calculated based on the fair value of plan assets and the Company’s target asset allocation of 40 percent longer duration corporate bonds, 25 percent U.S. value stocks, 20 percent international stocks, five percent emerging markets stocks and bonds and 10 percent alternative (private) investments. The Company monitors its actual asset allocation and believes that its long-term asset allocation will continue to approximate its target allocation. The Company’s historical annualized ten-year rate of return on plan assets, calculated using a geometric compounding of monthly returns, is approximately 10.5 percent as of December 31, 2003. Lowering the expected long-term rate of return on plan assets by 0.5 percent as of December 31, 2003 would increase estimated 2004 pension expense by approximately $32 million.

The health care cost trend rate is based upon an evaluation of the Company’s historical trends and experience taking into account current and expected market conditions. Increasing the assumed health care cost trend rate by 1.0 percent would increase estimated 2004 postretirement benefits expense by $41 million.

The Company has pension and postretirement benefit unrecognized net actuarial losses as of December 31, 2003, of approximately $1.6 billion and $407 million, respectively. The unrecognized net actuarial losses represent changes in the amount of the projected benefit obligation, the postretirement accumulated benefit obligation and plan assets resulting from (i) changes in assumptions and (ii) actual experience differing from assumptions. The amortization of unrecognized net actuarial loss component of the Company’s 2004 pension and postretirement benefit net periodic benefit costs are expected to be approximately $58 million and $8 million, respectively. The Company’s total 2004 defined benefit pension expense and postretirement expense is currently estimated to be approximately $428 million and $264 million (including the impact of the Medicare legislation discussed in Note 10 to the consolidated financial statements), respectively.

The Company records an additional minimum pension liability when its accumulated benefit obligation exceeds the pension plans’ assets in excess of amounts previously accrued for pension costs. As of December 31, 2003, the Company’s additional minimum pension liability was $1.1 billion, down from $1.6 billion as of December 31, 2002, primarily as a result of significantly improved asset performance. The decrease in the Company’s minimum pension liability resulted in a 2003 credit to equity of approximately $337 million. An additional minimum pension liability is recorded as an increase to the pension liability, an increase to other assets (to the extent that a plan has unrecognized prior service costs) and a charge to stockholders’ equity as a component of Accumulated other comprehensive loss. See Note 10 to the consolidated financial statements for additional information regarding the Company’s pension and other postretirement benefits.

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Income taxes — The Company accounts for income taxes in accordance with Financial Accounting Standards No. 109, “Accounting for Income Taxes”. Accordingly, the Company records a deferred tax asset valuation allowance when it is more likely than not that some portion or all of its deferred tax assets will not be realized. The Company considers its historical earnings, trends, and outlook for future years in making this determination. The Company has a deferred tax valuation allowance of $663 million as of December 31, 2003. See Note 8 to the consolidated financial statements for additional information.

Tax contingencies — The Company has reserves for taxes and associated interest that may become payable in future years as a result of audits by tax authorities. Although the Company believes that the positions taken on previously filed tax returns are appropriate, it nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge the positions taken by the Company resulting in additional liabilities for taxes and interest. The tax reserves are reviewed as circumstances warrant and adjusted as events occur that affect the Company’s potential liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, release of administrative guidance, or rendering of a court decision affecting a particular tax issue. In 2003, the Company reached an agreement with the IRS covering tax years 1990 through 1995 and as a result, recorded an $80 million tax benefit to reduce previously accrued income tax liabilities and an $84 million reduction in interest expense to reduce previously accrued interest related to accrued tax liabilities.

Risk Factors

The Company’s ability to return to sustained profitability will depend on a number of risk factors, many of which are largely beyond the Company’s control. Among other things, the following factors have had and/or may have a negative impact on the Company’s business and financial results:

Economic and Other Conditions The airline industry is affected by changes in international, national, regional and local economic, business and financial conditions, inflation, war, terrorist attacks, political instability (or the threat thereof), consumer preferences and spending patterns, demographic trends, disruptions to the air traffic control system, consumer perceptions of airline safety, costs of safety, security and environmental measures, and the weather.

Substantial Indebtedness The Company has, and will continue to have, a significant amount of indebtedness. In addition, the Company, American and their respective subsidiaries may incur substantial additional debt, including secured debt, in the future. As discussed earlier in this Report, the Company’s substantial indebtedness could have important consequences. For example, it could (i) limit the Company’s ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate purposes, (ii) require the Company to dedicate a substantial portion of its cash flow from operations to payments on its indebtedness, thereby reducing the funds available for other purposes, (iii) make the Company more vulnerable to economic downturns, (iv) limit its ability to withstand competitive pressures and reduce its flexibility in responding to changing business and economic conditions and, (v) limit the Company’s flexibility in planning for, or reacting to, changes in its business and the industry in which it operates.

Credit Facility Covenants American has a fully drawn $834 million bank credit facility that expires December 15, 2005, which contains a liquidity covenant and an EBITDAR (generally, earnings before interest, taxes, depreciation, amortization and rentals, adjusted for certain non-cash items) to fixed charges (generally, interest and total rentals) ratio covenant. The Company expects to be able to continue to comply with these covenants. However, it cannot be sure that it will continue to be able to do so through the expiration of the facility. Failure to do so would result in a default under this facility and a significant amount of American’s other debt.

Fuel Prices / Supply Due to the competitive nature of the airline industry, in the event of continuing increases in the price of jet fuel, there can be no assurance that the Company will be able to pass on increased fuel prices to its customers by increasing its fares. Likewise, increased fare competition and lower revenues for all air carriers may offset any potential benefit of lower fuel prices. As of December 31, 2003, the Company had hedged approximately 21 percent of its expected first quarter 2004 fuel requirements, and a much lower percentage of its expected fuel requirements beyond March 31, 2004.

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While the Company does not currently anticipate a significant reduction in fuel availability, dependency on foreign imports of crude oil and the possibility of changes in government policy on jet fuel production, transportation and marketing make it impossible to predict the future availability of jet fuel. In the event there is an outbreak of hostilities or other conflicts in oil producing areas or elsewhere, there could be reductions in the production and/or importation of crude oil and/or significant increases in the cost of fuel. If there were major reductions in the availability of jet fuel or significant increases in its cost, or if current high prices are sustained for a significant period of time, the Company’s business, as well as that of the entire industry, would be adversely affected.

Competition in the Airline Industry Service over almost all of the Company’s routes is highly competitive and fares remain at historically low levels. The Company faces vigorous competition from major domestic airlines, national, regional, all-cargo and charter carriers, foreign air carriers, low-cost air carriers, and, particularly on shorter segments, ground transportation. Increasingly, the Company faces significant competition from marketing/operational alliances formed by its competitors. To the extent those alliances can undertake activities that are not available to the Company, the Company’s ability to effectively compete could be hindered. Pricing decisions are affected by competition from other airlines. Fare discounting by competitors has historically had a negative effect on the Company’s financial results because the Company is generally required to match competitors’ fares to maintain passenger traffic. No assurance can be given that any future fare reduction would be offset by increases in passenger traffic, a reduction in costs or changes in the mix of traffic that would improve yields. In addition, since September 11, 2001, several air carriers have recently reorganized or are reorganizing under Chapter 11 of the United States Bankruptcy Code, including United and US Airways. It is possible that other competitors may seek to reorganize in or out of Chapter 11. Historically, air carriers involved in reorganizations have undertaken substantial fare discounting in order to maintain cash flows and enhance customer loyalty.

Restructuring Program As discussed in the Overview to this Item, the Company is continuing to implement a restructuring program. The ability of the Company to successfully implement the program without affecting operational performance and service levels is not assured.

Changing Business Strategy The Company evaluates its assets on an ongoing basis with a view to maximizing their value to the Company and determining which are core to its operations. It also evaluates its business strategies. The Company may change its business strategy in the future and may not pursue some of the goals stated herein.

Reduced Pricing Power The Company has reduced pricing power, resulting mainly from greater cost sensitivity on the part of travelers, especially business travelers, and increasing competition from low cost carriers. The percentage of routes on which the Company competes with carriers having substantially lower operating costs has grown significantly over the past decade. The Company now competes with low cost carriers on most of its domestic network. At the same time, the continuous increase in pricing transparency resulting from the use of the Internet has enabled cost conscious customers to more easily obtain the lowest fare on any given route.

Government Regulation Future results of the Company’s operations may vary based upon any actions which the governmental agencies with jurisdiction over the Company’s operations may take, including the granting and timing of certain governmental approvals (including foreign government approvals) needed for codesharing alliances and other arrangements with other airlines, restrictions on competitive practices (e.g., court orders, or agency regulations or orders, that would curtail an airline’s ability to respond to a competitor), the adoption of regulations that impact customer service standards (e.g., new passenger security standards), and the adoption of more restrictive locally-imposed noise restrictions.

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Military Involvement Prior to the war in Iraq, the increased threat of U.S. military involvement in overseas operations had a significant adverse impact on the Company’s business, financial position (including access to capital markets) and results of operations and on the airline industry in general. Furthermore, the war in Iraq had a significant adverse impact on international and domestic revenues and future bookings. The continuing U.S. military involvement in Iraq, or other conflicts in the Middle East or elsewhere, may result in a similar adverse impact.

Terrorist Attacks As described elsewhere in this Report, the events of September 11, 2001 had a material adverse impact on the Company. The occurrence of another terrorist attack (whether domestic or international and whether against the Company or another entity) would again have a material adverse impact on the Company, its finances and/or its operations.

Uncertainty in International Operations The Company’s current international activities and prospects could be adversely affected by factors such as reversals or delays in the opening of foreign markets, exchange controls, currency and political risks, taxation and changes in international government regulation of the Company’s operations, including the inability to obtain or retain needed route authorities and/or slots.

Diseases In 2003, there was an outbreak of Severe Acute Respiratory Syndrome (SARS), which primarily had an adverse impact on the Company’s Pacific operations. If there were another outbreak of a disease (such as SARS) that affects travel behavior, it could have a material adverse impact on the Company’s operations.

Uncertainty of Future Collective Bargaining Agreements and Events The Company’s operations could be adversely affected by failure of the Company to reach agreement with any labor union representing the Company’s employees. In addition, a dispute between the Company and an employee work group (outside the confines of a collective bargaining agreement) could adversely impact the Company’s operations.

Need for Additional Liquidity The Company needs additional liquidity because of its significant debt obligations maturing in the next several years, as well as substantial, and increasing pension funding obligations. The Company’s ability to obtain future financing or to sell assets may also be adversely affected because American has fewer unencumbered assets available than in years past. In recent years, a large portion of the aircraft assets (including virtually all of the aircraft eligible for benefits of Section 1110 of the U.S. Bankruptcy Code) have been encumbered. The ability to borrow against or sell those assets on acceptable terms is uncertain and, in any event, those assets may not maintain their current market value. To maintain sufficient liquidity as the Company continues to implement the Turnaround Plan, the Company will need continued access to additional funding. If the revenue environment deteriorates beyond normal seasonal trends, or the Company is unable to access the capital markets, it may be unable to fund its obligations and sustain its operations in the long-term.

Credit Ratings Since the September 11, 2001 terrorist attacks, AMR’s and American’s credit ratings have been lowered significantly. These reductions have increased borrowing costs and limited borrowing options. Additional significant reductions in the credit ratings could further increase borrowing or other costs and further restrict the availability of future financing.

Insurance Costs The Company carries insurance for public liability, passenger liability, property damage and all-risk coverage for damage to its aircraft. As a result of the September 11, 2001 events, aviation insurers significantly reduced the amount of insurance coverage available to commercial air carriers for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events (war-risk coverage). At the same time, these insurers significantly increased the premiums for aviation insurance in general. The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines until August 31, 2004, covering losses to employees, passengers, third parties and aircraft. In addition, the Secretary of Transportation may extend the policy until December 31, 2004, at his discretion. However, there is no assurance that it will be extended. If the U.S. government does not extend the policy beyond August 31, 2004, the Company will attempt to purchase similar coverage with narrower scope from commercial insurers at an additional cost. To the extent this coverage is not available at commercially reasonable rates, the Company’s results of operations would be negatively affected. In addition, in the event commercial insurance carriers further reduce the amount of insurance coverage available to the Company, or significantly increase its cost, the Company’s operations and/or financial position and results of operations would be adversely affected.

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ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Sensitive Instruments and Positions

The risk inherent in the Company’s market risk sensitive instruments and positions is the potential loss arising from adverse changes in the price of fuel, foreign currency exchange rates and interest rates as discussed below. The sensitivity analyses presented do not consider the effects that such adverse changes may have on overall economic activity, nor do they consider additional actions management may take to mitigate the Company’s exposure to such changes. Therefore, actual results may differ. The Company does not hold or issue derivative financial instruments for trading purposes. See Note 7 to the consolidated financial statements for accounting policies and additional information.

Aircraft Fuel The Company’s earnings are affected by changes in the price and availability of aircraft fuel. In order to provide a measure of control over price and supply, the Company trades and ships fuel and maintains fuel storage facilities to support its flight operations. The Company also manages the price risk of fuel costs primarily by using jet fuel, heating oil, and crude oil swap and option contracts. Market risk is estimated as a hypothetical 10 percent increase in the December 31, 2003 and 2002 cost per gallon of fuel. Based on projected 2004 fuel usage, such an increase would result in an increase to aircraft fuel expense of approximately $268 million in 2004, inclusive of the impact of fuel hedge instruments outstanding at December 31, 2003, and assumes the Company’s fuel hedging program remains effective under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”. Comparatively, based on projected 2003 fuel usage, such an increase would have resulted in an increase to aircraft fuel expense of approximately $205 million in 2003, inclusive of the impact of fuel hedge instruments outstanding at December 31, 2002. The change in market risk is due to the increase in fuel prices and a decrease in the amount of fuel hedged. Beginning in March 2003, because of the Company’s then existing financial condition, the Company stopped entering into new hedge contracts and, in June 2003, terminated substantially all of its contracts with maturities beyond March 2004. Commencing in October 2003, the Company began to enter into new fuel hedging contracts with maturities beyond March 2004 for a portion of its future fuel requirements. As of December 31, 2003, the Company had hedged, with option contracts, approximately 12 percent of its estimated 2004 fuel requirements, or approximately 21 percent of its estimated first quarter 2004 fuel requirements, 16 percent of its second quarter 2004 estimated fuel requirements and six percent of its estimated fuel requirements for the remainder of 2004. Comparatively, as of December 31, 2002 the Company had hedged approximately 32 percent of its estimated 2003 fuel requirements, 15 percent of its estimated 2004 fuel requirements, and approximately four percent of its estimated 2005 fuel requirements. The Company’s credit rating has limited its ability to enter into certain types of fuel hedge contracts. A further deterioration of its credit rating or liquidity position may negatively affect the Company’s ability to hedge fuel in the future.

Foreign Currency The Company is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of foreign currency-denominated operating revenues and expenses. The Company’s largest exposure comes from the British pound, Euro, Canadian dollar, Japanese yen and various Latin American currencies. Previously, the Company used options to hedge a portion of its anticipated foreign currency-denominated ticket sales. After determining its foreign currency hedge program’s impact was no longer materially beneficial, the Company discontinued entering into foreign currency hedges. The Company plans to periodically evaluate its foreign currency exposure to determine whether its foreign currency hedge program should be reinstated. The result of a uniform 10 percent strengthening in the value of the U.S. dollar from December 31, 2003 and 2002 levels relative to each of the currencies in which the Company has foreign currency exposure would result in a decrease in operating income of approximately $77 million and $65 million for the years ending December 31, 2004 and 2003, respectively, due to the Company’s foreign-denominated revenues exceeding its foreign-denominated expenses. This sensitivity analysis was prepared based upon projected 2004 and 2003 foreign currency-denominated revenues and expenses as of December 31, 2003 and 2002, respectively.

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Interest The Company’s earnings are also affected by changes in interest rates due to the impact those changes have on its interest income from cash and short-term investments, and its interest expense from variable-rate debt instruments. The Company’s largest exposure with respect to variable-rate debt comes from changes in the London Interbank Offered Rate (LIBOR). The Company had variable-rate debt instruments representing approximately 37 percent and 43 percent of its total long-term debt at December 31, 2003 and 2002, respectively, and interest rate swaps on notional amounts of approximately $138 million at December 31, 2002. If the Company’s interest rates average 10 percent more in 2004 than they did at December 31, 2003, the Company’s interest expense would increase by approximately $13 million and interest income from cash and short-term investments would increase by approximately $4 million. In comparison, at December 31, 2002, the Company estimated that if interest rates averaged 10 percent more in 2003 than they did at December 31, 2002, the Company’s interest expense would have increased by approximately $15 million and interest income from cash and short-term investments would have increased by approximately $5 million. These amounts are determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate long-term debt, interest rate swap agreements, and cash and short-term investment balances at December 31, 2003 and 2002.

Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately $372 million and $395 million as of December 31, 2003 and 2002, respectively. The change in market risk is due primarily to the increase in the Company’s fixed-rate long-term debt during 2003. The fair values of the Company’s long-term debt were estimated using quoted market prices or discounted future cash flows based on the Company’s incremental borrowing rates for similar types of borrowing arrangements.

Other The Company holds investments in certain other entities which are subject to market risk. However, the impact of such market risk on earnings is not significant due to the immateriality of the carrying value and the geographically diverse nature of these holdings.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

         
    Page
Report of Independent Auditors
    42  
Consolidated Statements of Operations
    43  
Consolidated Balance Sheets
    44-45  
Consolidated Statements of Cash Flows
    46  
Consolidated Statements of Stockholders’ Equity
    47  
Notes to Consolidated Financial Statements
    48-78  

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
AMR Corporation

We have audited the accompanying consolidated balance sheets of AMR Corporation as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMR Corporation at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

As discussed in Note 11 to the consolidated financial statements, effective January 1, 2002 the Company changed its method of accounting for its goodwill and other intangible assets as required by Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets.”

/s/ ERNST & YOUNG LLP

Dallas, Texas
February 16, 2004

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AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)


                         
    Year Ended December 31,
    2003
  2002
  2001
Revenues
                       
Passenger — American Airlines
  $ 14,332     $ 14,440     $ 15,780  
           — Regional Affiliates
    1,519       1,431       1,428  
Cargo
    558       561       662  
Other revenues
    1,031       988       1,099  
 
   
 
     
 
     
 
 
Total operating revenues
    17,440       17,420       18,969  
 
   
 
     
 
     
 
 
Expenses
                       
Wages, salaries and benefits
    7,264       8,392       8,032  
Aircraft fuel
    2,772       2,562       2,888  
Depreciation and amortization
    1,377       1,366       1,404  
Other rentals and landing fees
    1,173       1,198       1,197  
Commissions, booking fees and credit card expense
    1,063       1,163       1,540  
Maintenance, materials and repairs
    860       1,108       1,165  
Aircraft rentals
    687       840       829  
Food service
    611       698       778  
Other operating expenses
    2,428       2,715       2,996  
Special charges
    407       718       1,466  
U.S. government grant
    (358 )     (10 )     (856 )
 
   
 
     
 
     
 
 
Total operating expenses
    18,284       20,750       21,439  
 
   
 
     
 
     
 
 
Operating Loss
    (844 )     (3,330 )     (2,470 )
Other Income (Expense)
                       
Interest income
    55       71       110  
Interest expense
    (703 )     (685 )     (538 )
Interest capitalized
    71       86       144  
Miscellaneous — net
    113       (2 )     (2 )
 
   
 
     
 
     
 
 
 
    (464 )     (530 )     (286 )
 
   
 
     
 
     
 
 
Loss Before Income Taxes and Cumulative Effect of Accounting Change
    (1,308 )     (3,860 )     (2,756 )
Income tax benefit
    (80 )     (1,337 )     (994 )
 
   
 
     
 
     
 
 
Loss Before Cumulative Effect of Accounting Change
    (1,228 )     (2,523 )     (1,762 )
Cumulative Effect of Accounting Change, Net of Applicable Income Taxes
          (988 )      
 
   
 
     
 
     
 
 
Net Loss
  $ (1,228 )   $ (3,511 )   $ (1,762 )
 
   
 
     
 
     
 
 
Loss Per Share:
                       
Basic and Diluted
                       
Loss before cumulative effect of accounting change
  $ (7.76 )   $ (16.22 )   $ (11.43 )
Cumulative effect of accounting change
          (6.35 )      
 
   
 
     
 
     
 
 
Net loss
  $ (7.76 )   $ (22.57 )   $ (11.43 )
 
   
 
     
 
     
 
 

The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
CONSOLIDATED BALANCE SHEETS

(in millions, except shares and par value)


                 
    December 31,
    2003
  2002
Assets
               
Current Assets
               
Cash
  $ 120     $ 104  
Short-term investments
    2,486       1,846  
Restricted cash and short-term investments
    527       783  
Receivables, less allowance for uncollectible accounts (2003 - $62; 2002 - $66)
    796       909  
Income tax receivable
          572  
Inventories, less allowance for obsolescence (2003 - $428; 2002 - $450)
    516       627  
Other current assets
    237       96  
 
   
 
     
 
 
Total current assets
    4,682       4,937  
Equipment and Property
               
Flight equipment, at cost
    21,366       21,158  
Less accumulated depreciation
    6,047       6,117  
 
   
 
     
 
 
 
    15,319       15,041  
Purchase deposits for flight equipment
    359       767  
 
               
Other equipment and property, at cost
    4,820       4,738  
Less accumulated depreciation
    2,409       2,288  
 
   
 
     
 
 
 
    2,411       2,450  
 
   
 
     
 
 
 
    18,089       18,258  
Equipment and Property Under Capital Leases
               
Flight equipment
    2,291       2,245  
Other equipment and property
    167       165  
 
   
 
     
 
 
 
    2,458       2,410  
Less accumulated amortization
    1,087       974  
 
   
 
     
 
 
 
    1,371       1,436  
Other Assets
               
Route acquisition costs and airport operating and gate lease rights, less accumulated amortization (2003 - $284; 2002 - $257)
    1,253       1,292  
Other
    3,935       4,344  
 
   
 
     
 
 
 
    5,188       5,636  
 
   
 
     
 
 
Total Assets
  $ 29,330     $ 30,267  
 
   
 
     
 
 

The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
CONSOLIDATED BALANCE SHEETS

(in millions, except shares and par value)


                 
    December 31,
    2003
  2002
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Accounts payable
  $ 967     $ 1,198  
Accrued salaries and wages
    528       705  
Accrued liabilities
    1,461       1,855  
Air traffic liability
    2,799       2,614  
Current maturities of long-term debt
    603       713  
Current obligations under capital leases
    201       155  
 
   
 
     
 
 
Total current liabilities
    6,559       7,240  
Long-Term Debt, Less Current Maturities
    11,901       10,888  
Obligations Under Capital Leases, Less Current Obligations
    1,225       1,422  
Other Liabilities and Credits
               
Deferred gains
    520       487  
Pension and postretirement benefits
    4,803       4,730  
Other liabilities and deferred credits
    4,276       4,543  
 
   
 
     
 
 
 
    9,599       9,760  
Commitments and Contingencies
               
Stockholders’ Equity
               
Preferred stock — 20,000,000 shares authorized; None issued
           
Common stock — $1 par value; 750,000,000 shares authorized; 182,350,259 shares issued
    182       182  
Additional paid-in capital
    2,605       2,795  
Treasury shares at cost: 2003 — 22,768,027; 2002 — 26,260,620
    (1,405 )     (1,621 )
Accumulated other comprehensive loss
    (785 )     (1,076 )
Retained (deficit) earnings
    (551 )     677  
 
   
 
     
 
 
 
    46       957  
 
   
 
     
 
 
Total Liabilities and Stockholders’ Equity
  $ 29,330     $ 30,267  
 
   
 
     
 
 

The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)


                         
    Year Ended December 31,
    2003
  2002
  2001
Cash Flow from Operating Activities:
                       
Net Loss
  $ (1,228 )   $ (3,511 )   $ (1,762 )
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
                       
Depreciation
    1,222       1,210       1,122  
Amortization
    155       156       282  
Provisions for asset impairments and special charges
    190       463       1,214  
Goodwill impairment
          988        
Gain on sale of investments
    (154 )            
Deferred income taxes
          (845 )     (731 )
Additional tax refunds due to tax law change
          371        
Redemption payments under operating leases for special facility revenue bonds
    (521 )            
Change in assets and liabilities:
                       
Decrease (increase) in receivables
    690       (66 )     120  
Decrease (increase) in inventories
    56       48       (39 )
Increase (decrease) in accounts payable and accrued liabilities
    (198 )     (32 )     379  
Increase (decrease) in air traffic liability
    184       (154 )     (276 )
Increase in other liabilities and deferred credits
    245       188       165  
Other, net
    (40 )     73       68  
 
   
 
     
 
     
 
 
   Net cash provided (used) by operating activities
    601       (1,111 )     542  
Cash Flow from Investing Activities:
                       
Capital expenditures, including purchase deposits on flight equipment
    (680 )     (1,881 )     (3,640 )
Acquisition of Trans World Airlines, Inc.
                (742 )
Net (increase) decrease in short-term investments
    (640 )     540       (242 )
Net decrease (increase) in restricted cash and short-term investments
    256       (248 )     (535 )
Proceeds from sale of equipment and property and other investments
    395       220       401  
Other
    24       (24 )     18  
 
   
 
     
 
     
 
 
   Net cash used for investing activities
    (645 )     (1,393 )     (4,740 )
Cash Flow from Financing Activities:
                       
Payments on long-term debt and capital lease obligations
    (886 )     (687 )     (922 )
Proceeds from:
                       
Issuance of long-term debt
    945       3,099       4,744  
Sale-leaseback transactions
          91       352  
Exercise of stock options
    1       3       37  
 
   
 
     
 
     
 
 
   Net cash provided by financing activities
    60       2,506       4,211  
 
   
 
     
 
     
 
 
Net increase in cash
    16       2       13  
Cash at beginning of year
    104       102       89  
 
   
 
     
 
     
 
 
Cash at end of year
  $ 120     $ 104     $ 102  
 
   
 
     
 
     
 
 
Activities Not Affecting Cash
                       
Flight equipment acquired through seller financing
  $ 735     $     $  
 
   
 
     
 
     
 
 
Capital lease obligations incurred
  $ 140     $     $  
 
   
 
     
 
     
 
 
Reduction to capital lease and other obligations
  $ (190 )   $     $  
 
   
 
     
 
     
 
 

The accompanying notes are an integral part of these financial statements.

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AMR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in millions, except share amounts)


                                                 
                            Accumulated        
            Additional           Other        
    Common   Paid-in   Treasury   Comprehensive   Retained    
    Stock
  Capital
  Stock
  Loss
  Earnings
  Total
Balance at January 1, 2001
  $ 182     $ 2,911     $ (1,865 )   $ (2 )   $ 5,950     $ 7,176  
Net loss
                            (1,762 )     (1,762 )
Adjustment for minimum pension liability
                      (161 )           (161 )
Changes in fair value of derivative financial instruments
                      (75 )           (75 )
Unrealized gain on investments
                      5             5  
Income tax effect
                      87             87  
 
                                           
 
 
Total comprehensive loss
                                            (1,906 )
Issuance of 2,421,838 shares from Treasury pursuant to stock option, deferred stock and restricted stock incentive plans, net of tax of $58
          (46 )     149                   103  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at December 31, 2001
    182       2,865       (1,716 )     (146 )     4,188       5,373  
Net loss
                            (3,511 )     (3,511 )
Adjustment for minimum pension liability
                      (1,122 )           (1,122 )
Changes in fair value of derivative financial instruments
                      143             143  
Unrealized loss on investments
                      (6 )           (6 )
Income tax effect
                      55             55  
 
                                           
 
 
Total comprehensive loss
                                            (4,441 )
Issuance of 1,533,760 shares from Treasury pursuant to stock option, deferred stock and restricted stock incentive plans, net of tax of $2
          (70 )     95                   25  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at December 31, 2002
    182       2,795       (1,621 )     (1,076 )     677     957  
Net loss
                            (1,228 )     (1,228 )
Adjustment for minimum pension liability
                      337             337  
Changes in fair value of derivative financial instruments
                      (43 )           (43 )
Unrealized loss on investments
                      (3 )           (3 )
Income tax effect
                                   
 
                                           
 
 
Total comprehensive loss
                                            (937 )
Issuance of 3,492,593 shares from Treasury to vendors and employees pursuant to stock option and deferred stock incentive plans
          (190 )     216                   26  
 
   
 
     
 
     
 
     
 
     
 
     
 
 
Balance at December 31, 2003
  $ 182     $ 2,605     $ (1,405 )   $ (785 )   $ (551 )   $ 46  
 
   
 
     
 
     
 
     
 
     
 
     
 
 

The accompanying notes are an integral part of these financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. Summary of Accounting Policies

Basis of Presentation The accompanying consolidated financial statements include the accounts of AMR Corporation (AMR or the Company) and its wholly owned subsidiaries, including its principal subsidiary American Airlines, Inc. (American). On April 9, 2001, American (through a wholly owned subsidiary, TWA Airlines LLC (TWA LLC)) purchased substantially all of the assets of Trans World Airlines, Inc. (TWA) and assumed certain liabilities. TWA was the eighth largest U.S. carrier, with a primary domestic hub in St. Louis. American funded the acquisition of TWA’s assets with its existing cash and short-term investments. The acquisition of TWA was accounted for under the purchase method of accounting and, accordingly, the operating results of TWA LLC since the date of acquisition have been included in the accompanying consolidated financial statements. All significant intercompany transactions have been eliminated. Certain amounts have been reclassified to conform with the 2003 presentation.

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Restricted Cash and Short-term Investments The Company has restricted cash and short-term investments related primarily to collateral held to support projected workers’ compensation obligations and various other obligations.

Inventories Spare parts, materials and supplies relating to flight equipment are carried at average acquisition cost and are expensed when used in operations. Allowances for obsolescence are provided — over the estimated useful life of the related aircraft and engines — for spare parts expected to be on hand at the date aircraft are retired from service. Allowances are also provided for spare parts currently identified as excess. These allowances are based on management estimates, which are subject to change.

Maintenance and Repair Costs Maintenance and repair costs for owned and leased flight equipment are charged to operating expense as incurred, except costs incurred for maintenance and repair under flight hour maintenance contract agreements, which are accrued based on contractual terms.

Intangible Assets Route acquisition costs and airport operating and gate lease rights represent the purchase price attributable to route authorities (including international airport take-off and landing slots), domestic airport take-off and landing slots and airport gate leasehold rights acquired. Indefinite-lived intangible assets (route acquisition costs) are tested for impairment annually on December 31, rather than amortized, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). Airport operating and gate lease rights are being amortized on a straight-line basis over 25 years to a zero residual value.

Statements of Cash Flows Short-term investments, without regard to remaining maturity at acquisition, are not considered as cash equivalents for purposes of the statements of cash flows.

Employee Accruals The Company estimates the amount of potential retroactive pay expected to be provided upon finalization of a labor agreement for work groups working under contracts that have become amendable. These estimates are based upon management’s expectation of the most likely outcome of the contract negotiations.

