UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934

Filed by the Registrant x

Filed by a Party other than the Registrant o

Check the appropriate box:

o Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Pursuant to §240.14a-12

AMR Corporation

 

Payment of Filing Fee (Check the appropriate box):

x		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	(1)		Title of each class of securities to which transaction applies:
	(2)		Aggregate number of securities to which transaction applies:
	(3)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
	(4)		Proposed maximum aggregate value of transaction:
	(5)		Total fee paid:

o		Fee paid previously with preliminary materials.
o		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

April 17, 2009

 

Dear Stockholder,

 

You are invited to attend AMR Corporation’s annual meeting of stockholders to be held at the American Airlines Training & Conference Center in Fort Worth, Texas, on Wednesday, May 20, 2009, at 8:00 a.m., Central Daylight Saving Time.

 

Details of the business to be conducted at the meeting are set forth in the accompanying Notice of Annual Meeting of Stockholders and Proxy Statement. In addition, enclosed is our 2008 Annual Report to Stockholders. Directors and officers of the company will be present at the meeting to answer questions that you and other stockholders may have.

 

Your vote is important. Please read the attached Proxy Statement carefully and submit your proxy as soon as possible. You have a choice of submitting your proxy by using the Internet, by telephone, or by completing and returning by mail the enclosed proxy card or voting instruction form.

 

The Board of Directors and management look forward to seeing you at the meeting.

 

Sincerely,

 

 

Gerard J. Arpey
Chairman, President
and Chief Executive Officer

 

 

Important notice regarding the availability of proxy materials for the annual meeting to be held on May 20, 2009: Our official Notice of Annual Meeting of Stockholders, Proxy Statement and 2008 Annual Report to Stockholders are also available at our website located at www.aa.com/investorrelations.

 

 

 

P.O. Box 619616, MD 5675, Dallas/Fort Worth International Airport, TX 75261-9616

 

2009 ANNUAL MEETING OF STOCKHOLDERS
NOTICE OF ANNUAL MEETING AND PROXY STATEMENT
TABLE OF CONTENTS

 

 

 

P.O. Box 619616, MD 5675, Dallas/Fort Worth International Airport, TX 75261-9616

 

 

 

By Order of the Board of Directors,

 

Kenneth W. Wimberly
Corporate Secretary

 

April 17, 2009

 

 

P.O. Box 619616, MD 5675, Dallas/Fort Worth International Airport, TX 75261-9616

 

 

Annual Meeting of Stockholders
May 20, 2009

 

We are mailing this Proxy Statement and the form of proxy to stockholders on or around April 17, 2009 in connection with a solicitation of proxies by the Board of Directors of AMR Corporation (the “Company,” “we” or “us”) for use at the annual meeting of stockholders that we are holding on May 20, 2009. This Proxy Statement also includes information regarding our wholly-owned and principal subsidiary, American Airlines, Inc. The annual meeting of stockholders will be held at the American Airlines Training & Conference Center, Flagship Auditorium, 4501 Highway 360 South, Fort Worth, Texas 76155, on Wednesday, May 20, 2009, at 8:00 a.m., Central Daylight Saving Time. You can find a map of the area and directions to the American Airlines Training & Conference Center on the back cover of this Proxy Statement and on the admission ticket. The physical address of our principal executive offices is AMR Corporation, 4333 Amon Carter Boulevard, MD 5675, Fort Worth, Texas 76155. Our mailing address is set forth above.

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on May 20, 2009. Our official Notice of Annual Meeting of Stockholders, Proxy Statement and 2008 Annual Report to Stockholders are available on our website located at www.aa.com/investorrelations.

 

As an alternative to receiving printed copies of these materials in future years, you may elect to receive and access future annual meeting materials electronically. If your shares are registered directly in your name with American Stock Transfer & Trust Company, our stock registrar and transfer agent, you can choose to receive and access future annual meeting materials electronically by going to American Stock Transfer & Trust Company’s website (www.amstock.com) and clicking on “Shareholder Services” or by following the instructions provided when voting via the Internet.

 

If you hold your shares of our stock in a brokerage account or through some other third party in street name, please refer to the information provided by your bank, broker or nominee for instructions on how to elect to receive and view future annual meeting materials over the Internet.

 

What is the purpose of the annual meeting?

 

The purpose of the annual meeting of stockholders is to allow you to vote upon matters, which we outline in this Proxy Statement. These matters include (a) election of directors, (b) ratification of the Audit Committee’s selection of our independent auditors for 2009, (c) approval of the AMR Corporation 2009 Long Term Incentive Plan and (d) consideration of two stockholder proposals. In addition, management will report on our performance during 2008.

 

Where is the annual meeting?

 

The annual meeting of stockholders will be held at the American Airlines Training & Conference Center, Flagship Auditorium, 4501 Highway 360 South, Fort Worth, Texas 76155, on Wednesday, May 20, 2009, at

8:00 a.m. (Central Daylight Saving Time). You can find a map of the area and directions on the back cover of this Proxy Statement and on the admission ticket.

 

Who can attend the annual meeting?

 

Stockholders of record as of the close of business on March 23, 2009, or their duly appointed proxies, may attend the annual meeting. The Flagship Auditorium (which is the site of the annual meeting) can accommodate 275 people. Admission to the annual meeting will be on a first-come, first-served basis. Registration will begin at 7:15 a.m. (Central Daylight Saving Time), on May 20, 2009, in the reception area outside the Flagship Auditorium. The doors to the Flagship Auditorium will open at 7:45 a.m. (Central Daylight Saving Time).

 

If you plan to attend the annual meeting, you must have an admission ticket. We have included this ticket on the proxy card or with the voting instruction form. If you do not have an admission ticket, you will need to bring other proof of beneficial ownership of our stock as of March 23, 2009 that is acceptable to us, such as a copy of a statement from your broker reflecting your stock ownership. In addition, we may ask stockholders for valid governmentally-issued picture identification, such as a driver’s license or passport. For security reasons, all bags are subject to search, and all persons who attend the annual meeting may be subject to a metal detector and/or a hand wand search. The use of cameras or other recording devices at the annual meeting is prohibited. If you do not have valid picture identification and either an admission ticket or appropriate documentation verifying that you owned our stock on March 23, 2009, or you do not comply with our security measures, you will not be admitted to the annual meeting. All stockholders will be required to check-in at the registration desk.

 

What is the quorum for the annual meeting?

 

The presence, in person or by proxy, of the holders of at least one-third of the issued and outstanding shares entitled to vote at the annual meeting is necessary to constitute a quorum at the annual meeting, except with respect to proposal 3. We will count abstentions and broker non-votes as present for determining whether a quorum exists. In order for proposal 3 to be approved, the total votes cast on the proposal must represent over 50 percent of the voting power of the issued and outstanding shares entitled to vote at the annual meeting. In accordance with the voting procedures of the New York Stock Exchange (“NYSE”), we will count abstentions but not broker non-votes as present for determining whether a quorum exists. If a quorum is not present in person or represented by proxies at the annual meeting, the holders of shares entitled to vote at the annual meeting who are present in person or represented by proxies will have the power to adjourn the annual meeting from time to time until a quorum is present in person or represented by proxies. At any such adjourned and reconvened meeting at which a quorum is present in person or represented by proxies, any business may be transacted that might have been transacted at the original meeting.

 

What is the difference between a stockholder of record and a “street name” holder?

 

If your shares are registered directly in your name with American Stock Transfer & Trust Company, our stock transfer agent, you are considered the stockholder of record with respect to those shares. If you are a stockholder of record, we have sent the proxy statement, annual report and proxy card directly to you. If you hold your shares in a stock brokerage account or your shares are held by a bank or other nominee, you are considered the beneficial owner of these shares, and your shares are held in “street name.” The proxy statement, annual report and proxy card have been forwarded to you by your broker, bank or nominee who is considered, with respect to those shares, the stockholder of record. As the beneficial owner, you have the right to direct your broker, bank or nominee how to vote your shares by using the voting instructions included in the mailing or by following their instructions for voting by telephone or the Internet.

 

Who is entitled to vote at the annual meeting?

 

Only stockholders of record at the close of business on March 23, 2009 are entitled to receive notice of the annual meeting and to vote the shares of common stock that they held on that date at the annual meeting. If you were a stockholder of record on March 23, 2009, you will be entitled to vote all of the shares that you held on that date at the annual meeting or any postponements or adjournments of the meeting. If your shares are held in street name, you

may vote your shares in person at the annual meeting only if you obtain a legal proxy from the broker or nominee that held your shares on March 23, 2009. On March 23, 2009, we had 279,011,993 shares of common stock outstanding. Each stockholder of record on March 23, 2009 will be entitled to one vote in person or by proxy for each share of stock held.

 

If you are an employee/participant holding shares of our common stock as an investment option under the $uper $aver 401(k) Plan, you will receive one proxy card for all the shares that you own through the $uper $aver 401(k) Plan. The proxy card will serve as your voting instructions for the investment manager of the $uper $aver 401(k) Plan (Bank of America, National Association). To allow sufficient time for the investment manager to vote your $uper $aver 401(k) Plan shares, the investment manager must receive your voting instructions by 11:59 p.m., Eastern Daylight Saving Time, on May 15, 2009. The number of shares you are eligible to vote is based on your unit balance in the $uper $aver 401(k) Plan on March 23, 2009. If the investment manager does not receive your instructions by that date, it will vote your $uper $aver 401(k) Plan shares in the same proportion as shares for which instructions were received from other employee/participants in the $uper $aver 401(k) Plan. As of March 23, 2009, the $uper $aver 401(k) Plan held an aggregate 567,400 shares of our common stock on behalf of employees/participants.

 

Please note that having unexercised stock options, in and of itself, is not sufficient to entitle the holder of such options to vote at or attend the annual meeting. You must be a stockholder of record or a street name holder at the close of business on March 23, 2009 to vote the shares of common stock you held on that date at the annual meeting.

 

How do I vote before the annual meeting?

 

Stockholders of record on March 23, 2009 may vote before the annual meeting, as explained in the detailed instructions on the proxy card or voting instruction form. In summary, you may vote before the annual meeting by any one of the following methods:

 

 

When will Internet and telephone voting facilities close?

 

For stockholders of record, the Internet and telephone voting facilities will close at 11:59 p.m. (Central Daylight Saving Time) on May 19, 2009. If your shares are held in street name, please refer to the information provided by your bank, broker or nominee for information on when voting will end.

Can I change my vote after I have voted?

