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April 23, 2010

 

 

Dear Stockholder,

 

 

You are cordially invited to attend our annual meeting of stockholders on Wednesday, May 19, 2010, at 8:00 a.m. Eastern time. The meeting will be held at 730 Third Avenue, 17th Floor, New York, New York.

 

 

Details of the meeting are explained in the attached notice of the meeting and proxy statement, and additional information about us is included in the enclosed 2009 annual report to stockholders.

 

 

Please note that starting this year, brokers cannot vote your shares in director elections without your voting instructions. Please submit your proxy so your vote will be counted. You can submit your proxy by using the Internet, by telephone, or by completing and returning the enclosed proxy card or voting instruction form.

 

 

On behalf of the entire board, we look forward to seeing you at the meeting.

 

Sincerely,

 

 

Gerard J. Arpey

Chairman, President

and Chief Executive Officer

 

 

 

 

2010 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

 

OFFICIAL NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

By Order of the Board of Directors,

 

Kenneth W. Wimberly

Corporate Secretary

April 23, 2010

 

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

 

PROXY STATEMENT

 

Annual Meeting of Stockholders
May 19, 2010

 

We are mailing this Proxy Statement and the form of proxy to stockholders on or around April 23, 2010 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 19, 2010. This Proxy Statement also includes information regarding our wholly-owned and principal subsidiary, American Airlines, Inc. The annual meeting will be held at 730 Third Avenue, 17th Floor, New York, New York 10017, on Wednesday, May 19, 2010, at 8:00 a.m. Eastern time. 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 shown above.

 

INTERNET AVAILABILITY AND ELECTRONIC DELIVERY OF PROXY DOCUMENTS

 

Important Notice Regarding the Availability of Proxy Materials for the Annual Stockholder Meeting to be held on May 19, 2010. Our official Notice of Annual Meeting of Stockholders, Proxy Statement and 2009 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 can elect to receive and access future annual meeting materials electronically. If your shares are registered directly in your name with our stock registrar and transfer agent, American Stock Transfer & Trust Company, LLC, you can make this election by going to its website (www.amstock.com) and clicking on “Shareholder Account Access” or by following the instructions provided when voting by Internet.

 

If you hold your shares 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 electronically.

 

ABOUT THE ANNUAL MEETING

 

What is the purpose of the annual meeting?

 

The purpose of the annual meeting is to allow you to vote on the matters described in this Proxy Statement. These matters include: (a) the election of directors, (b) the ratification of the Audit Committee’s selection of our independent auditors for 2010 and (c) consideration of one stockholder proposal. In addition, management will report on our performance during 2009.

 

Where is the annual meeting?

 

The annual meeting will be held at 730 Third Avenue (between East 45th and East 46th Streets), 17th Floor, New York, New York 10017, on Wednesday, May 19, 2010, at 8:00 a.m. Eastern time.

Who can attend the annual meeting?

 

Stockholders of record as of the close of business on March 22, 2010, or their duly appointed proxies, can attend the annual meeting. Admission to the annual meeting will be on a first-come, first-served basis. Registration will begin at 7:15 a.m. Eastern time on May 19, 2010.

 

What are the requirements to attend the annual meeting?

 

All stockholders must check-in at the registration desk. At check-in, you must provide (a) an admission ticket or other proof of ownership of our stock as of March 22, 2010 that is acceptable to us and (b) valid governmentally-issued picture identification.

 

You can find your admission ticket on your proxy card or with your voting instruction form. A copy of a statement from your broker showing your stock ownership is an acceptable form of proof of ownership. A driver’s license or passport is an acceptable form of governmentally-issued picture identification. If you fail to provide the required admission ticket or proof of ownership and a valid governmentally-issued picture identification, you will not be admitted to the annual meeting.

 

All meeting attendees must comply with our security measures. We may require a search of your bags. In addition, we may require a metal detector and/or hand wand search of all persons attending the meeting. You may not use cameras or other recording devices at the annual meeting. If you fail to meet our security requirements, you will not be admitted to the annual meeting.