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1. Summary of Accounting Policies (Continued)

Equipment and Property The provision for depreciation of operating equipment and property is computed on the straight-line method applied to each unit of property, except that major rotable parts, avionics and assemblies are depreciated on a group basis. The depreciable lives used for the principal depreciable asset classifications are:

     
    Depreciable Life

American jet aircraft and engines
  20 – 30 years
ATR 42 aircraft
  20041
Saab 340 aircraft
  20051
Other regional aircraft and engines
  16 – 20 years
Major rotable parts, avionics and assemblies
  Life of equipment to which applicable
Improvements to leased flight equipment
  Term of lease
Buildings and improvements (principally on leased land)
  10-30 years or term of lease
Furniture, fixtures and other equipment
  3-10 years
Capitalized software
  3-10 years

  1   Approximate final aircraft retirement date.

Residual values for aircraft, engines, major rotable parts, avionics and assemblies are generally five to ten percent, except when guaranteed by a third party for a different amount.

Equipment and property under capital leases are amortized over the term of the leases or, in the case of certain aircraft, over their expected useful lives. Lease terms vary but are generally ten to 25 years for aircraft and seven to 40 years for other leased equipment and property.

Measurement of Asset Impairments In accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144), the Company records impairment charges on long-lived assets used in operations when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets and the net book value of the assets exceeds their estimated fair value. In making these determinations, the Company uses certain assumptions, including, but not limited to: (i) estimated fair value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used in the Company’s operations and estimated salvage values.

Regional Affiliates Revenue from ticket sales is generally recognized when service is provided. Regional Affiliates revenues for flights connecting to American flights are allocated based on industry standard mileage proration agreements.

Passenger Revenue Passenger ticket sales are initially recorded as a component of Air traffic liability. Revenue derived from ticket sales is recognized at the time service is provided. However, due to various factors, including the complex pricing structure and interline agreements throughout the industry, certain amounts are recognized in revenue using estimates regarding both the timing of the revenue recognition and the amount of revenue to be recognized, including breakage. These estimates are generally based upon the evaluation of historical trends, including the use of regression analysis and other methods to model the outcome of future events based on the Company’s historical experience, and are generally recorded at the time of sale.

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1. Summary of Accounting Policies (Continued)

Frequent Flyer Program The estimated incremental cost of providing free travel awards is accrued when such award levels are reached. American sells mileage credits and related services to companies participating in its frequent flyer program. The portion of the revenue related to the sale of mileage credits, representing the revenue for air transportation sold, is valued at current market rates and is deferred and amortized over 28 months, which approximates the expected period over which the mileage credits are used. The remaining portion of the revenue, representing the marketing products sold and administrative costs associated with operating the AAdvantage program, is recognized upon sale, as the related services have been provided.

Tax Contingencies The Company has reserves for taxes and associated interest that may become payable in future years as a result of audits by tax authorities. Although the Company believes that the positions taken on previously filed tax returns are appropriate, it nevertheless has established tax and interest reserves in recognition that various taxing authorities may challenge the positions taken by the Company resulting in additional liabilities for taxes and interest. The tax reserves are reviewed as circumstances warrant and adjusted as events occur that affect the Company’s potential liability for additional taxes, such as lapsing of applicable statutes of limitations, conclusion of tax audits, additional exposure based on current calculations, identification of new issues, release of administrative guidance, or rendering of a court decision affecting a particular tax issue.

Advertising Costs The Company expenses the costs of advertising as incurred. Advertising expense was $150 million, $161 million and $202 million for the years ended December 31, 2003, 2002 and 2001, respectively.

Stock Options The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25) and related Interpretations. Under APB 25, no compensation expense is recognized for stock option grants if the exercise price of the Company’s stock option grants is at or above the fair market value of the underlying stock on the date of grant. The Company has adopted the pro forma disclosure features of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. As required by SFAS 123, pro forma information regarding net loss and loss per share have been determined as if the Company had accounted for its employee stock options and awards granted using the fair value method prescribed by SFAS 123. The fair value for the stock options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2003, 2002 and 2001: risk-free interest rates ranging from 2.93% to 4.58%; dividend yields of 0%; expected stock volatility ranging from 45% to 55%; and expected life of the options ranging from 3.6 years to 4.5 years.

The following table illustrates the effect on net loss and loss per share amounts if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation (in millions, except per share amounts):

                         
    Year Ended December 31,
    2003
  2002
  2001
Net Loss, as reported
  $ (1,228 )   $ (3,511 )   $ (1,762 )
Add: Stock-based employee compensation expense included in reported net loss, net of tax
    20       5       14  
Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax
    (79 )     (36 )     (31 )
 
   
 
     
 
     
 
 
Pro forma net loss
  $ (1,287 )   $ (3,542 )   $ (1,779 )
 
   
 
     
 
     
 
 
Basic and diluted loss per share:
                       
As reported
  $ (7.76 )   $ (22.57 )   $ (11.43 )
Pro forma
  $ (8.13 )   $ (22.77 )   $ (11.54 )

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2. Special charges and U.S. government grant

In early 2001, the economic slowdown in the U.S. resulted in a sharp decline in the Company’s revenues. This slowdown was accelerated and exacerbated by the terrorist attacks on September 11, 2001. As a result, the Company reduced its operating schedule by approximately 20 percent and reduced its workforce by approximately 20,000 jobs in the fourth quarter 2001. Subsequent to these events, the Company determined that the revenue decrease would likely persist indefinitely and that achieving $4 billion in annual capacity-independent cost savings was necessary to offset the revenue decline. The Company initiated the following restructuring activities to realize this goal:

  In 2002, the Company announced a series of initiatives to reduce its costs by $2 billion. These initiatives are being implemented through 2005, and involve: (i) scheduling efficiencies, including the de-peaking of certain of its hubs, (ii) fleet simplification, (iii) streamlined customer interaction, (iv) distribution modifications, (v) in-flight product changes, (vi) operational changes and (vii) headquarters/administration efficiencies. As a result of the initiatives, the Company reduced an estimated 7,000 jobs by March 2003.
 
  In February 2003, American asked its employees for approximately $1.8 billion in annual savings through a combination of changes in wages, benefits and work rules. In April 2003, American reached agreements with its three unions (the Labor Agreements) and also implemented various changes in the pay plans and benefits for non-unionized personnel, including officers and other management (the Management Reductions), which resulted in additional workforce reductions. In addition, the Company and American reached concessionary agreements with certain vendors, lessors, lenders and suppliers (collectively, the Vendors, and the agreements, the Vendor Agreements). Generally, under the terms of these Vendor Agreements, the Company or American will receive the benefit of lower rates and charges for certain goods and services, and more favorable rent and financing terms with respect to certain of its aircraft.

As a result of the Company’s continuing restructuring activities, the Company has recorded a number of special charges. Special charges (credits) for the years ended December 31, 2003, 2002 and 2001 included the following (in millions):

                         
    Year Ended December 31,
    2003
  2002
  2001
Aircraft charges
  $ 321     $ 658     $ 1,237  
Employee charges
    92       57       71  
Facility exit costs
    62       3       115  
Other
    (68 )           43  
 
   
 
     
 
     
 
 
Total special charges
  $ 407     $ 718     $ 1,466  
 
   
 
     
 
     
 
 
             
        Amount
Year
  Description of Charge
  (millions)
Aircraft charges        
2003
  Accelerated the planned retirement of Airbus A300 aircraft and permanently retired Boeing 767-200 aircraft and four Boeing 767-200 ER aircraft. Aircraft and related Airbus A300 rotables were written down to fair value.*   $ 264  
  Retired 11 Boeing 757 leased aircraft and accrued future lease commitments and lease return condition costs     77  
  Adjusted prior accruals for lease return and other costs initially recorded as a component of Special charges     (20 )
       
 
 
      $ 321  
       
 
 

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2. Special charges and U.S. government grant (Continued)

             
        Amount
Year
  Description of Charge
  (millions)
Aircraft charges (Continued)        
2002
  Accelerated the planned retirement of Fokker 100, Saab 340 and ATR 42 aircraft. Aircraft and related rotables and excess inventory were written down to fair value. *   $ 370  
  Retired nine leased Boeing 767-300 aircraft and accelerated the retirement of four leased Fokker 100 aircraft. Accrued future lease commitments and lease return costs. Excess Boeing 767-300 inventory and related rotables were written down to fair value.     189  
  Accrued contract cancellation costs and other costs related to discontinued aircraft modifications     99  
       
 
 
      $ 658  
       
 
 
2001
  Accelerated the planned retirement of Fokker 100, Saab 340 and ATR 42 aircraft and retired five Boeing 727-200 and one McDonnell Douglas MD-80 aircraft. Aircraft, related Fokker 100, Saab 340 and ATR 42 rotables and certain other aircraft modifications were written down to fair value. *   $ 1,172  
  Retired leased McDonnell Douglas DC-9 and Boeing 717 aircraft and eight leased McDonnell Douglas MD-80 aircraft and accrued future lease commitments and lease return costs     65  
       
 
 
      $ 1,237  
       
 
 
Employee charges        
2003
  Reduced approximately 9,300 jobs across all work groups** (by June 2004) in conjunction with the Management Reductions and the Labor Agreements and the reduction of the St. Louis hub. Accrued primarily severance costs.   $ 76  
  Recognized curtailment loss as discussed in Note 10     46  
  Accrued severance charges related to the 2002 workforce reduction discussed below     25  
  Other     4  
  Reduced vacation accrual to reflect new lower pay scales and maximum vacation caps and wrote off a note receivable from one of the Company’s three major unions in conjunction with the Labor Agreements and the Management Reductions     (59 )
       
 
 
      $ 92  
       
 
 
2002
  Reduced approximately 7,000 jobs by March 2003 across all work groups** to realign workforce with planned capacity reductions, fleet simplification, and hub restructurings. Accrued severance and benefits related to voluntary programs in accordance with collective bargaining agreements with pilot and flight attendant work groups.   $ 57  
       
 
 

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2. Special charges and U.S. government grant (Continued)

             
        Amount
Year
  Description of Charge
  (millions)
Employee charges (Continued)        
2001
  Reduced workforce by approximately 20,000 jobs across all work groups**. Accrued primarily severance and benefits.   $ 71  
       
 
 
Facility exit costs        
2003
  Accrued the fair value of future lease commitments and wrote-off certain prepaid rental amounts and leasehold improvements related to certain excess airport space that will no longer be used   $ 45  
  Reduced the size of the St. Louis hub and accrued the fair value of certain future lease commitments     12  
  Other     5  
       
 
 
      $ 62  
       
 
 
2001
  Discontinued service at Dallas Love Field Airport and closed six Admiral’s Clubs, five airport Platinum Service Centers and approximately 105 off-airport Travel Centers in 37 cities. Accrued the fair value of future lease commitments and wrote-off certain leasehold improvements and fixed assets.   $ 87  
  Sold terminal facilities lease rights at the Raleigh-Durham International Airport to the Raleigh-Durham Airport Authority. Accrued residual cost less sales proceeds.     28  
       
 
 
      $ 115  
       
 
 

*   In determining the asset impairment charges described above, management estimated the undiscounted future cash flows using models used by the Company in making fleet and scheduling decisions. In determining the fair value of these aircraft, the Company considered outside third party appraisals and recent transactions involving sales of similar aircraft and engines. The Company also considered internal valuation models in determining the fair value of these aircraft, and with respect to the Fokker 100 aircraft, incorporated the fact that with this grounding, no major airline will operate this fleet type.
 
**   Work groups include pilots, flight attendants, mechanics, fleet service clerks, agents, management and support staff personnel.

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2. Special charges and U.S. government grant (Continued)

Other

As part of the Vendor Agreements discussed above, American sold 33 Fokker 100 aircraft (with a minimal net book value), issued a $23 million non-interest-bearing note, payable in installments and maturing in December 2010, entered into short-term leases on these aircraft and issued shares of AMR common stock as discussed in Note 9. In exchange, approximately $130 million of debt related to certain of the Fokker 100 aircraft was retired. However, the agreement contains provisions that would require American to repay additional amounts of the original debt if certain events occur prior to December 31, 2005, including: (i) an event of default (which generally occurs only if a payment default occurs), (ii) an event of loss with respect to the related aircraft, (iii) rejection by the Company of the lease under the provisions of Chapter 11 of the U.S. Bankruptcy Code or (iv) the Company’s filing for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. As a result of this transaction, including the sale of the 33 Fokker 100 aircraft, and the termination of the Company’s interest rate swap agreements related to the debt that has been retired, the Company recognized a gain of approximately $68 million. If the certain events described above do not occur, the Company expects to recognize an additional gain of approximately $37 million in December 2005.

Summary

The following table summarizes the components of these charges and the remaining accruals for future lease payments, aircraft lease return and other costs, facilities closure costs and employee severance and benefit costs (in millions):

                                         
    Aircraft   Facility   Employee        
    Charges
  Exit Costs
  Charges
  Other
  Total
2001
                                       
Special charges
  $ 1,237     $ 115     $ 71     $ 43     $ 1,466  
Non-cash charges
    (1,179 )     (93 )                 (1,272 )
Payments
          (2 )     (71 )     (43 )     (116 )
 
   
 
     
 
     
 
     
 
     
 
 
Remaining accrual at December 31, 2001
    58       20                   78  
2002
                                       
Special charges
    658       3       57             718  
Non-cash charges
    (460 )     (3 )                 (463 )
Payments
    (47 )     (3 )     (13 )           (63 )
 
   
 
     
 
     
 
     
 
     
 
 
Remaining accrual at December 31, 2002
    209       17       44             270  
2003
                                       
Special charges
    341       62       92       (68 )     427  
Adjustments
    (20 )                             (20 )
Non-cash charges
    (264 )     (17 )     23       68       (190 )
Payments
    (69 )     (6 )     (133 )           (208 )
 
   
 
     
 
     
 
     
 
     
 
 
Remaining accrual at December 31, 2003
  $ 197     $ 56     $ 26     $     $ 279  
 
   
 
     
 
     
 
     
 
     
 
 

Cash outlays related to the accruals, as of December 31, 2003, for aircraft charges, facility exit costs and employee charges will occur through 2014, 2018 and 2004, respectively.

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2. Special charges and U.S. government grant (Continued)

U.S. government grant

In April 2003, the President signed the Emergency Wartime Supplemental Appropriations Act, 2003 (the Appropriations Act), which includes provisions authorizing payment of $2.3 billion to reimburse air carriers for increased security costs in proportion to the amounts each carrier had paid or collected in passenger security and air carrier security fees to the Transportation Security Administration (the Security Fee Reimbursement). The Company’s Security Fee Reimbursement was $358 million (net of payments to independent regional affiliates) and is included in U.S. government grant in the accompanying consolidated statement of operations. The Appropriations Act also limits the total cash compensation for the two most highly compensated named executive officers in 2002 for certain airlines, including the Company, during the period April 1, 2003 to April 1, 2004 to the amount of salary received by such officers, or their successors, in 2002. A violation of this executive compensation provision would require the carrier to repay the government its Security Fee Reimbursement. The Company does not anticipate any difficulties in complying with this limitation on executive compensation.

On September 22, 2001, President Bush signed into law the Air Transportation Safety and System Stabilization Act (the Stabilization Act). The Company received a total of $866 million from the U.S. government under the airline compensation provisions of the Stabilization Act. For the years ended December 31, 2002 and 2001, the Company recognized approximately $10 million and $856 million, respectively, which is included in U.S. government grant on the accompanying consolidated statements of operations.

In addition, the Stabilization Act provides for compensation to individual claimants who were physically injured or killed as a result of the terrorist attacks of September 11, 2001. Furthermore, the Stabilization Act provides that, notwithstanding any other provision of law, liability for all claims, whether compensatory or punitive, arising from the terrorist-related events of September 11, 2001 against any air carrier shall not exceed the liability coverage maintained by the air carrier. Based upon estimates provided by the Company’s insurance providers, the Company recorded a liability of approximately $2.3 billion for claims arising from the events of September 11, 2001, after considering the liability protections provided for by the Stabilization Act. The Company has also recorded a liability of approximately $637 million related to flight 587, which crashed on November 12, 2001. In addition, the Company has recorded a receivable for these amounts, which the Company expects to recover from its insurance carriers as claims are resolved. These insurance receivables and liabilities are classified as Other assets and Other liabilities and deferred credits on the accompanying consolidated balance sheets, respectively, and are based on reserves established by the Company’s insurance carriers. These estimates may be revised as additional information becomes available concerning the expected claims. One of the Company’s insurance carriers has entered liquidation. The carrier provides approximately five percent of the Company’s coverage related to the events of September 11, 2001 and flight 587, as well as other covered items. This results in approximately $100 million in receivables, net of reserves, from the insurance carrier as of December 31, 2003. The Company expects to recover the net receivable via the liquidation process or other means available.

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3. Investments

Short-term investments consisted of (in millions):

                 
    December 31,
    2003
  2002
Overnight investments and time deposits
  $ 718     $ 572  
Corporate and bank notes
    1,245       832  
U. S. government agency notes
    496       285  
U. S. government agency mortgages
    17       142  
Other
    10       15  
 
   
 
     
 
 
 
  $ 2,486     $ 1,846  
 
   
 
     
 
 

Short-term investments at December 31, 2003, by contractual maturity included (in millions):

         
Due in one year or less
  $ 1,495  
Due between one year and three years
    974  
Due after three years
    17  
 
   
 
 
 
  $ 2,486  
 
   
 
 

All short-term investments are classified as available-for-sale and stated at fair value. Unrealized gains and losses, net of deferred taxes, are reflected as a component of Accumulated other comprehensive loss.

As of December 31, 2003, the Company had approximately $166 million in fuel prepayments and credit card holdback deposits classified as Other current assets and Other assets in the accompanying consolidated balance sheet.

During 2003, the Company sold its interests in Worldspan, a computer reservations company, and Hotwire, a discount travel website. The Company received $180 million in cash and a $39 million promissory note for its interest in Worldspan. It received $84 million in cash, $80 million of which was recognized as a gain, for its interest in Hotwire. In addition, during 2003, the Company sold a portion of its interest in Orbitz, a travel planning website, in connection with an Orbitz initial public offering and a secondary offering, resulting in total proceeds of $65 million, and a gain of $70 million. The gains on the sale of the Company’s interests in Hotwire and Orbitz are included in Miscellaneous-net in the accompanying consolidated statement of operations.

4. Commitments, Contingencies and Guarantees

As of December 31, 2003, the Company had commitments to acquire: 36 Embraer regional jets and six Bombardier CRJ-700s in 2004; an aggregate of 38 Embraer regional jets in 2005 and 2006; and an aggregate of 47 Boeing 737-800s and nine Boeing 777-200ERs in 2006 through 2010. Future payments for all aircraft, including the estimated amounts for price escalation, will approximate $755 million in 2004, $711 million in 2005, $669 million in 2006 and an aggregate of approximately $1.9 billion in 2007 through 2010. The Company has pre-arranged financing or backstop financing for all of its aircraft deliveries through June 2005 (42 aircraft in 2004 and 20 aircraft in 2005).

American has granted Boeing a security interest in American’s purchase deposits with Boeing. These purchase deposits totaled $277 million as of December 31, 2003.

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4. Commitments, Contingencies and Guarantees (Continued)

The Company has contracts related to facility construction or improvement projects, primarily at airport locations. The contractual obligations related to these projects totaled approximately $600 million as of December 31, 2003. The Company expects to make payments related to these projects as follows: $250 million in 2004, $188 million in 2005, $93 million in 2006 and $69 million in 2007. In addition, the Company has an information technology support related contract that requires minimum annual payments of $158 million through 2013.

The Company has capacity purchase agreements with two regional airlines, Chautauqua Airlines, Inc. (Chautauqua) and Trans States Airlines, Inc. (collectively the American Connection carriers) to provide Embraer EMB-140/145 regional jet services to certain markets under the brand “American Connection”. Under these arrangements, the Company pays the American Connection carriers a fixed fee per block hour to operate the aircraft. The block hour fees are designed to cover the American Connection carriers’ fully allocated costs. Assumptions for highly volatile or uncontrollable costs such as fuel, landing fees, insurance, and aircraft ownership are trued up to actual values on a pass through basis. In addition to covering the cost of operations, the Company also pays a designed profit margin to the American Connection carriers. In consideration for these payments, the Company retains all passenger and other revenues resulting from the operation of the American Connection regional jets. Minimum payments under the contracts are $95 million in 2004, $69 million in 2005, $70 million in 2006, $71 million in 2007 and $20 million in 2008. However, based on expected utilization, the Company expects to make payments of $162 million in 2004, $164 million in 2005, $166 million in 2006, $168 million in 2007, $170 million in 2008 and $854 million in 2009 and beyond. In addition, if the Company terminates the Chautauqua contract without cause, Chautauqua has the right to put its Embraer aircraft to the Company. If this were to happen, the Company would take possession of the aircraft and become liable for lease obligations totaling approximately $21 million per year with lease expirations in 2018 and 2019.

The Company is a party to many routine contracts in which it provides general indemnities in the normal course of business to third parties for various risks. The Company is not able to estimate the potential amount of any liability resulting from the indemnities. These indemnities are discussed in the following paragraphs.

The Company’s loan agreements and other London Interbank Offered Rate (LIBOR)-based financing transactions (including certain leveraged aircraft leases) generally obligate the Company to reimburse the applicable lender for incremental increased costs due to a change in law that imposes (i) any reserve or special deposit requirement against assets of, deposits with, or credit extended by such lender related to the loan, (ii) any tax, duty, or other charge with respect to the loan (except standard income tax) or (iii) capital adequacy requirements. In addition, the Company’s loan agreements, derivative contracts and other financing arrangements typically contain a withholding tax provision that requires the Company to pay additional amounts to the applicable lender or other financing party, generally if withholding taxes are imposed on such lender or other financing party as a result of a change in the applicable tax law.

These increased cost and withholding tax provisions continue for the entire term of the applicable transaction, and there is no limitation on the maximum additional amounts the Company could be obligated to pay under such provisions. Any failure to pay amounts due under such provisions generally would trigger an event of default, and, in a secured financing transaction, would entitle the lender to foreclose upon the collateral to realize the amount due.

In certain transactions, including certain aircraft financing leases and loans and derivative transactions, the lessors, lenders and/or other parties have rights to terminate the transaction based on changes in foreign tax law, illegality or certain other events or circumstances. In such a case, the Company may be required to make a lump sum payment to terminate the relevant transaction.

In its aircraft financing agreements, the Company generally indemnifies the financing parties, trustees acting on their behalf and other relevant parties against liabilities (including certain taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of the aircraft regardless of whether these liabilities (or taxes) relate to the negligence of the indemnified parties.

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4. Commitments, Contingencies and Guarantees (Continued)

The Company has general indemnity clauses in many of its airport and other real estate leases where the Company as lessee indemnifies the lessor (and related parties) against liabilities related to the Company’s use of the leased property. Generally, these indemnifications cover liabilities resulting from the negligence of the indemnified parties, but not liabilities resulting from the gross negligence or willful misconduct of the indemnified parties. In addition, the Company provides environmental indemnities in many of these leases for contamination related to the Company’s use of the leased property.

Under certain contracts with third parties, the Company indemnifies the third party against legal liability arising out of an action by the third party, or certain other parties. The terms of these contracts vary and the potential exposure under these indemnities cannot be determined. Generally, the Company has liability insurance protecting the Company for its obligations it has undertaken under these indemnities.

AMR and American have event risk covenants in approximately $2.0 billion of indebtedness and operating leases as of December 31, 2003. These covenants permit the holders of such obligations to receive a higher rate of return (between 100 and 650 basis points above the stated rate) if a designated event, as defined, should occur and the credit ratings of such obligations are downgraded below certain levels within a certain period of time. No designated event, as defined, has occurred as of December 31, 2003.

The Company is subject to environmental issues at various other airport and non-airport locations for which it has accrued $72 million and $92 million, which are included in Accrued liabilities on the accompanying consolidated balance sheets, at December 31, 2003 and 2002, respectively. Management believes, after considering a number of factors, that the ultimate disposition of these environmental issues is not expected to materially affect the Company’s consolidated financial position, results of operations or cash flows. Amounts recorded for environmental issues are based on the Company’s current assessments of the ultimate outcome and, accordingly, could increase or decrease as these assessments change.

The Company is involved in certain claims and litigation related to its operations. In the opinion of management, liabilities, if any, arising from these claims and litigation would not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.

5. Leases

As discussed in Note 2, in 2003, the Company reached concessionary agreements with certain lessors. The Vendor Agreements with these lessors affected the payments, lease term, and other conditions of certain leases. As a result of these changes, 30 leases, which were previously accounted for as operating leases, were converted to capital leases, and one lease, which was previously accounted for as a capital lease, was converted to an operating lease. The Company recorded the new capital leases at the fair value of the respective assets being leased. These changes did not have a significant effect on the Company’s accompanying consolidated balance sheet.

In addition, certain of the Vendor Agreements provide that the Company’s obligations under the related lease revert to the original terms if certain events occur prior to December 31, 2005, including: (i) an event of default under the related lease (which generally occurs only if a payment default occurs), (ii) an event of loss with respect to the related aircraft, (iii) rejection by the Company of the lease under the provisions of Chapter 11 of the U.S. Bankruptcy Code or (iv) the Company’s filing for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code. If any one of these events were to occur, the Company would be responsible for approximately $24 million in additional operating lease payments and $11 million in additional payments related to capital leases as of December 31, 2003. This amount will increase to approximately $119 million in operating lease payments and $111 million in payments related to capital leases prior to the expiration of the provision on December 31, 2005. These amounts are being accounted for as contingent rentals and will only be recognized if they become payable.

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5. Leases (Continued)

AMR’s subsidiaries lease various types of equipment and property, primarily aircraft and airport facilities. The future minimum lease payments required under capital leases, together with the present value of such payments, and future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2003, were (in millions):

                 
    Capital   Operating
Year Ending December 31,   Leases
  Leases
                 
2004
  $ 325     $ 1,114  
2005
    256       1,056  
2006
    256       990  
2007
    187       968  
2008
    224       916  
2009 and subsequent
    1,111       8,387  
 
   
 
     
 
 
 
    2,359     $ 13,431 (1)
 
           
 
 
Less amount representing interest
    933          
 
   
 
         
Present value of net minimum lease payments
  $ 1,426          
 
   
 
         

  (1)   As of December 31, 2003, included in Accrued liabilities and Other liabilities and deferred credits on the accompanying consolidated balance sheet is approximately $1.3 billion relating to rent expense being recorded in advance of future operating lease payments.

At December 31, 2003, the Company had 259 jet aircraft and 27 turboprop aircraft under operating leases and 99 jet aircraft and 13 turboprop aircraft under capital leases. The aircraft leases can generally be renewed at rates based on fair market value at the end of the lease term for one to five years. Some aircraft leases have purchase options at or near the end of the lease term at fair market value, but generally not to exceed a stated percentage of the defined lessor’s cost of the aircraft or a predetermined fixed amount.

Special facility revenue bonds have been issued by certain municipalities primarily to purchase equipment and improve airport facilities that are leased by American and accounted for as operating leases. Approximately $1.8 billion of these bonds (with total future payments of approximately $4.8 billion as of December 31, 2003) are guaranteed by American, AMR, or both. Approximately $532 million of these special facility revenue bonds contain mandatory tender provisions that require American to make operating lease payments sufficient to repurchase the bonds at various times: $112 million in 2004, $104 million in 2005, $28 million in 2006, $100 million in 2007 and $188 million in 2008. Although American has the right to remarket the bonds, there can be no assurance that these bonds will be successfully remarketed. Any payments to redeem or purchase bonds that are not remarketed would generally reduce existing rent leveling accruals or be considered prepaid facility rentals and would reduce future operating lease commitments. The special facility revenue bonds that contain mandatory tender provisions are included in the table above at their ultimate maturity date rather than their mandatory tender provision date.

Rent expense, excluding landing fees, was $1.4 billion, $1.6 billion and $1.7 billion in 2003, 2002 and 2001, respectively.

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5. Leases (Continued)

Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities”, revised in December 2003, (Interpretation 46), requires the primary beneficiary of a variable interest entity (VIE) to include the assets, liabilities, and results of the activities of the VIE in its consolidated financial statements, as well as disclosure of information about the assets and liabilities, and the nature, purpose and activities of consolidated variable interest entities. In addition, Interpretation 46 requires disclosure of information about the nature, purpose and activities of an unconsolidated VIE in which the Company holds a significant variable interest. The provisions of Interpretation 46 were effective immediately for any interest in a VIE acquired after January 31, 2003 and beginning in the fourth quarter of 2003 for any interest in a VIE commonly referred to as special-purpose entity that was acquired before February 1, 2003. The Financial Accounting Standards Board deferred the effective date of Interpretation 46 to the first quarter of 2004 for any other interests in a VIE acquired before February 1, 2003. Certain entities, including entities established by municipalities for the purpose of issuing special facility revenue bonds, are not subject to the provisions of Interpretation 46. In addition, certain entities with which the Company has capacity purchase agreements are not considered VIEs, as they are considered businesses as defined by Interpretation 46.

The Company has completed its evaluation of its interests in VIEs, including certain aircraft operating leases with fixed price purchase options and certain fuel consortia arrangements. The Company has determined that it holds a significant variable interest in, but is not the primary beneficiary of, certain trusts that are the lessor under certain of its aircraft operating leases (discussed below). Furthermore, the Company has determined that it is neither the primary beneficiary of, nor holds a significant variable interest in, any of its various fuel consortia arrangements. As a result, Interpretation 46 has had no impact on the Company’s consolidated statement of operations or balance sheet.

American has 88 aircraft operating leases where the lessor is a variable interest entity — a trust — and the lease contains a fixed price purchase option, which allows American to purchase the aircraft at a predetermined price on a specified date. However, American does not guarantee the residual value of the aircraft. As of December 31, 2003, future lease payments required under these leases totaled $3.2 billion.

6. Indebtedness

Long-term debt consisted of (in millions):

                 
    December 31,
    2003
  2002
Secured variable and fixed rate indebtedness due through 2021 (effective rates from 1.61% - 9.16% at December 31, 2003)
  $ 6,041     $ 5,474  
Enhanced equipment trust certificates due through 2011 (rates from 1.8% - 9.1% at December 31, 2003)
    3,747       3,623  
6.0% - 8.5% special facility revenue bonds due through 2036
    947       1,035  
Credit facility agreement due in 2005 (4.68% at December 31, 2003)
    834       834  
9.0% - 10.20% debentures due through 2021
    330       330  
7.88% - 10.55% notes due through 2039
    303       303  
4.25% senior convertible notes due 2023
    300        
Other
    2       2  
 
   
 
     
 
 
 
    12,504       11,601  
Less current maturities
    603       713  
 
   
 
     
 
 
Long-term debt, less current maturities
  $ 11,901     $ 10,888  
 
   
 
     
 
 

Maturities of long-term debt (including sinking fund requirements) for the next five years are: 2004 — $603 million; 2005 — $1.4 billion; 2006 — $1.2 billion; 2007 — $1.1 billion; 2008 — $570 million.

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6. Indebtedness (Continued)

American has a fully drawn $834 million bank credit facility that expires December 15, 2005, which contains a liquidity covenant and an EBITDAR (generally, earnings before interest, taxes, depreciation, amortization and rentals, adjusted for certain non-cash items) to fixed charges (generally, interest and total rentals) ratio covenant. The required EBITDAR to fixed charges ratio is 1.1 to 1.0 for the three-month period ending March 31, 2004, and increases on a quarterly basis up to 1.5 to 1.0 for each four consecutive quarters ending after December 31, 2004. The liquidity covenant requires American to maintain a minimum level of $1.0 billion of unrestricted cash and short-term investments. The Company expects to be able to continue to comply with these covenants. However, it cannot be sure that it will continue to be able to do so through the expiration of the facility. Failure to do so would result in a default under this facility and a significant amount of American’s other debt.