 

Yes. If you are a record holder on March 23, 2009, you may change your vote or revoke your proxy at any time before the annual meeting begins by filing a notice of revocation and a properly executed, later-dated proxy with our Corporate Secretary. Whether you are a record holder or hold your shares in street name, you may also change your vote or revoke your proxy by attending and voting your shares at the annual meeting, subject to requirements for attending and voting at the annual meeting.

 

How are votes counted?

 

With respect to the election of directors (proposal 1), you may either vote “FOR” all or less than all of the nominated directors or your vote may be “WITHHELD” as to one or more of them. Stockholders elect the nominated directors by a plurality of the votes cast at the annual meeting. This means that the stockholders will elect the thirteen persons receiving the highest number of “FOR” votes at the annual meeting. See “Corporate Governance — Majority Voting,” on page 9 of this Proxy Statement, for further details regarding the election of directors.

 

With respect to proposals 2, 4 and 5, a majority of the votes cast at the annual meeting is required for approval. With respect to these three proposals, you may vote “FOR,” “AGAINST” or “ABSTAIN.” If you “ABSTAIN,” it will not have an effect on the approval of these three proposals.

 

With respect to proposal 3, a majority of the votes cast on the proposal at the annual meeting is required for approval, provided that the total votes cast on the proposal represent over 50 percent of the voting power of all the shares of common stock outstanding and entitled to vote on proposal 3 at the annual meeting. With respect to proposal 3, you may vote “FOR,” “AGAINST,” or “ABSTAIN.” In accordance with the voting procedures of the NYSE, if you “ABSTAIN,” it will count as a vote against the proposal, and will count towards the requirement that the votes cast represent over 50 percent of the voting power of all outstanding shares of common stock.

 

If you are a record holder, you may vote your shares in person at the annual meeting, through the mail, by telephone or over the Internet, each as described on the proxy card (see also “How do I vote before the annual meeting?” for more information). If you sign your proxy card and provide no further instructions, the proxies will vote your shares “FOR” proposals 1 (as to all nominated directors), 2 and 3; and “AGAINST” proposals 4 and 5. With respect to any additional matters that properly come before the annual meeting, the vote will be determined by our proxies, Gerard J. Arpey, David L. Boren and Ann M. Korologos, each with full power to act without the others and with full power of substitution, to vote in their discretion.

 

If you hold your shares in street name, follow the instructions on the voting instruction form you receive from your broker (see also “How do I vote before the annual meeting?” for more information). With respect to any additional matters that properly come before the annual meeting, the vote will be determined in the discretion of our proxies.

 

Please note that the election of directors and the ratification of appointment of our independent auditors (proposals 1 and 2, respectively) are discretionary items under the voting procedures of the NYSE. Member brokers of the NYSE who do not receive voting instructions from the beneficial owners may vote such shares in their discretion with respect to these two proposals. Proposals 3, 4 and 5 are non-discretionary items and NYSE member brokers do not have discretion to vote on these proposals. If you do not submit voting instructions and if your broker does not have discretion to vote your shares on a proposal (a broker non-vote), we will not count your shares in determining the outcome of the vote on proposals 3, 4 and 5. Such “broker non-votes” will have no effect on the approval of proposals 3, 4 and 5, except that, because a broker non-vote does not count as a vote cast, it will not be counted towards the requirement that the votes cast on proposal 3 represent over 50 percent of the voting power of all outstanding shares of common stock. If you hold your shares in street name, you may vote your shares in person at the annual meeting only if you obtain a legal proxy from the broker or nominee that held your shares on March 23, 2009.

What are the Board of Directors’ recommendations?

 

The Board of Directors’ recommendations are included with the description of each item in this Proxy Statement. In summary, the Board of Directors recommends a vote:

 

 

What happens if additional matters are presented at the annual meeting?

 

Other than the five proposals described in this Proxy Statement, we are not aware of any other business to be presented at the annual meeting. If you sign and return the proxy card or the voting instruction form, our proxies will have discretion to vote your shares on any additional matters presented at the annual meeting. If for any reason any director nominee cannot stand for election at the annual meeting, our proxies will vote your shares for a substitute nominee, if any, that the Board of Directors may nominate. We note that our bylaws provide that any stockholder wishing to nominate a director at or bring any other item before the annual meeting, other than proposals intended to be included in the proxy materials pursuant to Rule 14a-8 (“Rule 14a-8”) of Regulation 14A of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), must have notified the Corporate Secretary of such fact not less than 90 nor more than 120 days before May 21, 2009.

 

Who will bear the cost of soliciting proxies for the annual meeting?

 

We will pay the cost of this solicitation.  In addition to using regular mail, we may use directors, officers, employees or agents of us or our subsidiaries to solicit proxies, in person or by telephone, facsimile, e-mail or other means of electronic communication. We will also request brokers or nominees who hold common stock in their names to forward proxy materials to the beneficial owners of such stock at our expense. To aid in the solicitation of proxies, we have retained Laurel Hill Advisory Group, LLC, a firm of professional proxy solicitors, at an estimated fee of $15,500, plus reimbursement of normal expenses.

 

When and where can I find the voting results of the annual meeting?

 

We intend to post the official voting results of the annual meeting at the Investor Relations section of our website (www.aa.com/investorrelations) as soon as possible. In addition, the official results will be published in our quarterly report on Form 10-Q for the second quarter of fiscal year 2009.

 

The Board of Directors proposes that stockholders elect at the annual meeting the following thirteen director candidates, all of whom currently serve as our directors, to serve until the next annual meeting. Each of the nominees for election as a director has indicated that he or she will serve if elected by the stockholders and has furnished the following information to us with respect to his or her principal occupation or employment and business directorships as of March 23, 2009.

 

Unless otherwise indicated, all proxy cards and voting instruction forms that authorize the persons named therein to vote for the election of directors will be voted for the election of the nominees listed below. If any nominee is not available for election because of unforeseen circumstances, the proxies designated by the Board of Directors intend to vote for the election of a substitute nominee, if any, that the Board of Directors may nominate. Although we will attempt to provide advance notice of such a substitute nominee, we may be unable to do so in certain circumstances.

 

 

A plurality of the votes cast is necessary for the election of each director.

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” ALL NOMINEES LISTED ABOVE.

 

Majority Voting

 

In 2006, the Board of Directors revised the Board of Directors Governance Policies so that any nominee for director who receives a greater number of votes “WITHHELD” than votes “FOR” in an uncontested election will be required to tender his or her resignation promptly to the Nominating/Corporate Governance Committee of the Board of Directors. The Nominating/Corporate Governance Committee will consider our best interests and the best interests of the stockholders and recommend to a special committee of independent directors of the Board of Directors whether to accept the tendered resignation or to take some other action. This special committee of the Board of Directors will be composed of only those independent directors who did not receive a majority of withheld votes and will consider the Nominating/Corporate Governance Committee’s recommendation. Within 90 days following the uncontested election, this special committee will determine whether to accept the tendered resignation or take some other action. Thereafter, we will publicly disclose the special committee’s decision.

 

If one or more members of the Nominating/Corporate Governance Committee receive a majority of withheld votes, then the Board of Directors will create a special committee of independent directors who did not receive a majority of withheld votes to consider the resignation offers of all directors receiving a majority of withheld votes. The special committee of the Board of Directors will determine whether to accept the tendered resignation or to take some other action and promptly disclose their decision. Any director who receives a majority of withheld votes and tenders his or her resignation will not participate in the committee determination. However, if there are three or fewer independent directors who did not receive a majority of withheld votes in the same election, then all independent directors may participate in the committee action regarding whether to accept the resignation or take some other action. The foregoing is a summary of the director resignation procedure. The entire procedure is set forth in Section 18 of the Board of Directors Governance Policies, which are available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link. The Board of Directors Governance Policies are also available free of charge in print to any stockholder who sends a request to the Corporate Secretary at the address on page 69 of this Proxy Statement.

 

Stockholder Right to Call a Special Meeting

 

In 2008, the Board of Directors amended our bylaws to provide that a special meeting of stockholders shall be called, subject to certain advance notice and information requirements, upon receipt of written requests from holders of shares representing at least 25 percent of our outstanding common stock. Under our current bylaws, a special meeting is not required to be called if (a) the request relates solely to a matter or matters not a proper subject for stockholder action under applicable law, (b) the request is received during the period commencing 90 days prior to the first anniversary of the previous year’s annual meeting of stockholders and ending on the date of the next annual meeting, (c) an annual or special meeting at which an identical or substantially similar item or items was presented has been called but not yet held or will be held within 120 days, (d) an identical or substantially similar item or items was presented at the most recent annual meeting, (e) an identical or substantially similar item or items was presented at a special meeting held not more than 90 days before the delivery of such request, or (f) the request was made in a manner that involved a violation of Regulation 14A under the Exchange Act or other applicable law. Our bylaws also provide that our Board of Directors, Chairman of the Board of Directors or President may call a special meeting of the stockholders. Our bylaws are available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link. Our bylaws are also available free of charge in print to any stockholder who sends a request to the Corporate Secretary at the address on page 69 of this Proxy Statement.

 

Number of Board of Directors Meetings; Attendance at Board of Directors, Committee and Annual Meetings

 

We generally hold eight regular meetings of the Board of Directors per year, and schedule special meetings when required. The Board of Directors held eight regular meetings in 2008, two of which were by telephone conference, and ten special meetings, four of which were by telephone conference. During 2008, each director attended at least 75% of the sum of the total number of meetings of the Board of Directors and each committee of which he or she was a

member with the exception of Mrs. Korologos, who attended 74% of such meetings. Mrs. Korologos was not able to attend at least 75% of the meetings in 2008 due to the illness of an immediate family member. We encourage each director to attend the annual meeting. Last year, 12 directors attended the annual meeting of stockholders.

 

Self-Assessment

 

In January of each year, the Board of Directors and its standing committees each conduct a self-assessment of the effectiveness of the Board and each standing committee.

 

Standards of Business Conduct for Employees and Directors

 

We have written standards for business conduct that are applicable to all our employees. We designed our Standards of Business Conduct to help employees resolve ethical issues in an increasingly complex business environment. The Standards of Business Conduct apply to all our employees, including without limitation, the Chief Executive Officer, the Chief Financial Officer, the General Counsel and Chief Compliance Officer, the Controller, the Treasurer, the Corporate Secretary and the General Auditor. The Standards of Business Conduct cover several topics including, without limitation, conflicts of interest; full, fair, accurate, timely and understandable disclosure in Securities and Exchange Commission (“SEC”) filings; confidentiality of information and accountability for adherence to the Standards of Business Conduct; prompt internal reporting of violations of the Standards of Business Conduct; and compliance with laws and regulations. A copy of the Standards of Business Conduct is available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link.