 

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 constitutes a quorum for the annual meeting. We will count abstentions and broker non-votes as present for determining whether a quorum exists. If we do not have a quorum at the annual meeting, the holders of shares entitled to vote at the annual meeting who are present in person or by proxy may adjourn the meeting from time to time until a quorum exists. Any business that could have been conducted at the original meeting may be conducted at any adjourned and reconvened meeting at which a quorum exists.

 

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

 

If your shares are registered directly in your name with our stock transfer agent, you are considered the stockholder of record of 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, which is considered the stockholder of record of those shares. 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 22, 2010 are entitled to vote their shares of common stock at the annual meeting. If you were a stockholder of record on March 22, 2010, 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 22, 2010 that is acceptable to us. On March 22, 2010, we had 332,689,067 shares of common stock outstanding. Each stockholder of record on March 22, 2010 will be entitled to one vote in person or by proxy for each share 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 (Evercore Trust Company, N.A.). 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 time on May 16, 2010. The number of shares you are eligible to vote is based on your unit balance in the $uper $aver 401(k) Plan on March 22, 2010. 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 22, 2010, the $uper $aver 401(k) Plan held a total of 499,450 shares of our common stock on behalf of employees/participants.

 

Do my unexercised stock options allow me to vote at or attend the annual meeting?

 

Holding unexercised stock options does not entitle you to vote at or attend the annual meeting. You must own shares of our common stock at the close of business on March 22, 2010 to vote at or attend the annual meeting.

 

How do I vote before the annual meeting?

 

Stockholders of record on March 22, 2010 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. Eastern time on May 18, 2010. 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?

 

If you are a stockholder of record, you may change your vote or revoke your proxy at any time before the annual meeting begins. To change your vote, you must file a notice of revocation and a

properly executed, later-dated proxy with our Corporate Secretary that is acceptable to us. Whether you are a stockholder of record or hold your shares in street name, you may also change your vote or revoke your proxy by voting your shares at the annual meeting.

 

How are votes counted?

 

For 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” from 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 11, for further details regarding the election of directors.

 

For proposals 2 and 3, a majority of the votes cast at the annual meeting is required for approval. For these two proposals, you may vote “FOR,” “AGAINST” or “ABSTAIN.” If you “ABSTAIN,” it will not have an effect on the approval of these two proposals.

 

If you are a stockholder of record, you may vote your shares in person at the annual meeting, through the mail, by telephone or over the Internet. Each of these voting methods is described on the proxy card (see also “How do I vote before the annual meeting?” on page 3, for more information). If you sign your proxy card and provide no voting instructions, the proxies will vote your shares “FOR” proposals 1 (as to all nominated directors) and 2; and “AGAINST” proposal 3. On 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 proxy has full power to act without the others and has 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 received from your broker (see also “How do I vote before the annual meeting?” on page 3, for more information). On any additional matters that properly come before the annual meeting, the vote will be determined in the discretion of our proxies, as described above.

 

Please note that proposals 1 and 3 are non-discretionary items under the voting procedures of the New York Stock Exchange (“NYSE”). As a result, NYSE-member brokers cannot vote your shares on these proposals without your voting instructions (known as a “broker non-vote”). If you do not submit voting instructions on proposals 1 and 3, we cannot count your shares on these proposals. Broker non-votes will have no effect on the approval of proposals 1 and 3. Proposal 2, the ratification of the appointment of our independent auditors, is a discretionary item under the voting procedures of the NYSE. As a result, NYSE-member brokers can vote your shares on proposal 2 even if you do not provide them with voting instructions.

 

What are the recommendations of the Board of Directors?

 

The recommendations of the Board of Directors 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 three 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 be able 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 may vote your shares for a substitute nominee chosen by the Board.

 

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 our directors, officers, employees or agents to solicit proxies in person or by telephone, facsimile, e-mail or other means of electronic communication. We will also request brokers or nominees that hold common stock in their names to forward proxy materials to their beneficial owners 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 $16,500, 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 preliminary results or, if they are available, the official results, will be published in a current report on Form 8-K within four business days of the annual meeting.