During the year ended December 31, 2003, American borrowed approximately $554 million, under seller financed debt agreements, related to the purchase of aircraft. These debt agreements are secured by the related aircraft and have effective interest rates, which are fixed and mature over various periods of time through 2013. As of December 31, 2003, the effective interest rate on these agreements ranged up to 9.12 percent.

During the year ended December 31, 2003, AMR Eagle borrowed approximately $473 million, under various debt agreements, related to the purchase of regional jet aircraft, including certain seller financed agreements. These debt agreements are secured by the related aircraft and have effective interest rates, which are fixed or variable based on LIBOR plus a spread and mature over various periods of time through 2020. As of December 31, 2003, the effective interest rate on these agreements ranged up to 6.73 percent.

In addition, in July 2003, American issued $255 million of enhanced equipment trust certificates, secured by aircraft, which bear interest at 3.86 percent and are repayable in semi-annual installments beginning in 2004, with a final maturity in 2010. These obligations are partially insured by a third party.

In September 2003, the Company issued $300 million principal amount of its 4.25 percent senior convertible notes due 2023 in a private placement. Each note is convertible into AMR common stock at a conversion rate of 57.61 shares per $1,000 principal amount of notes (which represents an equivalent conversion price of $17.36 per share), subject to adjustment in certain circumstances. The notes are convertible under certain circumstances, including if (i) the closing sale price of the Company’s common stock reaches a certain level for a specified period of time, (ii) the trading price of the notes as a percentage of the closing sale price of the Company’s common stock falls below a certain level for a specified period of time, (iii) the Company calls the notes for redemption, or (iv) certain corporate transactions occur. Holders of the notes may require the Company to repurchase all or any portion of the notes on September 23, 2008, 2013 and 2018 at a purchase price equal to the principal amount of the notes being purchased plus accrued and unpaid interest to the date of purchase. The Company may pay the purchase price in cash, common stock or a combination of cash and common stock. After September 23, 2008, the Company may redeem all or any portion of the notes for cash at a price equal to the principal amount of the notes being redeemed plus accrued and unpaid interest as of the redemption date. These notes are guaranteed by American.

Also in September 2003, American transferred its two headquarters buildings located in Fort Worth, Texas to AA Real Estate Holding L.P., a wholly owned consolidated subsidiary of American. This entity leased the buildings back to American pursuant to a triple-net lease, and used the buildings and the lease as security for a loan consisting of four notes, in the amount of $98 million (net of discount of $2 million), which is reflected as debt in the accompanying consolidated balance sheet of the Company. Each note corresponds to a separate class of AA/Ft. Worth HQ Finance Trust Lease Revenue Commercial Mortgage-Backed Pass-Through Certificates, Series 2003 (the Certificates) issued by the AA/Ft. Worth HQ Finance Trust, which is not a subsidiary of American, in a private placement pursuant to Rule 144A under the Securities Act of 1933. The Certificates and corresponding notes have an average effective interest rate of 7.2 percent and a final maturity in 2010.

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6. Indebtedness (Continued)

In 2002, the Regional Airports Improvement Corporation and the New York City Industrial Development Agency issued facilities sublease revenue bonds at the Los Angeles International Airport and John F. Kennedy International Airport, respectively, to provide reimbursement to American for certain facility construction and other related costs. The Company has recorded the total amount of the issuances of $759 million (net of $38 million discount) as long-term debt on the accompanying consolidated balance sheet as of December 31, 2002. These obligations bear interest at fixed rates, with an average effective rate of 8.54 percent, and mature over various periods of time, with a final maturity in 2028. The Company has received approximately $687 million in reimbursements of certain facility construction and other related costs through December 31, 2003. Of the remaining $72 million of bond issuance proceeds not yet received, classified as Other assets on the accompanying consolidated balance sheet, $25 million are held by the trustee for reimbursement of future facility construction costs and will be available to the Company in the future, and $47 million are held in a debt service reserve fund.

Certain debt is secured by aircraft, engines, equipment and other assets having a net book value of approximately $12.6 billion.

As of December 31, 2003, AMR has issued guarantees covering approximately $932 million of American’s tax-exempt bond debt and American has issued guarantees covering approximately $936 million of AMR’s unsecured debt, including the 4.25 percent senior convertible notes discussed above. In addition, as of December 31, 2003, AMR and American have issued guarantees covering approximately $503 million of AMR Eagle’s secured debt, and AMR has issued guarantees covering an additional $1.9 billion of AMR Eagle’s secured debt.

Cash payments for interest, net of capitalized interest, were $661 million, $564 million and $343 million for 2003, 2002 and 2001, respectively.

In February 2004, American issued $180 million of Fixed Rate Secured Notes due 2009. These notes are secured by certain spare parts and bear interest at 7.25 percent. Also in February 2004, AMR issued, and American guaranteed, $324 million of 4.5 percent senior convertible notes due 2024.

7. Financial Instruments and Risk Management

As part of the Company’s risk management program, AMR uses a variety of financial instruments, including fuel swap and option contracts and interest rate swaps. Prior to September 2002, the Company also used currency option contracts and exchange agreements. The Company does not hold or issue derivative financial instruments for trading purposes.

The Company is exposed to credit losses in the event of non-performance by counterparties to these financial instruments, but it does not expect any of the counterparties to fail to meet its obligations. The credit exposure related to these financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date, reduced by the effects of master netting agreements. To manage credit risks, the Company selects counterparties based on credit ratings, limits its exposure to a single counterparty under defined guidelines, and monitors the market position of the program and its relative market position with each counterparty. The Company also maintains industry-standard security agreements with a number of its counterparties which may require the Company or the counterparty to post collateral if the value of selected instruments exceed specified mark-to-market thresholds or upon certain changes in credit ratings. The Company’s outstanding posted collateral as of December 31, 2003 is included in restricted cash and short-term investments and is not material. The Company’s credit rating has limited its ability to enter into certain types of fuel hedge contracts. A further deterioration of its credit rating or liquidity position may negatively affect the Company’s ability to hedge fuel in the future.

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7. Financial Instruments and Risk Management (Continued)

Fuel Price Risk Management

American enters into jet fuel, heating oil and crude oil swap and option contracts to dampen the impact of the volatility in jet fuel prices. These instruments generally have maturities of up to 24 months. The Company accounts for its fuel swap and option contracts as cash flow hedges and records the fair value of its fuel hedging contracts in Other current assets, Other assets and Accumulated other comprehensive loss on the accompanying consolidated balance sheets. The Company determines the ineffective portion of its fuel hedge contracts by comparing the cumulative change in the total value of the fuel hedge contract, or group of fuel hedge contracts, to the cumulative change in the forecasted value of the jet fuel being hedged. If the total cumulative change in value of the fuel hedge contract more than offsets the total cumulative change in the forecasted value of the jet fuel being hedged, the difference is considered ineffective and is immediately recognized as a component of Aircraft fuel expense. Effective gains or losses on fuel hedging contracts are deferred in Accumulated other comprehensive loss and are recognized in earnings as a component of Aircraft fuel expense when the underlying jet fuel being hedged is used.

The Company monitors the commodities used in its fuel hedging programs to determine that these commodities are expected to be “highly effective” in offsetting changes in its forecasted jet fuel prices. In doing so, the Company uses a regression model to determine the correlation of the percentage change in prices of the commodities used to hedge jet fuel (i.e., WTI Crude oil and NYMEX Heating oil) to the percentage change in prices of jet fuel over a 12 to 24 month period. The fuel hedge contracts are deemed to be “highly effective” if this correlation is within 80 percent to 125 percent.

Beginning in March 2003, because of the Company’s then existing financial condition, the Company stopped entering into new hedge contracts and, in June 2003, terminated substantially all of its contracts with maturities beyond March 2004. The termination of these contracts resulted in the collection of approximately $41 million in settlement of the contracts. The gain on these contracts will continue to be deferred in Accumulated other comprehensive loss and recognized in earnings when the original underlying jet fuel hedged is used. Commencing in October 2003, the Company began to enter into new option contracts with maturities beyond March 2004 for a portion of its future fuel requirements.

For the years ended December 31, 2003, 2002 and 2001, the Company recognized net gains of approximately $149 million, $4 million and $29 million, respectively, as a component of fuel expense on the accompanying consolidated statements of operations related to its fuel hedging agreements. The net gains recognized in 2003, 2002 and 2001 included approximately $1 million, $13 million and $72 million, respectively, of expense related to ineffectiveness. The fair value of the Company’s fuel hedging agreements at December 31, 2003 and 2002, representing the amount the Company would receive to terminate the agreements, totaled $54 million and $212 million, respectively.

Interest Rate Risk Management

American uses interest rate swap contracts to effectively convert a portion of its fixed-rate capital lease obligations to floating-rate obligations. The Company accounts for its interest rate swap contracts as fair value hedges whereby the fair value of the related interest rate swap agreement is reflected in Other assets with the corresponding liability being recorded as a component of Obligations Under Capital Leases on the accompanying consolidated balance sheets. The Company has no ineffectiveness with regard to its interest rate swap contracts. The fair value of the Company’s interest rate swap agreements related to capital lease obligations, representing the amount the Company would receive if the agreements were terminated at December 31, 2003 and 2002, was approximately $9 million and $14 million, respectively.

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7. Financial Instruments and Risk Management (Continued)

Foreign Exchange Risk Management

The Company has entered into Japanese yen currency exchange agreements to hedge certain yen-based capital lease obligations (effectively converting these obligations into dollar-based obligations). The Company accounts for its Japanese yen currency exchange agreements as cash flow hedges whereby the fair value of the related Japanese yen currency exchange agreements is reflected in Other liabilities and deferred credits and Accumulated other comprehensive loss on the accompanying consolidated balance sheets. The Company has no ineffectiveness with regard to its Japanese yen currency exchange agreements. The fair values of the Company’s yen currency exchange agreements, representing the amount the Company would pay to terminate the agreements, were $33 million and $44 million as of December 31, 2003 and 2002, respectively. The exchange rates on the Japanese yen agreements range from 66.5 to 105.1 yen per U.S. dollar.

Fair Values of Financial Instruments

The fair values of the Company’s long-term debt were estimated using quoted market prices where available. For long-term debt not actively traded, fair values were estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and estimated fair values of the Company’s long-term debt, including current maturities, were (in millions):

                                 
    December 31,
    2003
  2002
    Carrying   Fair   Carrying   Fair
    Value
  Value
  Value
  Value
Secured variable and fixed rate indebtedness
  $ 6,041     $ 5,307     $ 5,474     $ 4,569  
Enhanced equipment trust certificates
    3,747       3,454       3,623       3,153  
6.0% - 8.5% special facility revenue bonds
    947       797       1,035       658  
Credit facility agreement
    834       834       834       834  
9.0% - 10.20% debentures
    330       267       330       153  
7.88% - 10.55% notes
    303       257       303       149  
4.25% senior convertible notes
    300       309              
Other
    2       2       2       2  
 
   
 
     
 
     
 
     
 
 
 
  $ 12,504     $ 11,227     $ 11,601     $ 9,518  
 
   
 
     
 
     
 
     
 
 

The Company has other investments for which the fair value exceeds carrying value by $121 million. All other financial instruments are either carried at fair value or their carrying value approximates fair value.

8. Income Taxes

The significant components of the income tax benefit for loss before cumulative effect of accounting change were (in millions):

                         
    Year Ended December 31,
    2003
  2002
  2001
Current
  $ (80 )   $ (863 )   $ (263 )
Deferred
          (474 )     (731 )
 
   
 
     
 
     
 
 
 
  $ (80 )   $ (1,337 )   $ (994 )
 
   
 
     
 
     
 
 

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8. Income Taxes (Continued)

The income tax benefit includes a federal income tax benefit of $76 million, $1,235 million and $911 million and a state income tax benefit of $4 million, $107 million and $90 million for the years ended December 31, 2003, 2002 and 2001, respectively.

In the fourth quarter of 2003, the Company reached an agreement with the IRS covering tax years 1990 through 1995 and, as a result, recorded an $80 million tax benefit to reduce previously accrued income tax liabilities.

The income tax benefit for loss before cumulative effect of accounting change differed from amounts computed at the statutory federal income tax rate as follows (in millions):

                         
    Year Ended December 31,
    2003
  2002
  2001
Statutory income tax benefit
  $ (458 )   $ (1,351 )   $ (965 )
State income tax benefit, net of federal tax effect
    (31 )     (103 )     (58 )
IRS audit settlement
    (80 )            
Meal expense
    11       16       18  
Expiration of foreign tax credits
    9       39        
Foreign tax credit carryforwards
                (7 )
Deferred tax assets not benefited
    465       50       7  
Other, net
    4       12       11  
 
   
 
     
 
     
 
 
Income tax benefit
  $ (80 )   $ (1,337 )   $ (994 )
 
   
 
     
 
     
 
 

The deferred tax assets not benefited in 2003 relate primarily to net operating loss carryforwards. The deferred tax assets not benefited in 2002 related to the Company’s uncertainty regarding the realization of the foreign tax credit carryforwards and state net operating losses, and in 2001 related to the Company’s uncertainty regarding the realization of the foreign tax credit carryforwards.

Additionally, as of December 31, 2003, the recording of other comprehensive income items, primarily the minimum pension liability, resulted in a decrease to the net deferred tax asset. The Company recorded a $111 million reduction to the valuation allowance as a component of Accumulated other comprehensive income related to such net deferred tax asset. As of December 31, 2002, the recording of other comprehensive income items, primarily the minimum pension liability, resulted in a net deferred tax asset. The Company recorded a $313 million valuation allowance as a component of Accumulated other comprehensive income related to such net deferred tax asset. The total change in the valuation allowance was $293 million and $363 million in 2003 and 2002, respectively.

The Company provides a valuation allowance for deferred tax assets when it is more likely than not that some portion, or all of its deferred tax assets, will not be realized. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion, or all of the deferred tax assets, will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income (including reversals of deferred tax liabilities) during the periods in which those temporary differences will become deductible.

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8. Income Taxes (Continued)

The components of AMR’s deferred tax assets and liabilities were (in millions):

                 
    December 31,
    2003
  2002
Deferred tax assets:
               
Postretirement benefits other than pensions
  $ 1,067     $ 1,005  
Rent expense
    851       815  
Alternative minimum tax credit carryforwards
    427       500  
Operating loss carryforwards
    1,228       597  
Pensions
    525       589  
Frequent flyer obligation
    467       444  
Gains from lease transactions
    212       185  
Other
    693       745  
Valuation allowance
    (663 )     (370 )
 
   
 
     
 
 
Total deferred tax assets
    4,807       4,510  
 
   
 
     
 
 
Deferred tax liabilities:
               
Accelerated depreciation and amortization
    (4,441 )     (4,076 )
Other
    (366 )     (434 )
 
   
 
     
 
 
Total deferred tax liabilities
    (4,807 )     (4,510 )
 
   
 
     
 
 
Net deferred tax liability
  $     $  
 
   
 
     
 
 

At December 31, 2003, the Company had available for federal income tax purposes an alternative minimum tax credit carryforward of approximately $427 million, which is available for an indefinite period, and federal net operating losses of approximately $2.9 billion for regular tax purposes, which will fully expire, if unused, in 2022 and 2023. The Company had available for state income tax purposes net operating losses of $2.9 billion, which expire, if unused, in years 2005 through 2023.

Cash refunds for income taxes were $575 million, $646 million and $28 million for 2003, 2002 and 2001, respectively. The amounts received in 2003 and 2002 relate primarily to net operating loss carryback claims, including a carryback claim filed as a result of a provision in Congress’ economic stimulus package that changes the period for carrybacks of net operating losses (NOLs). This change allows the Company to carry back 2001 and 2002 NOLs for five years, rather than two years under the previous law, allowing the Company to more quickly recover its NOLs.

9. Stock Awards and Options

In March 2003, the Board of Directors of AMR approved the issuance of additional shares of AMR common stock to employees and Vendors in connection with negotiations concerning concessions. The maximum number of shares authorized for issuance was 30 percent of the number of shares of the Company’s common stock outstanding on March 24, 2003 (156,359,955) or approximately 46.9 million shares. From the foregoing authorization, the Company issued approximately 2.5 million shares to Vendors from treasury stock, resulting in a re-allocation from Treasury stock to Additional paid-in capital of $142 million.

In 2003, the Company established the 2003 Employee Stock Incentive Plan (the 2003 Plan) to provide equity awards to employees in connection with the Labor Agreements and Management Reductions discussed in Note 2. Under the 2003 Plan, employees may be granted stock options, restricted stock and deferred stock. The total number of shares authorized for distribution under the 2003 Plan is 42,680,000 shares.

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9. Stock Awards and Options (Continued)

Under the 1998 Long Term Incentive Plan, as amended, officers and key employees of AMR and its subsidiaries may be granted stock options, stock appreciation rights (SARs), restricted stock, deferred stock, stock purchase rights, other stock-based awards and/or performance-related awards, including cash bonuses. The total number of common shares authorized for distribution under the 1998 Long Term Incentive Plan is 23,700,000 shares. The 1998 Long Term Incentive Plan, the successor to the 1988 Long Term Incentive Plan, will terminate no later than May 21, 2008.

Options granted under the 1988 and 1998 Long Term Incentive Plans (collectively, the LTIP Plans) and the 2003 Plan are awarded with an exercise price equal to the fair market value of the stock on date of grant, become exercisable in equal annual installments over periods ranging from two to five years following the date of grant and expire no later than ten years from the date of grant. As of December 31, 2003, approximately 7.1 million shares were available for future grant under the LTIP Plans and the 2003 Plan.

In May 1997, in conjunction with a labor agreement reached between American and members of the Allied Pilots Association (APA), the Company established the Pilots Stock Option Plan (The Pilot Plan). The Pilot Plan granted members of the APA the option to purchase 11.5 million shares of AMR stock at $41.69 per share, $5 less than the average fair market value of the stock on the date of grant. These shares were exercisable immediately. In conjunction with the Sabre spin-off, the exercise price was adjusted to $17.59 per share.

Stock option activity under the LTIP Plans, the Pilot Plan and the 2003 Plan was:

                                                 
    Year Ended December 31,
    2003
  2002
  2001
            Weighted Average           Weighted Average           Weighted Average
    Options
  Exercise Price
  Options
  Exercise Price
  Options
  Exercise Price
Outstanding at January 1
    30,842,767     $ 23.66       29,327,611     $ 23.49       27,559,097     $ 22.30  
Granted
    40,751,272       5.39       2,495,500       25.86       4,180,595       28.35  
Exercised
    (112,432 )     13.28       (197,393 )     23.63       (2,126,056 )     26.87  
Canceled
    (2,597,898 )     17.92       (782,951 )     24.90       (286,025 )     23.04  
 
   
 
             
 
             
 
     
 
 
Outstanding at December 31
    68,883,709     $ 13.08       30,842,767     $ 23.66       29,327,611     $ 23.49  
 
   
 
             
 
             
 
         
Exercisable at December 31
    22,912,273     $ 22.36       20,557,681     $ 21.31       16,976,671     $ 19.85  
 
   
 
             
 
             
 
         

The following table summarizes information about the stock options outstanding at December 31, 2003:

                                         
            Weighted   Weighted           Weighted
Range of Exercise   Number of Options   Average Remaining   Average Exercise   Number of Options   Average Exercise
Prices
  Outstanding
  Life (years)
  Price
  Exercisable
  Price
$1-$5
    37,223,406       9.29     $ 5.00       7,900     $ 4.42  
$5-$20
    14,189,954       4.34       16.04       11,547,184       17.27  
$20-$30
    10,945,642       6.31       24.63       7,154,448       24.41  
Over $30
    6,524,707       6.48       33.42       4,202,741       32.89  
 
   
 
     
 
     
 
     
 
     
 
 
 
    68,883,709       7.53     $ 13.08       22,912,273     $ 22.36  
 
   
 
                     
 
         

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9. Stock Awards and Options (Continued)

The weighted-average grant date fair value per share of all stock option awards granted during 2003, 2002 and 2001 was $2.32, $11.42 and $12.23, respectively.

Shares of deferred stock are awarded at no cost to officers and key employees under the LTIP Plans’ Career Equity Program and will be issued upon the individual’s retirement from AMR or, in certain circumstances, will vest on a pro rata basis. Deferred stock activity was:

                         
    Year Ended December 31,
    2003
  2002
  2001
Outstanding at January 1
    3,596,508       4,785,712       4,956,497  
Granted
                 
Issued
    (858,262 )     (1,091,149 )     (98,566 )
Canceled
    (275,185 )     (98,055 )     (72,219 )
 
   
 
     
 
     
 
 
Outstanding at December 31
    2,463,061       3,596,508       4,785,712  
 
   
 
     
 
     
 
 

A performance share plan was implemented in 1993 under the terms of which shares of deferred stock are awarded at no cost to officers and key employees under the LTIP Plans and, in 2003, under the 2003 Plan. The fair value of the performance shares granted is equal to the market price of the Company’s stock at the date of grant. The shares vest over a three-year performance period based upon certain specified financial measures of the Company. Performance share activity was:

                         
    Year Ended December 31,
    2003
  2002
  2001
Outstanding at January 1
    1,230,104       2,486,802       2,507,755  
Granted
    512,885       507,350       913,422  
Issued
          (178,596 )     (194,128 )
Awards settled in cash
          (495,897 )     (706,302 )
Canceled
    (172,491 )     (1,089,555 )     (33,945 )
 
   
 
     
 
     
 
 
Outstanding at December 31
    1,570,498       1,230,104       2,486,802  
 
   
 
     
 
     
 
 

The weighted-average grant date fair value per share of performance share awards granted during 2003, 2002 and 2001 was $10.50, $25.98 and $28.27, respectively.

In 2003, 2002 and 2001, the total charge for stock compensation expense included in wages, salaries and benefits expense, primarily related to the Company’s performance share plan, was $20 million, $9 million and $21 million, respectively. No compensation expense was recognized for stock option grants under the LTIP Plans or the 2003 Plan, since the exercise price was equal to the fair market value of the underlying stock on the date of grant.

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10. Retirement Benefits

All regular employees of the Company are eligible to participate in pension plans. The defined benefit plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. The Company uses a December 31 measurement date for all of its defined benefit plans. Airline pilots also participate in a defined contribution plan for which Company contributions are determined as a percentage of participant compensation.

Effective January 1, 2001, American established a defined contribution plan for non-contract employees in which the Company will match the employees before-tax contribution on a dollar-for-dollar basis, up to 5.5 percent of their pensionable pay. During 2000, American provided a one-time election for current non-contract employees to remain in the defined benefit plan or discontinue accruing future credited service in the defined benefit plan as of January 1, 2001 and begin participation in the defined contribution plan. Effective January 1, 2002, all new non-contract employees of the Company become members of the defined contribution plan.

In addition to pension benefits, other postretirement benefits, including certain health care and life insurance benefits (which provide secondary coverage to Medicare), are provided to retired employees. The amount of health care benefits is limited to lifetime maximums as outlined in the plan. Substantially all regular employees of American and employees of certain other subsidiaries may become eligible for these benefits if they satisfy eligibility requirements during their working lives.

Certain employee groups make contributions toward funding a portion of their retiree health care benefits during their working lives. AMR funds benefits as incurred and makes contributions to match employee prefunding.

In connection with the acquisition of TWA in April 2001, the Company assumed certain retiree benefit plan liabilities of TWA, primarily its postretirement benefit obligation. As such, the following information reflects the inclusion of these obligations from the date of acquisition. In addition, effective January 1, 2002, TWA LLC employees were eligible to begin participation in American’s pension plans. However, these employees were not granted prior credited service.

In the second quarter of 2003, as a result of the Labor Agreements and Management Reductions discussed in Note 2, the Company remeasured its defined benefit pension plans. The significant actuarial assumptions used for the remeasurement were the same as those used as of December 31, 2002, except for the discount rate and salary scale, which were lowered to 6.50 percent, and 2.78 percent through 2008 and 3.78 percent thereafter, respectively. In addition, assumptions with respect to interest rates used to discount lump sum benefit payments available under certain plans were updated. As a result of workforce reductions related to the Labor Agreements and Management Reductions, the Company recognized a curtailment loss of $46 million related to its defined benefit pension plans, which is included in Special charges in the accompanying consolidated statement of operations. Net periodic benefit cost for defined benefit pension plans includes eight months of expense calculated based upon the revised measurement.

In December 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Modernization Act), which introduces a prescription drug benefit under Medicare, into law. In January 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position which permits companies to elect to defer accounting for the effects of the Modernization Act. The Company has not elected this deferral and has recognized the effect of the Modernization Act in the calculation of its postretirement benefit liability as of December 31, 2003. The effect of the Modernization Act was to reduce the Company’s accumulated postretirement benefit obligation (APBO) by $415 million by decreasing unrecognized net actuarial losses. This decrease is due to a reduction in the expected per capita claims cost along with a reduction in the expected rates of participation in the plan. The decrease in the APBO will be reflected in the Company’s postretirement benefits expense in future periods through amortization of unrecognized gains/losses. Additionally, the service and interest cost components of postretirement benefits expense will be reduced in future periods. Final authoritative guidance on accounting for the Modernization Act has not been issued and could require the Company to change previously reported information.

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10. Retirement Benefits (Continued)

The following table provides a reconciliation of the changes in the defined benefit plans’ benefit obligations and fair value of assets for the years ended December 31, 2003 and 2002, and a statement of funded status as of December 31, 2003 and 2002 (in millions):

                                 
    Pension Benefits
  Other Benefits
    2003
  2002
  2003
  2002
Reconciliation of benefit obligation
                               
Obligation at January 1
  $ 8,757     $ 7,422     $ 3,299     $ 2,759  
Service cost
    370       352       85       77  
Interest cost
    569       569       218       207  
Actuarial (gain) loss
    (96 )     820       (138 )     391  
Plan amendments
    (90 )     65       (58 )      
Benefit payments
    (554 )     (394 )     (143 )     (135 )
Curtailments
    (60 )                  
Settlements
    (2 )     (77 )            
 
   
 
     
 
     
 
     
 
 
Obligation at December 31
  $ 8,894     $ 8,757     $ 3,263     $ 3,299  
 
   
 
     
 
     
 
     
 
 
Reconciliation of fair value of plan assets
                               
Fair value of plan assets at January 1
  $ 5,323     $ 5,482     $ 100     $ 95  
Actual return on plan assets
    1,268       (16 )     25       (13 )
Employer contributions
    195       328       138       153  
Benefit payments
    (554 )     (394 )     (143 )     (135 )
Settlements
    (2 )     (77 )            
 
   
 
     
 
     
 
     
 
 
Fair value of plan assets at December 31
  $ 6,230     $ 5,323     $ 120     $ 100  
 
   
 
     
 
     
 
     
 
 
Funded status
                               
Accumulated benefit obligation (ABO)
  $ 8,209     $ 7,344     $     $  
Projected benefit obligation (PBO)
    8,894       8,757              
Accumulated postretirement benefit obligation (APBO)
                3,263       3,299  
Fair value of assets
    6,230       5,323       120       100  
Funded status at December 31
    (2,664 )     (3,434 )     (3,143 )     (3,199 )
Unrecognized loss
    1,649       2,709       407       581  
Unrecognized prior service cost
    173       330       (81 )     (36 )
Unrecognized transition asset
    (3 )     (4 )            
 
   
 
     
 
     
 
     
 
 
Net amount recognized
  $ (845 )   $ (399 )   $ (2,817 )   $ (2,654 )
 
   
 
     
 
     
 
     
 
 

As of December 31, 2003 and 2002, the accumulated benefit obligation exceeded the fair value of plan assets for all of the Company’s defined benefit plans.

At December 31, 2003 and 2002, other benefits plan assets of approximately $118 million and $98 million, respectively, were invested in shares of mutual funds managed by a subsidiary of AMR.

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10. Retirement Benefits (Continued)

The following tables provide the components of net periodic benefit cost for the years ended December 31, 2003, 2002 and 2001 (in millions):

                         
    Pension Benefits
    2003
  2002
  2001
Components of net periodic benefit cost
                       
Defined benefit plans:
                       
Service cost
  $ 370     $ 352     $ 260  
Interest cost
    569       569       515  
Expected return on assets
    (473 )     (501 )     (539 )
Amortization of:
                       
Transition asset
    (1 )     (1 )     (1 )
Prior service cost
    18       21       11  
Unrecognized net loss
    106       49       22  
Curtailment loss
    46              
Settlement loss
          33        
 
   
 
     
 
     
 
 
Net periodic benefit cost for defined benefit plans
    635       522       268  
Defined contribution plans
    181       213       244  
 
   
 
     
 
     
 
 
Total
  $ 816     $ 735     $ 512  
 
   
 
     
 
     
 
 
                         
    Other Benefits
    2003
  2002
  2001
Components of net periodic benefit cost
                       
Service cost
  $ 85     $ 77     $ 66  
Interest cost
    218       207       175  
Expected return on assets
    (9 )     (9 )     (9 )
Amortization of:
                       
Prior service cost
    (9 )     (6 )     (5 )
Unrecognized net loss
    20              
 
   
 
     
 
     
 
 
Net periodic benefit cost
  $ 305     $ 269     $ 227  
 
   
 
     
 
     
 
 

The following table provides the amounts recognized in the accompanying consolidated balance sheets as of December 31, 2003 and 2002 (in millions):

                                 
    Pension Benefits
  Other Benefits
    2003
  2002
  2003
  2002
Prepaid benefit cost
  $ 3     $ 54     $     $  
Accrued benefit liability
    (848 )     (453 )     (2,817 )     (2,654 )
Additional minimum liability
    (1,138 )     (1,623 )            
Intangible asset
    182       330              
Accumulated other comprehensive loss
    956       1,293              
   
     
     
     
 
Net amount recognized
  $ (845 )   $ (399 )   $ (2,817 )   $ (2,654 )
   
     
     
     
 

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10. Retirement Benefits (Continued)

                                 
    Pension Benefits
  Other Benefits
    2003
  2002
  2003
  2002
Weighted-average assumptions used to determine benefit obligations as of December 31
                               
Discount rate
    6.25 %     6.75 %     6.25 %     6.75 %
Salary scale (ultimate)
    3.78       3.78              
                                 
    Pension Benefits
  Other Benefits
    2003
  2002
  2003
  2002
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31
                               
Discount rate
    6.57 %     7.50 %     6.57 %     7.50 %
Salary scale (ultimate)
    3.78       3.93              
Expected return on plan assets
    9.00       9.25       9.00       9.25  

The Company estimates the long-term rate of return on plan assets will be nine percent, based on the target asset allocation as of December 31, 2003. Expected returns on longer duration bonds are based on yields to maturity of the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management, currency overlay and securities lending programs. The Company’s annualized ten-year rate of return on plan assets, as of December 31, 2003, is approximately 10.5 percent.

The Company’s pension plan weighted-average asset allocations at December 31, by asset category, are as follows:

                 
    2003
  2002
Long duration bonds
    35 %     41 %
U.S. stocks
    32       29  
International stocks
    22       20  
Emerging markets stocks and bonds
    6       5  
Alternative (private) investments
    5       5  
 
   
 
     
 
 
Total
    100 %     100 %
 
   
 
     
 
 

The Company’s target asset allocation is 40 percent longer duration corporate and U.S. government/agency bonds, 25 percent U.S. stocks, 20 percent developed international stocks, five percent emerging markets stocks and bonds, and ten percent alternative (private) investments. Each asset class is actively managed and has produced returns in excess of the expected rate over the last ten years, net of management fees. Stocks and emerging market bonds are used to provide diversification and are expected to generate higher returns over the long-term than longer duration U.S. bonds. Public stocks are managed using a value investment approach in order to participate in the returns generated by stocks in the long-term, while reducing year-over-year volatility. Longer duration U.S. bonds are used to partially hedge the assets from declines in interest rates. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long-term. Additionally, the Company engages currency overlay managers in an attempt to increase returns by protecting non-U.S. dollar denominated assets from a rise in the relative value of the U.S. dollar. The Company also participates in securities lending programs in order to generate additional income by loaning plan assets to borrowers on a fully collateralized basis.