 

The Board of Directors has adopted a Code of Ethics and Conflicts of Interest Policy for the Board of Directors. We designed our Code of Ethics and Conflicts of Interest Policy to, among other things, assist the directors in recognizing and resolving ethical issues and identifying and avoiding conflicts of interest. A copy of the Code of Ethics and Conflicts of Interest Policy is available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link. We may post amendments to, or waivers of, the provisions of the Standards of Business Conduct and the Code of Ethics and Conflicts of Interest Policy with respect to any director or executive officer on the foregoing website. The Standards of Business Conduct and the Code of Ethics and Conflicts of Interest Policy are available free of charge in print to any stockholder who sends a request to the Corporate Secretary at the address on page 69 of this Proxy Statement.

 

Executive Sessions and the Lead Director

 

Non-employee directors meet regularly throughout the year without the Chief Executive Officer or other management employees. We hold these “executive sessions” at least twice per year. In 2008, the non-employee directors held executive sessions in January, February March, May, July, September and November. The Board of Directors appoints a Lead Director from among the independent directors to chair these executive sessions. Mr. Codina has served as the Lead Director of the Board of Directors since April 1, 2007.

 

The Lead Director has frequent contact with Mr. Arpey and the other members of our senior management throughout the year. The Lead Director or the Chairman of the Nominating/Corporate Governance Committee may schedule executive sessions. In addition, such sessions may be scheduled at the request of the Board of Directors.

 

As provided in the Board of Directors Governance Policies, the responsibilities of the Lead Director are determined by the independent directors from time to time. Those responsibilities include:

 

 

Evaluation of the Chief Executive Officer

 

Each year, the Chair of the Nominating/Corporate Governance Committee leads the independent directors in an executive session to assess the Chief Executive Officer’s performance. The results of this review are discussed with the Chief Executive Officer.

 

Continuing Education

 

We encourage and afford our directors the opportunity to attend seminars, conferences and external director education programs relating to, among other things, board governance practices and the functioning of the Board of Directors’ principal committees. We also conduct a comprehensive orientation process for new directors. In addition, directors receive ongoing continuing education through educational sessions at meetings and periodic mailings between meetings. We hold periodic training sessions for the Audit Committee and invite the other directors and executive officers to these sessions. We reimburse the directors for any costs associated with these seminars and conferences, including related travel expenses.

 

Director Access to Management and Independent Advisers

 

Independent directors have direct access to members of management whenever they deem it necessary. In accordance with NYSE listing standards, each of the Audit Committee, the Compensation Committee and the Nominating/Corporate Governance Committee has the authority to retain its own independent advisers at our expense. The independent directors and the Diversity Committee are also free to retain their own independent advisers at any time and at our expense.

 

Contacting the Board of Directors

 

The Board of Directors has approved procedures to facilitate communications between the directors and employees, stockholders and other interested third parties. Pursuant to these procedures, a person who desires to contact the Lead Director, a standing committee of the Board of Directors, the Board of Directors as a whole or any individual director may do so in writing to the following address:

 

AMR Corporation

The Board of Directors

P.O. Box 619616, MD 5675

Dallas/Fort Worth International Airport, Texas 75261-9616

 

These procedures are available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link.

 

Upon receipt of any communication to the Board of Directors, we will distribute the communication to the Lead Director, to another director or to an executive officer as appropriate, in each case depending on the facts and circumstances outlined in the communication. For example, a letter concerning a stockholder nominee would be sent to the Chairman of the Nominating/Corporate Governance Committee; a complaint regarding accounting or internal accounting controls would be forwarded to the Chairman of the Audit Committee and the General Auditor; and a complaint regarding passenger service would be sent to the executive officer responsible for customer service. The Corporate Secretary and the Nominating/Corporate Governance Committee review data about the number and types of stockholder communications received; the nature of the communications; to whom the communication was directed; the responses sent; and, as applicable, the ultimate disposition of any communication. The Board of Directors has approved this process.

 

The Board of Directors has standing Audit, Compensation, Diversity and Nominating/Corporate Governance committees. All members of the Audit Committee are independent in accordance with the listing standards of the NYSE, the requirements of the SEC, and the Board of Directors’ independence criteria. In addition, all members of the Compensation Committee, the Diversity Committee and the Nominating/Corporate Governance Committee are independent in accordance with the NYSE listing standards and our independence criteria. No member of the Audit Committee, the Compensation Committee, the Diversity Committee or the Nominating/Corporate Governance Committee is a current or former employee or officer of us or any of our affiliates. The committees on which the members of the Board of Directors (other than Mr. Arpey) serve as of April 1, 2009 are identified below.

 

Audit

Compensation

Diversity

Nominating / Corporate

Director

Committee

Committee

Committee

Governance Committee

John W. Bachmann

ü(Chair)

ü

David L. Boren

ü

ü(Chair)

Armando M. Codina

ü

Rajat K. Gupta

ü

Alberto Ibargüen

ü

ü

Ann M. Korologos

ü

Michael A. Miles

ü(Chair)

Philip J. Purcell

ü

ü

Ray M. Robinson

ü

ü

Judith Rodin

ü

Matthew K. Rose

ü

Roger T. Staubach

ü(Chair)

Number of Committee Meetings in 2008:

9

6

5

6

 

Each of the Audit, Compensation, Diversity and Nominating/Corporate Governance Committees has a charter that details the committee’s responsibilities. The charters for all the standing committees of the Board of Directors are available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link. The charters are also available in print and free of charge to any stockholder who sends a written request to the Corporate Secretary at the address on page 69 of this Proxy Statement.

 

Nominating/Corporate Governance Committee Matters

 

Functions

 

The functions of the Nominating/Corporate Governance Committee include:

 

 

 

Director Nominees

 

As noted above, the Nominating/Corporate Governance Committee is responsible for recommending director nominees for election to the Board of Directors. To fulfill this role, the Nominating/Corporate Governance Committee annually reviews the optimal size of the Board of Directors and its composition to determine the qualifications and areas of expertise needed to enhance the composition of the Board of Directors. To be considered, a candidate must:

 

 

Among other things, when assessing a candidate’s qualifications (including a self-nominee or a candidate nominated by a stockholder), the Nominating/Corporate Governance Committee considers:

 

 

In addition, all directors are expected to exercise their best business judgment when acting on our behalf; to represent the interests of all of our stockholders; to act ethically; and to adhere to the ethical standards applicable to the directors (see “Standards of Business Conduct for Employees and Directors,” on page 10 of this Proxy Statement, for further details regarding our standards of conduct).

 

The Nominating/Corporate Governance Committee considers all of these factors when determining whether to recommend a candidate for a director position. The Nominating/Corporate Governance Committee from time to time has used a search firm to assist it in identifying suitable candidates for director positions, although one is not retained at present.

Stockholder Nominees

 

The Nominating/Corporate Governance Committee will consider stockholder nominees for election to the Board of Directors at an annual meeting or in the event a vacancy exists on the Board of Directors. In 2008, no individuals self-nominated themselves for election to the Board of Directors. See “Other Information,” beginning on page 68 of this Proxy Statement, for further details regarding submitting nominations for director positions.

 

Director Independence; Board of Directors Governance Policies

 

The Board of Directors has approved the Board of Directors Governance Policies (the “Governance Policies”), which govern certain of the Board of Directors’ procedures and protocols. The Governance Policies are available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link. The Governance Policies are also available free of charge in print to any stockholder who sends a written request to the Corporate Secretary at the address on page 69 of this Proxy Statement.

 

Among other things, the Governance Policies establish the standards to determine the independence of the directors. In general, the Governance Policies provide that a director is independent if the director has no direct or indirect material relationship with us. A relationship is “material” if it would interfere with the director’s independent judgment. To assist the Nominating/Corporate Governance Committee in determining whether a relationship is material, the Board of Directors has established guidelines in the Governance Policies. In general, the guidelines provide that a director is not independent if, within certain time parameters:

 

 

This is only a summary of the Board of Directors’ independence guidelines, which also incorporate any additional requirements of the SEC and the NYSE. A complete list of the guidelines and principles are set forth in the Governance Policies.

 

In order to determine each director’s independence, the Nominating/Corporate Governance Committee reviews transactions between us or our subsidiaries and companies that employ one of our directors (or one of his or her immediate family members). For example, we have corporate travel arrangements with certain companies at which some of our independent directors also serve as officers or employees. Each such company, along with the director and his or her position at such company, are Edward Jones (John W. Bachmann, senior partner); The University of Oklahoma (David L. Boren, President); Flagler Development Group, Inc. (Armando M. Codina, Chairman); the John S. and James L. Knight Foundation (Alberto Ibargüen, President and Chief Executive Officer); The Rockefeller Foundation (Dr. Judith Rodin, President); and Burlington Northern Santa Fe Corporation (Matthew K. Rose, Chairman, President and CEO). Pursuant to these agreements, American Airlines and/or American Eagle provide air transportation to those companies. We believe that the terms of these arrangements are at least as favorable to us as

those we would have in a similar arrangement with an unaffiliated third party. The Nominating/Corporate Governance Committee determined that such arrangements do not affect the independence of Messrs. Bachmann, Boren, Codina, Ibargüen and Rose, and Dr. Rodin. In making these determinations, the Nominating/Corporate Governance Committee considered that the payments made by each participating company were less than the greater of $1 million or 2% of the other company’s consolidated gross revenues in each of the last three years.

 

Pursuant to the Governance Policies, the Nominating/Corporate Governance Committee has determined, and the Board of Directors has agreed, that Mrs. Korologos, Dr. Rodin and Messrs. Bachmann, Boren, Codina, Gupta, Ibargüen, Miles, Purcell, Robinson, Rose and Staubach are all independent in accordance with the Governance Policies. In addition, the Nominating/Corporate Governance Committee has previously determined, and the Board of Directors agreed, that Mr. Graves, who retired from the Board of Directors in March 2008, was independent in accordance with the Governance Policies during his term. Since Mr. Arpey is one of our employees, he is not independent.

 

Transactions with Related Persons

 

In addition to the independence requirements of the Governance Policies and the obligations of the directors under our Code of Ethics and Conflicts of Interest Policy described on page 10 of this Proxy Statement, the Board of Directors has adopted a written policy with respect to the review, approval or ratification of related party transactions. Our policy defines related party transactions generally as transactions or series of related transactions in excess of $120,000 involving us or our subsidiaries in which any (a) of our directors or nominees for director, (b) of our executive officers, (c) persons owning five percent or more of our outstanding stock at the time of the transaction, or (d) of the immediate family members of our directors, nominees for director, executive officers, or five percent stockholders, has a direct or indirect material interest. In addition, the Board of Directors has determined that certain interests and transactions are by their nature not material and are not subject to the policy.