 

PROPOSAL 1—ELECTION OF DIRECTORS

 

The Board of Directors proposes that stockholders elect the following thirteen director candidates to serve until the next annual meeting. All of these nominees currently serve as directors of the Company and American Airlines, Inc., our wholly-owned subsidiary. Each of them has indicated that he or she will serve if elected. Each has also furnished the following information about his or her principal occupation or employment and other directorships as of March 22, 2010. A plurality of the votes cast is necessary for the election of each director.

 

The Board believes that each nominee meets the requirements of our Director Nominating Policies and Nominating/Corporate Governance Committee Charter, which are described below in “Director Nominees,” beginning on page 16. In addition, we have included a brief description of some of the specific experience, qualifications, attributes or skills that led the Board to the conclusion that each nominee should be elected to again serve on our Board. The Board believes that all of the nominees also have good judgment, integrity, and a dedication to the Company and our business, as well as intelligence, wisdom and inquisitiveness. The nominees work well together, challenge each other and management when appropriate, and collaborate to come up with innovative ideas and solutions.

 

Unless you indicate otherwise, all proxy cards and voting instruction forms 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 may vote for the election of a substitute nominee selected by the Board. Although we will attempt to provide advance notice of any substitute nominee, we may be unable to do so.

NOMINEES FOR ELECTION AS DIRECTORS

 

 

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

CORPORATE GOVERNANCE

 

Majority Voting

 

Under the Board of Directors Governance Policies, 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. After taking into account our best interests and the best interests of the stockholders, the committee will recommend to a special committee of independent directors of the Board whether to accept the tendered resignation or to take some other action. Nominees receiving a majority of withheld votes will not be eligible to sit on this special committee. The special committee will have 90 days from the date of the election to consider the Nominating/Corporate Governance Committee’s recommendation and determine whether to accept the tendered resignation or take some other action. Thereafter, we will publicly disclose the special committee’s decision. This is a summary of the director resignation procedure. The entire procedure is in Section 18 of the Board’s 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.

 

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

 

We generally hold nine regular meetings of the Board of Directors per year, and schedule special meetings when required. In 2009, the Board held nine regular meetings and seven special meetings. During 2009, each director attended at least 75% of the sum of the total number of meetings of the Board and each committee of which he or she was a member. We encourage each director to attend the annual meeting. Last year, all of our directors attended the annual meeting.

 

Self-Assessment

 

The Board and its standing committees conduct a self-assessment of their effectiveness each year.

 

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 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 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. It is designed to help the directors recognize and resolve ethical issues and to identify and avoid 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 for any director or executive officer on this website.

Executive Sessions

 

Our non-employee directors meet regularly throughout the year in executive session (without the presence of any management employee, including our Chief Executive Officer). In 2009, the non-employee directors held eight such executive sessions. The Lead Director chairs the executive sessions. Executive sessions may be scheduled by the Lead Director, the Chairman of the Nominating/Corporate Governance Committee, or at the request of the Board. See “Board Leadership Structure” below for more details.

 

Board Leadership Structure

 

The Board believes it is in the best interests of the stockholders and the Company that the Board have the flexibility to select the best director to serve as Chairman at any given time, regardless of whether that director is an independent director or the Chief Executive Officer. Consequently, the Board’s Governance Policies allow the Board to determine whether to separate or combine the roles of the Chairman and Chief Executive Officer at any time. Using this flexibility, in April 2003 the Board separated the roles of the Chairman and Chief Executive Officer when Mr. Arpey became the Chief Executive Officer and President. In May 2004, the Board asked Mr. Arpey to also serve as Chairman, at which time the Board appointed an independent director to serve as Lead Director.

 

The Board strongly believes that the most effective Board leadership structure at this time is for Mr. Arpey to serve both as our Chairman of the Board and our Chief Executive Officer. Mr. Arpey is responsible for both the day-to-day operations of the Company and the execution of the Company’s strategies. Since these topics are an integral part of our Board discussions, Mr. Arpey is the director best qualified to chair those discussions. His vast knowledge of the Company and the airline industry are critical to Board discussions and our success. The Board believes that he is an effective leader of the Company and the Board, and combining the roles has served the Company well.

 

No single leadership model is right for all companies, and the Board recognizes that depending upon the circumstances, other leadership structures, such as a separate independent Chairman, might be appropriate. The Board therefore periodically reviews its leadership structure.