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10. Retirement Benefits (Continued)

                                 
    Pre-65 Individuals
  Post-65 Individuals
    2003
  2002
  2003
  2002
Assumed health care trend rates at December 31
                               
Health care cost trend rate assumed for next year
    5.0 %     6.0 %     11.0 %     12.0 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
    4.5 %     4.5 %     4.5 %     4.5 %
Year that the rate reaches the ultimate trend rate
    2005       2005       2010       2010  

A one percentage point change in the assumed health care cost trend rates would have the following effects (in millions):

                 
    One Percent   One Percent
    Increase
  Decrease
Impact on 2003 service and interest cost
  $ 26     $ (24 )
Impact on postretirement benefit obligation as of December 31, 2003
  $ 250     $ (239 )

The Company expects to contribute approximately $600 million to its defined benefit pension plans and $14 million to its postretirement benefit plan in 2004. The Company’s estimate of its 2004 defined benefit pension plan contributions assumes Congress passes legislation providing certain technical corrections to current Employee Retirement Income Security Act pension plan funding requirements. Congress is also considering other legislation that, if passed, would further reduce the Company’s 2004 minimum funding requirements.

The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:

                 
    Pension
  Other
2004
  $ 410     $ 197  
2005
    436       204  
2006
    464       195  
2007
    537       200  
2008
    575       201  
2009 – 2013
    3,404       1,042  

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11. Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142). SFAS 142 requires the Company to test goodwill and indefinite-lived intangible assets (for AMR, route acquisition costs) for impairment rather than amortize them. In so doing, the Company determined its entire goodwill balance of $1.4 billion was impaired. In arriving at this conclusion, the Company’s net book value was determined to be in excess of the Company’s fair value at January 1, 2002, using AMR as the reporting unit for purposes of the fair value determination. The Company determined its fair value as of January 1, 2002 using market capitalization as the primary indicator of fair value. As a result, the Company recorded a one-time, non-cash charge, effective January 1, 2002, of $988 million ($6.35 per share, net of a tax benefit of $363 million) to write-off all of AMR’s goodwill. The tax benefit of $363 million differed from the amount computed at the statutory federal income tax rate due to a portion of AMR’s goodwill not being deductible for federal tax purposes. The charge is nonoperational in nature and is reflected as a cumulative effect of accounting change in the accompanying consolidated statements of operations.

The pro forma effect of discontinuing amortization of goodwill and route acquisition costs under SFAS 142 — assuming the Company had adopted this standard as of January 1, 2001 — results in an adjusted net loss of approximately $1,722 million, or $11.17 per share for the year ended December 31, 2001.

The Company had route acquisition costs (including international slots) of $829 million as of December 31, 2003 and 2002. The Company’s impairment analysis for route acquisition costs did not result in an impairment charge in 2003 or 2002.

The following tables provide information relating to the Company’s amortized intangible assets as of December 31 (in millions):

                         
    2003
            Accumulated    
    Cost
  Amortization
  Net Book Value
Amortized intangible assets:
                       
Airport operating rights
  $ 517     $ 199     $ 318  
Gate lease rights
    191       85       106  
 
   
 
     
 
     
 
 
Total
  $ 708     $ 284     $ 424  
 
   
 
     
 
     
 
 
                         
    2002
            Accumulated    
    Cost
  Amortization
  Net Book Value
Amortized intangible assets:
                       
Airport operating rights
  $ 516     $ 178     $ 338  
Gate lease rights
    204       79       125  
 
   
 
     
 
     
 
 
Total
  $ 720     $ 257     $ 463  
 
   
 
     
 
     
 
 

Airport operating and gate lease rights are being amortized on a straight-line basis over 25 years to a zero residual value. The Company recorded amortization expense related to these intangible assets of approximately $28 million for each of the years ended December 31, 2003 and 2002 and $29 million for the year ended December 31, 2001. The Company expects to record annual amortization expense of approximately $28 million in each of the next five years related to these intangible assets.

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12. Accumulated Other Comprehensive Loss

The components of Accumulated other comprehensive loss are as follows (in millions):

                                 
                    Unrealized    
                    Gain/(Loss) on    
            Unrealized   Derivative    
    Minimum Pension   Gain/(Loss) on   Financial    
    Liability
  Investments
  Instruments
  Total
Balance at December 31, 2000
  $ (6 )   $ 4     $     $ (2 )
Current year net change
    (161 )     5             (156 )
Cumulative effect of adoption of SFAS 133 as of January 1, 2001
                102       102  
Reclassification of derivative financial instruments into earnings
                (99 )     (99 )
Change in fair value of derivative financial instruments
                (78 )     (78 )
Income tax effect
    60       (2 )     29       87  
 
   
 
     
 
     
 
     
 
 
Balance at December 31, 2001
    (107 )     7       (46 )     (146 )
Current year net change
    (1,122 )     (6 )           (1,128 )
Reclassification of derivative financial instruments into earnings
                5       5  
Change in fair value of derivative financial instruments
                138       138  
Income tax effect
    109       2       (56 )     55  
 
   
 
     
 
     
 
     
 
 
Balance at December 31, 2002
    (1,120 )     3       41       (1,076 )
Current year net change
    337       (3 )           334  
Reclassification of derivative financial instruments into earnings
                (146 )     (146 )
Change in fair value of derivative financial instruments
                103       103  
 
   
 
     
 
     
 
     
 
 
Balance at December 31, 2003
  $ (783 )   $     $ (2 )   $ (785 )
 
   
 
     
 
     
 
     
 
 

Total Accumulated other comprehensive loss is net of tax of $145 million.

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13. Loss Per Share

The following table sets forth the computation of basic and diluted loss per share (in millions, except per share amounts):

                         
    Year Ended December 31,
    2003
  2002
  2001
Numerator:
                       
Numerator for loss per share — loss before cumulative effect of accounting change
  $ (1,228 )   $ (2,523 )   $ (1,762 )
   
     
     
 
Denominator:
                       
Denominator for basic and diluted loss per share — weighted-average shares
    158       156       154  
   
     
     
 
Basic and diluted loss per share before cumulative effect of accounting change
  $ (7.76 )   $ (16.22 )   $ (11.43 )
   
     
     
 

For the years ended December 31, 2003, 2002 and 2001, approximately 14 million, four million and 11 million potential dilutive shares, respectively, were not added to the denominator because inclusion of such shares would be antidilutive. In addition, for the year ended December 31, 2003, approximately 17 million shares issuable upon conversion of the Company’s 4.25 percent convertible notes discussed in Note 6 were not added to the denominator because the inclusion of such shares would be antidilutive.

14. Segment Reporting

The Company’s operations of American and AMR Eagle are managed as a single business unit providing for an integrated route network. The aircraft of these carriers are combined to form one fleet, which is deployed through a combined route scheduling system to maximize the operating results of the entire fleet. The Company’s chief operating decision maker makes resource allocation decisions to maximize the Company’s consolidated financial results, not the individual results of American or AMR Eagle. Based on the way the Company’s operations are managed and the manner in which resource allocation decisions are made, the Company has only one operating segment consisting of the operations of American and AMR Eagle.

Following the acquisition of TWA in April 2001, American is the largest scheduled passenger airline in the world. At the end of 2003, American provided scheduled jet service to approximately 150 destinations throughout North America, the Caribbean, Latin America, Europe and the Pacific. American is also one of the largest scheduled air freight carriers in the world, providing a full range of freight and mail services to shippers throughout its system. AMR Eagle owns two regional airlines, which do business as “American Eagle” — American Eagle Airlines, Inc. and Executive Airlines, Inc. The American Eagle carriers provide connecting service from eight of American’s high-traffic cities to smaller markets throughout the United States, Canada, and the Caribbean.

Revenues from other segments are below the quantitative threshold for determining reportable segments and consist primarily of revenues from AMR Investment Services, Inc. and Americas Ground Services, Inc. The difference between the financial information of the Company’s one reportable segment and the financial information included in the accompanying consolidated statements of operations and balance sheets as a result of these entities is not material.

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14. Segment Reporting (Continued)

     The Company’s operating revenues by geographic region are summarized below (in millions):

                         
    Year Ended December 31,
    2003
  2002
  2001
Domestic
  $ 12,687     $ 12,556     $ 13,652  
Latin America
    2,477       2,530       2,738  
Europe
    1,980       1,921       2,080  
Pacific
    296       413       499  
 
   
 
     
 
     
 
 
Total consolidated revenues
  $ 17,440     $ 17,420     $ 18,969  
 
   
 
     
 
     
 
 

The Company attributes operating revenues by geographic region based upon the origin and destination of each flight segment. The Company’s tangible assets consist primarily of flight equipment, which is mobile across geographic markets and, therefore, has not been allocated.

15. Quarterly Financial Data (Unaudited)

Unaudited summarized financial data by quarter for 2003 and 2002 (in millions, except per share amounts):

                                 
    First   Second   Third   Fourth
    Quarter
  Quarter
  Quarter
  Quarter
2003
                               
Operating revenues
  $ 4,120     $ 4,324     $ 4,605     $ 4,391  
Operating income (loss)
    (869 )     87       165       (227 )
Net earnings (loss)
    (1,043 )     (75 )     1       (111 )
Earnings (loss) per share:
                               
Basic and diluted
    (6.68 )     (0.47 )           (0.70 )
2002
                               
Operating revenues
  $ 4,163     $ 4,508     $ 4,524     $ 4,225  
Operating loss
    (729 )     (601 )     (1,321 )     (679 )
Loss before cumulative effect of accounting change (*)
    (575 )     (495 )     (924 )     (529 )
Net loss
    (1,563 )     (495 )     (924 )     (529 )
Loss per share:
                               
Basic and diluted
    (10.09 )     (3.19 )     (5.93 )     (3.39 )


(*)   As a result of the adoption of SFAS 142, the Company recorded a one-time, non-cash charge, effective January 1, 2002, of $988 million, net of tax, to write-off all of AMR’s goodwill, which is reflected as a cumulative effect of accounting change in the accompanying consolidated financial statements.

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15. Quarterly Financial Data (Unaudited) (Continued)

The following table summarizes the Special charges and U.S. government grant reimbursement recorded by the Company by quarter (in millions):

                                 
    First   Second   Third   Fourth
    Quarter
  Quarter
  Quarter
  Quarter
2003
                               
Aircraft charges
  $     $ (20 )   $ 39     $ 302  
Employee charges
    25       47       4       16  
Facility exit costs
          49       1       12  
Other
                (68 )      
 
   
 
     
 
     
 
     
 
 
Total Special charges
  $ 25     $ 76     $ (24 )   $ 330  
 
   
 
     
 
     
 
     
 
 
U.S. government grant
  $     $ (358 )   $     $  
 
   
 
     
 
     
 
     
 
 
2002
                               
Aircraft charges
  $     $     $ 658     $  
Employee charges
                57        
Facility exit costs
                3        
Other
                       
 
   
 
     
 
     
 
     
 
 
Total Special charges
  $     $     $ 718     $  
 
   
 
     
 
     
 
     
 
 
U.S. government grant
  $     $     $ (10 )   $  
 
   
 
     
 
     
 
     
 
 

See Note 2 for a further discussion of Special charges and U.S. government grant.

In addition to the above items, in the fourth quarter of 2003, the Company reached an agreement with the IRS covering tax years 1990 through 1995. As a result of this agreement, the Company recorded an $80 million tax benefit to reduce previously accrued income tax liabilities and an $84 million reduction in interest expense to reduce previously accrued interest related to the accrued income tax liabilities.

Also in the fourth quarter of 2003, the Company recognized an $80 million gain on the sale of the Company’s investment in Hotwire and a $70 million gain related to an Orbitz initial public offering and a related secondary offering.

Furthermore, during the second quarter of 2002, the Company recorded a $57 million charge for the displacement of foreign tax credits resulting from a provision in Congress’ economic stimulus package. The provision changed the period for carrybacks of NOLs from two to five years and allowed the Company to more quickly recover its NOLs. However, the extended NOL carryback resulted in the displacement of foreign tax credits taken in prior years.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

ITEM 9A. CONTROLS AND PROCEDURES

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2003. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2003. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated herein by reference from the Company’s definitive proxy statement for the annual meeting of stockholders on May 19, 2004. Information concerning the executive officers is included in Part I of this report on page 17 and information concerning the Company’s code of ethics is included in Part I of this report on page 10.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated herein by reference from the Company’s definitive proxy statement for the annual meeting of stockholders on May 19, 2004.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Equity Compensation Plan Information

                         
                    Number of
                    securities
                    remaining available
    Number of           for future issuance
    securities to be           under equity
    issued upon   Weighted-average   compensation plans
    exercise of   exercise price of   (excluding
    outstanding   outstanding   securities
    options, warrants   options, warrants   reflected in the
    and rights
  and rights
  first column)
Equity compensation plans approved by security holders
    19,983,105     $ 26.13       8,003,927 **
Equity compensation plans not approved by security holders
    48,900,604 *   $ 7.75       3,533,986 ***
 
   
 
     
 
     
 
 
Total
    68,883,709     $ 13.08       11,537,913  
 
   
 
     
 
     
 
 

  *   Represents 9,790,288 options granted under the Pilot Stock Option Plan and 39,110,316 options granted under the 2003 Employee Stock Incentive Plan (the ESIP). The Pilot Stock Option Plan and the ESIP were implemented in accordance with the rules of the New York Stock Exchange.
 
  **   Includes 4,003,118 shares available for future grant under the 1998 Long Term Incentive Plan, as amended, and shares granted but not vested and issued under the following programs: 1,086,214 shares of deferred stock available for issue under the Performance Share Program, 2,463,061 shares of deferred stock available for issue under the Career Equity Program and 451,534 shares available for issue under the 1994 Stock Incentive Plan for Directors (the DSIP). The DSIP will expire by its own term in May 2004.
 
  ***   Includes 3,049,702 shares available for future grant under the ESIP and 484,284 shares granted but not vested and issued under the Performance Share Program.

See Note 9 to the consolidated financial statements for additional information regarding the equity compensation plans included above.

The information required by Item 403 of Regulation S-K is incorporated herein by reference from the Company’s definitive proxy statement for the annual meeting of stockholders on May 19, 2004.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated herein by reference from the Company’s definitive proxy statement for the annual meeting of stockholders on May 19, 2004.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated herein by reference from the Company’s definitive proxy statement for the annual meeting of stockholders on May 19, 2004.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) The following financial statements and Independent Auditors’ Report are filed as part of this report:

         
    Page
Report of Independent Auditors
    42  
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001
    43  
Consolidated Balance Sheets at December 31, 2003 and 2002
    44-45  
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001
    46  
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2003, 2002 and 2001
    47  
Notes to Consolidated Financial Statements
    48-78  

(2)   The following financial statement schedule and Independent Auditors’ Report are filed as part of this report:
         
    Page
Report of Independent Auditors
    90  
Schedule II Valuation and Qualifying Accounts and Reserves
    91  

    Schedules not included have been omitted because they are not applicable or because the required information is included in the consolidated financial statements or notes thereto.

(3)   Exhibits required to be filed by Item 601 of Regulation S-K. (Where the amount of securities authorized to be issued under any of AMR’s long-term debt agreements does not exceed 10 percent of AMR’s assets, pursuant to paragraph (b)(4) of Item 601 of Regulation S-K, in lieu of filing such as an exhibit, AMR hereby agrees to furnish to the Commission upon request a copy of any agreement with respect to such long-term debt.)

     Exhibit

     
3.1
  Restated Certificate of Incorporation of AMR, incorporated by reference to AMR’s Registration Statement on Form S-4, file number 33-55191.
 
   
3.2
  Bylaws of AMR Corporation, amended as of April 24, 2003, incorporated by reference to Exhibit 3.2 to AMR’s report on Form 10-Q for the quarterly period ended September 30, 2003.
 
   
3.3
  Amendments to the AMR Corporation Certificate of Incorporation, incorporated by reference to AMR’s report on Form 10-Q for the quarterly period ended September 30, 2003.

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10.1
  Compensation and Benefit Agreement relative to the retirement of Robert L. Crandall, between AMR and Robert L. Crandall, dated September 18, 1998, incorporated by reference to Exhibit 10.3 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.2
  Description of informal arrangement relating to deferral of payment of directors’ fees, incorporated by reference to Exhibit 10(c)(11) to American’s Registration Statement No. 2-76709.
 
   
10.3
  Deferred Compensation Agreement, dated as of December 18, 2001 between AMR and John W. Bachmann, incorporated by reference to Exhibit 10.5 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.4
  Deferred Compensation Agreement, dated as of November 16, 2002 between AMR and John W. Bachmann, incorporated by reference to Exhibit 10.27 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.5
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and John W. Bachmann.
 
   
10.6
  Deferred Compensation Agreement, dated as of June 1, 1998, between AMR and Edward A. Brennan, incorporated by reference to Exhibit 10.15 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.7
  Deferred Compensation Agreement, dated as of January 11, 2000, between AMR and Edward A. Brennan, incorporated by reference to Exhibit 10.15(a) to AMR’s report on Form 10-K for the year ended December 31, 1999.
 
   
10.8
  Changes to the Deferred Compensation Agreement, dated as of June 2, 1998, between AMR and Edward A. Brennan, incorporated by reference to Exhibit 10.14 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.9
  Deferred Compensation Agreement, dated as of December 18, 2001 between AMR and Edward A. Brennan, incorporated by reference to Exhibit 10.2 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.10
  Deferred Compensation Agreement, dated as of November 14, 2002 between AMR and Edward A. Brennan incorporated by reference to Exhibit 10.24 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.11
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Edward A. Brennan.
 
   
10.12
  Deferred Compensation Agreement, dated as of April 30, 2003 between AMR and David L. Boren, incorporated by reference to Exhibit 10.1 to AMR’s report on Form 10-Q for the quarterly period ended March 31, 2003.
 
   
10.13
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and David L. Boren.
 
   
10.14
  Deferred Compensation Agreement, dated as of February 19, 1998, between AMR and Armando M. Codina, incorporated by reference to Exhibit 10.15 to AMR’s report on Form 10-K for the year ended December 31, 1997.
 
   
10.15
  Deferred Compensation Agreement, dated as of January 13, 1999, between AMR and Armando M. Codina, incorporated by reference to Exhibit 10.19 to AMR’s report on Form 10-K for the year ended December 31, 1998.

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10.16
  Deferred Compensation Agreement, dated as of January 12, 2000, between AMR and Armando M. Codina, incorporated by reference to Exhibit 10.20 to AMR’s report on Form 10-K for the year ended December 31, 1999.
 
   
10.17
  Deferred Compensation Agreement, dated as of January 22, 2001, between AMR and Armando M. Codina, incorporated by reference to Exhibit 10.20 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.18
  Deferred Compensation Agreement, dated as of December 18, 2001 between AMR and Armando M. Codina, incorporated by reference to Exhibit 10.6 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.19
  Deferred Compensation Agreement, dated as of December 13, 2002 between AMR and Armando M. Codina, incorporated by reference to Exhibit 10.28 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.20
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Armando M. Codina.
 
   
10.21
  Deferred Compensation Agreement, dated as of April 30, 2003 between AMR and Earl G. Graves, incorporated by reference to Exhibit 10.2 to AMR’s report on Form 10-Q for the quarterly period ended March 31, 2003.
 
   
10.22
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Earl G. Graves.
 
   
10.23 
  Deferred Compensation Agreement, dated as of April 30, 2003 between AMR and Ann M. Korologos, incorporated by reference to Exhibit 10.3 to AMR’s report on Form 10-Q for the quarterly period ended March 31, 2003.
 
   
10.24
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Ann M. Korologos.
 
   
10.25
  Deferred Compensation Agreement, dated as of April 30, 2003 between AMR and Michael A. Miles, incorporated by reference to Exhibit 10.4 to AMR’s report on Form 10-Q for the quarterly period ended March 31, 2003.
 
   
10.26
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Michael A. Miles.
 
   
10.27
  Deferred Compensation Agreement, dated as of January 19, 2001, between AMR and Philip J. Purcell, incorporated by reference to Exhibit 10.26 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.28
  Deferred Compensation Agreement, dated as of December 18, 2001 between AMR and Philip J. Purcell, incorporated by reference to Exhibit 10.7 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.29
  Deferred Compensation Agreement, dated as of November 15, 2002 between AMR and Philip J. Purcell, incorporated by reference to Exhibit 10.29 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.30
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Philip J. Purcell.

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10.31
  Deferred Compensation Agreement, dated as of January 14, 2002 between AMR and Joe M. Rodgers, incorporated by reference to Exhibit 10.3 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.32
  Deferred Compensation Agreement, dated as of November 22, 2002 between AMR and Joe M. Rodgers, incorporated by reference to Exhibit 10.25 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.33
  Deferred Compensation Agreement, dated as of April 30, 2003 between AMR and Joe M. Rodgers, incorporated by reference to Exhibit 10.5 to AMR’s report on Form 10-Q for the quarterly period ended March 31, 2003.
 
   
10.34
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Joe M. Rodgers.
 
   
10.35
  Deferred Compensation Agreement, dated as of July 16, 1997, between AMR and Judith Rodin, incorporated by reference to Exhibit 10.22 to AMR’s report on Form 10-K for the year ended December 31, 1997.
 
   
10.36
  Deferred Compensation Agreement, dated as of February 19, 1998, between AMR and Judith Rodin, incorporated by reference to Exhibit 10.23 to AMR’s report on Form 10-K for the year ended December 31, 1997.
 
   
10.37
  Deferred Compensation Agreement, dated as of January 7, 1999, between AMR and Judith Rodin, incorporated by reference to Exhibit 10.30 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.38
  Deferred Compensation Agreement, dated as of January 12, 2000, between AMR and Judith Rodin, incorporated by reference to Exhibit 10.29 to AMR’s report on Form 10-K for the year ended December 31, 1999.
 
   
10.39
  Deferred Compensation Agreement, dated as of January 22, 2001, between AMR and Judith Rodin, incorporated by reference to Exhibit 10.25 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.40
  Deferred Compensation Agreement, dated as of December 18, 2001 between AMR and Judith Rodin, incorporated by reference to Exhibit 10.4 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.41
  Deferred Compensation Agreement, dated as of November 20, 2002 between AMR and Judith Rodin, incorporated by reference to Exhibit 10.26 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.42
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Judith Rodin.
 
   
10.43
  Deferred Compensation Agreement, dated as of December 18, 2001 between AMR and Roger T. Staubach, incorporated by reference to Exhibit 10.1 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.44
  Deferred Compensation Agreement, dated as of November 18, 2002 between AMR and Roger T. Staubach, incorporated by reference to Exhibit 10.23 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.45
  Deferred Compensation Agreement, dated as of January 12, 2004 between AMR and Roger T. Staubach.

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10.46
  AMR Corporation 1998 Long-Term Incentive Plan, as amended.
 
   
10.47
  AMR Corporation 2003 Employee Stock Incentive Plan, incorporated by reference to Exhibit 10.31 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.48
  Current form of Stock Option Agreement under the 1998 Long-Term Incentive Plan, as amended, incorporated by reference to Exhibit 10.1 to AMR’s report on Form 10-Q for the quarterly period ended September 30, 2003.
 
   
10.49
  Current form of Stock Option Agreement under the 2003 Employee Stock Incentive Plan.
 
   
10.50
  Current form of Career Equity Program Deferred Stock Award Agreement for Corporate Officers under the AMR 1998 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.41 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.51
  Current form of Career Equity Program Deferred Stock Award Agreement for non-officers under the AMR 1998 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.42 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.52
  Current form of Career Equity Program Deferred Stock Award Agreement for Senior Officers under the AMR 1998 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.42(a) to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.53
  Current form of Career Equity Program Deferred Stock Award Agreement for Employees under the AMR 1998 Long-Term Incentive Plan, incorporated by reference to Exhibit 10.44 to AMR’s report on Form 10-K for the year ended December 31, 1999.
 
   
10.54
  Current form of Deferred Stock Award Agreement.
 
   
10.55
  AMR Corporation 2001 — 2003 Performance Share Plan for Officers and Key Employees under the 1998 Long-Term Incentive Plan, as amended, incorporated by reference to Exhibit 10.52 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.56
  AMR Corporation 2001 — 2003 Performance Share Program Deferred Stock Award Agreement under the 1998 Long-Term Incentive Program, as amended, incorporated by reference to Exhibit 10.53 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.57
  AMR Corporation 2002 — 2004 Performance Share Plan for Officers and Key Employees under the 1998 Long-Term Incentive Plan, as amended, incorporated by reference to Exhibit 10.10 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.58
  AMR Corporation 2002 — 2004 Performance Share Program Deferred Stock Award Agreement under the 1998 Long-Term Incentive Plan, as amended, incorporated by reference to Exhibit 10.11 to AMR’s report on Form 10-Q for the quarterly period ended June 30, 2002, as filed on July 19, 2002.
 
   
10.59
  AMR Corporation 2003 — 2005 Performance Unit Plan for Officers and Key Employees, incorporated by reference to Exhibit 10.41 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.60
  AMR Corporation 2003 — 2005 Performance Unit Agreement.

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10.61
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Gerard J. Arpey, dated May 21, 1998, incorporated by reference to Exhibit 10.61 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.62
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Peter M. Bowler, dated May 21, 1998, incorporated by reference to Exhibit 10.63 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.63
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Daniel P. Garton, dated May 21, 1998, incorporated by reference to Exhibit 10.66 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.64
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Monte E. Ford, dated November 15, 2000, incorporated by reference to Exhibit 10.74 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.65
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Henry C. Joyner, dated January 19, 2000, incorporated by reference to Exhibit 10.74 to AMR’s report on Form 10-K for the year ended December 31, 1999.
 
   
10.66
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Charles D. MarLett, dated May 21, 1998, incorporated by reference to Exhibit 10.70 to AMR’s report on Form 10-K for the year ended December 31, 1998.
 
   
10.67
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Susan M. Oliver, dated September 22, 2000, incorporated by reference to Exhibit 10.81 to AMR’s report on Form 10-K for the year ended December 31, 2000.
 
   
10.68
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and William K. Ris, Jr., dated October 20, 1999, incorporated by reference to Exhibit 10.79 to AMR’s report on Form 10-K for the year ended December 31, 1999.
 
   
10.69
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Ralph L. Richardi dated September 26, 2002, incorporated by reference to Exhibit 10.54 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.70
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Gary F. Kennedy dated February 3, 2003, incorporated by reference to Exhibit 10.55 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.71
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and Robert W. Reding dated May 20, 2003.
 
   
10.72
  Amended and Restated Executive Termination Benefits Agreement between AMR, American Airlines and James A. Beer dated January 5, 2004.
 
   
10.73
  Employment agreement between AMR, American Airlines and William K. Ris, Jr. dated November 11, 1999.

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10.74
  Supplemental Executive Retirement Program for Officers of American Airlines, Inc., as amended on October 15, 2002, incorporated by reference to Exhibit 10.60 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.75
  Trust Agreement under Supplemental Retirement Program for Officers of American Airlines, Inc., dated October 14, 2002, incorporated by reference to Exhibit 10.61 to AMR’s report on Form 10-K for the year ended December 31, 2002.
 
   
10.76
  Aircraft Purchase Agreement by and between American Airlines, Inc. and The Boeing Company, dated October 31, 1997, incorporated by reference to Exhibit 10.48 to AMR’s report on Form 10-K for the year ended December 31, 1997. Confidential treatment was granted as to a portion of this document.
 
   
10.77
  Aircraft Purchase Agreement by and between AMR Eagle Holding Corporation and Bombardier Inc., dated January 31, 1998, incorporated by reference to Exhibit 10.49 to AMR’s report on Form 10-K for the year ended December 31, 1997. Confidential treatment was granted as to a portion of this document.
 
   
10.78
  Aircraft Purchase Agreement by and between AMR Eagle, Inc. and Embraer-Empresa Brasileira de Aeronautica S.A., dated December 22, 1997, incorporated by reference to Exhibit 10.50 to AMR’s report on Form 10-K for the year ended December 31, 1997. Confidential treatment was granted as to a portion of this document.
 
   
10.79
  Aircraft Purchase Agreement by and between AMR Eagle Holding Corporation and Embraer-Empresa Brasileira de Aeronautica S.A., dated September 30, 1998, incorporated by reference to Exhibit 10.76 to AMR’s report on Form 10-K for the year ended December 31, 1998. Confidential treatment was granted as to a portion of this document.
 
   
12
  Computation of ratio of earnings to fixed charges for the years ended December 31, 1999, 2000, 2001, 2002 and 2003.
 
   
21
  Significant subsidiaries of the registrant as of December 31, 2003.
 
   
23
  Consent of Independent Auditors.
 
   
31.1
  Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
 
   
31.2
  Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
 
   
32
  Certification pursuant to Rule 13a-14(b) and section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code).

(b) Reports on Form 8-K:

     Form 8-Ks filed under Item 5 — Other Events

     On December 5, 2003, AMR filed a report on Form 8-K to provide a press release issued on December 5, 2003 to report, among other things, the appointment of James Beer as Senior Vice President and Chief Financial Officer of the Company.

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     Form 8-Ks furnished under Item 9 — Regulation FD Disclosure

     On October 9, 2003, AMR furnished a report on Form 8-K to announce AMR’s intent to host a conference call on October 22, 2003 with the financial community relating to its third quarter 2003 earnings.

     On October 29, 2003, AMR filed a report on Form 8-K to announce that Gerard Arpey, President and CEO of AMR Corporation, would be presenting to the Society of Airline Analysts on November 6, 2003.

     On November 4, 2003, AMR filed a report on Form 8-K to announce that Jeffrey Campbell, Senior Vice President of Finance and CFO of AMR Corporation, would be speaking at the Citigroup Smith Barney 18th Annual Transportation Conference on November 12, 2003.

     Form 8-Ks furnished under Item 7 — Financial Statements and Exhibits

     On October 22, 2003, AMR filed a report on Form 8-K to provide a press release issued on October 22, 2003 to report the Company’s third quarter 2003 earnings.

     Form 8-Ks furnished under Item 12 — Disclosure of Results of Operations and Financial Condition

     On October 24, 2003, AMR filed a report on Form 8-K to provide a press release issued on October 22, 2003 to report the Company’s third quarter 2003 earnings.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AMR CORPORATION

     
By:
  /s/ Gerard J. Arpey
 
 
  Gerard J. Arpey
President and Chief Executive Officer
(Principal Executive Officer)

Date: February 27, 2004

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates noted:

     
/s/ Gerard J. Arpey
Gerard J. Arpey
Director, President and Chief Executive Officer
(Principal Executive Officer)
   
/s/ James A. Beer
James A. Beer
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
   
/s/ John W. Bachmann
John W. Bachmann, Director
  /s/ Michael A. Miles

Michael A. Miles, Director
/s/ David L. Boren
David L. Boren, Director
  /s/ Philip J. Purcell

Philip J. Purcell, Director
/s/ Edward A. Brennan
Edward A. Brennan, Director and Executive Chairman
  /s/ Joe M. Rodgers

Joe M. Rodgers, Director
/s/ Armando M. Codina
Armando M. Codina, Director
  /s/ Judith Rodin

Judith Rodin, Director
/s/ Earl G. Graves
Earl G. Graves, Director
  /s/ Roger T. Staubach

Roger T. Staubach, Director
/s/ Ann McLaughlin Korologos
Ann McLaughlin Korologos, Director
   

Date: February 27, 2004

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
AMR Corporation

     We have audited the consolidated financial statements of AMR Corporation as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated February 16, 2004. Our audits also included Schedule II — Valuation and Qualifying Accounts and Reserves. This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on this schedule based on our audits.