 

The policy requires that the Nominating/Corporate Governance Committee, with the assistance of our General Counsel and/or Corporate Secretary, review and approve related party transactions. In its review of a proposed related party transaction, the Nominating/Corporate Governance Committee considers, among other factors: (a) whether the terms of the proposed transaction are at least as favorable as those we would have in a similar agreement with an unaffiliated third party; (b) the size of the transaction and the amount of consideration payable to or receivable by a related party; (c) the nature of the interest of the related party; and (d) whether the transaction may involve a conflict of interest.

 

During 2008, American Airlines advertised in, and sponsored events hosted by, Black Enterprise magazine. Mr. Graves, who was a member of our Board of Directors until March 31, 2008, is the Chairman of Earl G. Graves, Ltd., which publishes that magazine. During 2008, the payments made to Earl G. Graves, Ltd. and its affiliates totaled approximately $411,000. The Nominating/Corporate Governance Committee reviewed and ratified these transactions under our Related Party Transaction Policy.

 

Audit Committee Matters

 

Functions

 

The functions of the Audit Committee include:

 

 

 

 

 

During 2008, the Audit Committee met nine times. The Audit Committee reviewed, among other things, the quality and integrity of our financial statements; our compliance with legal and regulatory requirements; periodic filings on Form 10-K and Form 10-Q; the qualifications and independence of Ernst & Young LLP; the performance of our internal audit function; the status of the internal controls audit required by Section 404 of the Sarbanes-Oxley Act of 2002; the performance of the independent auditors; and other significant financial matters.

 

Each member of the Audit Committee satisfies the definition of “independent director” as established in the NYSE listing standards and the rules and regulations of the SEC. Also, each member of the Audit Committee fulfills the independence standards established under the Governance Policies and has been determined to be financially literate. The Board of Directors has concluded that Mr. Bachmann qualifies as an audit committee financial expert under SEC rules and regulations and has the requisite financial management expertise as specified under the NYSE listing standards. The Board believes that other members of the committee may also meet these qualifications.

 

Audit Committee Report

 

Throughout 2008, the Audit Committee met and held discussions with our management, as well as with Ernst & Young. Several of the discussions between the Audit Committee and Ernst & Young were in private, with no members of our management present. The Audit Committee also met privately (with no other members of our management present) with our General Auditor several times during 2008. Among other things, the Audit Committee reviewed and discussed our audited consolidated financial statements with management, our General Auditor, and Ernst & Young during these meetings.

 

The Audit Committee has also discussed with Ernst & Young the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Communication with Audit Committees).

 

The Audit Committee has received and reviewed the written disclosures and the letter from Ernst & Young required by the applicable requirements of the Public Company Accounting Oversight Board, and the Audit Committee has discussed with Ernst & Young the firm’s independence.

 

In reliance upon the reviews and discussions noted above, the Audit Committee recommended to the Board of Directors that our audited consolidated financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Subject to stockholder approval at the 2009 annual meeting, the Audit Committee has also selected Ernst & Young as our independent auditors for 2009 (see proposal 2).

 

Audit Committee of AMR Corporation:

 

Rajat K. Gupta

Alberto Ibargüen

Ray M. Robinson

 

Independent Auditor’s Fees

 

The following table reflects the aggregate fees paid to Ernst & Young for audit services rendered in connection with the consolidated financial statements, reports for fiscal years 2007 and 2008, and for other services rendered during fiscal years 2007 and 2008 on our behalf and on behalf of our subsidiaries:

 

		(amounts in thousands)
		2008				2007
Audit Fees		$	2,578			$	2,489
Audit-Related Fees			819				890
Tax Fees			171				74
All Other Fees			0				0
Total Fees		$	3,568			$	3,453

 

Audit Fees:  Consists of fees billed for professional services rendered for (a) the audit of our consolidated financial statements; (b) the audit of internal control over financial reporting; (c) the review of the interim condensed consolidated financial statements included in quarterly reports; (d) services that are normally provided by Ernst & Young in connection with statutory and regulatory filings or engagements and attest services, except those not required by statute or regulation; and (e) consultations concerning financial accounting and reporting standards.

 

Audit-Related Fees:  Consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements and are not reported under “Audit Fees.” These services include (a) employee benefit plan audits; (b) auditing work on proposed transactions; (c) attest services that are not required by statute or regulation; and (d) consultations concerning financial accounting and reporting standards that do not impact the annual audit.

 

Tax Fees:  Consists of tax compliance/preparation and other tax services. Tax compliance/preparation consists of fees billed for professional services related to federal, state and international tax compliance; assistance with tax audits and appeals; expatriate tax services; and assistance related to the impact of mergers, acquisitions and divestitures on tax return preparation. Other tax services consist of fees billed for other miscellaneous tax consulting and planning.

 

All Other Fees:  There were no fees for other services not included above.

 

In selecting Ernst & Young as our independent auditors for the fiscal year ending December 31, 2009, the Audit Committee has considered whether services other than audit and audit-related services provided by Ernst & Young are compatible with maintaining the firm’s independence.

 

The Audit Committee pre-approves all audit and permissible non-audit services provided by Ernst & Young, including audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and includes an anticipated budget. In addition, the Audit Committee may also pre-approve particular services on a case-by-case basis. The Audit Committee has delegated pre-approval authority to the Chairman of the Audit Committee. Pursuant to this delegation, the Chairman of the Audit Committee must report any pre-approval decision by him to the Audit Committee. The Audit Committee pre-approved all such audit, audit-related and permissible non-audit services in 2007 and 2008 in accordance with these procedures.

Diversity Committee Matters

 

Functions

 

The functions of the Diversity Committee include:

 

 

 

 

Compensation Committee Matters

 

Functions

 

The functions of the Compensation Committee include:

 

 

Processes and Procedures

 

The Compensation Committee acts on behalf of the Board of Directors and has the responsibility for approving the compensation of all of our officers, including the named executive officers. This responsibility includes establishing and implementing our executive compensation objectives, including linking each named executive officer’s compensation to our short-term and long-term strategic, financial and operational goals. The Compensation Committee also determines: (a) the performance measures established for performance-based awards for our officers; and (b) where the performance measures are subjective, the achievement of those performance measures and the amounts payable with respect to those awards. The Compensation Committee reviews and has the authority to adopt employment and change in control agreements with our officers and incentive plans for our officers, including those pertaining to performance shares, deferred shares, stock-settled stock appreciation rights and career performance shares.

 

The Compensation Committee is responsible for the administration of our executive compensation program. The Compensation Committee delegates authority for the day-to-day administration of our executive compensation program to our Senior Vice President – Human Resources and Human Resources department, but the Compensation Committee does not delegate compensation determinations for our officers.

 

The Compensation Committee meets regularly throughout the year to review general compensation issues and to monitor the compensation of our officers. In fulfilling its responsibilities, the Compensation Committee has the

authority to retain, and establish the duties and compensation of, external compensation consultants. During 2008, the Compensation Committee retained Hewitt Associates LLC to evaluate the competitiveness and reasonableness of our executive compensation relative to other public corporations employing similar executive talent. The Compensation Committee also engaged Deloitte Consulting LLP to advise the Compensation Committee on the Chief Executive Officer’s compensation package, incentive plan design and other executive compensation matters. Deloitte Consulting and certain of its affiliates and Hewitt Associates have also provided other services to us, such as tax and consulting services; however, the employees providing those services are not the employees who advise the Compensation Committee, and the Compensation Committee believes that these relationships do not impair the independence of these firms or their advisors.

 

With respect to executives other than the Chief Executive Officer, the Compensation Committee makes compensation decisions with, and frequently based upon the recommendation of, the Chief Executive Officer and our Senior Vice President – Human Resources. The Compensation Committee also reviews and considers comparative market data provided by Hewitt Associates. The Compensation Committee makes all determinations with respect to the Chief Executive Officer’s compensation with the assistance, when appropriate, of our Lead Director, Hewitt Associates and Deloitte Consulting.

 

The Nominating/Corporate Governance Committee is responsible for determining compensation for the Board of Directors. See “Director Compensation,” beginning on page 51 of this Proxy Statement, for further details regarding the Nominating/Corporate Governance Committee’s role in this determination.

 

The “Compensation Discussion and Analysis” below provides further details regarding our compensation objectives and programs, including information regarding the Compensation Committee’s annual compensation review, the types of compensation awards it uses, and the manner in which the Compensation Committee determines the size and terms of such awards.

 

Compensation Committee Interlocks and Insider Participation

 

Dr. Rodin, Messrs. Boren, Miles and Purcell, and, beginning in July 2008, Mr. Rose, were the members of the Compensation Committee during 2008. None of the members of the Compensation Committee was at any time during 2008, or at any other time, one of our officers or employees. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our Board of Directors or our Compensation Committee.

 

The following discussion provides an overview and analysis of the material elements and objectives of our executive compensation program. We provide information relating to the following, who were our named executive officers in 2008:

 

Gerard J. Arpey, Chairman, President and Chief Executive Officer of AMR Corporation and American Airlines;

 

Thomas W. Horton, Executive Vice President – Finance and Planning and Chief Financial Officer of AMR Corporation and American Airlines;

 

Daniel P. Garton, Executive Vice President – Marketing of AMR Corporation and American Airlines;

 

Robert W. Reding, Executive Vice President – Operations of AMR Corporation and American Airlines; and

 

Gary F. Kennedy, Senior Vice President, General Counsel and Chief Compliance Officer of AMR Corporation and American Airlines.

 

This discussion should be read in conjunction with “Executive Compensation” beginning on page 32 of this Proxy Statement.

Administration of Executive Compensation Program

 

The Board of Directors delegates oversight of our executive compensation program to the Compensation Committee, although the Compensation Committee discusses executive compensation matters and shares materials from the Compensation Committee meetings with the entire Board of Directors. The Compensation Committee is responsible for establishing our executive compensation objectives, approving the corporate objectives against which the committee measures performance in setting certain elements of our executive compensation packages, and determining the compensation of all of our officers, including the named executive officers. The Compensation Committee meets regularly throughout the year to review general compensation issues. See “Processes and Procedures,” beginning on page 18 of this Proxy Statement, for further details regarding administration of our executive compensation program.