 

Since the Board combined the roles of Chairman and Chief Executive Officer in 2004, the Board has also appointed strong independent directors to serve as Lead Director. Mr. Codina has served as our Lead Director since 2007. The Lead Director has frequent contact with Mr. Arpey and the other members of our senior management throughout the year. As provided in the Board’s 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 Chairman 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 our directors to attend seminars, conferences and external director education programs relating to, among other things, board governance practices and the functioning of the Board’s principal committees. We also conduct a comprehensive orientation process for new directors. In addition, directors receive continuing education through educational sessions at meetings and 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 can also retain their own independent advisers at any time and at our expense.

 

Risk Oversight

 

We have an enterprise risk management program. Under this program, we regularly assess our risks and the risk management measures undertaken by our primary operating groups. The leader of each operating group is responsible for incorporating risk assessment and management into that organization’s business processes, and our senior management team frequently reviews their efforts. While the responsibility for our risk assessment and management lies with our senior management team, the Board also provides oversight of our risk management function in several ways, depending upon the type of risk. For example, our strategic, financial and operations risks are frequently reviewed and discussed by the full Board. The Board’s standing committees also consider the risks within their area of responsibilities. The Audit Committee reviews our risk assessment and management policies and oversees risks relating to accounting matters, financial reporting, legal and regulatory compliance, ethics and other matters. In fulfilling these responsibilities, the committee meets regularly with our Chief Financial Officer, General Counsel and Chief Compliance Officer, General Auditor and external auditor, and frequently receives reports in these areas from them and other members of our management team. As described below, the Compensation Committee oversees risks relating to our compensation programs. The Nominating/Corporate Governance Committee reviews risks related to director and officer succession planning and our corporate governance programs and policies. The committee also receives regular reports from our Chief Executive Officer, General Counsel and Chief Compliance Officer, and Corporate Secretary to help monitor these risks. The Diversity Committee reviews risks related to our diversity policies and practices in several areas, and meets frequently with members of management to support this role, including our Senior Vice President of Human Resources and our Vice President of Diversity and Leadership Strategies. The reports prepared for the meetings of the Board’s standing committees are sent to all of the directors, and the chair of each committee gives a report to the full Board following each committee meeting. We believe that this division of risk oversight ensures that oversight of each type of risk falls to the particular directors most qualified to oversee it. It also promotes Board efficiency because Board committees are able to select the most important risk-related issues for full Board consideration.

 

We also assessed whether our employee compensation policies and practices create risks that are reasonably likely to have a material adverse impact on us. In doing so, we considered that our executive compensation programs are designed with what we believe is an appropriate focus on both our short-term and long-term performance. We also considered risk mitigation elements of these programs. For example, our incentive plans are tied to broad measures of Company performance that

cannot be directly influenced by individual employees, such as pre-tax earnings and shareholder return. Also, our short term incentive awards are capped, and our long-term awards vest over periods of three to five years. We have also adopted a recoupment policy, which is described in “Recoupment Policy” on page 32. With the assistance of its consultants and our Chief Executive Officer and Senior Vice President of Human Resources, we discussed the assessment’s findings with the Compensation Committee.

 

Contacting the Board of Directors

 

The Board has adopted procedures for written communications between the directors and employees, stockholders and other interested third parties. 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. To contact the Lead Director, a standing committee of the Board, the Board as a whole or any individual director, a person should write to the following address:

 

AMR Corporation

The Board of Directors

P.O. Box 619616, MD 5675

Dallas/Fort Worth International Airport, Texas 75261-9616

 

Under those procedures, our General Counsel and Chief Compliance Officer and Corporate Secretary review the communications with the Lead Director, another director or committee, or an executive officer, in each case depending on the facts and circumstances outlined in the communication. For example, we review letters concerning a stockholder nominee with the Nominating/Corporate Governance Committee. We review complaints regarding accounting or internal accounting controls with the Audit Committee and the General Auditor. The Nominating/Corporate Governance Committee frequently reviews with senior management the number and types of stockholder communications received; the nature of the communications; the responses sent; and, as applicable, the ultimate outcome of any communication.