     In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

Dallas, Texas
February 16, 2004

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Table of Contents

AMR CORPORATION
Schedule II - Valuation and Qualifying Accounts and Reserves
(in millions)

     
   
                                                         
    Balance   Changes   Increases                           Balance
    at   charged to   charged           Write-offs   Sales,   at
    beginning   statement of   to other           (net of   retirements   end of
    of year
  operations accounts
  accounts
  Payments
  recoveries)
  and transfers
  year
                    (Note)                                
Year ended December 31, 2003
                                                       
Allowance for obsolescence of inventories
  $ 450     $ 71     $     $     $     $ (93 )   $ 428  
Allowance for uncollectible accounts
    66       14                   (18 )           62  
Reserves for environmental remediation costs
    92       (12 )           (8 )                 72  
Reserves for litigation
    4                                     4  
Allowance for insurance receivable
    12       10                               22  
Year ended December 31, 2002
                                                       
Allowance for obsolescence of inventories
    383       71                         (4 )     450  
Allowance for uncollectible accounts
    52       27                   (13 )           66  
Reserves for environmental remediation costs
    84       25             (17 )                 92  
Reserves for litigation
    6       (2 )                             4  
Allowance for insurance receivable
          12                               12  
Year ended December 31, 2001
                                                       
Allowance for obsolescence of inventories
    332       67                         (16 )     383  
Allowance for uncollectible accounts
    27       19                   6             52  
Reserves for environmental remediation costs
    70       24       19       (29 )                 84  
Reserves for litigation
    29       6             (29 )                 6  

Note:  Amount was established as part of the April 2001 acquisition of TWA and was charged to goodwill on the consolidated balance sheets.

91


                                                                    EXHIBIT 10.5



                                                January 12, 2004


Mr. John W. Bachmann
Managing Director
Edward Jones
12555 Manchester Road
St. Louis, MO 63131-3279

Dear John:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004, will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
("fair market value") during the month when you ceased to be a Director of AMR
Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
number of Stock Equivalent Units as of your date of death will be multiplied by
the fair market value of AMR stock during the calendar month immediately
preceding your death, and the amount paid to Katharine Bachmann.




         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.



                                                    Very truly yours,



                                                    Charles D. MarLett
                                                    Corporate Secretary


Accepted and agreed:




/s/ John W. Bachmann
- ------------------------------
John W. Bachmann


1/23/2004
- ------------------------------
Date






                                                                   EXHIBIT 10.11


                                January 12, 2004



Mr. Edward A. Brennan
400 North Michigan Avenue
Suite 400
Chicago, IL 60611

Dear Ed:

         You've elected to defer your retainer and meeting fees for calendar
year 2004.

         In June 1998, you and the Company entered into an agreement governing
the fees you had deferred through that date. That agreement is attached.

         I'm assuming you want to continue to defer your fees in accordance with
the June 1998 letter. If so, please sign below and return to me. If you want
another agreement, please let me know the details and we'll see what we can do.

         Thank you for your cooperation and if there are questions, please let
me know.


                                                   Very truly yours,



                                                   Charles D. MarLett
                                                   Corporate Secretary


Deferral of 2004 fees to be in accordance with June 2, 1998 letter:



AGREED: /s/ Edward A. Brennan         DATE: 1/19/2004
        --------------------------          ---------------------
        Edward A. Brennan


P.S. I'm enclosing two originals - one to be returned to me and the other for
your files.

Attachment






                                                                   EXHIBIT 10.13



                                                      January 12, 2004


Mr. David L. Boren
Office of the President
University of Oklahoma
660 Parrington Oval, Room 110
Norman, OK 73019

Dear David:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004 , will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
during the month when you ceased to be a Director of AMR Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
cash payment contemplated by paragraph 3 will be made to your named beneficiary
under the Director's Term Life Insurance Policy maintained by the Corporation.




         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.


                                                    Very truly yours,




                                                    Charles D. MarLett
                                                    Corporate Secretary


Accepted and agreed:



   /s/ David L. Boren
- ---------------------------------
David L. Boren


   1/21/2004
- ---------------------------------
Date




                                                                   EXHIBIT 10.20



                                                      January 12, 2004


Mr. Armando M. Codina
Chairman
Codina Group, Inc.
355 Alhambra Circle, Suite 900
Coral Gables, FL 33134

Dear Armando:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004, will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. On or before January 31, 2014, all the Stock Equivalent Units will
be converted to cash and paid to you by multiplying the number of Stock
Equivalent Units as of December 31, 2013, by the arithmetic mean of the high and
low of AMR stock ("fair market value") during December 2013.

         4. AMR's obligation to make payments pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
number of Stock Equivalent Units as of your date of death will be multiplied by
the fair market value of AMR stock during the calendar month immediately
preceding your death, and the amount paid to Margarita Codina.




         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.


                                                       Very truly yours,




                                                       Charles D. MarLett
                                                       Corporate Secretary


Accepted and agreed:




/s/ Armando M. Codina
- -----------------------------
Armando M. Codina


1/22/04
- -----------------------------
Date






                                                                   EXHIBIT 10.22


                                                     January 12, 2004


Mr. Earl G. Graves
Chairman and CEO
Earl G. Graves Ltd.
130 Fifth Avenue
New York, New York 10011

Dear Earl:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004 , will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
during the month when you ceased to be a Director of AMR Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
cash payment contemplated by paragraph 3 will be made to your named beneficiary
under the Director's Term Life Insurance Policy maintained by the Corporation.





         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.



                                                         Very truly yours,



                                                         Charles D. MarLett
                                                         Corporate Secretary


Accepted and agreed:




   /s/ Earl G Graves
- ----------------------------
Earl G. Graves


1/20/2004
- ----------------------------
Date







                                                                   EXHIBIT 10.24


                                                     January 12, 2004



Mrs. Ann M. Korologos
3150 South Street, NW
Washington, D.C. 20007

Dear Ann:


         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004 , will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
during the month when you ceased to be a Director of AMR Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
cash payment contemplated by paragraph 3 will be made to your named beneficiary
under the Director's Term Life Insurance Policy maintained by the Corporation.





         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.


                                                     Very truly yours,




                                                     Charles D. MarLett
                                                     Corporate Secretary


Accepted and agreed:




/s/ Ann M. Korologos
- -------------------------------
Ann M. Korologos


1/19/2004
- -------------------------------
Date






                                                                   EXHIBIT 10.26


                                January 12, 2004


Mr. Michael A. Miles
1350 Lake Road
Lake Forest, IL 60045

Dear Mike:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004 , will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
during the month when you ceased to be a Director of AMR Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
cash payment contemplated by paragraph 3 will be made to your named beneficiary
under the Director's Term Life Insurance Policy maintained by the Corporation.





         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.

                                                Very truly yours,




                                                Charles D. MarLett
                                                Corporate Secretary


Accepted and agreed:


 /s/ Michael A. Miles
- --------------------------
Michael A. Miles



 1/24/2004
- --------------------------
Date



                                                                   EXHIBIT 10.30


                                January 12, 2004

Mr. Philip J. Purcell
Morgan Stanley
2500 Lake Cook Road
Riverwoods, IL 60015

Dear Phil:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004, will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
("fair market value") during the month when you ceased to be a Director of AMR
Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
number of Stock Equivalent Units as of your date of death will be multiplied by
the fair market value of AMR stock during the calendar month immediately
preceding your death, and the amount paid to Anne Purcell.



         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.

                                               Very truly yours,



                                               Charles D. MarLett
                                               Corporate Secretary


Accepted and agreed:


 /s/ Philip J. Purcell
- ------------------------------
Philip J. Purcell


 1/20/2004
- ------------------------------
Date



                                                                   EXHIBIT 10.34


                                January 12, 2004


Mr. Joe M. Rodgers
Chairman
The JMR Group
P. O. Box 158838
Nashville, TN 37215-8838

Dear Joe:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004, will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
during the month when you ceased to be a Director of AMR Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
cash payment contemplated by paragraph 3 will be made to your named beneficiary
under the Director's Term Life Insurance Policy maintained by the Corporation.



         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.

                                                 Very truly yours,


                                                 Charles D. MarLett
                                                 Corporate Secretary


Accepted and agreed:


 /s/ Joe M. Rodgers
- --------------------------------
Joe M. Rodgers



 1/22/2004
- --------------------------------
Date



                                                                   EXHIBIT 10.42


                                January 12, 2004


Judith Rodin, PhD.
President
University of Pennsylvania
100 College Hall
Philadelphia, PA   19104

Dear Judith:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004, will be deferred and paid to you in
accordance with this letter agreement.

         2. Interest will be accrued on the amounts to be paid on a deferred
basis pursuant to paragraph 1 above, from the date such fees would otherwise
have been paid to the date actually paid, at the prime rate which The Chase
Manhattan Bank (National Association) from time to time charges in New York for
90-day loans to responsible commercial borrowers, such interest to be compounded
monthly.

         3. The total amount to be paid on a deferred basis plus the aggregate
amount of interest accrued thereon will be paid to you in a lump sum
distribution within 30 days of the date when you cease to be a Director of AMR
Corporation.

         4. AMR's obligation to make payments pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
number of Stock Equivalent Units as of your date of death will be multiplied by
the fair market value of AMR stock during the calendar month immediately
preceding your death, and the amount paid to the Trustees under your Revocable
Agreement of Trust, dated September 15, 1997, as amended November 3, 1997,
Judith Rodin Settlor and Trustee.



         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.


                                                      Very truly yours,


                                                      Charles D. MarLett
                                                      Corporate Secretary


Accepted and agreed:


 /s/ Judith Rodin
- ---------------------------
Judith Rodin


 1/22/2004
- ---------------------------
Date


                                                                   EXHIBIT 10.45


                                January 12, 2004


Mr. Roger T. Staubach
Chairman & CEO
The Staubach Company
15601 Dallas Parkway
Suite 400
Addison, TX 75001

Dear Roger:

         This will confirm the following agreement relating to the deferral of
your director's fees in 2004.

         1. All director's fees and retainers ("Fees") payable to you in
connection with your service on the boards of directors (including committees of
such boards) of AMR Corporation and American Airlines, Inc. for the period
January 1, 2004 through December 31, 2004, will be deferred and paid to you in
accordance with this letter agreement.

         2. Fees will be converted to Stock Equivalent Units in accordance with
the Directors' Stock Equivalent Purchase Plan, a copy of which is attached
hereto as Exhibit A (the "Plan").

         3. Within 30 days of the date when you cease to be a Director of AMR
Corporation, the Stock Equivalent Units accrued pursuant to the Plan will be
converted to cash and paid to you by multiplying the number of such Stock
Equivalent Units by the arithmetic mean of the high and the low of AMR stock
during the month when you ceased to be a Director of AMR Corporation.

         4. AMR's obligation to make the payment pursuant to paragraph 3 hereof
will not be released or modified by reason of your death. In such event, the
cash payment contemplated by paragraph 3 will be made to Marianne Staubach.



         If the foregoing is satisfactory to you, please indicate by signing one
of the originals (two are enclosed) and returning it to me.

                                                 Very truly yours,


                                                 Charles D. MarLett
                                                 Corporate Secretary


Accepted and agreed:


 /s/ Roger T. Staubach
- -------------------------------
Roger T. Staubach


 1/20/2004
- -------------------------------
Date


                                                                   EXHIBIT 10.46

                                 AMR CORPORATION

                    1998 LONG TERM INCENTIVE PLAN, AS AMENDED

         SECTION 1. Purpose, Definitions.

         The purpose of the AMR Corporation 1998 Long Term Incentive Plan, as
amended (the "Plan") is to enable AMR Corporation (the "Company") to attract,
retain and reward key employees of the Company and its Subsidiaries and
Affiliates, and strengthen the mutuality of interests between such key employees
and the Company's shareholders, by offering such key employees performance-
based stock incentives and/or other equity interests or equity-based incentives
in the Company, as well as performance-based incentives payable in cash.

         For purposes of the Plan, the following terms shall be defined as set
forth below:

         (a) "Affiliate" means any entity other than the Company and its
Subsidiaries that is designated by the Board as a participating employer under
the Plan, provided that the Company directly or indirectly owns at least twenty
percent (20%) of the combined voting power of all classes of stock of such
entity or at least twenty percent (20%) of the ownership interests in such
entity.

         (b) "Board" means the Board of Directors of the Company.

         (c) "Book Value" means, as of any given date, on a per share basis (i)
the Stockholders' Equity in the Company as of the end of the immediately
preceding fiscal year as reflected in the Company's audited consolidated balance
sheet, subject to such adjustments as the Committee shall specify, divided by
(ii) the number of then outstanding shares of Stock as of such year-end date (as
adjusted by the Committee for subsequent events).

         (d) "Cause" means a felony conviction of a participant or the failure
of a participant to contest prosecution for a felony, or a participant's willful
misconduct or dishonesty, any of which is directly and materially harmful to the
business or reputation of the Company or any Subsidiary or Affiliate.

         (e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.

         (f) "Committee" means the Committee referred to in Section 2 of the
Plan. If at any time no Committee shall be in office, then the functions of the
Committee specified in the Plan shall be exercised by the Board.

         (g) "Company" means AMR Corporation, a corporation organized under the
laws of the State of Delaware, or any successor corporation.

                                       1


         (h) "Deferred Stock" means the right to receive Stock at the end of a
specified deferral period pursuant to Section 8.

         (i) "Disability" means disability as determined under procedures
established by the Committee for purposes of this Plan.

         (j) "Early Retirement" means retirement, with the express consent for
purposes of this Plan of the Company at or before the time of such retirement,
from active employment with the Company and any Subsidiary or Affiliate.

         (k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor thereto.

         (l) "Fair Market Value" means, as of any given date, unless otherwise
determined by the Committee in good faith, the mean between the highest and
lowest quoted selling price, regular way, of the Stock on the New York Stock
Exchange or, if no such sale of Stock occurs on the New York Stock Exchange on
such date, the fair market value of the Stock as determined by the Committee in
good faith.

         (m) "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option" within the meaning of Section 422 of
the Code.

         (n) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.

         (o) "Normal Retirement" means retirement from active employment with
the Company and any Subsidiary or Affiliate pursuant to the applicable
retirement provisions of the applicable pension plan of such entity.

         (p) "Other Stock Based Award" means an award under Section 10 below
that is valued in whole or in part by reference to, or is otherwise based on,
Stock.

         (q) "Performance Related Awards" means an award made pursuant to
Section 11 of Restricted Stock or Deferred Stock or Other Stock Based Awards
upon the determination by the Committee that performance objectives established
by the Committee have been attained, in whole or in part.

         (r) "Plan" means this AMR Corporation 1998 Long Term Incentive Plan, as
it may be amended from time to time.

         (s) "Restricted Stock" means shares of Stock that are subject to
restrictions under Section 7 below.

         (t) "Retirement" means Normal or Early Retirement.

                                       2


         (u) "Stock" means the Common Stock, $1.00 par value per share, of the
Company.

         (v) "Stock Appreciation Right" means the right pursuant to an award
granted under Section 6 below to surrender to the Company all (or a portion) of
a Stock Option in exchange for an amount equal to the difference between: (i)
the Fair Market Value, as of the date such Stock Option (or such portion
thereof) is surrendered, of the shares of Stock covered by such Stock Option (or
such portion thereof), subject, where applicable, to the pricing provisions in
Section 6(b)(ii); and (ii) the aggregate exercise price of such Stock Option (or
such portion thereof).

         (w) "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) granted pursuant to Section 5 below.

         (x) "Stock Purchase Right" means the right to purchase Stock pursuant
to Section 9.

         (y) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.

         In addition, the terms "LTIP Awards," "Performance Criteria", "Change
in Control," "Potential Change in Control" and "Change in Control Price" shall
have the meanings set forth, respectively, in Sections 2, 11(a), 12(b), (c) and
(d) below.

         SECTION 2. Administration.

         The Plan shall be administered by a committee of not less than two
members of the Board, who shall be appointed by, and serve at the pleasure of,
the Board. In selecting the members of the Committee, the Board shall take into
account the requirements for the members of the Committee to be treated as
"Outside Directors" within the meaning of Section 162(m) of the Code and
"Non-Employee Directors" for purposes of Rule 16b-3, as promulgated under
Section 16 of the Exchange Act. The functions of the Committee specified in the
Plan shall be exercised by the Board, if and to the extent that no Committee
exists which has the authority to so administer the Plan, or to the extent that
the Committee is not comprised solely of Non-Employee Directors for purposes of
Rule 16b-3, as promulgated under Section 16 of the Exchange Act.

         The Committee shall have full authority to grant, pursuant to the terms
of the Plan, to officers and other key employees eligible under Section 4: (i)
Stock Options and Incentive Stock Options; (ii) Stock Appreciation Rights; (iii)
Restricted Stock; (iv) Deferred Stock; (v) Stock Purchase Rights; (vi) Other
Stock Based Awards; and/or (vii) Performance Related Awards (collectively, the
"LTIP Awards").

                                       3


         In particular the Committee shall have the authority:

                  (a) to select the officers and other key employees of the
         Company and its Subsidiaries and Affiliates to whom LTIP Awards may
         from time to time be granted hereunder;

                  (b) to determine whether and to what extent LTIP Awards, or
         any combination thereof, are to be granted hereunder to one or more
         eligible employees;

                  (c) subject to the provisions of Sections 3, 5 and 11, to
         determine the number of shares to be covered by each such award granted
         hereunder;

                  (d) to determine the terms and conditions, not inconsistent
         with the terms of the Plan, of any award granted hereunder (including,
         but not limited to, the share price and any restriction or limitation,
         or any vesting acceleration or waiver of forfeiture restrictions
         regarding any Stock Option or other award and/or the shares of Stock
         relating thereto, based in each case on such factors as the Committee
         shall determine in its sole discretion);

                  (e) to determine whether, to what extent and under what
         circumstances a Stock Option may be settled in cash, Restricted Stock
         and/or Deferred Stock under Section 5(k) or 5(1), as applicable,
         instead of Stock;

                  (f) to determine whether, to what extent and under what
         circumstances an award of Restricted Stock or Deferred Stock may be
         settled in cash;

                  (g) to determine whether, to what extent and under what
         circumstances Option grants and/or other awards under the Plan and/or
         other cash awards made by the Company are to be made, and operate, on a
         tandem basis vis-a-vis other awards under the Plan and/or cash awards
         made outside of the Plan, or on an additive basis;

                  (h) to determine whether, to what extent and under what
         circumstances Stock and other amounts payable with respect to an award
         under this Plan shall be deferred either automatically or at the
         election of the participant (including providing for and determining
         the amount (if any) of any deemed earnings on any deferred amount
         during any deferral period);

                  (i) to determine the terms and restrictions applicable to
         Stock Purchase Rights and the Stock purchased by exercising such
         Rights;

                  (j) with respect to an award of Restricted Stock, to determine
         whether the right to vote will be granted with such award and/or
         whether any dividends declared with respect to such award will be paid
         in cash, additional Restricted Stock, Deferred Stock, Other Stock Based
         Awards, or not at all;

                                       4


                  (k) with respect to an award of Deferred Stock, to determine
         whether any dividends declared with respect to such award will be paid
         in cash, Restricted Stock, additional Deferred Stock, Other Stock Based
         Awards, or not at all; and

                  (l) to determine the terms and conditions pursuant to which an
         LTIP Award may vest on a pro rata basis or be terminated.

         The Committee shall have the authority: to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
award issued under the Plan (and any agreements relating thereto); and to
otherwise supervise the administration of the Plan.

         All decisions made by the Committee pursuant to the provisions of the
Plan shall be made in the Committee's sole discretion and shall be final and
binding on all persons, including the Company and Plan participants.

         SECTION 3. Stock Subject to Plan.

         The total number of shares of Stock reserved and available for
distribution under the Plan shall be 5,000,000 shares, plus any shares remaining
available for issuance under the 1988 Long Term Incentive Plan, as amended, as
of the Effective Date hereof. Such shares may consist, in whole or in part, of
authorized and unissued shares or treasury shares.

         Subject to Section 6(b)(iv) below, if any shares of Stock that have
been optioned cease to be subject to a Stock Option, or if any such shares of
Stock that are subject to any Restricted Stock or Deferred Stock award, Stock
Purchase Right, Other Stock Based Award or Performance Related Award granted
hereunder or granted under the 1988 Long Term Incentive Plan, as amended, are
forfeited or any such award otherwise terminates without a payment being made to
the participant in the form of Stock, such shares shall again be available for
distribution in connection with future awards under the Plan.

         In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Stock, such substitution or adjustment shall be made in
the aggregate number of shares reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted under
the Plan, in the number and purchase price of shares subject to outstanding
Stock Purchase Rights under the Plan, and in the number of shares subject to
other outstanding awards granted under the Plan as may be determined to be
appropriate by the Committee, in its sole discretion, provided that the number
of shares subject to any award shall always be a whole number. Such adjusted
option price shall also be used to determine the amount payable by the Company
upon the exercise of any Stock Appreciation Right associated with any Stock
Option.

                                       5


         SECTION 4. Eligibility.

         Officers and other key employees of the Company and its Subsidiaries
and Affiliates (but excluding members of the Committee and any person who serves
only as a director) who are responsible for, or contribute to, the management,
growth and/or profitability of the business of the Company and/or its
Subsidiaries and Affiliates are eligible for awards under the Plan.

         SECTION 5. Stock Options.

         Stock Options may be granted alone, in addition to, or in tandem with,
other awards granted under the Plan. Any Stock Option granted under the Plan
shall be in such form as the Committee may from time to time approve.

         Stock Options granted under the Plan may be of two types: (i) Incentive
Stock Options; and (ii) Non-Qualified Stock Options.

         The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock
Options (in each case with or without Stock Appreciation Rights); provided that,
in no event shall the number of shares of Stock subject to any Stock Options
granted to any employee during any calendar year exceed 250,000 shares, as such
number may be adjusted pursuant to Section 3.

         Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:

         (a) Option Price. The option price per share of Stock purchasable under
a Stock Option shall be determined by the Committee at the time of grant;
provided, that such option price may not be less than the Fair Market Value of
the Stock on the date the Stock Option is granted.

         (b) Option Term. The term of each Stock Option shall be fixed by the
Committee, but no Stock Option shall be exercisable more than ten (10) years
after the date the Option is granted.

         (c) Exercisability. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by the
Committee; provided, however, that except as determined by the Committee, no
Stock Option shall be exercisable prior to the first anniversary date of the
granting of the Option. If the Committee provides, in its sole discretion, that
any Stock Option is exercisable only in installments, the Committee may waive
such installment exercise provisions at any time in whole or in part, based on
such factors as the Committee shall determine, in its sole discretion.

         (d) Method of Exercise. Subject to whatever installment exercise
provisions apply under Section 5(c) and subject to whatever restrictions may be
imposed by the Company, Stock Options may be exercised in whole or in part at
any time during the option period, by giving written notice of exercise to the
Company specifying the number of shares to be purchased.

                                       6


         Such notice shall be accompanied by payment in full of the purchase
price. Without limiting the generality of the foregoing, payment of the option
price may be made: (i) in cash or its equivalent; (ii) by exchanging shares of
Stock owned by the optionee (which are not the subject of any pledge or other
security interest), including in the case of a Non-Qualified Stock Option,
Restricted Stock or Deferred Stock subject to an award hereunder (or an award
under the terms of the 1988 Long Term Incentive Plan, as amended); (iii) through
an arrangement with a broker approved by the Company whereby payment of the
exercise price is accomplished with the proceeds of the sale of Stock; or (iv)
by any combination of the foregoing, provided that the combined value of all
cash and cash equivalents paid and the Fair Market Value of any such Stock so
tendered to the Company, valued as of the date of such tender, is at least equal
to such option price.

         If payment of the option exercise price of a Non-Qualified Stock Option
is made in whole or in part in the form of Restricted Stock or Deferred Stock,
such Restricted Stock or Deferred Stock (and any replacement shares relating
thereto) shall remain (or be) restricted or deferred, as the case may be, in
accordance with the original terms of the Restricted Stock award or Deferred
Stock award in question, and any additional Stock received upon the exercise
shall be subject to the same forfeiture restrictions or deferral limitations,
unless otherwise determined by the Committee, in its sole discretion.

         No shares of Stock shall be issued upon exercise of a stock option
until full payment therefor has been made. An optionee shall generally have the
rights to dividends or other rights of a shareholder with respect to shares
subject to the Option when the optionee has given written notice of exercise,
has paid in full for such shares, and, if requested, has given the
representation described in Section 15(a).

         (e) Transferability of Options. Unless the Committee shall permit (on
such terms and conditions as it shall establish) an Option to be transferred to
a member of the participant's immediate family or to a trust or similar vehicle
for the benefit of such immediate family members, no Option shall be assignable
or transferable except by will or the laws of descent and distribution, and
except to the extent required by law, no right or interest of any participant
shall be subject to any lien, obligation or liability of the participant.

         (f) Termination by Death. Subject to Section 5(j), if an optionee's
employment by the Company and any Subsidiary or Affiliate terminates by reason
of death, any Stock Option held by such optionee may thereafter be exercised in
accordance with the terms and conditions established by the Committee.

         (g) Termination by Reason of Disability. Subject to Section 5(j), if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of Disability, any Stock Option held by such optionee may thereafter
be exercised by the optionee in accordance with the terms and conditions
established by the Committee. In the event of termination of employment by
reason of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422 of the
Code, such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.

                                       7


         (h) Termination by Reason of Retirement. Subject to Section 5(j), if an
optionee's employment by the Company and any Subsidiary or Affiliate terminates
by reason of Normal or Early Retirement, any Stock Option held by such optionee
may thereafter be exercised by the optionee in accordance with the terms and
conditions established by the Committee. In the event of termination of
employment by reason of Retirement, if an Incentive Stock Option is exercised
after the expiration of the exercise periods that apply for purposes of Section
422 of the Code, such Stock Option will thereafter be treated as a Non-Qualified
Stock Option.

         (i) Other Termination. Unless otherwise determined by the Committee, if
an optionee's employment by the Company or any Subsidiary or Affiliate
terminates for any reason other than death, Disability or Normal or Early
Retirement, the Stock Option shall thereupon terminate.

         (j) Incentive Stock Options. Anything in the Plan to the contrary
notwithstanding, no term of this Plan relating to Incentive Stock Options shall
be interpreted, amended or altered, nor shall any discretion or authority
granted under the Plan be so exercised, so as to disqualify the Plan under
Section 422 of the Code, or, without the consent of the optionee(s) affected, to
disqualify any Incentive Stock Option under such Section 422.

         (k) Buyout Provisions. The Committee may at any time offer to buy out
for a payment in cash, Stock, Deferred Stock or Restricted Stock, an option
previously granted hereunder, based on such terms and conditions as the
Committee shall establish and communicate to the participant at the time that
such offer is made.

         (l) Settlement Provisions. If the option agreement so provides at grant
or is amended after grant, and prior to the exercise, to so provide (with the
optionee's consent), the Committee may require that all or part of the shares to
be issued with respect to the spread value of an exercised Option take the form
of Deferred or Restricted Stock, which shall be valued on the date of exercise
on the basis of the Fair Market Value (as determined by the Committee) of such
Deferred or Restricted Stock determined without regard to the deferral
limitations and/or the forfeiture restrictions involved.

         SECTION 6. Stock Appreciation Rights.

         (a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan. In the
case of a Non-Qualified Stock Option, such rights may be granted either at or
after the time of the grant of such Stock Option. In the case of an Incentive
Stock Option, such rights may be granted only at the time of grant of such Stock
Option.

         A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, subject to such
provisions as the Committee may specify at grant where a Stock Appreciation
Right is granted with respect to less than the full number of shares covered by
a related Stock Option.

                                       8


         A Stock Appreciation Right may be exercised by an optionee, subject to
Section 6(b), in accordance with the procedures established by the Committee for
such purposes. Upon such exercise, the optionee shall be entitled to receive an
amount determined in the manner prescribed in Section 6(b). Stock Options
relating to exercised Stock Appreciation Rights shall no longer be exercisable
to the extent that the related Stock Appreciation Rights have been exercised.

         (b) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Committee, including the following:

                  (i) Stock Appreciation Rights shall be exercisable only at
         such time or times and to the extent that the Stock Options to which
         they relate shall be exercisable in accordance with the provisions of
         Section 5 and this Section 6 of the Plan.

                  (ii) Upon the exercise of a Stock Appreciation Right, an
         optionee shall be entitled to receive an amount in cash and/or shares
         of Stock equal in value to the excess of the Fair Market Value of one
         share of Stock over the option price per share specified in the related
         Stock Option multiplied by the number of shares in respect of which the
         Stock Appreciation Right shall have been exercised, with the Committee
         having the right to determine the form of payment. When payment is to
         be made in shares, the number of shares to be paid shall be calculated
         on the basis of the Fair Market Value of the shares on the date of
         exercise.

                  (iii) Stock Appreciation Rights shall be transferable only
         when and to the extent that the underlying Stock Option would be
         transferable under Section 5(e) of the Plan.

                  (iv) Upon the exercise of a Stock Appreciation Right, the
         Stock Option or part thereof to which such Stock Appreciation Right is
         related shall be deemed to have been exercised for the purpose of the
         limitation set forth in Section 3 of the Plan on the number of shares
         of Stock exercised under the Plan, but only to the extent of the number
         of shares issued under the Stock Appreciation Right at the time of
         exercise based on the value of the Stock Appreciation Right at such
         time.

                  (v) The Committee, in its sole discretion, may provide that,
         in the event of a Change in Control and/or a Potential Change in
         Control, the amount to be paid upon the exercise of a Stock
         Appreciation Right shall be based on the Change in Control Price,
         subject to such terms and conditions as the Committee may specify at
         grant.

         SECTION 7. Restricted Stock

         (a) Administration. Shares of Restricted Stock may be issued either
alone, in addition to, or in tandem with, other awards granted under the Plan
and/or awards made outside of the Plan. The Committee shall determine the
eligible persons to whom, and the time or times at which,


                                       9


grants of Restricted Stock will be made, the number of shares to be awarded, the
price (if any) to be paid by the recipient of Restricted Stock (subject to
Section 7(b)), the time or times within which such awards may be subject to
forfeiture, and all other terms and conditions of the awards.

         The Committee may condition the grant of Restricted Stock upon the
attainment of specified Performance Criteria or such other factors as the
Committee may determine, in its sole discretion.

         The provisions of Restricted Stock awards need not be the same with
respect to each recipient.

         (b) Awards and Certificates. The prospective recipient of a Restricted
Stock award shall not have any rights with respect to such award, unless and
until the Company and such recipient have executed an agreement evidencing the
award and the recipient has delivered a fully executed copy thereof to the
Company, and has otherwise complied with the applicable terms and conditions of
such award.

                  (i) The purchase price for shares of Restricted Stock shall be
         equal to or less than their par value and may be zero.