 

Role of the Compensation Consultants

 

The Compensation Committee utilizes the advice of two external consultants, Hewitt Associates LLC and Deloitte Consulting LLP. The Compensation Committee retains Hewitt Associates to evaluate the competitiveness and reasonableness of our executive compensation relative to other public corporations employing similar executive talent. The Compensation Committee also engages Deloitte Consulting to advise the Compensation Committee on the Chief Executive Officer’s compensation package, incentive plan design and other executive compensation matters. The compensation consultants meet with the Compensation Committee during its annual review of executive compensation, including in executive session without any members of management present. At the direction of the Compensation Committee, the compensation consultants collaborate with and assist Mr. Arpey and other members of management, including the Senior Vice President of Human Resources, in obtaining information necessary for them to form their recommendations regarding compensation.

 

Role of the Chief Executive Officer in Setting Compensation

 

Mr. Arpey regularly attends Compensation Committee meetings, including the committee’s annual review of executive compensation. At these meetings, he provides his perspective on the performance of our officers, including the other named executive officers, and other subjective considerations that may influence the Compensation Committee’s compensation decisions, such as retention, succession planning, and critical personnel and business needs. He also presents his views on compensation recommendations for the other named executive officers. The Compensation Committee gives considerable weight to Mr. Arpey’s evaluation of the other named executive officers because he has direct knowledge of each officer’s performance and contributions since they report directly to him. Mr. Arpey does not participate in the Compensation Committee’s deliberations or decisions with regard to his compensation, although he discusses his compensation with the Compensation Committee and its consultants.

 

Process to Determine Compensation

 

Annually, the Compensation Committee, with the participation of our Lead Director, conducts a comprehensive review of our executive compensation program. Prior to 2008, the annual compensation review was conducted in July of each year. In 2008, the annual compensation review took place in May in order to grant long-term equity awards prior to the expiration of our 1998 Long Term Incentive Plan (as amended, the “1998 LTIP”) on May 21, 2008. The compensation review includes a review of: (a) a report prepared by our Human Resources department evaluating our executive compensation to ensure that we are achieving our compensation objectives and a review of the compensation paid at eight other major U.S. passenger airlines, and (b) a comprehensive report from Hewitt Associates evaluating the competitiveness of our executive compensation program relative to the programs at companies in a cross-industry comparator group. Since we compete for our executive talent with companies both within and outside our industry, the Committee reviewed market data from a peer group of our major U.S. passenger airline competitors and Hewitt’s report, which included 26 public companies that have certain similar characteristics to us, such as (a) comparable revenue size (with our revenue approximately at the median of the revenues of the companies in the comparator group), (b) operations in multiple locations across the United States, (c) similar labor requirements, (d) headquarters in the Dallas-Fort Worth area, and/or (e) comparable management structures so that job comparisons are meaningful. In addition, at the time of this review and with the participation of our Lead Director, the Compensation Committee evaluates the Chief Executive Officer’s compensation.

For the 2008 compensation review, the Compensation Committee reviewed (a) data for the following eight major U.S. passenger airlines: AirTran Airways, Continental Airlines, Delta Air Lines, JetBlue Airways, Northwest Airlines, Southwest Airlines, United Airlines, and US Airways, and (b) Hewitt’s report comprised of the following 26 companies (the “Comparator Group”):

 

 

The Compensation Committee reviews data comparing total compensation and each element of compensation provided to our named executive officers to executive compensation at the companies comprising the Comparator Group. While the Compensation Committee has the ability to exercise discretion with respect to the total compensation provided to our named executive officers and consider other factors, its policy, except as described below, is to establish a compensation package that provides to each such officer total compensation that is approximately equal to the median total compensation of persons holding comparable positions or responsibilities at the companies comprising the Comparator Group and generally consistent with the compensation provided to our other named executive officers with similar levels of responsibility. The Compensation Committee generally believes that the median reflects competitive market compensation for our named executive officers, and in 2008, the Compensation Committee approved total compensation packages for our named executive officers that generally were consistent with this policy. However, during 2008 and in prior years, Mr. Arpey’s total compensation was below the median of the chief executive officers in the Comparator Group. While it remains the Compensation Committee’s intent to increase Mr. Arpey’s compensation to be closer to the median of chief executives in the Comparator Group, in light of the industry’s and our current financial situation, the Compensation Committee determined that his total compensation for 2008 should have the same value as his 2007 compensation, except for a 1.5% increase to his base salary that was awarded to all of our employees in 2008. In addition, the Compensation Committee included in the group against which Mr. Garton’s compensation was benchmarked the compensation of persons serving in the role of chief financial officer at the companies in the Comparator Group. The Compensation Committee made this determination due to Mr. Garton’s (a) contributions and broad skill set, (b) oversight of a large operating group, our flight attendants, in addition to his marketing responsibilities, and (c) prior experience as a chief financial officer of a company in the airline industry.

 

In addition to reviewing competitive market data, the Compensation Committee considered:

 

 

To better understand the impact of its decisions on the total compensation for our named executive officers, the Compensation Committee also analyzes tally sheets. The tally sheets quantify all material components of compensation for the named executive officers during the preceding five years. These include (a) annual base salary and bonuses, (b) outstanding equity awards and their value, (c) compensation actually realized, (d) retirement benefits, (e) potential termination of employment benefits (or payments), and (f) change in control payments under

certain scenarios. Based on its review of the tally sheets and other items described above in 2008, the Compensation Committee concluded that the total compensation amounts for prior years and for 2008 remained reasonable and consistent with our overall compensation objectives, and the Compensation Committee did not make any material changes to the compensation of our named executive officers or our existing programs and policies for 2008 as a result of such review.

 

Compensation Objectives

 

The principal objectives of our executive compensation program are to:

 

 

We believe that our executive compensation program should be considered in the context of the business environment in which we have operated during the last several years. In 2003, we implemented our Turnaround Plan in response to the challenges we faced resulting from the September 11th attacks and the subsequent economic downturn. The plan’s four tenets include: (a) lowering costs; (b) increasing our focus on what customers value; (c) increasing union and employee involvement in our operations; and (d) improving our balance sheet and financial structure.

 

Evaluation of Corporate Performance

 

To implement our pay for performance objective, a substantial portion of our executives’ pay is “at risk,” meaning the final amount of compensation actually realized is dependent on the achievement of certain short-term and long-term financial and operating measures and objectives that, if achieved, would contribute to our long-term financial stability and success. The Compensation Committee has determined that the corporate measures described below are critical to our success and has linked our executives’ performance-based compensation to these measures:

 

Measures Utilized in Connection with Short-Term Incentive Compensation Plans

 

Pre-Tax Profits—Over the course of its more than 80 year history, the airline business has proven to be very cyclical and vulnerable to general economic conditions and various external factors, such as fuel prices and government regulations in recent years. To encourage our executives to strive to generate adequate profit levels, the Compensation Committee has established a short-term incentive program that requires a minimum 5% pre-tax earnings margin in order for bonuses to be paid. Given the environment in which the airline industry has operated since 2001, this minimum level of pre-tax earnings is an extremely challenging hurdle for us to achieve, and we have not made any annual bonus payments to the named executive officers based on this performance measure since 2001.

 

Customer Service—To reinforce the tenets of the Turnaround Plan, all employees, including the named executive officers, are awarded cash payments under our Annual Incentive Plan if we achieve our target for on-time flight arrivals or customer satisfaction scores. See the discussion regarding the Annual Incentive Plan under “Short-Term Incentive Compensation” beginning on page 24 for more details. We believe that by focusing all employees on customer satisfaction, we are more likely to achieve positive pre-tax earnings and long-term stockholder value.

 

Measures Utilized in Connection with Long-Term Incentive Compensation Plans

 

Stock Price Growth—We believe that consistent execution of our strategy over multi-year periods should lead to an increase in our stock price over time. Stock-settled stock appreciation rights (SSARs) are one way in which we provide our executive officers with a stake in this potential increase. The actual compensation

realized from the SSARs is entirely dependent on increases in our stock price after the SSAR grant date. We also grant performance shares and deferred shares that generally vest after three years, the value of which is also dependent on our stock price over time.

 

Total Shareholder Return—In addition to general growth in our stock price, we believe that it is important for our stock to perform as well as or better than other airlines that we compete against. Thus, distributions under our performance share plans are in part dependent on how well our total shareholder return compares to the total shareholder return of our competitors over three-year measurement periods. The Compensation Committee selected the three-year total shareholder return (“TSR”) measure because it is an objective, market-based metric that directly measures shareholder value creation over the long term. Use of a relative TSR metric also mitigates the effect of general market or sector performance on our stock price and, by extension, compensation levels for our executive officers.

 

Corporate Objectives—Prior to 2004, TSR was the sole performance measure used to determine distributions, if any, with respect to performance shares. Since the adoption of our Turnaround Plan in 2003, Mr. Arpey and our Senior Vice President of Human Resources have recommended to the Compensation Committee each year, for the committee’s review and approval, annual corporate objectives tied to our Turnaround Plan. The Compensation Committee and the Board of Directors believe that successful execution of these objectives is important to our financial stability and long-term success. Accordingly, starting with awards made in 2004 the Compensation Committee determined that attainment of these objectives would govern one-half of the final distribution of performance shares to our senior officers, including our named executive officers.

 

In April 2008, however, the Compensation Committee determined that with respect to any performance share awards granted thereafter, the TSR objective would again be the sole performance measure used to determine distributions for all recipients, including our senior and named executive officers. While the Compensation Committee believes that achieving our corporate objectives remains important, it made this policy change in order to more directly align executive compensation with stockholders’ interests.

 

Primary Components of Compensation

 

Our executive compensation program principally consists of the following direct compensation components, each of which we describe more fully below and in the accompanying tables and footnotes:

 

 

In addition, we provide certain termination benefits to our named executive officers.

 

We do not have a formal policy for allocating compensation between cash or non-cash elements and short-term or long-term incentives for our named executive officers. Rather, the Compensation Committee determines the appropriate allocation of cash or non-cash elements and short-term or long-term compensation with our compensation objectives and comparative company data in mind. “At risk” compensation is an important element of our compensation program, and represents more than 70% of the named executive officers’ total compensation package in 2008. We provide “at risk” compensation primarily through grants of stock-based compensation and participation in compensation plans tied to achieving strategic, financial and operational goals and performance measures.

 

Base salary and short-term incentives are payable in cash. Base salary is generally designed to comprise 15% of the named executive officers’ total compensation package. Short-term incentive compensation is generally designed to comprise 15% of the named executive officers’ potential annual compensation, although we have not paid annual bonuses to any of our named executive officers since 2001. Long-term incentive compensation is generally designed to represent 70% of the named executive officers’ potential annual compensation.

Base Salary

 

The Compensation Committee believes that it is important to pay a base salary to each of our named executive officers to provide them with a secure, known amount of cash compensation during the year. The Compensation Committee considers competitive market compensation and establishes each officer’s base salary close to the median base salary of persons holding comparable positions at the companies comprising our Comparator Group.