BOARD COMMITTEES

 

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’s Governance Policies. In addition, all members of the Compensation, Diversity and Nominating/Corporate Governance committees are independent in accordance with the NYSE listing standards and the Board’s Governance Policies. No member of the Audit, Compensation, Diversity or Nominating/Corporate Governance committees is a current or former employee or officer of the Company or any of our affiliates. The committees on which the members of the Board (other than Mr. Arpey) serve as of April 21, 2010 are shown in the chart below.

 

 

Each committee has a charter that details its responsibilities. These charters are available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link.

 

Nominating/Corporate Governance Committee Matters

 

The functions of the committee include:

 

 

 

Director Nominees

 

As noted above, the committee is responsible for recommending nominees for election to the Board. To fulfill this role, the committee annually reviews the optimal size of the Board and its composition to determine if any additional skills, qualifications or areas of expertise are needed. To be considered for nomination to the Board, a candidate must:

 

 

When assessing a candidate’s qualifications (including a self-nominee or a candidate nominated by a stockholder), the committee considers, among things:

 

 

Under our Director Nominating Policies, the committee also considers each director nominee’s contribution to the diversity of the Board. In doing so, the committee considers diversity in the broadest sense, taking into account race, gender, geographic residence and professional background. This focus on diversity has produced a Board with two Hispanic members, one Asian member, one African American member, and two female members. In addition, our Board members come from diverse geographical locations and have diverse professional backgrounds, including banking and financial services, education, real estate, consulting, media, government, philanthropic, public policy, investment banking, private equity and transportation. On an annual basis, the committee reviews with the Board its assessment of the skills and characteristics appropriate for outside Board members. The goal of this assessment is to determine if the needs of the Board, including diversity, are being met by the current members of the Board.

The committee considers all of these factors when determining whether to recommend a candidate for a director position. The committee from time to time has used a search firm to help identify suitable candidates for director positions, although one is not retained at present.

 

The committee will consider stockholder nominees for election to the Board at an annual meeting or if a vacancy exists on the Board. In 2009, there were no stockholder nominees for election to the Board. See “Other Information,” beginning on page 59, for further details regarding submitting nominations for director positions.

 

Director Independence; Board of Directors Governance Policies

 

The Board has approved the Board’s Governance Policies, which govern many of the Board’s procedures and protocols. The policies are available on the Investor Relations section of our website located at www.aa.com/investorrelations by clicking on the “Corporate Governance” link.

 

Among other things, the Board’s Governance Policies establish the standards for director independence. In general, the 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. The policies include guidelines to assist the committee in determining whether a relationship is material. In general, the guidelines provide that a director is not independent if:

 

 

This is a summary of the Board’s independence guidelines, which also incorporate any additional requirements of the SEC and the NYSE. A complete list of the guidelines and principles are in the Board’s Governance Policies. The committee has determined, and the Board 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 making these determinations, the Board considered information submitted by the directors in response to questionnaires, information from our records and advice from counsel. Because Mr. Arpey is one of our employees, he is not considered independent.

Transactions with Related Persons

 

The Board has adopted a written policy for the review, approval or ratification of related party transactions. Our policy defines a related party transaction generally as a transaction or series of related transactions involving the Company totaling $120,000 or more and in which any of the following persons has a direct or indirect material interest: (a) our directors or nominees for director; (b) our executive officers; (c) persons owning five percent or more of our outstanding stock at the time of the transaction; or (d) the immediate family members of our directors, nominees for director, executive officers, or five percent stockholders. The Board 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 committee review and approve or ratify related party transactions with the assistance of our General Counsel and Chief Compliance Officer or Corporate Secretary. In its review, the committee considers, among other factors: (a) the size of the transaction and the amount of consideration payable to or receivable by the related party; (b) the nature of the interest of the related party; and (c) whether the transaction may involve a conflict of interest.

 

Audit Committee Matters

 

The functions of the committee include:

 

 

 

 

At its meetings in 2009, the 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 committee is an independent director as defined in the NYSE listing standards and the rules and regulations of the SEC. Also, each member of the committee fulfills the independence standards established under the Board’s Governance Policies and has been determined to be financially literate. The Board has concluded that Mr. Bachmann qualifies as an audit committee financial expert under SEC rules and regulations and has the requisite financial management expertise required by the NYSE listing standards. The Board believes that other members of the committee may also meet these qualifications.