                  (ii) Awards of Restricted Stock must be accepted within a
         reasonable period (or such specific period as the Committee may specify
         at grant) after the award date, by executing a Restricted Stock award
         agreement and paying whatever price (if any) is required under Section
         7(b)(i).

                  (iii) Each participant receiving a Restricted Stock award
         shall be issued a stock certificate in respect of such shares of
         Restricted Stock. Such certificate shall be registered in the name of
         such participant, and shall bear an appropriate legend referring to the
         terms, conditions, and restrictions applicable to such award.

                  (iv) The Committee shall require that the stock certificates
         evidencing such shares be held in custody by the Company until the
         restrictions thereon shall have lapsed, and that, as a condition of any
         Restricted Stock award, the participant shall have delivered a stock
         power, endorsed in blank, relating to the Stock covered by such award.

         (c) Terms and Conditions. The shares of Restricted Stock awarded
pursuant to this Section 7 shall be subject to the following terms and
conditions:

                  (i) Subject to the provisions of this Plan and the award
         agreement, during a period set by the Committee commencing with the
         date of such award (the "Restriction Period"), the participant shall
         not be permitted to sell, transfer, pledge or assign shares of
         Restricted Stock awarded under the Plan. Within these limits and
         subject to Sections 7(c)(iv) and/or 7(c)(v), the Committee, in its sole
         discretion, may provide for the lapse of such restrictions in
         installments and may accelerate or waive such restrictions in whole or


                                       10


         in part, based on service, Performance Criteria and/or such other
         factors as the Committee may determine, in its sole discretion.

                  (ii) If and when the Restriction Period expires without a
         prior forfeiture of the Restricted Stock subject to such Restriction
         Period, certificates for an appropriate number of unrestricted shares
         of Stock shall be delivered to the participant promptly (unless the
         Committee decides pursuant to Section 2(f) to settle the award in
         cash).

                  (iii) The voting rights and/or dividend rights, if any, of the
         Restricted Stock award shall be established by the Committee pursuant
         to Section 2(j).

                  (iv) An award of Restricted Stock, where the Restriction
         Period is based on Performance Criteria, shall have a Restriction
         Period of at least one (1) year.

                  (v) An award of Restricted Stock, where the Restriction Period
         is based on service, shall have a Restriction Period of at least three
         (3) years.

         (d) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a Restricted Stock award, subject to such
Performance Criteria, future service, deferral and other terms and conditions as
may be specified by the Committee.

         SECTION 8. Deferred Stock.

         (a) Administration. Deferred Stock may be awarded either alone, in
addition to, or in tandem with, other awards granted under the Plan and/or
awards made outside of the Plan. The Committee shall determine the eligible
persons to whom and the time or times at which Deferred Stock shall be awarded,
the number of shares of Deferred Stock to be awarded to any person, the duration
of the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Stock will be deferred, and the other terms and conditions
of the award in addition to those set forth in Section 8(b).

         The Committee may condition the grant of Deferred Stock upon the
attainment of specified Performance Criteria or such other factors or criteria
as the Committee shall determine, in its sole discretion.

         The provisions of Deferred Stock awards need not be the same with
respect to each recipient.

         (b) Terms and Conditions. The shares of Deferred Stock awarded pursuant
to this Section 8 shall be subject to the following terms and conditions:

                                       11


                  (i) Subject to the provisions of this Plan and the award
         agreement referred to in Section 8(b)(iv) below, Deferred Stock awards
         may not be sold, assigned, transferred, pledged or otherwise encumbered
         during the Deferral Period. At the expiration of the Deferral Period
         (or the Elective Deferral Period referred to in Section 8(b)(iii),
         where applicable), stock certificates shall be delivered to the
         participant, or his legal representative, in a number equal to the
         shares covered by the Deferred Stock award (unless the Committee
         decides pursuant to Section 2(f) to settle the award in cash).

                  (ii) Subject to Sections 8(b)(vi) and/or 8(b)(vii), the
         Committee may accelerate the vesting of all or any part of any Deferred
         Stock award and/or waive the deferral limitations in whole or in part,
         based on service, Performance Criteria and/or such other factors as the
         Committee may determine, in its sole discretion.

                  (iii) A participant may elect to further defer receipt of an
         award (or an installment of an award) for a specified period or until a
         specified event (the "Elective Deferral Period"), subject in each case
         to such terms as are determined by the Committee, all in its sole
         discretion. Subject to any exceptions adopted by the Committee, such
         election must generally be made at least twelve (12) months prior to
         completion of the Deferral Period for such Deferred Stock award (or
         such installment).

                  (iv) Each award shall be confirmed by, and subject to the
         terms of, a Deferred Stock agreement executed by the Company and the
         participant.

                  (v) The dividend rights, if any, of the Deferred Stock award
         established by the Committee pursuant to Section 2(k).

                  (vi) An award of Deferred Stock, where the Deferral Period is
         based on Performance Criteria, shall have a Deferral Period of at least
         one (1) year.

                  (vii) An award of Deferred Stock, where the Deferral Period is
         based on service, shall have a Deferral Period of at least three (3)
         years.

         (c) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a tandem
performance-based or other award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a Deferred Stock award, subject to such
Performance Criteria, future service, deferral and other terms and conditions as
may be specified by the Committee.

         SECTION 9. Stock Purchase Rights.

         (a) Awards and Administration. The Committee may grant eligible
participants Stock Purchase Rights which shall enable such participants to
purchase Stock (including Deferred Stock and Restricted Stock) at price(s)
determined by the Committee at or after grant, in its sole discretion.

                                       12


         The Committee shall also impose such deferral, forfeiture and/or other
terms and conditions as it shall determine, in its sole discretion, on such
Stock Purchase Rights or the exercise thereof.

         The terms of Stock Purchase Rights awards need not be the same with
respect to each participant.

         Each Stock Purchase Right award shall be confirmed by, and be subject
to the terms of, a Stock Purchase Rights agreement.

         (b) Exercisability. Stock Purchase Rights shall be exercisable for such
period after grant as is determined by the Committee.

         SECTION 10. Other Stock Based Awards.

         (a) Administration. Other awards of Stock and other awards that are
valued in whole or in part by reference to, or are otherwise based on, Stock
("Other Stock Based Awards"), including, without limitation, stock purchase
rights, performance shares, convertible preferred stock, convertible debentures,
exchangeable securities and Stock awards or options valued by reference to Book
Value or subsidiary performance, may be granted either alone, in addition to, or
in tandem with, Stock Options, Stock Appreciation Rights, Restricted Stock,
Deferred Stock, Stock Purchase Rights or Performance Related Awards granted
under the Plan and/or cash awards made outside of the Plan.

         Subject to the provisions of the Plan, the Committee shall have
authority to determine the persons to whom and the time or times at which such
awards shall be made, the amount of such awards, and all other conditions of the
awards including any dividend and/or voting rights. Subject to Sections
10(b)(iv) and 10(b)(v), the Committee may also provide for the grant of Stock
upon the attainment of specified Performance Criteria or such other factors as
the Committee may determine, in its sole discretion.

         The provisions of Other Stock Based Awards need not be the same with
respect to each recipient.

         (b) Terms and Conditions. Other Stock Based Awards made pursuant to
this Section 10 shall be subject to the following terms and conditions:

                  (i) Subject to the provisions of this Plan and the award
         agreement referred to in Section 10(b)(ii) below, awards made under
         this Section 10 may not be sold, assigned, transferred, pledged or
         otherwise encumbered prior to the date on which any shares are issued
         or amounts are paid, or, if later, the date on which any applicable
         restriction, performance or deferral period lapses. Subject to Sections
         10(b)(iv) and/or 10(b)(v), the Committee, in its sole discretion, may
         accelerate the vesting of all or any part of any Other Stock Based
         Award, and/or waive any restrictions or deferral limitations in whole


                                       13


         or in part, based on service, Performance Criteria and/or other factors
         as the Committee may determine, in its sole discretion.

                  (ii) Each award under this Section 10 shall be confirmed by,
         and subject to the terms of, an agreement or other instrument by the
         Company and by the participant.

                  (iii) Stock (including securities convertible into Stock)
         issued on a bonus basis under this Section 10 may be issued for no cash
         consideration. Stock (including securities convertible into Stock)
         purchased pursuant to a purchase right awarded under this Section 10
         shall be purchased at price(s) determined by the Committee, in its sole
         discretion.

                  (iv) Any Other Stock Based Award that has a Restriction Period
         or Deferral Period that is based on Performance Criteria shall have a
         Restriction Period or Deferral Period, as the case may be, of at least
         one (1) year.

                  (v) Any Other Stock Based Award that has a Restriction Period
         or Deferral Period that is based on service shall have a Restriction
         Period or Deferral Period, as the case may be, of at least three (3)
         years.

         SECTION 11. Performance Related Awards.

         (a) Performance Objectives. Notwithstanding anything else contained in
the Plan to the contrary, unless the Committee otherwise determines at the time
of grant, any award of Restricted Stock or Deferred Stock or Other Stock Based
Awards to an officer who is subject to the reporting requirements of Section
16(a) of the Exchange Act other than an award which will vest solely on the
basis of the passage of time, shall become vested, if at all, upon the
determination by the Committee that performance objectives established by the
Committee have been attained, in whole or in part (a "Performance Award"). Such
performance objectives shall be determined over a measurement period or periods
established by the Committee (which period or periods shall not be less than one
(1) year) and related to at least one of the following criteria, which may be
determined solely by reference to the performance of: (i) the Company; (ii) a
Subsidiary; (iii) an Affiliate; (iv) a division or unit of any of the foregoing
or based on comparative performance of any of the foregoing relative to past
performance or to other companies: (A) return on equity; (B) total shareholder
return; (C) revenues; (D) cash flows, revenues and/or earnings relative to other
parameters (e.g., net or gross assets); (E) operating income; (F) return on
investment; (G) changes in the value of the Stock; and (H) return on assets (the
"Performance Criteria"). Excluding Stock Options and/or Stock Appreciation
Rights granted hereunder, the maximum number of shares of Stock that may be
subject to any such Performance Award granted to any key employee in any
calendar year shall not exceed 100,000 shares, as such number may be adjusted
pursuant to Section 3.

         (b) Annual Incentive Compensation. The Committee may, in addition to
the Performance Awards described above, pay cash amounts under the Plan or any
other plan or arrangement approved by the Committee, provided such other plan or
arrangement is in


                                       14


conformity with the provisions of this Section 11(b), to any officer of the
Company or any Subsidiary who is subject to the reporting requirements of
Section 16(a) of the Exchange Act upon the achievement, in whole or in part, of
performance goals or objectives established in writing by the Committee with
respect to such performance periods as the Committee shall determine. Any such
goals or objectives shall be based on one or more of the Performance Criteria.
Notwithstanding anything else contained herein to the contrary, the maximum
amount of any such cash payment to any single officer with respect to any
calendar year shall not exceed the lesser of (i) $2,000,000; or (ii) twice the
officer's annual base salary as in effect on the last day of the preceding
fiscal year.

         (c) Interpretation. Notwithstanding anything else contained in the Plan
to the contrary, to the extent required to so qualify any Performance Award as
other performance based compensation within the meaning of Section 162(m)(4)(C)
of the Code, the Committee shall not be entitled to exercise any discretion
otherwise authorized under the Plan (such as the right to accelerate vesting
without regard to the achievement of the relevant performance objectives) with
respect to such Performance Award if the ability to exercise such discretion (as
opposed to the exercise of such discretion) would cause such award to fail to
qualify as other performance based compensation.

         SECTION 12. Change in Control Provisions.

         (a) Impact of Event. Notwithstanding the provisions of Sections
7(c)(iv), 7(c)(v), 8(b)(vi), 8(b)(vii), 10(b)(iv), and 10(b)(v), in the event
of:

                  (i) a "Change in Control" as defined in Section 12(b), or

                  (ii) a "Potential Change in Control" as defined in Section
         12(c), but only if and to the extent so determined by the Committee or
         the Board (subject to any right of approval expressly reserved by the
         Committee or the Board at the time of such determination):

                  (A) Any Stock Options awarded under the Plan not previously
         exercisable and vested shall become fully exercisable and vested;

                  (B) The restrictions and deferral limitations applicable to
         any Restricted Stock, Deferred Stock, Stock Purchase Rights, Other
         Stock Based Awards and Performance Related Awards, in each case to the
         extent not already vested under the Plan, shall lapse and such shares
         and awards shall be deemed fully vested and any Performance Criteria
         shall be deemed met at target; and

                  (C) The value of all outstanding LTIP Awards to the extent
         vested may at the sole discretion of the Committee at or after grant
         but prior to any Change in Control, be cashed out on the basis of the
         "Change in Control Price" as defined in Section 12(d) as of the date
         such Change in Control or such Potential Change in Control is
         determined to


                                       15


         have occurred or such other date as the Committee may determine prior
         to the Change in Control.

         (b) Definition of "Change in Control". For purposes of Section 12(a), a
"Change in Control" means the happening of any of the following:

                  (i) When any "person" as defined in Section 3(a)(9) of the
         Exchange Act and as used in Sections 13(d) and 14(d) thereof, including
         a "group" as defined in Section 13(d) of the Exchange Act but excluding
         the Company, any Subsidiary or any employee benefit plan sponsored or
         maintained by the Company or any Subsidiary (including any trustee of
         such plan acting as trustee), directly or indirectly, becomes the
         "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, as
         amended from time to time), of securities of the Company representing
         fifteen percent (15%) or more of the combined voting power of the
         Company's then outstanding securities;

                  (ii) The individuals who, as of the Effective Date of this
         Plan, constitute the Board (the "Incumbent Board") cease for any reason
         to constitute at least a majority of the Board; provided, however, that
         any individual becoming a director subsequent to the Effective Date of
         the Plan whose election, or nomination for election by the Company's
         shareholders, was approved by a vote of at least a majority of the
         directors then comprising the Incumbent Board shall be considered as
         though such individual were a member of the Incumbent Board, but
         excluding, for this purpose, any such individual whose initial
         assumption of office occurs as a result of an actual or threatened
         election contest with respect to the election or removal of directors
         or other actual or threatened solicitation of proxies or consents by or
         on behalf of a person other than the Board; or

                  (iii) Consummation of a reorganization, merger or
         consolidation or sale or other disposition of all or substantially all
         of the assets of the Company or the acquisition of assets of another
         corporation (a "Business Combination"), in each case, unless, following
         such Business Combination: (A) all or substantially all of the
         individuals and entities who were the beneficial owners, respectively,
         of the then outstanding shares of Stock of the Company and the combined
         voting power of the then outstanding voting securities of the Company
         entitled to vote generally in the election of directors immediately
         prior to such Business Combination beneficially own, directly or
         indirectly, more than sixty percent (60%) of, respectively, the then
         outstanding shares of common stock and the combined voting power of the
         then outstanding voting securities entitled to vote generally in the
         election of directors, as the case may be, of the corporation resulting
         from such Business Combination (including, without limitation, a
         corporation which as a result of such transaction owns the Company or
         all or substantially all of the Company's assets either directly or
         through one or more subsidiaries); (B) no person (excluding any
         employee benefit plan (or related trust) of the Company or such
         corporation resulting from such Business Combination) beneficially
         owns, directly or indirectly, fifteen percent (15%) or more of,
         respectively, the then outstanding shares of common stock of the
         corporation resulting from such Business Combination or the combined
         voting power of the then outstanding voting securities of such
         corporation except to the extent that such


                                       16


         ownership existed prior to the Business Combination; and (C) at least a
         majority of the members of the board of directors of the corporation
         resulting from such Business Combination were members of the Incumbent
         Board at the time of the execution of the initial agreement, or of the
         action of the Board, providing for such Business Combination; or

                  (iv) Approval by the shareholders of the Company of a complete
         liquidation or dissolution of the Company.

         (c) Definition of Potential Change in Control. For purposes of Section
12(a), a "Potential Change in Control" means the happening of any one of the
following:

                  (i) The approval by shareholders of an agreement by the
         Company, the consummation of which would result in a Change in Control
         of the Company as defined in Section 12(b); or

                  (ii) The acquisition of beneficial ownership, directly or
         indirectly, by any entity, person or group (other than the Company or a
         Subsidiary or any Company employee benefit plan (including any trustee
         of such plan acting as such trustee)) of securities of the Company
         representing five percent (5%) or more of the combined voting power of
         the Company's outstanding securities and the adoption by the Board of a
         resolution to the effect that a Potential Change in Control of the
         Company has occurred for purposes of this Plan.

         (d) Change in Control Price. For the purposes of this Section 12,
"Change in Control Price" means the highest price per share paid in any
transaction reported on the New York Stock Exchange Composite Index, or paid or
offered in any bona fide transaction related to a potential or actual Change in
Control of the Company at any time during the sixty (60) day period immediately
preceding the occurrence of the Change in Control (or, where applicable, the
occurrence of the Potential Change in Control event), in each case as determined
by the Committee except that, in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, such price shall be
based only on transactions reported for the date on which the optionee exercises
such Stock Appreciation Rights or, where applicable, the date on which a cashout
occurs under Section 12(a)(ii)(C).

         SECTION 13. Amendments and Termination.

         The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee or participant under an LTIP Award theretofore granted, without the
optionee's or participant's consent.

         The Committee may amend the terms of any Stock Option or other award
theretofore granted, prospectively or retroactively, but subject to Section 3
above, no such amendment shall impair the rights of any holder without the
holder's consent.

                                       17


         Subject to the above provisions, the Board shall have broad authority
to amend the Plan to take into account changes in applicable securities and tax
laws and accounting rules, as well as other developments.

         SECTION 14. Unfunded Status of Plan.

         The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing contained herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Stock or payments in lieu of or with respect to awards
hereunder; provided, however, that unless the Committee otherwise determines
with the consent of the affected participant, the existence of such trusts or
other arrangements is consistent with the "unfunded" status of the Plan.

         SECTION 15. General Provisions.

         (a) The Committee may require each person purchasing shares pursuant to
a Stock Option or other award under the Plan to represent to and agree with the
Company in writing that the optionee or participant is acquiring the shares
without a view to distribution thereof. The certificates for such shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer.

         All certificates for shares of Stock or other securities delivered
under the Plan shall be subject to such stock-transfer orders and other
restrictions as the Committee may deem advisable under the rules, regulations,
and other requirements of the Securities and Exchange Commission, any stock
exchange upon which the Stock is then listed, and any applicable federal or
state securities law, and the Committee may cause a legend or legends to be put
on any such certificates to make appropriate reference to such restrictions.

         (b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required, and such arrangements may be either
generally applicable or applicable only in specific cases.

         (c) The adoption of the Plan shall not confer upon any employee of the
Company or any Subsidiary or Affiliate any right to continued employment with
the Company or a Subsidiary or Affiliate, as the case may be, nor shall it
interfere in any way with the right of the Company or a Subsidiary or Affiliate
to terminate the employment of any of its employees at any time.

         (d) Except as the participant and the Company may otherwise agree, no
later than the date as of which an amount first becomes includible in the gross
income of the participant for federal income tax purposes with respect to any
award under the Plan, the participant shall pay to the Company, or make
arrangements satisfactory to the Committee regarding the payment of, any


                                       18


federal, state, or local taxes of any kind required by law to be withheld with
respect to such amount. Unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including Stock that is part
of the award that gives rise to the withholding requirement. The obligations of
the Company under the Plan shall be conditional on such payment or arrangements,
and the Company and its Subsidiaries or Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment of
any kind otherwise due to the participant.

         (e) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or in Deferred Stock or other types
of Plan awards) at the time of any dividend payment shall only be permissible if
sufficient shares of Stock are available under Section 3 for such reinvestment
(taking into account then outstanding Stock Options, Stock Purchase Rights and
other Plan awards).

         (f) The Committee may permit a participant to postpone the delivery of
Stock under any award, including a Stock Option, under the Plan upon such terms
and conditions as the Committee shall determine.

         (g) The Plan and all awards made and actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Delaware.

         SECTION 16. Effective Date of Plan.

         As amended, the Plan shall be effective as of May 21, 1998.

         SECTION 17. Term of Plan.

         No LTIP Award shall be granted pursuant to the Plan on or after the
tenth anniversary of the date of shareholder approval, but awards granted prior
to such tenth anniversary may extend beyond that date, in accordance with the
terms of such awards.

         SECTION 18. Applicability to Grants under 1988 Plan.

         The provisions of the Plan relating to stock options, stock
appreciation rights, restricted stock awards, deferred stock awards, stock
purchase rights, other stock-based awards or performance related awards shall
apply to, and govern existing and subsequent stock options, stock appreciation
rights, restricted stock awards, deferred stock awards, stock purchase rights,
other stock-based awards or performance related awards granted under the 1988
Long Term Incentive Plan, as amended.


                                       19


                                                                   EXHIBIT 10.49

                                  STOCK OPTION
                       2003 EMPLOYEE STOCK INCENTIVE PLAN

         STOCK OPTION granted ______ by AMR Corporation, a Delaware corporation
(the "Corporation"), and __________ employee number ________, an employee of the
Corporation or one of its Subsidiaries or Affiliates (the "Optionee").

                                   WITNESSETH:

         WHEREAS, the Board of Directors of the Corporation (the "Board"), has
approved the 2003 Employee Stock Incentive Plan (such plan, as may be amended
from time to time, to be referenced the "2003 Plan"); and

         WHEREAS, the 2003 Plan provides for the grant of an option to purchase
shares of the Corporation's Common Stock (as later defined) to those individuals
selected by the Committee or, in lieu thereof, the Board of Directors of AMR
Corporation (the "Board"); and

         WHEREAS, the Board has determined that the Optionee is eligible under
the 2003 Plan and that it is to the advantage and interest of the Corporation to
grant the option provided for herein to the Optionee as an incentive for
Optionee to remain in the employ of the Corporation or one of its Subsidiaries
or Affiliates, and to encourage ownership by the Optionee of the Corporation's
Common Stock, $1 par value (the "Common Stock").

         NOW, THEREFORE:

         1. Option Grant. The Corporation hereby grants to the Optionee a
non-qualified stock option, subject to the terms and conditions hereinafter set
forth, to purchase all or any part of an aggregate of _______ shares of Common
Stock at a price of $________ per share (being the fair market value of the
Common Stock on the date hereof), exercisable in approximately equal
installments on and after the following dates and with respect to the following
number of shares of Common Stock:

      Exercisable On and After                  Number of Shares
      ------------------------                  ----------------


                                                                               1


Provided, that in no event shall this option be exercisable in whole or in part
ten years from the date hereof and that the Corporation shall in no event be
obligated to issue fractional shares. The right to exercise this option and to
purchase the number of shares comprising each such installment shall be
cumulative, and once such right has become exercisable it may be exercised in
whole at any time and in part from time to time until the date of termination of
the Optionee's rights hereunder.

         2. Restriction on Exercise. Notwithstanding any other provision hereof,
this option shall not be exercised if at such time such exercise or the delivery
of certificates representing shares of Common Stock purchased pursuant hereto
shall constitute a violation of any rule of the Corporation, any provision of
any applicable Federal or State statute, rule or regulation, or any rule or
regulation of any securities exchange on which the Common Stock may be listed.

         3. Manner of Exercise. This option may be exercised with respect to all
or any part of the shares of Common Stock then subject to such exercise pursuant
to whatever procedures may be adopted by the Corporation. In the event that at
the time of such exercise the shares of Common Stock as to which this option is
exercisable have not been registered under the Securities Act of 1933, the
Optionee will make a representation that he is acquiring the shares of Common
Stock for investment only and not with a view to distribution. Subject to
compliance by the Optionee with all the terms and conditions hereof, the
Corporation or its agent shall promptly thereafter deliver to the Optionee a
certificate or certificates for such shares with all requisite transfer stamps
attached. (In the event of a cashless exercise, the Corporation or its agent
will pay to the Optionee the appropriate cash amount, less required
withholdings.)

         4. Termination of Option. This option shall terminate and may no longer
be exercised if (i) the Optionee ceases to be an employee of the Corporation or
one of its Subsidiaries or Affiliates; or (ii) the Optionee becomes an employee
of a Subsidiary that is not wholly owned, directly or indirectly, by the
Corporation; or (iii) the Optionee takes a leave of absence without
reinstatement rights, unless otherwise agreed in writing between the Corporation
(or one of its Subsidiaries or Affiliates) and the Optionee; except that

         (a) If the Optionee's employment by the Corporation (and any Subsidiary
or Affiliate) terminates by reason of death, the vesting of the option will be
accelerated and the option will remain exercisable until its expiration;


                                                                               2


         (b) If the Optionee's employment by the Corporation (and any Subsidiary
or Affiliate) terminates by reason of Disability, the option will continue to
vest in accordance with its terms and may be exercised until its expiration;
provided, however, that if the Optionee dies after such Disability the vesting
of the option will be accelerated and the option will remain exercisable until
its expiration;

         (c) Subject to Section 7(c), if the Optionee's employment by the
Corporation (and any Subsidiary or Affiliate) terminates by reason of Normal or
Early Retirement, the option will continue to vest in accordance with its terms
and may be exercised until its expiration; provided, however, that if the
Optionee dies after Retirement the vesting of the option will be accelerated and
the option will remain exercisable until its expiration;

         (d) If the Optionee's employment by the Corporation (and any Subsidiary
or Affiliate) is involuntarily terminated by the Corporation or a Subsidiary or
Affiliate (as the case may be) without Cause, the option may thereafter be
exercised, to the extent it was exercisable at the time of termination, for a
period of three months from the date of such termination of employment or until
the stated term of such option, whichever period is shorter; and

         (e) In the event of a Change in Control or a Potential Change in
Control of the Corporation, this option shall become exercisable in accordance
with the 2003 Plan, or its successor.

         5. Adjustments in Common Stock. In the event of any stock dividend,
stock split, merger, consolidation, reorganization, recapitalization or other
change in the corporate structure, appropriate adjustments may be made by the
Board in the number of shares, class or classes of securities and the price per
share.

         6. Non-Transferability of Option. Unless the Committee shall permit (on
such terms and conditions as it shall establish), an option may not be
transferred except by will or the laws of descent and distribution to the extent
provided herein. During the lifetime of the Optionee this option may be
exercised only by him or her (unless otherwise determined by the Committee).

         7. Miscellaneous.

         (a) This option (i) shall be binding upon and inure to the benefit of
any successor of the Corporation, (ii) shall be governed by the laws of the
State of Texas, and any applicable laws of the United States, and (iii) may not
be amended except in writing. No contract or right of employment shall be
implied by this option.


                                                                               3


         (b) If this option is assumed or a new option is substituted therefore
in any corporate reorganization (including, but not limited to, any transaction
of the type referred to in Section 425(a) of the Internal Revenue Code of 1986,
as amended), employment by such assuming or substituting corporation or by a
parent corporation or a subsidiary thereof shall be considered for all purposes
of this option to be employment by the Corporation.

         (c) In the event the Optionee's employment is terminated by reason of
Early or Normal Retirement and the Optionee subsequently is employed by a
competitor of the Corporation, the Corporation reserves the right, upon notice
to the Optionee, to declare the option forfeited and of no further validity.

         (d) In consideration of the employee's privilege to participate in the
Plan, the employee agrees (i) not to disclose any trade secrets of, or other
confidential/restricted information of, American Airlines, Inc. ("American") or
its Affiliates to any unauthorized party and (ii) not to make any unauthorized
use of such trade secrets or confidential or restricted information during his
or her employment with American or its Affiliates or after such employment is
terminated, and (iii) not to solicit any then current employees of American or
any other subsidiaries of the Corporation to join the employee at his or her new
place of employment after his or her employment with American or its Affiliates
is terminated.

         8. Securities Law Requirements. The Corporation shall not be required
to issue shares upon the exercise of this option unless and until (a) such
shares have been duly listed upon each stock exchange on which the Corporation's
Stock is then registered; and (b) a registration statement under the Securities
Act of 1933 with respect to such shares is then effective.

         The Board may require the Optionee to furnish to the Corporation, prior
to the issuance of any shares of Stock in connection with the exercise of this
option, an agreement, in such form as the Board may from time to time deem
appropriate, in which the Optionee represents that the shares acquired by him
upon such exercise are being acquired for investment and not with a view to the
sale or distribution thereof.

         9. Option Subject to 2003 Plan. This option shall be subject to all the
terms and provisions of the 2003 Plan and the Optionee shall abide by and be
bound by all rules, regulations and determinations of the Board now or hereafter
made in connection with the administration of the 2003 Plan. Capitalized terms
not otherwise defined herein shall have the meanings set forth for such terms in
the 2003 Plan.


                                                                               4


IN WITNESS WHEREOF, the Corporation has executed this Stock Option as of the day
and year first above written.


                                                    AMR Corporation



- ---------------------------                         ----------------------------
Optionee                                            Charles D. MarLett
                                                    Corporate Secretary



                                                                               5


                                                                   EXHIBIT 10.54

                         DEFERRED STOCK AWARD AGREEMENT

         This AGREEMENT made as of this ___________, by and between AMR
Corporation, a Delaware corporation (the "Corporation"), and _________ (the
"Officer").

         WHEREAS, the stockholders of the Corporation approved the 1998 Long
Term Incentive Plan, as amended (the "1998 Plan") at the Corporation's annual
meeting held on May 20, 1998; and

         WHEREAS, the Compensation Committee of the Board of Directors has
determined that Officer is a key executive and has further determined to make an
award of Deferred Stock to the Officer (subject to terms of the 1998 Plan and
this Agreement), as an inducement for the Officer to remain with the Corporation
(or a Subsidiary or Affiliate thereof) and to motivate the Officer during such
employment.

         NOW, THEREFORE, the Corporation and the Officer hereby agree as
follows:

         1. Grant of Award.

         The Officer is hereby granted as of ___________ (the "Grant Date") a
Deferred Stock Award (the "Award"), subject to the terms and conditions of this
Agreement, with respect to _______ shares of Common Stock, $1.00 par value, of
the Corporation (the "Stock"). The shares of Stock covered by the Award will
vest, if at all in accordance with Sections 2 and 3. VESTING DATE is hereby
established as the "Vesting Date" of the Award.