 

In April 2008, the Compensation Committee approved a uniform 1.5% increase to the named executive officers’ base salaries, which is the same increase to base salaries that all of our U.S.-based employees received in 2008.

 

Short-Term Incentive Compensation

 

Annual Incentive Plan.  As part of the Turnaround Plan, we established the Annual Incentive Plan (the “AIP”) to link the interests of our stockholders, customers and employees. All U.S.-based employees, including the named executive officers, participate in the AIP, which provides cash incentive payments upon the achievement of monthly customer service goals and annual financial goals.

 

Awards are earned monthly under the customer service component of the AIP if we achieve at least one of the following two customer service targets:

 

 

The customer service component of the AIP provides for payments ranging from $40 to $80 per month for each employee, predicated upon our achieving at least one of the two customer service targets. An additional $250 is paid annually to each employee for achieving a top six performance relative to our competitors for on-time arrival, as determined by the U.S. Department of Transportation. Any amounts earned under the customer service component of the AIP will be subtracted from any amounts earned under the financial component of the AIP. In 2008, we paid $160 under the customer service component of the AIP to each eligible employee, including our named executive officers. In addition, in January 2008, we made payments of $800 to each eligible employee of American Airlines under the customer service component of the AIP with respect to services provided in 2007, except no such payments were made to our named executive officers or any of our other officers.

 

Awards are earned annually under the financial component of the AIP if American Airlines achieves threshold, target or maximum pre-tax earnings margins described in the following table:

 

						Approximate
						Pre-Tax Earnings
		Pre-Tax				(Based on American Airlines’
Level		Earnings Margin				2008 Revenue)
Threshold			5%			$	1.2 Billion
Target			10%			$	2.4 Billion
Maximum			15%			$	3.6 Billion

 

The actual dollar amount of a paid award is determined as a percentage of base salary, and the percentage of base salary varies according to the level of responsibility and the pre-tax earnings margin achieved. As part of its annual compensation review in 2008, the Compensation Committee determined the threshold, target and maximum award payout levels under the financial component of the AIP for 2008 for each of the named executive officers by reference to the short-term incentive compensation awards available to persons holding comparable positions at the companies comprising our Comparator Group. Subject to the maximum awards established for each of the named executive officers, the Compensation Committee has the discretion to adjust the final awards. The percentages of base salary that each of our named executive officers was eligible to receive in 2008 are set forth in “Non-Equity Incentive Plan Awards” on page 35 of this Proxy Statement.

We did not make any payments under the financial component of the AIP for 2008, and because we have not achieved any of the pre-tax earnings margin thresholds, we have not made any short-term incentive compensation payments to our named executive officers under the financial component of the AIP (or its predecessor incentive compensation plan) since March 2001.

 

The Compensation Committee also has the discretion under the AIP to award limited cash incentive payments to the named executive officers and certain other management employees if we do not meet the payout levels under the financial component of the AIP. Under the terms of the AIP, any such discretionary payments can be no more than 20% of the employee’s maximum bonus payable under the AIP. We did not make any such discretionary cash payments or pay any other forms of bonuses to any of the named executive officers in 2008 or in any previous year.

 

American Airlines also maintains a Profit Sharing Plan for its employees. Under that plan, profit sharing payments are made to eligible employees if our annual pre-tax earnings exceed $500 million. By its terms, our officers (including the named executive officers) and certain other management employees are not eligible to participate in the Profit Sharing Plan. However, under the AIP, the Compensation Committee has the discretion to award cash payments to these officers and management employees if the other employees of American Airlines receive profit sharing payments under the Profit Sharing Plan. No such payments were made to any of the named executive officers in 2008 or in any previous year.

 

Long-Term Incentive Compensation

 

Long-term compensation is a critical component of our executive compensation program because it is designed to link executive compensation to the interests of our stockholders by motivating executives to increase total stockholder return. We also believe that long-term compensation is an important retention tool.

 

The Compensation Committee utilizes a variety of equity-based instruments to provide long-term compensation for our named executive officers. We generally grant awards at the time of the Compensation Committee’s annual compensation review, with interim awards made from time to time to new hires or upon increases in responsibilities. In 2008, we granted the following equity-based instruments:

 

 

Our long-term incentive plans generally allow us to settle these awards in either stock, cash, or a combination of stock and cash.

 

In determining the types and amounts of the long-term equity awards granted in 2008 to each of our named executive officers, the Compensation Committee targeted the median level of long-term equity awards to persons holding comparable positions at the companies comprising our Comparator Group, while keeping such awards generally consistent with the compensation provided to our other named executive officers with similar levels of responsibility. However, the long-term equity awards granted in 2008 to Mr. Arpey were substantially below the comparable median among chief executive officers in the Comparator Group.

 

In connection with its annual compensation review in May 2008, the Compensation Committee determined to grant long-term equity awards with the same value as were granted in 2007, but to change the mix of long-term equity awards to reduce the large swings in realized compensation that have been experienced in the past several years by reducing performance share awards and increasing deferred share awards. The Compensation Committee also determined to grant a higher percentage of the total value in the form of SSARs in order to extend the duration of the award from three years to ten years and to place more emphasis on absolute stock appreciation. Grants of

long-term equity awards were approved to the named executive officers in approximately the following proportions: 50% in performance shares (including, for Mr. Arpey, his career performance shares); 30% in SSARs; and 20% in deferred shares. As a result, approximately 80% of the named executive officers’ potential long-term incentive compensation is dependent upon our financial and operating performance, including, in the case of SSARs, appreciation in our stock price. We establish the value and number of performance and deferred share awards using a standard valuation methodology developed by Hewitt Associates that takes into account the terms of such awards, including the applicable vesting and performance criteria. We use a modified Black-Scholes valuation model to determine the value and number of SSAR awards. See “Fiscal Year 2006, 2007 and 2008 Summary Compensation Table,” beginning on page 32 of this Proxy Statement and the accompanying footnotes, for further details on long-term compensation.

 

Performance Shares.  The actual number of performance shares (if any) ultimately distributed to the named executive officers has been determined in recent years based on (a) our TSR as compared to that of our main competitors and (b) the Compensation Committee’s subjective determination of achievement of our corporate objectives, in each case during a three-year measurement period. As originally designed, final distribution of the performance share awards for the 2006-2008 measurement period could range from 0% to 175% of the performance shares originally granted, depending on our performance against these measures during the applicable three-year measurement period.

 

TSR is defined as the rate of return reflecting stock price appreciation plus reinvestment of dividends over the measurement period. The average stock price at the close of trading on the NYSE (adjusted for splits and dividends) for the three months prior to the beginning and ending points of the measurement period is used to smooth out market fluctuations.

 

The Compensation Committee selects the competing airlines against which we will compare our TSR based on their market capitalization, revenues and airline seat capacity. For the 2008/2010 Performance Share Plan, the Compensation Committee determined to increase the number of airlines from six to ten in order to encompass a broader and more objective representation of the U.S. passenger airline industry. This group consists of: AirTran Holdings, Inc., Alaska Air Group, Inc., AMR Corporation, Continental Airlines, Inc., Delta Air Lines Inc., JetBlue Airways Corporation, Northwest Airlines Corporation, Southwest Airlines Co., US Airways Group, Inc. and UAL Corporation.

 

Distributions of performance shares related to TSR vary according to the following schedule, where “Rank” is our TSR ranking among the ten airlines and “Percent of Original Award” is the percentage of the performance shares initially granted that will be earned based on the TSR measure of performance. In the event that one or more of the ten airlines ceases to trade on a national securities exchange at any point during the three year measurement period, the airline is excluded from the calculation of the TSR, as shown in the table below:

 

 

For performance share awards granted from 2004 to 2007, the determination of distributions of the other half of the performance share awards initially granted to our named executive officers and other senior officers was

based upon the Compensation Committee’s subjective determination of achievement of corporate objectives adopted by the Compensation Committee each year. The corporate objectives are consistent with the objectives of our Turnaround Plan, and for the years 2004 through 2008 were: (a) keeping safety our top priority; (b) raising external capital, maintaining a minimum amount of cash and building a strong balance sheet; (c) meeting our pension funding obligations; (d) continuing to lower our non-fuel costs and implementing measures to conserve fuel; (e) improving customer service and dependability rankings; (f) continuously improving revenues and business results through employee collaboration and other means; (g) enhancing our image and customer loyalty; (h) continuing to successfully advocate on industry legislative and regulatory issues; (i) focusing on a positive work environment and promoting diversity; (j) promoting employee commitment to the employee standards of conduct and compliance with laws and regulations; (k) meeting financial goals in order to return to and sustain profitability and create long-term shareholder value; and (l) any other factors that the Compensation Committee may determine are important or appropriate. In determining attainment of the corporate objectives, the Compensation Committee is not required to use any formula or other measure or assign any particular weighting to any objective, and may also consider any other factor that it considers important or appropriate.

 

With respect to the performance share awards under the 2006/2008 Performance Share Plan, the Compensation Committee determined that we had a fourth place TSR rank during the 2006-2008 measurement period, resulting in a TSR distribution percentage of 75%. Achievement of the corporate objectives during this measurement period was well in excess of 75%. Because TSR is the sole performance measure used to determine performance shares distributed to all of the other participants in that plan, our named executive officers and other senior officers would have received a higher distribution percentage than the other participants in that plan if the determination of distributions of one-half of the performance shares initially granted to the senior officers was based on achievement of the corporate objectives. The Compensation Committee and senior officers believed that such an outcome was not appropriate. With the consent of the senior officers, the Compensation Committee therefore determined to align the distribution percentage for all participants under the 2006/2008 Performance Share Plan by only using the TSR metric to determine distribution of the awards to our named executive officers and other senior officers. As a result, on April 15, 2009, our senior officers (including the named executive officers) received 75% of the awards originally granted to them under the 2006/2008 Performance Share Plan.

 

With respect to the performance share awards to our named executive officers under the 2005/2007 Performance Share Plan (that were distributed in April 2008), in 2008 the Compensation Committee determined that we had a second place TSR rank during the 2005-2007 measurement period, resulting in a TSR distribution percentage of 135%, and our attainment of the corporate objectives over the same period was 133%. As a result, in April 2008, each named executive officer received 134% of the share awards originally granted to him under the 2005/2007 Performance Share Plan.