 

Audit Committee Report

 

Throughout 2009, the Audit Committee met and held discussions with our management and with Ernst & Young, our independent auditor. Several of the discussions between the committee and Ernst & Young were in private, with no members of our management present. The committee also met privately with our General Auditor several times during 2009. Among other things, the committee reviewed and discussed our audited consolidated financial statements with management, our General Auditor, and Ernst & Young during these meetings.

 

The 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 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. The committee has also discussed with Ernst & Young the firm’s independence.

 

In reliance upon the reviews and discussions noted above, the 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, 2009. Subject to stockholder approval at the 2010 annual meeting, the committee has also selected Ernst & Young as our independent auditors for 2010 (see proposal 2).

 

Audit Committee of AMR Corporation:

 

John W. Bachmann, Chairman

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 2008 and 2009, and for other services rendered during fiscal years 2008 and 2009 on our behalf:

 

 

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 (a) federal, state and international tax compliance; (b) assistance with tax audits and appeals; (c) expatriate tax services; and (d) 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, 2010, the 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 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 committee may also pre-approve particular services on a case-by-case basis. The committee has delegated pre-approval authority to its chairman. Under this delegation, the chairman must report any pre-approval decision by him to the committee. The committee pre-approved all such audit, audit-related and permissible non-audit services in 2008 and 2009 in accordance with these procedures.

 

Diversity Committee Matters

 

The functions of the committee include:

 

 

 

 

Compensation Committee Matters

 

Functions

 

The functions of the committee include:

 

 

Processes and Procedures

 

The committee acts on behalf of the Board and approves the compensation of all of our officers, including the named executive officers. This responsibility includes establishing and implementing our executive compensation objectives, such as linking each named executive officer’s compensation to our short-term and long-term strategic, financial and operational goals. The committee also determines the performance measures established for performance-based awards for our officers and, where the performance measures are subjective, whether we have met those performance measures and the amounts payable under those awards. The committee reviews and has authority to approve employment and change in control agreements and incentive awards for our officers, including performance shares, deferred shares, stock appreciation rights and career performance shares.

 

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

 

The committee meets regularly throughout the year to review general compensation issues and to monitor the compensation of our officers. In 2009, the committee directly engaged two external compensation consultants, Hewitt Associates and Deloitte Consulting, to help the committee fulfill its responsibilities. Hewitt Associates provided compensation benchmarking services for our officers. Deloitte Consulting provided assistance on competitive pay benchmarking for our officers, incentive plan design, performance metrics analysis, peer group selection, and other executive compensation advice. Deloitte Consulting also helped us design our 2009 Long Term Incentive Plan and made compensation recommendations for our named executive officers. At the committee’s direction, the compensation consultants assisted Mr. Arpey and our Senior Vice President of Human Resources in preparing their compensation recommendations for our named executive officers. In 2009, we paid Deloitte Consulting fees of $148,050 for the executive compensation assistance the firm provided the committee. Deloitte Consulting and some of its affiliates also provided additional services to the Company in 2009 unrelated to the services they provided the committee, such as tax services. We paid them aggregate fees of approximately $3,346,680 for these additional services. Management made the decision to engage Deloitte Consulting and its affiliates for these additional services in the ordinary course of business. We discussed the additional services with the committee, but the committee was not asked to formally approve them. The employees providing the additional services were not the employees who advised the committee. The committee believes that these relationships do not impair the independence or objectivity of Deloitte Consulting or the employees advising the

committee. The committee, however, decided not to use Deloitte Consulting as its compensation consultant for 2010 and terminated the firm’s engagement in March 2010.

 

For executives other than the Chief Executive Officer, the committee makes compensation decisions with, and frequently based upon the recommendation of, the Chief Executive Officer and our Senior Vice President of Human Resources. The committee also reviews and considers comparative market data provided by Hewitt Associates. The committee makes all determinations related 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 53, 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 it determines the size and terms of compensation awards.