         2. Distribution of Award on and after the Vesting Date.

         Distribution of the Award on and after the Vesting Date will occur, if
at all, in accordance with the following terms and conditions:

         (a) If the Officer is on the payroll of a Subsidiary that is wholly
owned by the Corporation as of the Vesting Date, the Award will be distributed
to the Officer in accordance with the following schedule:

Number of Shares Date of Distribution Tranche ---------------- -------------------- -------
Provided, however, if the Officer's employment with the Corporation (or a Subsidiary or Affiliate thereof) is terminated after the Vesting Date but prior to the complete distribution of the Award due to the Officer's death, Disability, Retirement or termination not for Cause (each an "Early Termination"), the distribution of any portion of the Award not already distributed will be accelerated so as to occur as soon as practicable after such Early Termination. (b) In the event of a Change in Control or Potential Change in Control of the Corporation after the Vesting Date but prior to the complete distribution of the Award, the Award will be paid in accordance with the 1998 Plan or its successor. (c) Notwithstanding the terms of Section 2(a), the Award will be forfeited in its entirety if after the Vesting Date but prior to the Award's complete distribution: (i) The Officer's employment with the Corporation (or Subsidiary or Affiliate thereof) is terminated for Cause, or if the Officer terminates his/her employment with the Corporation (or Subsidiary or Affiliate thereof); (ii) The Officer becomes an employee of a Subsidiary that is not wholly owned by the Corporation; or (iii) The Officer takes a leave of absence without reinstatement rights, unless otherwise agreed in writing between the Corporation and the Officer. 3. Distribution prior to Vesting Date. (a) In the event the Officer's employment with the Corporation (or a Subsidiary or Affiliate thereof) terminates prior to the Vesting Date due to an Early Termination, the Award will be distributed on a prorata basis (as described in the second sentence of this Section 3(a)) and will be paid to the Officer (or, in the event of the Officer's death, the Officer's designated beneficiary for purposes of the Award, or in the absence of an effective beneficiary designation, the Officer's estate) as soon as practicable after such Early Termination. The prorata basis will be a percentage where (i) the numerator is the number of months from the GRANT DATE to the month of early termination, inclusive and (ii) the denominator is 36 for Tranche 1, 48 for Tranche 2 and 60 for Tranche 3. For example, assuming an Early Termination occurring in month six, and an Award of 300 shares for each of Tranche 1, Tranche 2 and Tranche 3, the payment would be made with respect to:
Months in # Months # of Tranche Plan per Tranche Shares Shares - ----------- ----------- ----------- ----------- ----------- 1 6 / 36 X 300 = 50 2 6 / 48 X 300 = 37.5 3 6 / 60 X 300 = 30 Total 117.5
(b) In the event of a Change in Control or Potential Change in Control of the Corporation prior to the Vesting Date, the Award will be paid in accordance with the 1998 Plan or its successor. (c) The Award will be forfeited in its entirety if prior to the Vesting Date: (i) The Officer's employment with the Corporation (or and Subsidiary or Affiliate thereof) is terminated for Cause, or if the Officer terminates his employment with the Corporation (or any Subsidiary or Affiliate thereof); (ii) The Officer becomes an employee of a Subsidiary that is not wholly owned, directly or indirectly, by the Corporation; or (iii) The Officer takes a leave of absence without reinstatement rights, unless otherwise agreed in writing between the Corporation and the Officer 4. Transfer Restrictions. Unless otherwise permitted by the CEO, this award is non-transferable other than by will or by the laws of descent and distribution, and may not be assigned, pledged or hypothecated and will not be subject to execution, attachment or similar process. Upon any attempt by the Officer (or the Officer's successor in the interest after the Officer's death) to effect any such disposition, or upon the levy of any such process, the Award may immediately become null and void, at the discretion of the CEO. 5. Miscellaneous. This Agreement (a) will be binding upon and inure to the benefit of any successor of the Corporation, (b) will be governed by the laws of the State of Texas and any applicable laws of the United States, and (c) may not be amended without the written consent of both the Corporation and the Officer. No contract or right of employment will be implied by this Agreement. In the event Officer does not forward to the Corporation, within the applicable period, required taxes with respect to any Award distributed pursuant to this Agreement, the Corporation may withhold from any payments to by made to the Officer by the Corporation (or any Subsidiary or Affiliate thereof) an amount(s) equal to such taxes. 6. Adjustments in Awards. In the event of a Stock dividend, Stock split, merger consolidation, re-organization, re-capitalization or other change in the corporate structure of the Company, appropriate adjustments may be made by the Board of Directors in the number of shares awarded. 7. Securities Law Requirements. The Corporation will not be required to issue Stock pursuant to this Award unless and until (a) such shares have been duly listed upon each stock exchange on which the Corporation's Stock is registered; and (b) a registration statement under the Securities Act of 1933 with respect to such shares is then effective. The CEO may require the Officer to furnish to the Corporation, prior to distribution of the Stock in connection with this Award, an agreement, in such form as the CEO may from time to time deem appropriate, in which the Officer represents that the shares acquired by him/her under the Award are being acquired for investment and not with a view to the sale or distribution thereof. 8. Incorporation of 1998 Plan Provisions. This agreement is made pursuant to the 1998 Plan and is subject to all of the terms and provisions of the 1998 Plan as if the same were fully set forth herein. Capitalized terms not otherwise defined herein will have the meanings set forth for such terms in the 1998 Plan, as amended. IN WITNESS HEREOF, the Officer and the Corporation have executed this Deferred Stock Agreement as of the day and year first above written. Officer AMR CORPORATION - ------------------------------ ------------------------------- Charles D. MarLett Corporate Secretary

                                                                   EXHIBIT 10.60

                     2003 - 2005 PERFORMANCE UNIT AGREEMENT

         This performance unit agreement ("Agreement") is made this ____ day of
____ 2003, by and between AMR Corporation, a Delaware corporation (the
"Corporation"), and _____________ (the "Employee" or "Recipient"), employee
number ________.

         WHEREAS, pursuant to the Performance Unit Program (the "Program")
adopted by the Board of Directors of the Corporation (the "Board"), the Board
has determined to make a Program grant to the Employee of performance units
(subject to the terms of the 2003 Performance Unit Plan (the "2003 Unit Plan")
and this Agreement), as an inducement for the Employee to remain an employee of
the Corporation (or a Subsidiary of Affiliate thereof), and to retain and
motivate such Employee during such employment.

         This Agreement sets forth the terms and conditions attendant to the
performance units granted under the 2003 Unit Plan.

         1. Grant of Award. The Recipient is hereby granted as of ______, (the
"Grant Date") performance units (the "Award"), subject to the terms and
conditions of this Agreement with respect to _____ performance units
(collectively, the "Units"). The Units covered by the Award shall vest, if at
all, in accordance with Section 2. On the date the Units vest (if at all),
Recipient will receive, net of applicable withholding or applicable social
security taxes, a payment representing the product of (i) the number of vested
Units and (ii) the average of the high and low price of the Corporation's Common
Stock, $1.00 par value per share, on a date chosen by the Board, which date
shall be as soon as practicable after the end of the Measurement Period (as
defined below).

         2. Vesting.

         (a) The Units will vest, if at all, in accordance with Schedule A,
attached hereto and made a part of this Agreement.

         (b) In the event Recipient's employment with the Corporation (or a
Subsidiary or Affiliate thereof) is terminated prior to the end of the three
year measurement period set forth in Schedule A (the "Measurement Period") due
to the Recipient's death, Disability, Retirement or termination not for Cause
(each an "Early Termination") the Award will vest, if at all, on a prorata basis
and will be paid to the Employee (or, in the event of the Employee's death, the
Employee's designated beneficiary for purposes of the Award, or in the absence
of an effective beneficiary designation, the Employee's estate). The prorata
shares will be a percentage where the denominator is 36 and the numerator is the
number of months from January 1, 2003 through the month of Early Termination,
inclusive. The Award will be paid to the Recipient at or around the same time as
payments are made to then current employees who have been granted Units under
the 2003 Unit Plan.

                                                                               1


         (c) In the event Recipient's employment with the Corporation (or any
Subsidiary or Affiliate thereof) is terminated for Cause, or if the Recipient
terminates his/her employment with the Corporation (or any Subsidiary or
Affiliate thereof), each occurring prior to the payment contemplated by this
Agreement, the Award shall be forfeited in its entirety.

         (d) If prior to the payment contemplated by this Agreement, the
Recipient becomes an employee of a Subsidiary that is not wholly owned, directly
or indirectly, by the Corporation, or if the Recipient begins a leave of absence
without reinstatement rights, then in each case the Award shall be forfeited in
its entirety.

         (e) In the event of a Change in Control or Potential Change in Control
of the Corporation, the Award shall vest in accordance with the 2003 Unit Plan,
or its successor.

         3. Transfer Restrictions. This Award is non-transferable otherwise than
by will or by the laws of descent and distribution, and may not otherwise be
assigned, pledged or hypothecated and shall not be subject to execution,
attachment or similar process. Upon any attempt by the Recipient (or the
Recipient's successor in interest after the Recipient's death) to effect any
such disposition, or upon the levy of any such process, the Award may
immediately become null and void, at the discretion of the Board.

         4. Miscellaneous. This Agreement (a) shall be binding upon and inure to
the benefit of any successor of the Corporation, (b) shall be governed by the
laws of the State of Texas and any applicable laws of the United States, and (c)
may not be amended without the written consent of both the Corporation and the
Recipient. No contract or right of employment shall be implied by this
Agreement.

                  In consideration of the employee's privilege to participate in
the Plan, the employee agrees (i) not to disclose any trade secrets of, or other
confidential/restricted information of, American Airlines, Inc. ("American") or
its Affiliates to any unauthorized party and (ii) not to make any unauthorized
use of such trade secrets or confidential or restricted information during his
or her employment with American or its Affiliates or after such employment is
terminated, and (iii) not to solicit any then current employees of American or
any other Subsidiaries of the Corporation to join the employee at his or her new
place of employment after his or her employment with American or its Affiliates
is terminated.

         5. Adjustments in Awards. In the event of a Stock dividend, Stock
split, merger, consolidation, re-organization, re-capitalization or other change
in the corporate structure of the Corporation, appropriate adjustments may be
made by the Board of Directors in the number of shares awarded.


                                                                               2


         6. Incorporation of 1998 Plan Provisions. Capitalized terms not
otherwise defined herein (inclusive of Schedule A) shall have the meanings set
forth for such terms in the Corporation's 1998 Long Term Incentive Plan, as
amended.

                  IN WITNESS HEREOF, the Recipient and the Corporation have
executed this Performance Unit Agreement as of the day, month and year set forth
above.

RECIPIENT                                          AMR CORPORATION



- -----------------------------                      -----------------------------
                                                   Charles D. MarLett
                                                   Corporate Secretary


                                                                               3


                        2003 - 2005 PERFORMANCE UNIT PLAN
                         FOR OFFICERS AND KEY EMPLOYEES

Purpose

The purpose of the 2003 - 2005 AMR Corporation Performance Unit Plan ("Plan")
for Officers and Key Employees is to provide greater incentive to officers and
key employees of the subsidiaries and affiliates of AMR Corporation ("AMR" or
"the Corporation") to achieve the highest level of individual performance and to
meet or exceed specified goals which will contribute to the success of the
Corporation.

Definitions

For purposes of the Plan, the following definitions will control:

"Affiliate" is defined as a subsidiary of AMR or any entity that is designated
by the Committee as a participating employer under the Plan, provided that AMR
directly or indirectly owns at least 20% of the combined voting power of all
classes of stock of such entity.

"Committee" is defined as the Compensation Committee, or its successor, of the
AMR Board of Directors.

"Comparator Group" is defined as the six major U.S. based carriers including AMR
Corporation, Continental Airlines, Inc., Delta Air Lines, Inc., Northwest
Airlines Corp., Southwest Airlines Co., and UAL Corporation.

"Measurement Period" is defined as the three year period beginning January 1,
2003 and ending December 31, 2005.

"Total Shareholder Return (TSR)" is defined as the rate of return reflecting
stock price appreciation plus reinvestment of dividends over the Measurement
Period. The average Daily Closing Stock Price (adjusted for splits and
dividends) for the three months prior to the beginning and ending points of the
Measurement Period will be used to smooth out market fluctuations.

"Daily Closing Stock Price" is defined as the stock price at the close of
trading (4:00 PM EST) of the National Exchange on which the stock is traded.

"National Exchange" is defined as either the New York Stock Exchange (NYSE), the
National Association of Stock Dealers and Quotes (NASDAQ), or the American Stock
Exchange (AMEX).


                                                                               4


Accumulation of Units

         Any payment under the Plan will be determined by (i) the Corporation's
TSR rank within the Comparator Group and (ii) the terms and conditions of the
award agreement between the Corporation and the employee. The distribution
percentage of target units, based on rank, is specified below:

Granted Shares - Percent of Target Based on Rank - ----------------- -------------- --------------- -------------- -------------- --------------- ------------ Rank 6 5 4 3 2 1 Payout % 0% 50% 75% 100% 135% 175%
In the event that a carrier (or carriers) in the Comparator Group ceases to trade on a National Exchange at any point in the Measurement Period, the following distribution percentage of target units, based on rank and the number of remaining comparators, will be used accordingly. 5 Comparators
Granted Units - Percent of Target Based on Rank - ----------------- -------------- --------------- -------------- -------------- ------------- Rank 5 4 3 2 1 Payout % 50% 75% 100% 135% 175%
4 Comparators
Granted Units - Percent of Target Based on Rank - ----------------- -------------- --------------- -------------- ------------ Rank 4 3 2 1 Payout % 75% 100% 135% 175%
3 Comparators
Granted Units - Percent of Target Based on Rank - -------------------- ----------------- ----------------- ---------------- Rank 3 2 1 Payout % 50% 135% 175%
5 Administration The Committee shall have authority to administer and interpret the Plan, establish administrative rules, approve eligible participants, and take any other action necessary for the proper and efficient operation of the Plan. The distribution percentage of units, if any, will be determined based on an audit of AMR's TSR rank by the General Auditor of American Airlines, Inc. A summary of awards under the Plan shall be provided to the Board of Directors at the first regular meeting following determination of the awards. THE AWARDS WILL BE PAID IN CASH. General Neither this Plan nor any action taken hereunder shall be construed as giving any employee or participant the right to be retained in the employ of American Airlines, Inc. or an Affiliate. Nothing in the Plan shall be deemed to give any employee any right, contractually or otherwise, to participate in the Plan or in any benefits hereunder, other than the right to receive an award as may have been expressly awarded by the Committee subject to the terms and conditions of the award agreement between the Corporation and the employee. In the event of any act of God, war, natural disaster, aircraft grounding, revocation of operating certificate, terrorism, strike, lockout, labor dispute, work stoppage, fire, epidemic or quarantine restriction, act of government, critical materials shortage, or any other act beyond the control of the Corporation, whether similar or dissimilar, (each a "Force Majeure Event"), which Force Majeure Event affects the Corporation or its Subsidiaries or its Affiliates, the Committee, in its sole discretion, may (i) terminate or (ii) suspend, delay, defer (for such period of time as the Committee may deem necessary), or substitute any awards due currently or in the future under the Plan, including, but not limited to, any awards that have accrued to the benefit of participants but have not yet been paid. In consideration of the employee's privilege to participate in the Plan, the employee agrees (i) not to disclose any trade secrets of, or other confidential/restricted information of, American Airlines, Inc. or its Affiliates to any unauthorized party and, (ii) not to make any unauthorized use of such trade secrets or confidential or restricted information during his or her employment with American Airlines, Inc. or its Affiliates or after such employment is terminated, and (iii) not to solicit any then current employees of American Airlines, Inc. or any other Subsidiaries of the Corporation to join the employee at his or her new place of employment after his or her employment with American Airlines, Inc. or its Affiliates is terminated. The Committee may amend, suspend, or terminate the Plan at any time. 6

                                                                   EXHIBIT 10.71


                              AMENDED AND RESTATED
                    EXECUTIVE TERMINATION BENEFITS AGREEMENT


         THIS AMENDED AND RESTATED EXECUTIVE TERMINATION BENEFITS AGREEMENT
(this "Agreement"), dated as of the 20th day of May, 2003 is among AMR
CORPORATION, a Delaware corporation, AMERICAN AIRLINES, INC., a Delaware
corporation (collectively the "Company"), and ROBERT W. REDING (the
"Executive").

                                   WITNESSETH:

         WHEREAS, the Company considers it essential to the best interests of
the Company and its stockholders that its management be encouraged to remain
with the Company and to continue to devote full attention to the Company's
business in the event an effort is made to obtain control of the Company through
a tender offer or otherwise;

         WHEREAS, the Company recognizes that the possibility of a change in
control and the uncertainty and questions which it may raise among management
may result in the departure or distraction of management personnel to the
detriment of the Company and its stockholders;

         WHEREAS, the Company's Board of Directors (the "Board") has determined
that appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of members of the Company's management to their
assigned duties without distraction in the face of the potentially disturbing
circumstances arising from the possibility of a change in control of the
Company;

         WHEREAS, the Executive is a key Executive of the Company;



         WHEREAS, the Company believes the Executive has made valuable
contributions to the productivity and profitability of the Company;

         WHEREAS, should the Company receive any proposal from a third person
concerning a possible business combination with or acquisition of equity
securities of the Company, the Board believes it imperative that the Company and
the Board be able to rely upon the Executive to continue in his position, and
that the Company be able to receive and rely upon his advice as to the best
interests of the Company and its stockholders without concern that he might be
distracted by the personal uncertainties and risks created by such a proposal;
and

         WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposals, advise management and the Board as to whether such
proposals would be in the best interests of the Company and its stockholders,
and to take such other actions as the Board might determine to be appropriate.

         NOW, THEREFORE, to assure the Company that it will have the continued
undivided attention and services of the Executive and the availability of his
advice and counsel notwithstanding the possibility, threat or occurrence of a
bid to take over control of the Company, and to induce the Executive to remain
in the employ of the Company, and for other good and valuable consideration, the
Company and the Executive agree as follows:

         1. Change in Control

         For purposes of this Agreement, a Change in Control of the Company
shall be deemed to have taken place if:

                  (a) any person as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended from time to time (the "Exchange Act"), and as
used in Sections 13(d) and


                                       2


14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange
Act (a "Person"), but excluding the Company, any subsidiary of the Company and
any employee benefit plan sponsored or maintained by the Company or any
subsidiary of the Company (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the "beneficial owner" (as defined in
Rule 13(d)-3 under the Exchange Act, as amended from time to time) of securities
of the Company representing 15% or more of the combined voting power of the
Company's then outstanding securities; or

                  (b) individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or

                  (c) consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets of the
Company or the acquisition of the assets of another corporation (a "Business
Combination"), in each case, unless, following such Business Combination, (i)
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the then outstanding shares of common stock of the
Company and the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors
immediately prior to such Business Combination


                                       3


beneficially own, directly or indirectly, more than 60% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries), (ii) no Person
(excluding any employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 15% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination, and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Incumbent Board, providing for
such Business Combination; or

                  (d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.

         2. Circumstances Triggering Receipt of Severance Benefits

                  (a) Subject to Section 2(c), the Company will provide the
Executive with the benefits set forth in Section 4 upon any termination of the
Executive's employment:

                           (i) by the Company at any time within the first 24
                  months after a Change in Control;


                                       4


                           (ii) by the Executive for "Good Reason" (as defined
                  in Section 2(b) below) at any time within the first 24 months
                  after a Change in Control;

                           (iii) by the Executive pursuant to Section 2(d); or

                           (iv) by the Company or the Executive pursuant to
                  Section 2(e).

                  (b) In the event of the occurrence of a Change in Control, the
Executive may terminate employment with the Company and/or any subsidiary for
"Good Reason" with the right to benefits set forth in Section 4 upon the
occurrence of one or more of the following events (regardless of whether any
other reason, other than Cause as provided below, for such termination exists or
has occurred, including without limitation other employment):

                           (i) Failure to elect or reelect or otherwise to
                  maintain the Executive in the office or the position, or a
                  substantially equivalent office or position, of or with the
                  Company and/or a subsidiary, as the case may be, which the
                  Executive held immediately prior to a Change in Control, or
                  the removal of the Executive as a director of the Company
                  and/or a subsidiary (or any successor thereto) if the
                  Executive shall have been a director of the Company and/or a
                  subsidiary immediately prior to the Change in Control;

                           (ii) (A) A significant adverse change in the nature
                  or scope of the authorities, powers, functions,
                  responsibilities or duties attached to the position with the
                  Company and/or any subsidiary which the Executive held
                  immediately prior to the Change in Control, (B) a reduction in
                  the aggregate of the Executive's annual base salary rate and
                  annual incentive compensation target to be received from the
                  Company and/or any subsidiary, or (C) the termination or
                  denial of the Executive's rights to Employee Benefits (as
                  defined below) or a reduction in the


                                       5


                  scope or value thereof, any of which is not remedied by the
                  Company within 10 calendar days after receipt by the Company
                  of written notice from the Executive of such change, reduction
                  or termination, as the case may be;

                           (iii) A determination by the Executive (which
                  determination will be conclusive and binding upon the parties
                  hereto provided it has been made in good faith and in all
                  events will be presumed to have been made in good faith unless
                  otherwise shown by the Company by clear and convincing
                  evidence) that a change in circumstances has occurred
                  following a Change in Control, including, without limitation,
                  a change in the scope of the business or other activities for
                  which the Executive was responsible immediately prior to the
                  Change in Control, which has rendered the Executive
                  substantially unable to carry out, has substantially hindered
                  Executive's performance of, or has caused the Executive to
                  suffer a substantial reduction in, any of the authorities,
                  powers, functions, responsibilities or duties attached to the
                  position held by the Executive immediately prior to the Change
                  in Control, which situation is not remedied within 10 calendar
                  days after written notice to the Company from the Executive of
                  such determination;

                           (iv) The liquidation, dissolution, merger,
                  consolidation or reorganization of the Company or transfer of
                  all or substantially all of its business and/or assets, unless
                  the successor or successors (by liquidation, merger,
                  consolidation, reorganization, transfer or otherwise) to which
                  all or substantially all of its business and/or assets have
                  been transferred (directly or by operation of


                                       6


                  law) assumed all duties and obligations of the Company under
                  this Agreement pursuant to Section 9(a);

                           (v) The Company relocates its principal executive
                  offices, or requires the Executive to have his principal
                  location of work changed, to any location that is in excess of
                  50 miles from the location thereof immediately prior to the
                  Change in Control, or requires the Executive to travel away
                  from his office in the course of discharging his
                  responsibilities or duties hereunder at least 20% more (in
                  terms of aggregate days in any calendar year or in any
                  calendar quarter when annualized for purposes of comparison to
                  any prior year) than was required of Executive in any of the
                  three full years immediately prior to the Change in Control
                  without, in either case, his prior written consent; or

                           (vi) Without limiting the generality or effect of the
                  foregoing, any material breach of this Agreement by the
                  Company or any successor thereto, which breach is not remedied
                  within 10 calendar days after written notice to the Company
                  from the Executive describing the nature of such breach.

                  (c) Notwithstanding Sections 2(a) and (b) above, no benefits
shall be payable by reason of this Agreement in the event of:

                           (i) Termination of the Executive's employment with
                  the Company and its subsidiaries by reason of the Executive's
                  death or Disability, provided that the Executive has not
                  previously given a valid "Notice of Termination" pursuant to
                  Section 3. For purposes hereof, "Disability" shall be defined
                  as the inability of Executive due to illness, accident or
                  other physical or mental disability to perform his duties for
                  any period of six consecutive months or for any period of
                  eight


                                       7


                  months out of any 12-month period, as determined by an
                  independent physician selected by the Company and reasonably
                  acceptable to the Executive (or his legal representative),
                  provided that the Executive does not return to work on
                  substantially a full-time basis within 30 days after written
                  notice from the Company, pursuant to Section 3, of an intent
                  to terminate the Executive's employment due to Disability;

                           (ii) Termination of the Executive's employment with
                  the Company and its subsidiaries on account of the Executive's
                  retirement at or after age 65, pursuant to the Company's
                  Retirement Benefit Plan; or

                           (iii) Termination of the Executive's employment with
                  the Company and its subsidiaries for Cause. For the purposes
                  hereof, "Cause" shall be defined as a felony conviction of the
                  Executive or the failure of the Executive to contest
                  prosecution for a felony, or the Executive's wilful misconduct
                  or dishonesty, any of which is directly and materially harmful
                  to the business or reputation of the Company or any subsidiary
                  or affiliate. Notwithstanding the foregoing, the Executive
                  shall not be deemed to have been terminated for "Cause"
                  hereunder unless and until there shall have been delivered to
                  the Executive a copy of a resolution duly adopted by the
                  affirmative vote of not less than three quarters of the Board
                  then in office at a meeting of the Board called and held for
                  such purpose, after reasonable notice to the Executive and an
                  opportunity for the Executive, together with his counsel (if
                  the Executive chooses to have counsel present at such
                  meeting), to be heard before the Board, finding that, in the
                  good faith opinion of the Board, the Executive had committed
                  an act constituting


                                       8


                  "Cause" as herein defined and specifying the particulars
                  thereof in detail. Nothing herein will limit the right of the
                  Executive or his beneficiaries to contest the validity or
                  propriety of any such determination.

         This Section 2(c) shall not preclude the payment of any amounts
otherwise payable to the Executive under any of the Company's employee benefit
plans, stock plans, programs and arrangements and/or under any Employment
Agreement.

                  (d) Notwithstanding anything contained in this Agreement to
the contrary, in the event of a Change in Control, the Executive may terminate
employment with the Company and any subsidiary for any reason, or without
reason, by providing Notice of Termination pursuant to Section 3 during the
30-day period immediately following the first anniversary of the first
occurrence of a Change in Control with the right to the benefits set forth in
Section 4.

                  (e) Any termination of employment of the Executive, including
a termination for "Good Reason," but excluding a termination for "Cause," or the
removal of the Executive from the office or position in the Company or any
subsidiary that occurs (i) not more than 180 days prior to the date on which a
Change in Control occurs and (ii) following the commencement of any discussion
with a third person that ultimately results in a Change in Control shall be
deemed to be a termination or removal of the Executive after a Change in Control
for purposes of this Agreement.

         3. Notice of Termination

         Any termination of the Executive's employment with the Company and its
subsidiaries as contemplated by Section 2 shall be communicated by written
"Notice of Termination" to the other party hereto. Any "Notice of Termination"
shall indicate the effective date of termination which shall not be less than 30
days or more than 60 days after the date the Notice of


                                       9


Termination is delivered (the "Termination Date"), the specific provision in
this Agreement relied upon, and, except for a termination pursuant to Section
2(d), will set forth in reasonable detail the facts and circumstances claimed to
provide a basis for such termination including, if applicable, the failure after
provision of written notice by the Executive to effect a remedy pursuant to the
final clause of Section 2(b)(ii), 2(b)(iii) or 2(b)(vi).

         4. Termination Benefits

         Subject to the conditions set forth in Section 2, the following
benefits shall be paid or provided to the Executive:

                  (a) Compensation

                  The Company shall pay to the Executive three times the sum of
(i) "Base Pay", which shall be an amount equal to the greater of (A) the
Executive's effective annual base salary at the Termination Date or (B) the
Executive's effective annual base salary immediately prior to the Change in
Control, plus (ii) "Incentive Pay" equal to the greater of (x) the target annual
bonus payable to the Executive under the Company's Incentive Compensation Plan
or any other annual bonus plan for the fiscal year of the Company in which the
Change in Control occurred or (y) the highest annual bonus earned by the
Executive under the Company's Incentive Compensation Plan or any other annual
bonus plan (whether paid currently or on a deferred basis) with respect to any
12 consecutive month period during the three fiscal years of the Company
immediately preceding the fiscal year of the Company in which the Change in
Control occurred, plus (iii) "Performance Returns" equal to the highest annual
payment of performance returns paid to the Executive with respect to any 12
consecutive month period during the three fiscal years of the Company
immediately preceding the fiscal year of the Company in which the Change in
Control occurred.

                                       10


                  (b) Welfare Benefits

                  For a period of 36 months following the Termination Date (the
"Continuation Period"), the Company shall arrange to provide the Executive with
benefits, including travel accident, major medical, dental, vision care and
other welfare benefit programs in effect immediately prior to the Change in
Control ("Employee Benefits") substantially similar to those that the Executive
was receiving or entitled to receive immediately prior to the Termination Date
(or, if greater, immediately prior to the reduction, termination, or denial
described in Section 2(b)(ii)(C)). If and to the extent that any benefit
described in this Section 4(b) is not or cannot be paid or provided under any
policy, plan, program or arrangement of the Company or any subsidiary, as the
case may be, then the Company will itself pay or provide for the payment to the
Executive, his dependents and beneficiaries, of such Employee Benefits along
with, in the case of any benefit which is subject to tax because it is not or
cannot be paid or provided under any such policy, plan, program or arrangement
of the Company or any subsidiary, an additional amount such that after payment
by the Executive, or his dependents or beneficiaries, as the case may be, of all
taxes so imposed, the recipient retains an amount equal to such taxes. Employee
Benefits otherwise receivable by the Executive pursuant to this Section 4(b)
will be reduced to the extent comparable welfare benefits are actually received
by the Executive from another employer during the Continuation Period, and any
such benefits actually received by the Executive shall be reported by the
Executive to the Company.

                  (c) Retirement Benefits

                  The Executive shall be deemed to be completely vested in
Executive's currently accrued benefits under the Company's Retirement Benefit
Plan and Supplemental Executive Retirement Plan ("SERP") in effect as of the
date of Change in Control (collectively, the


                                       11


"Plans"), regardless of his actual vesting service credit thereunder. In
addition, the Executive shall be deemed to earn service credit for benefit
calculation purposes thereunder for the Continuation Period. Benefits under the
Plans will become payable at any time designated by the Executive following
termination of the Executive's employment with the Company and its subsidiaries
after the Executive reaches age 55, subject to the terms of the Plans regarding
the actuarial adjustment of benefit payments commencing prior to normal
retirement age. The benefits to be paid pursuant to the Plans shall be
calculated as though the Executive's compensation rate for each of the five
years immediately preceding his retirement equaled the sum of Base Pay plus
Incentive Pay plus Performance Returns. Any benefits payable pursuant to this
Section 4(c) that are not payable out of the Plans for any reason (including but
not limited to any applicable benefit limitations under the Employee Retirement
Income Security Act of 1974, as amended, or any restrictions relating to the
qualification of the Company's Retirement Benefit Plan under Section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code")) shall be paid
directly by the Company out of its general assets.

                  (d) Relocation Benefits

                  If the Executive moves his residence in order to pursue other
business or employment opportunities during the Continuation Period and requests
in writing that the Company provide relocation services, he will be reimbursed
for any expenses incurred in that initial relocation (including taxes payable on
the reimbursement) which are not reimbursed by another employer. Benefits under
this provision will include assistance in selling the Executive's home and all
other assistance and benefits which were customarily provided by the Company to
transferred executives prior to the Change in Control.

                                       12


                  (e) Executive Outplacement Counseling

                  At the request of the Executive made in writing during the
Continuation Period, the Company shall engage an outplacement counseling service
of national reputation to assist the Executive in obtaining employment.

                  (f) Stock Based Compensation Plans

                           (i) Any issued and outstanding Stock Options (to the
                  extent they have not already become exercisable) shall become
                  exercisable as of the date on which the Change in Control
                  occurs, unless otherwise specifically provided at the time
                  such options are granted.

                           (ii) The Company's right to rescind any award of
                  stock to the Executive under the Company's 1988 Long Term
                  Incentive Plan or the Company's 1998 Long Term Incentive Plan
                  (or any successor plan) shall terminate upon a Change in
                  Control, and all restrictions on the sale, pledge,
                  hypothecation or other disposition of shares of stock awarded
                  pursuant to such plan shall be removed at the Termination
                  Date, unless otherwise specifically provided at the time such
                  award(s) are made.

                           (iii) The Executive's rights under any other stock
                  based compensation plan shall vest (to the extent they have
                  not already vested) and any performance criteria shall be
                  deemed met at target as of the date on which a Change in
                  Control occurs, unless otherwise specifically provided at the
                  time such right(s) are granted.

                  (g) Split Dollar Life Insurance

                  The Company shall pay to the Executive a lump sum equal to the
cost on the Termination Date of purchasing, at standard independent insurance
premium rates, an individual


                                       13


paid up insurance policy providing benefits equal to the benefits provided by
the Company's Split Dollar Life Insurance coverage immediately prior to the date
of the Change in Control.

                  (h) Other Benefits

                           (i) The Executive shall have all flight privileges
                  provided by the Company to Directors as of the date of Change
                  in Control until the Executive reaches age 55, at which time
                  he shall have all flight privileges provided by the Company to
                  its retirees who held the same or similar position as the
                  Executive immediately prior to the Change in Control.