 

SSARs.  SSARs provide compensation to the named executive officers only to the extent that the market value of our common stock appreciates from the date of grant. SSARs vest in equal annual installments over five years, so an officer must generally complete five years of service to receive the full benefit of any SSAR grant. We generally grant SSARs to our officers (including our named executive officers) at the time of the Compensation Committee’s annual compensation review. Our practice is generally to use the date the Compensation Committee approves the grant as the effective date, unless the grants are approved at the time of our earnings release (in which case we use the third business day after the corresponding earnings release). We established the exercise price of these SSARs as the fair market value of our common stock on that date. For 2008, the Compensation Committee conducted the compensation review at its May meeting. The effective date of the SSARs granted at that meeting was May 20, 2008, which was the date the Compensation Committee approved the grant.

 

Deferred Shares.  The Compensation Committee believes that deferred shares are important for long-term retention of our named executive officers since they are intended to provide a minimum value for their continued service. Since the deferred shares generally vest upon three years of service from the date of grant, these awards complement our performance share and SSAR awards, which are both contingent upon the achievement of either specified performance objectives or stock price appreciation.

Career Performance Shares.  In 2005, the Compensation Committee determined, with the assistance of Deloitte Consulting and Hewitt Associates, that Mr. Arpey’s total compensation was substantially below the median compensation of chief executive officers of the companies comprising our Comparator Group. In lieu of increasing his current compensation to more competitive levels, the Compensation Committee entered into an agreement with Mr. Arpey pursuant to which he would be granted a minimum of 58,000 deferred shares of our common stock in each year from 2005 through and including 2009, that will vest, if at all, in 2015. These awards are referred to as career performance shares.

 

At the end of the performance period, the Compensation Committee will determine, in its discretion, whether any distributions of these shares will be made, based on its assessment of achievement of the following financial and operating measures during the performance period: (a) overall cash flow; (b) earnings; (c) the per share price of our common stock; (d) operating performance (including safety and other issues concerning regulatory compliance); (e) the rate of return achieved on our investments and/or equity; (f) measures of employee engagement and/or satisfaction; (g) the overall state of relations with our organized labor groups; (h) our balance sheet; (i) our overall relationships with our largest stockholders; (j) revenues; and (k) other factors as the Compensation Committee may, in its judgment, deem material. Depending on this assessment, the ultimate distribution with respect to such career performance shares could range from 0% to 175% of the shares originally granted. The Compensation Committee is not required to use any formula or other measure or assign any particular weighting to any objective or the performance for any particular year in determining achievement of these objectives. Also, the Compensation Committee may consider any other factors it believes are material.

 

In addition to providing more competitive long-term compensation for Mr. Arpey, the Career Share Performance Award Agreement reflects our desire to retain Mr. Arpey because of his knowledge of the airline business, his contributions to the airline’s success, and our confidence that Mr. Arpey has the vision and managerial capability to oversee our continued growth. The Compensation Committee has not granted career performance shares to any other named executive officer because their total potential compensation more closely approximates the median for similarly situated positions with the companies comprising our Comparator Group.

 

As part of its 2008 compensation review in May and pursuant to its agreement with Mr. Arpey, the Compensation Committee granted Mr. Arpey 58,000 career performance shares, the minimum number of shares required to be granted by the Career Performance Share Award Agreement. In approving such grant, the Compensation Committee concluded that Mr. Arpey’s total compensation was still significantly below the median for chief executive officers in the Comparator Group. Vesting of the granted shares remains contingent on Mr. Arpey’s performance and continued service through 2015, subject to certain exceptions discussed in “Termination By Executive For Good Reason” beginning on page 46 of this Proxy Statement.

 

Retirement

 

Retirement Benefit Plan.  We provide the Retirement Benefit Plan of American Airlines, Inc. for Agents, Management, Specialists, Support Personnel and Officers (the “Retirement Benefit Plan”) to help provide compensation to our eligible employees during their retirement. All of the named executive officers participate in the Retirement Benefit Plan, which is a defined benefit plan. Similar defined benefit plans exist for other American Airlines employees, including those employees covered by bargained labor agreements. We design our retirement benefits to be competitive with overall market practices and to provide long-term financial security for employees and, specifically for executives, to promote retention.

 

The Retirement Benefit Plan complies with the Employee Retirement Income Security Act of 1974 (“ERISA”) and qualifies for an exemption from federal income taxation under the Internal Revenue Code of 1986 (the “Code”). Since the Retirement Benefit Plan is a qualified plan, it is subject to various restrictions under the Code and ERISA with respect to payments and benefit calculations. These restrictions limit the maximum annual benefit payable under qualified plans (such as the Retirement Benefit Plan). The limit was $180,000 in 2007, $185,000 in 2008 and $195,000 in 2009. Further, the Code limits the maximum amount of annual compensation that we may take into account under the Retirement Benefit Plan. The limit was $225,000 in 2007, $230,000 in 2008 and $245,000 in 2009. We pay benefits under the Retirement Benefit Plan as monthly annuities, which we reduce for the receipt of social security benefits.

See “2008 Pension Benefits Table” and the accompanying narrative discussion and footnotes that follow the table, beginning on page 43 of this Proxy Statement, for further details regarding the Retirement Benefit Plan.

 

Non-Qualified Plan.  To address limitations on benefits under the Retirement Benefit Plan, American Airlines pays an additional retirement benefit to the named executive officers under the Supplemental Executive Retirement Plan, a plan that is not qualified under the Code (the “Non-Qualified Plan”). The Non-Qualified Plan formulas are the same as those applicable under the Retirement Benefit Plan, but are not subject to the annual benefit or compensation limits of the Code. Short-term incentive compensation is included in the Non-Qualified Plan benefit formula because base pay for the named executive officers generally represents a small percentage of their total compensation potential. Income received from long-term incentive compensation distributions (such as stock option/SSAR exercises, performance share, deferred share and career performance share distributions) are not included in the Non-Qualified Plan benefit formulas. We pay benefits under the Non-Qualified Plan in a lump sum.

 

The Board of Directors approved the establishment of a secular trust in 2002 to fund defined benefits payable under the Non-Qualified Plan. We fund the trust to provide participants in the Non-Qualified Plan a comparable level of certainty regarding payment of their retirement benefits under the plan to that afforded to all eligible employees under the Retirement Benefit Plan. Contributions of vested benefits to the secular trust are taxable to the named executive officers and the funds are not subject to claims from creditors in the event of bankruptcy. It is our current policy not to fund the Non-Qualified Plan’s trust to any greater extent than the funded percentage of our least funded qualified defined benefit plan for non-officer employees.

 

See “2008 Pension Benefits Table” and the accompanying narrative discussion and footnotes that follow, beginning on page 43 of this Proxy Statement, for further details regarding the Non-Qualified Plan.

 

Travel Privileges and Other Benefits

 

The named executive officers participate in a variety of health and welfare and other benefits provided to the other U.S.-based employees of American Airlines. The Compensation Committee has also determined that it is important to provide a limited number of additional perquisites and benefits to our named executive officers to attract and retain them. As is common practice in the industry, we provide unlimited travel privileges in any available class of service on American Airlines and American Eagle Airlines to our named executive officers and their respective spouses or companions and dependent children, and complimentary travel from time to time on other airlines on request. Although these travel privileges are primarily complimentary, each named executive officer is required to pay service charges, fees and taxes for the transportation and are subject to our travel privilege program terms and conditions.

 

In order to reduce costs, in 2003 we elected to eliminate a number of perquisites frequently provided to executive officers of public companies, such as automobile lease payments, club memberships, financial planning fees and split dollar life insurance. We instead provide personal allowances. We also provide personal security services from time to time for Mr. Arpey and his family. We describe further the perquisites that we provide to our named executive officers while they are employed by us in footnote (6) to the “Fiscal Year 2006, 2007 and 2008 Summary Compensation Table” on page 32 of this Proxy Statement.

 

Post-Termination and Change in Control Benefits

 

The named executive officers are eligible for benefits, perquisites and privileges following their employment with us that we generally provide to all of our salaried employees. These may vary depending upon the reason for termination or the position or tenure of the named executive officer. In addition, they are eligible to receive severance determined according to prescribed policy, pro-rated incentive compensation and equity distributions, and a limited number of other benefits, perquisites and privileges. Subject to certain terms and conditions, upon termination we also generally provide unlimited air transportation on American Airlines and American Eagle Airlines in any available class of service to our named executive officers (and their respective spouses or companions and dependent children). See the narrative discussion under “Post-Employment Compensation,” beginning on page 45 of this Proxy Statement, for further details regarding these post-termination benefits, perquisites and privileges.

Under the terms of our 1998 LTIP, upon the occurrence of a change in control as defined in the 1998 LTIP, all outstanding stock options and SSARs will become immediately exercisable, all outstanding shares of restricted stock and deferred shares will vest, and all performance shares (including career performance shares) will be deemed vested at target levels of performance. In connection with a change in control, the Compensation Committee may elect to cash out each such outstanding award. Also, upon a change in control each named executive officer will receive a payment equal to the present value of the remaining annual retirement benefit to be paid to him under the Non-Qualified Plan.

 

Under the 1998 LTIP, as modified in 2008 to comply with Section 409A of the Code (“Section 409A”), a change in control of AMR Corporation is deemed to occur: (a) if a third party acquires beneficial ownership of thirty percent or more of our common stock over a twelve month period; (b) if the Board of Directors or their approved successors no longer constitute a majority of the Board of Directors (as measured over a twelve month period); (c) if our stockholders approve our complete liquidation or dissolution; or (d) upon the consummation of a reorganization, merger, consolidation, or a sale or other disposition of all our assets, unless, immediately following such transaction, (1) our stockholders prior to the transaction hold at least fifty percent of the voting securities of the successor, (2) no one person owns more than thirty percent of the successor, and (3) the members of the Board of Directors prior to the transaction constitute at least a majority of the Board of Directors of the successor. However, in no event will a change in control be deemed to have occurred unless the event also complies with regulations issued under Section 409A. This modified change in control definition requires a significantly higher threshold of ownership or control to trigger a change in control as compared to the change in control definition it replaced.

 

These events were used to define change in control because each reflects a circumstance in which, through a party’s acquisition of a significant voting block, a shift in the control of the majority of the Board of Directors, or a corporate transaction, a person or group would be expected to obtain control or effective control over our policies and direction. In those circumstances, the Compensation Committee believes it would be appropriate to provide management the benefit of the awards that have been conveyed prior to such event and to waive the service and other conditions applicable to management’s rights to such awards, because such change could reasonably be expected to materially alter our policies and objectives, and/or result in a material change in the composition of management.