 

Compensation Committee Interlocks and Insider Participation

 

Dr. Rodin and Messrs. Boren, Miles, Purcell and Rose were the members of the Compensation Committee during 2009. None of the members of the committee was at any time during 2009, or at any other time, one of our officers or employees. No executive officer of the Company served or serves on the compensation committee or board of any company that employed or employs any member of our Compensation Committee or Board.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The following discussion provides an overview and analysis of the material elements and objectives of our executive compensation program. Our named executive officers in 2009 were:

 

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

 

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

 

Please read this discussion with “Executive Compensation” beginning on page 34.

 

Executive Summary

 

Below are some of the highlights of our named executive officer compensation program in 2009:

 

 

 

Our Compensation Objectives and Philosophy

 

We designed our executive compensation program to support our business strategy, promote long-term growth, and align our executives’ decisions with the long-term interests of our stockholders.

 

With this in mind, the principal objectives of our executive compensation program are to:

 

 

Consistent with these objectives, an average of 70% of the total potential pay we awarded to our named executive officers in 2009 was in the form of long-term stock-based compensation. These awards are considered at risk because the amount of compensation that our executives ultimately receive depends on our stock price or achieving financial and operating measures. While we believe this aligns the interests of our named executive officers and our stockholders, it can also lead to actual realized compensation below market when our stock price declines for general economic or industry reasons, as has been the case the past few years.

 

The discussion in the sections below describes the efforts of the Compensation Committee to address these issues.

 

The Process We Use to Determine Compensation

 

Each year, the Compensation Committee conducts a comprehensive review of our executive compensation program. As part of this review, the committee uses several tools to structure our compensation programs to meet our objectives. These tools include benchmarking, peer group analysis, internal equity data, tally sheets, and input from Mr. Arpey, each of which is discussed further

below. Please also see “Processes and Procedures,” beginning on page 21, for further details regarding the administration of our executive compensation program.

 

Benchmarking and Peer Group Analysis

 

The Compensation Committee believes that it is important that our executive compensation program is both in line with other airlines and sufficiently competitive to retain our named executive officers and attract talent from other industries when needed. Consequently, the committee reviewed the following reports in 2009:

 

 

 

Executive pay at other airlines has been highly variable during the past decade. Due to bankruptcy proceedings, executives at several airlines in the Peer Group did not receive equity grants for several years. However, most of these airlines granted substantial equity awards to their management teams following their emergence from bankruptcy. To help smooth out this variability and provide more meaningful comparisons, the Peer Group analysis in 2009 included both granted and realized pay and averages of each over the last three years.

 

The Compensation Committee did not target a specific pay level or rank among the Peer Group. Because we avoided bankruptcy and maintained a consistent approach in setting pay and granting equity awards over the past several years, the committee’s objective in its Peer Group analysis instead was to ensure that our named executive officers’ realized compensation was generally in line with the Peer Group. The Peer Group analysis showed that the realized pay for our named executive officers was the fourth highest among the eight airlines for 2008, and the second highest for the period 2006 through 2008. Based on this information, the committee determined that our named executive officer compensation was in line with the Peer Group.

 

The Compensation Committee’s Comparator Group analysis focused on both annual total compensation and each pay element – base, short-term incentive and long-term incentive pay. For each of our named executive officers, the committee generally targeted the median total

compensation for similar positions at companies in the Comparator Group. However, for Mr. Arpey, the committee benchmarked his pay to the average of the median chief executive officer pay in the Comparator Group and the Peer Group. His compensation remains significantly below the median of the CEOs in the Comparator Group. Also, the committee benchmarked Mr. Garton’s pay to two positions in the Comparator Group analysis – the head of marketing and the chief financial officer. The committee did this because of his (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.

 

Internal Equity

 

The committee also considered internal pay equity among the named executive officers, particularly among Messrs. Horton, Garton and Reding, who are all Executive Vice Presidents. The committee did not target specific pay ratios among the named executive officers or between them and other officers, but instead tried to keep their total compensation and each pay element in line with the others.

 

Tally Sheets

 

To better understand the impact of its decisions on our named executive officers’ total compensation, the Compensation Committee also analyzed tally sheets during its 2009 review. The tally sheets quantified all material components of their compensation during the preceding five years. The components analyzed included: (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 different scenarios.