                           (ii) The Executive, at the Executive's option, shall
                  be entitled to continue the use of the Executive's
                  Company-provided automobile during the Continuation Period
                  under the same terms that applied to the automobile
                  immediately prior to the Change in Control, or to purchase the
                  automobile at its book value as of the Termination Date.

                           (iii) The Company shall pay to the Executive an
                  amount equal to the cost to the Company of providing any other
                  perquisites and benefits of the Company in effect immediately
                  prior to the Change in Control, calculated as if such benefits
                  were continued during the Continuation Period.

                  (i) Accrued Amounts

                  The Company shall pay to the Executive all other amounts
accrued or earned by the Executive through the Termination Date and amounts
otherwise owing under the then existing plans and policies of the Company,
including but not limited to all amounts of compensation previously deferred by
the Executive (together with any accrued interest thereon) and not yet paid by
the Company, and any accrued vacation pay not yet paid by the Company.

                                       14


                  (j) The Company shall pay to the Executive the amounts due
pursuant to Sections 4(a), 4(g) and 4(h)(iii) in a lump sum on the first
business day of the month following the Termination Date. The Company shall pay
to the Executive the amounts due pursuant to Section 4(i) in accordance with the
terms and conditions of the existing plans and policies of the Company.

         5. Certain Additional Payments by the Company.

                  (a) Anything in this Agreement to the contrary
notwithstanding, but subject to Section 5(h), in the event that this Agreement
shall become operative and it shall be determined (as hereafter provided) that
any payment (other than the Gross-Up payments provided for in this Section 5) or
distribution by the Company or any of its subsidiaries to or for the benefit of
the Executive, whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise pursuant to or by reason of any
other agreement, policy, plan, program or arrangement, including without
limitation any stock option, stock appreciation right or similar right,
restricted stock, deferred stock or the lapse or termination of any restriction
on, deferral period or the vesting or exercisability of any of the foregoing (a
"Payment"), would be subject to the excise tax imposed by Section 4999 of the
Code (or any successor provision thereto) by reason of being considered
"contingent on a change in ownership or control" of the Company, within the
meaning of Section 280G of the Code (or any successor provision thereto) or to
any similar tax imposed by state or local law, or any interest or penalties with
respect to such tax (such tax or taxes, together with any such interest and
penalties, being hereafter collectively referred to as the "Excise Tax"), then
the Executive shall be entitled to receive an additional payment or payments
(collectively, a "Gross-Up Payment"). The Gross-Up Payment shall be in an amount
such that, after payment by the Executive of all taxes (including any interest
or


                                       15


penalties imposed with respect to such taxes), including any Excise Tax and any
income tax imposed upon the Gross-Up Payment, the Executive retains an amount of
the Gross-Up Payment equal to the Excise Tax imposed upon the Payment.

                  (b) Subject to the provisions of Section 5(f), all
determinations required to be made under this Section 5, including whether an
Excise Tax is payable by the Executive and the amount of such Excise Tax and
whether a Gross-Up Payment is required to be paid by the Company to the
Executive and the amount of such Gross-Up Payment, if any, shall be made by a
nationally recognized accounting firm (the "Accounting Firm") selected by the
Executive in his sole discretion. The Executive shall direct the Accounting Firm
to submit its determination and detailed supporting calculations to both the
Company and the Executive within 30 calendar days after the Change in Control
Date, the Termination Date, if applicable, and any such other time or times as
may be requested by the Company or the Executive. If the Accounting Firm
determines that any Excise Tax is payable by the Executive, the Company shall
pay the required Gross-Up Payment to the Executive within five business days
after receipt of such determination and calculations with respect to any Payment
to the Executive. If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall, at the same time as it makes such
determination, furnish the Company and the Executive an opinion that the
Executive has substantial authority not to report any Excise Tax on his federal,
state or local income or other tax return. As a result of the uncertainty in the
application of Section 4999 of the Code (or any successor provision thereto) and
the possibility of similar uncertainty regarding applicable state or local tax
law at the time of any determination by the Accounting Firm hereunder, it is
possible that Gross-Up Payments which will not have been made by the Company
should have been made (an "Underpayment"), consistent with the calculations
required to be made hereunder. In the


                                       16


event that the Company exhausts or fails to pursue its remedies pursuant to
Section 5(f) and the Executive thereafter is required to make a payment of any
Excise Tax, the Executive shall direct the Accounting Firm to determine the
amount of the Underpayment that has occurred and to submit its determination and
detailed supporting calculations to both the Company and the Executive as
promptly as possible. Any such Underpayment shall be promptly paid by the
Company to, or for the benefit of, the Executive within five business days after
receipt of such determination and calculations.

                  (c) The Company and the Executive shall each provide the
Accounting Firm access to and copies of any books, records and documents in the
possession of the Company or the Executive, as the case may be, reasonably
requested by the Accounting Firm, and otherwise cooperate with the Accounting
Firm in connection with the preparation and issuance of the determinations and
calculations contemplated by Section 5(b). Any determination by the Accounting
Firm as to the amount of the Gross-Up Payment shall be binding upon the Company
and the Executive.

                  (d) The federal, state and local income or other tax returns
filed by the Executive shall be prepared and filed on a consistent basis with
the determination of the Accounting Firm with respect to the Excise Tax payable
by the Executive. The Executive shall make proper payment of the amount of any
Excise Payment, and at the request of the Company, provide to the Company true
and correct copies (with any amendments) of his federal income tax return as
filed with the Internal Revenue Service and corresponding state and local tax
returns, if relevant, as filed with the applicable taxing authority, and such
other documents reasonably requested by the Company, evidencing such payment. If
prior to the filing of the Executive's federal income tax return, or
corresponding state or local tax return, if relevant, the Accounting


                                       17


Firm determines that the amount of the Gross-Up Payment should be reduced, the
Executive shall within five business days pay to the Company the amount of such
reduction.

                  (e) The fees and expenses of the Accounting Firm for its
services in connection with the determinations and calculations contemplated by
Section 5(b) shall be borne by the Company. If such fees and expenses are
initially paid by the Executive, the Company shall reimburse the Executive the
full amount of such fees and expenses within five business days after receipt
from the Executive of a statement therefor and reasonable evidence of his
payment thereof.

                  (f) The Executive shall notify the Company in writing of any
claim by the Internal Revenue Service or any other taxing authority that, if
successful, would require the payment by the Company of a Gross-Up Payment or
any additional Gross-Up Payment. Such notification shall be given as promptly as
practicable but no later than 10 business days after the Executive actually
receives notice of such claim and the Executive shall further apprise the
Company of the nature of such claim and the date on which such claim is
requested to be paid (in each case, to the extent known by the Executive). The
Executive shall not pay such claim prior to the earlier of (x) the expiration of
the 30-calendar-day period following the date on which he gives such notice to
the Company and (y) the date that any payment of amount with respect to such
claim is due. If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the Executive
shall:

                           (i) provide the Company with any written records or
                  documents in his possession relating to such claim reasonably
                  requested by the Company;

                           (ii) take such action in connection with contesting
                  such claim as the Company shall reasonably request in writing
                  from time to time, including without


                                       18


                  limitation accepting legal representation with respect to such
                  claim by an attorney competent in respect of the subject
                  matter and reasonably selected by the Company;

                           (iii) cooperate with the Company in good faith in
                  order effectively to contest such claim; and

                           (iv) permit the Company to participate in any
                  proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold harmless the Executive, on an after-tax
basis, for and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such contest and payment
of costs and expenses. Without limiting the foregoing provisions of this Section
5(f), the Company shall control all proceedings taken in connection with the
contest of any claim contemplated by this Section 5(f) and, at its sole option,
may pursue or forego any and all administrative appeals, proceedings, hearings
and conferences with the taxing authority in respect of such claim (provided,
however, that the Executive may participate therein at his own cost and expense)
and may, at its option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a determination before any
administrative tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine; provided, however, that if the
Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any


                                       19


Excise Tax or income or other tax, including interest or penalties with respect
thereto, imposed with respect to such advance; and provided further, however,
that any extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which the contested amount
is claimed to be due is limited solely to such contested amount. Furthermore,
the Company's control of any such contested claim shall be limited to issues
with respect to which a Gross-Up Payment would be payable hereunder and the
Executive shall be entitled to settle or contest, as the case may be, any other
issue raised by the Internal Revenue Service or any other taxing authority.

                  (g) If, after the receipt by the Executive of an amount
advanced by the Company pursuant to Section 5(f), the Executive receives any
refund with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of Section 5(f)) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
any taxes applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 5(f), a determination is made
that the Executive shall not be entitled to any refund with respect to such
claim and the Company does not notify the Executive in writing of its intent to
contest such denial or refund prior to the expiration of 30 calendar days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of any such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid by the
Company to the Executive pursuant to this Section 5.

                  (h) Notwithstanding any provision of this Agreement to the
contrary, if (i) but for this sentence, the Company would be obligated to make a
Gross-Up Payment to the Executive, (ii) the aggregate "present value" of the
"parachute payments" to be paid or provided


                                       20


to the Executive under this Agreement or otherwise does not exceed 1.15
multiplied by three times the Executive's "base amount," and (iii) but for this
sentence, the net after-tax benefit to the Executive of the Gross-Up Payment
would not exceed $50,000 (taking into account both income taxes and any Excise
Tax), then the payments and benefits to be paid or provided under this Agreement
(including any stock based compensation pursuant to Section 4(f)) will be
reduced to the minimum extent necessary (but in no event to less than zero) so
that no portion of any payment or benefit to the Executive, as so reduced,
constitutes an "excess parachute payment." For purposes of this Section 5(h),
the terms "excess parachute payment," "present value," "parachute payment," and
"base amount" will have the meanings assigned to them by Section 280G of the
Code. The determination of whether any reduction in such payments or benefits to
be provided under this Agreement is required pursuant to the preceding sentence
will be made at the expense of the Company, if requested by the Executive or the
Company, by the Accounting Firm. The fact that the Executive's right to payments
or benefits may be reduced by reason of the limitations contained in this
Section 5(h) will not of itself limit or otherwise affect any other rights of
the Executive other than pursuant to this Agreement. In the event that any
payment or benefit intended to be provided under this Agreement or otherwise is
required to be reduced pursuant to this Section 5(h), the Executive will be
entitled to designate the payments and/or benefits to be so reduced in order to
give effect to this Section 5(h). The Company will provide the Executive with
all information reasonably requested by the Executive to permit the Executive to
make such designation. In the event that the Executive fails to make such
designation within 10 business days of the Termination Date, the Company may
effect such reduction in any manner it deems appropriate.

                                       21


         6. No Mitigation Obligation. The Company hereby acknowledges that it
will be difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date. Accordingly, the payment
of the severance compensation by the Company to the Executive in accordance with
the terms of this Agreement is hereby acknowledged by the Company to be
reasonable, and the Executive will not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
nor will any profits, income, earnings or other benefits from any source
whatsoever create any mitigation, offset, reduction or any other obligation on
the part of the Executive hereunder or otherwise, except as expressly provided
in the last sentence of Section 4(b).

         7. Legal Fees and Expenses.

                  (a) It is the intent of the Company that the Executive not be
required to incur legal fees and the related expenses associated with the
interpretation, enforcement or defense of Executive's rights under this
Agreement by litigation or otherwise because the cost and expense thereof would
substantially detract from the benefits intended to be extended to the Executive
hereunder. Accordingly, if it should appear to the Executive that the Company
has failed to comply with any of its obligations under this Agreement or in the
event that the Company or any other person takes or threatens to take any action
to declare this Agreement void or unenforceable, or institutes any litigation or
other action or proceeding designed to deny, or to recover from, the Executive
any or all of the benefits provided or intended to be provided to the Executive
hereunder, the Company irrevocably authorizes the Executive from time to time to
retain counsel of Executive's choice, at the expense of the Company as hereafter
provided, to advise and represent the Executive in connection with any such
interpretation, enforcement or


                                       22


defense, including without limitation the initiation or defense of any
litigation or other legal action, whether by or against the Company or any
director, officer, stockholder or other person affiliated with the Company, in
any jurisdiction. Notwithstanding any existing or prior attorney-client
relationship between the Company and such counsel, the Company irrevocably
consents to the Executive's entering into an attorney-client relationship with
such counsel, and in that connection the Company and the Executive agree that a
confidential relationship shall exist between the Executive and such counsel.
Without respect to whether the Executive prevails, in whole or in part, in
connection with any of the foregoing, the Company will pay and be solely
financially responsible for any and all attorneys' and related fees and expenses
incurred by the Executive in connection with any of the foregoing.

                  (b) Without limiting the obligations of the Company pursuant
to Section 7(a) hereof, in the event a Change in Control occurs, the performance
of the Company's obligations under this Section 7 shall be secured by amounts
deposited or to be deposited in trust pursuant to certain trust agreements to
which the Company shall be a party, which amounts deposited shall in the
aggregate be not less than $2,000,000, providing that the fees and expenses of
counsel selected from time to time by the Executive pursuant to Section 7(a)
shall be paid, or reimbursed to the Executive if paid by the Executive, either
in accordance with the terms of such trust agreements, or, if not so provided,
on a regular, periodic basis upon presentation by the Executive to the trustee
of a statement or statements prepared by such counsel in accordance with its
customary practices. Any failure by the Company to satisfy any of its
obligations under this Section 7(b) shall not limit the rights of the Executive
hereunder. Subject to the foregoing, the Executive shall have the status of a
general unsecured creditor of the Company and shall have no right to, or
security interest in, any assets of the Company or any subsidiary.

                                       23


         8. Continuing Obligations

                  (a) The Executive hereby agrees that all documents, records,
techniques, business secrets and other information which have come into his
possession from time to time during his employment with the Company shall be
deemed to be confidential and proprietary to the Company and, except for
personal documents and records of the Executive, shall be returned to the
Company. The Executive further agrees to retain in confidence any confidential
information known to him concerning the Company and its subsidiaries and their
respective businesses so long as such information is not publicly disclosed,
except that Executive may disclose any such information required to be disclosed
in the normal course of his employment with the Company or pursuant to any court
order or other legal process.

                  (b) The Executive hereby agrees that during the Continuation
Period, he will not directly or indirectly solicit any employee of the Company
or any of its subsidiaries or affiliated companies to join the employ of any
entity that competes with the Company or any of its subsidiaries or affiliated
companies.

         9. Successors

                  (a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of such successor entity to enter into such agreement prior to the
effective date of any such succession (or, if later, within three business days
after first receiving a written request for such agreement) shall constitute a
breach of this Agreement and shall entitle the Executive to


                                       24


terminate his employment pursuant to Section 2(a)(ii) and to receive the
payments and benefits provided under Section 4. As used in this Agreement,
"Company" shall mean the Company as hereinbefore defined and any successor to
its business and/or assets as aforesaid which executes and delivers the
Agreement provided for in this Section 9 or which otherwise becomes bound by all
the terms and provisions of this Agreement by operation of law.

                  (b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive dies while any amounts are payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to his devisee, legatee or other designee or, if there is no such
designee, to his estate.

         10. Notices

         For all purposes of this Agreement, all communications, including
without limitation notices, consents, requests or approvals, required or
permitted to be given hereunder will be in writing and will be deemed to have
been duly given when hand delivered or dispatched by electronic facsimile
transmission (with receipt thereof orally confirmed), or five business days
after having been mailed by United States registered or certified mail, return
receipt requested, postage prepaid, or three business days after having been
sent by a nationally recognized overnight courier service such as FedEx, UPS, or
Purolator, addressed to the Company (to the attention of the Secretary of the
Company, with a copy to the General Counsel of the Company) at its principal
executive office and to the Executive at his principal residence, or to such
other address as any party may have furnished to the other in writing and in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.

                                       25


         11. Governing Law

         THE VALIDITY, INTERPRETATION, CONSTRUCTION AND PERFORMANCE OF THIS
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF DELAWARE.

         12. Miscellaneous

         No provisions of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
the Executive and the Company. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement (or in any
employment or other written agreement relating to the Executive).
Notwithstanding any provision of this Agreement to the contrary, the parties'
respective rights and obligations under Sections 4, 5 and 7 will survive any
termination or expiration of this Agreement or the termination of the
Executive's employment following a Change in Control for any reason whatsoever.
Nothing expressed or implied in this Agreement will create any right or duty on
the part of the Company or the Executive to have the Executive remain in the
employment of the Company or any subsidiary prior to or following any Change in
Control. The Company may withhold from any amounts payable under this Agreement
all federal, state, city or other taxes as the Company is required to withhold
pursuant to any law or government regulation or ruling. In the event that the
Company refuses or otherwise fails to make a payment when due and it is
ultimately decided that the Executive is entitled to such


                                       26


payment, such payment shall be increased to reflect an interest factor,
compounded annually, equal to the prime rate in effect as of the date the
payment was first due plus two points. For this purpose, the prime rate shall be
based on the rate identified by Chase Manhattan Bank as its prime rate.

         13. Separability

         The invalidity or unenforceability of any provisions of this Agreement
shall not affect the validity or enforceability of any other provision of this
Agreement, which shall remain in full force and effect.

         14. Non-assignability

         This Agreement is personal in nature and neither of the parties hereto
shall, without the consent of the other, assign or transfer this Agreement or
any rights or obligations hereunder, except as provided in Section 9. Without
limiting the foregoing, the Executive's right to receive payments hereunder
shall not be assignable or transferable, whether by pledge, creation of a
security interest or otherwise, other than a transfer by his will or by the laws
of descent or distribution, and in the event of any attempted assignment or
transfer by Executive contrary to this Section 14 the Company shall have no
liability to pay any amount so attempted to be assigned or transferred to any
person other than the Executive or, in the event of his death, his designated
beneficiary or, in the absence of an effective beneficiary designation, the
Executive's estate.

         15. Effectiveness; Term

         This Agreement will be effective and binding as of the date first above
written immediately upon its execution, but, anything in this Agreement to the
contrary notwithstanding, this Agreement will not be operative unless and until
a Change in Control occurs. Upon the


                                       27


occurrence of a Change in Control at any time during the Term (as defined
below), without further action, this Agreement shall become immediately
operative. For purposes of this Agreement, "Term" means the period commencing as
of the date first above written and expiring as of the later of (i) the fifth
anniversary of the date first above written or (ii) the second anniversary of
the first occurrence of a Change in Control; provided, however, that (A)
commencing on the fifth anniversary of the date first above written and each
fifth anniversary date thereafter, the Term of this Agreement will automatically
be extended for an additional five years unless, not later than 180 days
preceding each such fifth anniversary date, the Company or the Executive shall
have given notice that it or the Executive, as the case may be, does not wish to
have the Term extended and (B) subject to Section 2(e), if, prior to a Change in
Control, the Executive ceases for any reason to be an employee of the Company
and any subsidiary, thereupon without further action the Term shall be deemed to
have expired and this Agreement will immediately terminate and be of no further
effect. For purposes of this Section 15, the Executive shall not be deemed to
have ceased to be an employee of the Company and any subsidiary by reason of the
transfer of Executive's employment between the Company and any subsidiary, or
among any subsidiaries.

         16 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.

         17 Prior Agreement. This Agreement supersedes and terminates any and
all prior Executive Termination Benefits Agreements by and among Company and the
Executive.

                                       28


         IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the day and year first above set forth, thereby
mutually and voluntarily agreeing that this Agreement supersedes and replaces
any prior similar agreements for such termination benefits.

                                                AMR CORPORATION



                                                By: /s/ Gerard J. Arpey
                                                    ----------------------------


                                                AMERICAN AIRLINES, INC.



                                                By: /s/ Susan M. Oliver
                                                    ----------------------------


                                                ROBERT W. REDING



                                                /s/ Robert W. Reding
                                                --------------------------------


                                       29


                                                                   EXHIBIT 10.72

                              AMENDED AND RESTATED
                    EXECUTIVE TERMINATION BENEFITS AGREEMENT


         THIS AMENDED AND RESTATED EXECUTIVE TERMINATION BENEFITS AGREEMENT
(this "Agreement"), dated as of the 5th day of January, 2004, is among AMR
CORPORATION, a Delaware corporation, AMERICAN AIRLINES, INC., a Delaware
corporation (collectively the "Company"), and JAMES A. BEER (the "Executive").

                                   WITNESSETH:

         WHEREAS, the Company considers it essential to the best interests of
the Company and its stockholders that its management be encouraged to remain
with the Company and to continue to devote full attention to the Company's
business in the event an effort is made to obtain control of the Company through
a tender offer or otherwise;

         WHEREAS, the Company recognizes that the possibility of a change in
control and the uncertainty and questions which it may raise among management
may result in the departure or distraction of management personnel to the
detriment of the Company and its stockholders;

         WHEREAS, the Company's Board of Directors (the "Board") has determined
that appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of members of the Company's management to their
assigned duties without distraction in the face of the potentially disturbing
circumstances arising from the possibility of a change in control of the
Company;

         WHEREAS, the Executive is a key Executive of the Company;



         WHEREAS, the Company believes the Executive has made valuable
contributions to the productivity and profitability of the Company;

         WHEREAS, should the Company receive any proposal from a third person
concerning a possible business combination with or acquisition of equity
securities of the Company, the Board believes it imperative that the Company and
the Board be able to rely upon the Executive to continue in his position, and
that the Company be able to receive and rely upon his advice as to the best
interests of the Company and its stockholders without concern that he might be
distracted by the personal uncertainties and risks created by such a proposal;
and

         WHEREAS, should the Company receive any such proposals, in addition to
the Executive's regular duties, he may be called upon to assist in the
assessment of such proposals, advise management and the Board as to whether such
proposals would be in the best interests of the Company and its stockholders,
and to take such other actions as the Board might determine to be appropriate.

         NOW, THEREFORE, to assure the Company that it will have the continued
undivided attention and services of the Executive and the availability of his
advice and counsel notwithstanding the possibility, threat or occurrence of a
bid to take over control of the Company, and to induce the Executive to remain
in the employ of the Company, and for other good and valuable consideration, the
Company and the Executive agree as follows:

         1. Change in Control

         For purposes of this Agreement, a Change in Control of the Company
shall be deemed to have taken place if:

                  (a) any person as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended from time to time (the "Exchange Act"), and as
used in Sections 13(d) and

                                       2


14(d) thereof, including a "group" as defined in Section 13(d) of the Exchange
Act (a "Person"), but excluding the Company, any subsidiary of the Company and
any employee benefit plan sponsored or maintained by the Company or any
subsidiary of the Company (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the "beneficial owner" (as defined in
Rule 13(d)-3 under the Exchange Act, as amended from time to time) of securities
of the Company representing 15% or more of the combined voting power of the
Company's then outstanding securities; or

                  (b) individuals who, as of the date hereof, constitute the
Board (the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company's stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or

                  (c) consummation of a reorganization, merger or consolidation
or sale or other disposition of all or substantially all of the assets of the
Company or the acquisition of the assets of another corporation (a "Business
Combination"), in each case, unless, following such Business Combination, (i)
all or substantially all of the individuals and entities who were the beneficial
owners, respectively, of the then outstanding shares of common stock of the
Company and the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors
immediately prior to such Business Combination


                                       3


beneficially own, directly or indirectly, more than 60% of, respectively, the
then outstanding shares of common stock and the combined voting power of the
then outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a result of
such transaction owns the Company or all or substantially all of the Company's
assets either directly or through one or more subsidiaries), (ii) no Person
(excluding any employee benefit plan (or related trust) of the Company or such
corporation resulting from such Business Combination) beneficially owns,
directly or indirectly, 15% or more of, respectively, the then outstanding
shares of common stock of the corporation resulting from such Business
Combination or the combined voting power of the then outstanding voting
securities of such corporation except to the extent that such ownership existed
prior to the Business Combination, and (iii) at least a majority of the members
of the board of directors of the corporation resulting from such Business
Combination were members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Incumbent Board, providing for
such Business Combination; or

                  (d) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.

         2. Circumstances Triggering Receipt of Severance Benefits

                  (a) Subject to Section 2(c), the Company will provide the
Executive with the benefits set forth in Section 4 upon any termination of the
Executive's employment:

                           (i) by the Company at any time within the first 24
                  months after a Change in Control;

                                       4


                           (ii) by the Executive for "Good Reason" (as defined
                  in Section 2(b) below) at any time within the first 24 months
                  after a Change in Control;

                           (iii) by the Executive pursuant to Section 2(d); or

                           (iv) by the Company or the Executive pursuant to
                  Section 2(e).

                  (b) In the event of the occurrence of a Change in Control, the
Executive may terminate employment with the Company and/or any subsidiary for
"Good Reason" with the right to benefits set forth in Section 4 upon the
occurrence of one or more of the following events (regardless of whether any
other reason, other than Cause as provided below, for such termination exists or
has occurred, including without limitation other employment):

                           (i) Failure to elect or reelect or otherwise to
                  maintain the Executive in the office or the position, or a
                  substantially equivalent office or position, of or with the
                  Company and/or a subsidiary, as the case may be, which the
                  Executive held immediately prior to a Change in Control, or
                  the removal of the Executive as a director of the Company
                  and/or a subsidiary (or any successor thereto) if the
                  Executive shall have been a director of the Company and/or a
                  subsidiary immediately prior to the Change in Control;

                           (ii) (A) A significant adverse change in the nature
                  or scope of the authorities, powers, functions,
                  responsibilities or duties attached to the position with the
                  Company and/or any subsidiary which the Executive held
                  immediately prior to the Change in Control, (B) a reduction in
                  the aggregate of the Executive's annual base salary rate and
                  annual incentive compensation target to be received from the
                  Company and/or any subsidiary, or (C) the termination or
                  denial of the Executive's rights to Employee Benefits (as
                  defined below) or a reduction in the


                                       5


                  scope or value thereof, any of which is not remedied by the
                  Company within 10 calendar days after receipt by the Company
                  of written notice from the Executive of such change, reduction
                  or termination, as the case may be;

                           (iii) A determination by the Executive (which
                  determination will be conclusive and binding upon the parties
                  hereto provided it has been made in good faith and in all
                  events will be presumed to have been made in good faith unless
                  otherwise shown by the Company by clear and convincing
                  evidence) that a change in circumstances has occurred
                  following a Change in Control, including, without limitation,
                  a change in the scope of the business or other activities for
                  which the Executive was responsible immediately prior to the
                  Change in Control, which has rendered the Executive
                  substantially unable to carry out, has substantially hindered
                  Executive's performance of, or has caused the Executive to
                  suffer a substantial reduction in, any of the authorities,
                  powers, functions, responsibilities or duties attached to the
                  position held by the Executive immediately prior to the Change
                  in Control, which situation is not remedied within 10 calendar
                  days after written notice to the Company from the Executive of
                  such determination;

                           (iv) The liquidation, dissolution, merger,
                  consolidation or reorganization of the Company or transfer of
                  all or substantially all of its business and/or assets, unless
                  the successor or successors (by liquidation, merger,
                  consolidation, reorganization, transfer or otherwise) to which
                  all or substantially all of its business and/or assets have
                  been transferred (directly or by operation of


                                       6


                  law) assumed all duties and obligations of the Company under
                  this Agreement pursuant to Section 9(a);

                           (v) The Company relocates its principal executive
                  offices, or requires the Executive to have his principal
                  location of work changed, to any location that is in excess of
                  50 miles from the location thereof immediately prior to the
                  Change in Control, or requires the Executive to travel away
                  from his office in the course of discharging his
                  responsibilities or duties hereunder at least 20% more (in
                  terms of aggregate days in any calendar year or in any
                  calendar quarter when annualized for purposes of comparison to
                  any prior year) than was required of Executive in any of the
                  three full years immediately prior to the Change in Control
                  without, in either case, his prior written consent; or

                           (vi) Without limiting the generality or effect of the
                  foregoing, any material breach of this Agreement by the
                  Company or any successor thereto, which breach is not remedied
                  within 10 calendar days after written notice to the Company
                  from the Executive describing the nature of such breach.

                  (c) Notwithstanding Sections 2(a) and (b) above, no benefits
shall be payable by reason of this Agreement in the event of:

                           (i) Termination of the Executive's employment with
                  the Company and its subsidiaries by reason of the Executive's
                  death or Disability, provided that the Executive has not
                  previously given a valid "Notice of Termination" pursuant to
                  Section 3. For purposes hereof, "Disability" shall be defined
                  as the inability of Executive due to illness, accident or
                  other physical or mental disability to perform his duties for
                  any period of six consecutive months or for any period of
                  eight


                                       7


                  months out of any 12-month period, as determined by an
                  independent physician selected by the Company and reasonably
                  acceptable to the Executive (or his legal representative),
                  provided that the Executive does not return to work on
                  substantially a full-time basis within 30 days after written
                  notice from the Company, pursuant to Section 3, of an intent
                  to terminate the Executive's employment due to Disability;

                           (ii) Termination of the Executive's employment with
                  the Company and its subsidiaries on account of the Executive's
                  retirement at or after age 65, pursuant to the Company's
                  Retirement Benefit Plan; or

                           (iii) Termination of the Executive's employment with
                  the Company and its subsidiaries for Cause. For the purposes
                  hereof, "Cause" shall be defined as a felony conviction of the
                  Executive or the failure of the Executive to contest
                  prosecution for a felony, or the Executive's wilful misconduct
                  or dishonesty, any of which is directly and materially harmful
                  to the business or reputation of the Company or any subsidiary
                  or affiliate. Notwithstanding the foregoing, the Executive
                  shall not be deemed to have been terminated for "Cause"
                  hereunder unless and until there shall have been delivered to
                  the Executive a copy of a resolution duly adopted by the
                  affirmative vote of not less than three quarters of the Board
                  then in office at a meeting of the Board called and held for
                  such purpose, after reasonable notice to the Executive and an
                  opportunity for the Executive, together with his counsel (if
                  the Executive chooses to have counsel present at such
                  meeting), to be heard before the Board, finding that, in the
                  good faith opinion of the Board, the Executive had committed
                  an act constituting


                                       8


                  "Cause" as herein defined and specifying the particulars
                  thereof in detail. Nothing herein will limit the right of the
                  Executive or his beneficiaries to contest the validity or
                  propriety of any such determination.

         This Section 2(c) shall not preclude the payment of any amounts
otherwise payable to the Executive under any of the Company's employee benefit
plans, stock plans, programs and arrangements and/or under any Employment
Agreement.
                  (d) Notwithstanding anything contained in this Agreement to
the contrary, in the event of a Change in Control, the Executive may terminate
employment with the Company and any subsidiary for any reason, or without
reason, by providing Notice of Termination pursuant to Section 3 during the
30-day period immediately following the first anniversary of the first
occurrence of a Change in Control with the right to the benefits set forth in
Section 4.
                  (e) Any termination of employment of the Executive, including
a termination for "Good Reason," but excluding a termination for "Cause," or the
removal of the Executive from the office or position in the Company or any
subsidiary that occurs (i) not more than 180 days prior to the date on which a
Change in Control occurs and (ii) following the commencement of any discussion
with a third person that ultimately results in a Change in Control shall be
deemed to be a termination or removal of the Executive after a Change in Control
for purposes of this Agreement.

         3. Notice of Termination

         Any termination of the Executive's employment with the Company and its
subsidiaries as contemplated by Section 2 shall be communicated by written
"Notice of Termination" to the other party hereto. Any "Notice of Termination"
shall indicate the effective date of termination which shall not be less than 30
days or more than 60 days after the date the Notice of


                                       9


Termination is delivered (the "Termination Date"), the specific provision in
this Agreement relied upon, and, except for a termination pursuant to Section
2(d), will set forth in reasonable detail the facts and circumstances claimed