 

We have also entered into executive termination benefit agreements or similar protections with our named executive officers for terminations associated with a change in control. Since 1987, it has been our practice to enter into these agreements with our executive and senior officers. All of the named executive officers, except Mr. Horton, are covered under change in control agreements. These agreements were revised in 2008 to comply with Section 409A, including adopting the modified definition of change in control described above. Mr. Horton has similar change in control protections under his employment agreement. We believe that these agreements are consistent with executive termination agreements entered into by other companies at that time. These agreements encourage the executive to work for the best interests of the stockholders during a potential change in control situation by guaranteeing the executive a specified level of financial security if the executive’s employment is terminated following a change in control. The executive termination benefit agreements also help ensure that the executive will remain with us for a reasonable period after the change in control, enabling a smooth transition to new management. Further, we believe that these features remain in common use. The airline industry is highly competitive, has witnessed bankruptcies, and is subject to potential future consolidation and economic contingencies due to the current challenging economic climate. Our Compensation Committee therefore believes that we should have these agreements with our named executive officers. See the narrative discussion of these agreements under “Change In Control,” beginning on page 49 of this Proxy Statement, for further details.

 

Extension of Mr. Horton’s Employment Agreement

 

In March 2006, we entered into a three-year employment agreement with Mr. Horton in order to attract him to become our Executive Vice President-Finance and Planning and Chief Financial Officer. In order to continue to retain him, in July 2008, the Compensation Committee extended Mr. Horton’s employment agreement by an additional three years until March 29, 2012. No other changes were made to Mr. Horton’s employment agreement. Additional information regarding Mr. Horton’s employment agreement is provided in “Employment Agreement with Mr. Horton” on page 35 and elsewhere in Executive Compensation beginning on page 32.

Recoupment Policy

 

In March 2009, the Compensation Committee approved a policy that allows the Compensation Committee to recoup certain compensation paid to our chief executive officer and each of his direct reports (including each other named executive officer) if we restate our financial statements due to that officer’s intentional misconduct. The recoupment policy applies to excess compensation that may have been realized, as a result of the misstated financial information, by the officer engaged in the misconduct under an annual incentive plan or equity incentive awards to the extent the awards were predicated upon metrics that were affected by the misstated financial information.

 

Consideration of Tax Consequences in Determining Compensation

 

Section 162(m) of the Code limits the deductibility of certain compensation paid to certain of our named executive officers to $1 million. While the Compensation Committee believes that it is important for the compensation paid to our named executive officers to be tax deductible under Section 162(m), it does not think this should be the determining factor in establishing compensation. The Compensation Committee believes that we must balance the emphasis on maximizing deductibility against both the need to retain executive talent and our long-term strategies and goals.

 

Compensation Committee Report

 

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on such review and discussions, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

Compensation Committee of AMR Corporation:

 

     Michael A. Miles, Chairman

     David L. Boren

     Philip J. Purcell

     Judith Rodin

     Matthew K. Rose

 

Fiscal Year 2006, 2007 and 2008 Summary Compensation Table

 

The following Fiscal Year 2006, 2007 and 2008 Summary Compensation Table contains information regarding compensation for 2006 – 2008 that we paid to: (a) our Chief Executive Officer, Gerard J. Arpey, (b) our Chief Financial Officer, Thomas W. Horton, and (c) our three most highly compensated executive officers (other than the Chief Executive Officer and Chief Financial Officer) as of December 31, 2008, Daniel P. Garton, Robert W. Reding and Gary F. Kennedy.

 

 

 

Fiscal Year 2008 Grants of Plan-Based Awards Table

 

The table below lists each grant or award made in 2008 to our named executive officers under our equity and non-equity incentive plans.

 

 

 

Discussion Regarding Fiscal Year 2006, 2007 and 2008 Summary Compensation Table and Fiscal Year 2008 Grants of Plan-Based Awards Table

 

General

 

Base salary and short-term incentives are payable in cash. Base salary is generally designed to comprise 15% of the named executive officers’ total compensation package. Short-term incentive compensation is generally designed to comprise 15% of the named executive officers’ potential annual compensation, although we have not paid annual bonuses to any of our named executive officers since 2001. Long-term incentive compensation is generally designed to represent 70% of the named executive officers’ potential annual compensation.

 

Employment Agreement with Mr. Horton

 

In March 2006, we entered into an employment agreement with Mr. Horton, which in July 2008 was extended until March 29, 2012. Pursuant to the agreement, Mr. Horton is entitled to receive an annual base salary of $600,000, which is reviewed annually and may not be reduced after any increase, and an annual target bonus equal to 108% of his salary. Mr. Horton is eligible to participate in our management employee and executive benefit programs, including the Retirement Benefit Plan and the Non-Qualified Plan, and to receive an annual personal allowance of at least $27,000 per year. The agreement grants Mr. Horton additional years of credited service under the Non-Qualified Plan, as described under “2008 Pension Benefits Table,” beginning on page 43 of this Proxy Statement, and certain post-employment and change in control benefits, as described under “Post-Employment Compensation,” beginning on page 45 of this Proxy Statement and “Change In Control,” beginning on page 49 of this Proxy Statement. Except as described above, we are not a party to any currently effective employment agreement with any of our named executive officers.

 

Non-Equity Incentive Plan Awards

 

In 2003, we agreed that all U.S.-based employees, including the named executive officers, would participate in a new cash incentive plan, called the Annual Incentive Plan. Awards under the AIP are based on a customer service component and a financial component. The customer service component of the AIP contemplates payments ranging from $40 to $80 per month for each employee, predicated upon American Airlines achieving at least one of two customer service targets. With respect to the customer service component, in 2008 monthly payments of $40 were earned in each of September, October, November and December.

 

The financial component of the AIP provides for payments if American Airlines achieves certain pre-tax earnings margin levels. The actual dollar amount of a paid award is determined as a percentage of base salary, and the percentage of base salary varies according to the level of responsibility and the pre-tax earnings margin achieved. The percentages of base salary that each of our named executive officers was eligible to receive in 2008, based upon our achievement of the threshold, target or maximum performance levels, are set forth below.

 

Percentage of Base Salary
					Threshold					Target					Maximum
	Arpey					92	%				140	%				200	%
	Horton					54	%				108	%				200	%
	Garton					54	%				108	%				200	%
	Reding					54	%				108	%				200	%
	Kennedy					50	%				75	%				200	%

 

American Airlines’ pre-tax earnings margin did not reach the 5% threshold (approximately $1.2 billion dollars based upon American Airlines’ 2008 revenue), and therefore no payments were made under the financial component of the AIP in 2008. See “Compensation Discussion and Analysis,” beginning on page 19 of this Proxy Statement, for further details regarding the AIP.

Equity Incentive Plan Awards

 

During its annual compensation review conducted in May 2008, the Compensation Committee approved the annual grants of performance shares, career performance shares, deferred shares and SSARs to the named executive officers as described below.

 

Performance Shares.  Performance shares are grants of stock-based compensation that vest after the completion of a three-year measurement period. The “Fiscal Year 2008 Grants of Plan-Based Awards Table” reflects the number of performance shares granted in 2008 under the 2008/2010 Performance Share Plan to each of our named executive officers. Except as provided below, vesting of these performance shares is also generally contingent upon continued employment with us through April 20, 2011. In the event of death, disability, termination other than for cause, or early retirement of one of our named executive officers, the performance shares previously granted will vest on a pro-rata basis, based on the number of months that have elapsed since the award date and our achievement of the performance criteria. In the event of a change in control, distributions with respect to the performance shares will be at the target level, or 100%, of the shares initially granted. See “Compensation Discussion and Analysis,” beginning on page 19 of this Proxy Statement, for further details regarding the performance shares.

 

Career Performance Shares.  In 2005, we entered into a Career Performance Share Award Agreement with Mr. Arpey. Pursuant to the terms of that agreement, in 2008, we granted Mr. Arpey an award of 58,000 career performance shares that generally vest and become payable in 2015 (listed in the above “Fiscal Year 2008 Grants of Plan-Based Awards Table”). However, in the event of Mr. Arpey’s death, disability, termination other than for cause or early retirement; if Mr. Arpey resigns for good reason (as defined below); or in the event of a change in control, the career performance shares previously granted will vest. Upon vesting, the Compensation Committee will determine whether any distributions of these shares will be made, based on its assessment of achievement of various financial and operating measures described in “Compensation Discussion and Analysis,” beginning on page 19 of this Proxy Statement. Depending on this assessment, the ultimate distribution with respect to such career performance shares could range from 0% to 175% of the shares originally granted. Under the Career Performance Share Award Agreement, Mr. Arpey is also entitled to receive additional grants of at least 58,000 career performance shares in 2009. In the Career Performance Share Award Agreement, “good reason” includes the occurrence of any of the following without Mr. Arpey’s consent: (a) a reduction in his salary (other than a reduction pursuant to a salary reduction program including other senior officers); (b) a significant reduction in his authority, duties or responsibilities such that he believes he can no longer perform his duties; or (c) a material reduction in the benefits we provide him. See “Compensation Discussion and Analysis,” beginning on page 19 of this Proxy Statement, for further details regarding career performance shares and the performance criteria.

 

Deferred Shares.  The deferred shares granted in 2008 to each of our named executive officers vest on May 20, 2011, the third anniversary of the grant date, subject to the named executive officer’s continued employment with us through that date. In the event of death, disability, termination other than for cause, or early retirement of one of our named executive officers, the deferred shares will vest on a pro-rata basis, based on the number of months that have elapsed since the award date. In the event of a change in control, deferred shares previously awarded will vest. See “Compensation Discussion and Analysis,” beginning on page 19 of this Proxy Statement, for further details regarding the deferred shares.

 

SSARs.  The “Fiscal Year 2008 Grants of Plan-Based Awards Table” lists the number of shares granted in 2008 in respect of SSARs. Upon their exercise, we pay the value of the appreciation in an equivalent number of shares of our stock. SSARs are exercisable for ten years from the date of grant and vest in 20% increments over five years. In the event of death or a change in control, vesting is accelerated; and in the event of early retirement or disability, unexercised options and SSARs continue to vest and remain exercisable until expiration. The effective date of the SSARs granted in 2008 was May 20, 2008. We established the exercise price of these SSARs as the fair market value of our common stock on that date, which was the last reported sales price of our stock at the time of grant as defined by our 1998 LTIP.

2008 Outstanding Equity Awards At Fiscal Year-End Table

 

The following table lists all of the outstanding stock and stock option/SSAR awards held on December 31, 2008 by each of our named executive officers. The table also includes, where applicable, the value of these awards based on the closing price of our common stock on December 31, 2008, which was $10.67. Each award listed in the “Number of Securities Underlying Unexercised Options Unexercisable” column with an expiration date prior to July 24, 2016 is a stock option with a tandem SSAR. The other awards listed in this column are SSARs.