 

Role of the Chief Executive Officer in Setting Compensation

 

Mr. Arpey regularly attends Compensation Committee meetings. At those meetings, he provides his perspective on the performance of the other named executive officers. He also provides other subjective considerations that may influence the committee’s compensation decisions for them, such as retention, succession planning, and critical personnel and business needs. Because Mr. Arpey has direct knowledge of each officer’s performance and contributions, the committee gives considerable weight to his evaluations. Mr. Arpey is not present during the committee’s deliberations or decisions regarding his compensation.

 

Other Considerations

 

The Compensation Committee also considered the following factors in setting pay for our named executive officers in 2009:

 

 

 

How Corporate Performance Impacts Compensation

 

To implement our pay for performance objective described above, the Compensation Committee has linked our named executive officers’ performance-based compensation to these measures:

 

Pre-Tax Profits—Over its long history, the airline business has been very cyclical and vulnerable to general economic conditions and external factors, such as fuel prices and the economy. This has been especially true over the last several years. To encourage our named executive officers to strive to generate adequate profit levels, the Annual Incentive Plan requires that we earn at least a 5% pre-tax earnings margin in order for any bonuses to be paid under that plan.

 

Customer Service—All employees, including our named executive officers, are awarded cash payments under the Annual Incentive Plan if we achieve our target for on-time flight departures or customer satisfaction scores. 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.

 

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 appreciation rights, which vest over a 5-year period, provide our named executive officers with a stake in this potential increase. The actual compensation realized from the stock appreciation rights is entirely dependent on increases in our stock price after the stock appreciation right 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 the stock of our competitors. Distributions under our performance share plans are consequently based on how well our total shareholder return (or “TSR”) compares to the total shareholder return of our competitors over three-year measurement periods. The three-year TSR measure is used because it is an objective, market-based metric that directly measures shareholder value over the long-term. Use of a relative TSR metric also tends to mitigate the effects of general market or sector performance on our stock price.

 

The Primary Components of Our Compensation Program

 

Our executive compensation program principally consists of the following components:

 

 

In addition, we provide post-employment benefits to our named executive officers. We describe all of these further in the tables and footnotes following this Compensation Discussion and Analysis.

While we do not target a fixed mix of pay, we generally allocate compensation to our named executive officers as follows:

 

General Compensation Allocation

 

 

The mix of pay actually realized by our named executive officers varies from this allocation based on our financial results and stock price performance.

 

Base Salary

 

The Compensation Committee believes that it is important to pay a base salary to our named executive officers to provide them with a secure, known amount of cash compensation during the year.

 

2009

 

Due to the financial difficulties facing us and the airline industry in general, in 2009 we decided to forego annual merit pay increases for our employees. Consistent with that approach, none of our named executive officers received a base salary increase in 2009.

 

Short-Term Incentive Compensation – the Annual Incentive Plan

 

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

 

The customer service component of the Annual Incentive Plan provides for payments of up to $100 per month for each employee if we achieve one of its customer service targets. 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.

 

Our employees (including the named executive officers) can also earn awards annually under the financial component of the Annual Incentive Plan. Awards are paid under this component if American Airlines achieves at least a 5% pre-tax earnings margin. Awards are paid as a percentage of base salary and increase as our pre-tax earnings margin increases, with the potential to receive either no payment, payment at the threshold level, payment at the target level, or payment at the maximum level. For our named executive officers, each year the Compensation Committee determines the percentages of base salary that will be paid to them under the financial component of the Annual Incentive Plan. The committee determines this percentage during its compensation review, considering short-term incentive opportunities available to persons holding comparable positions at companies in the Comparator Group. The committee has discretion to adjust the final awards paid under the Annual Incentive Plan, although actual awards, if paid, are capped at 200% of base salary. The percentage of base salary that each of our named executive officers was eligible to receive in 2009 and the approximate pre-tax earnings levels that corresponded to the

threshold, target and maximum levels under the 2009 Annual Incentive Plan are set forth in “Non-Equity Incentive Plan Awards – Annual Incentive Plan” on page 37.

 

2009

 

During 2009, each named executive officer earned $583 under the customer service component of the Annual Incentive Plan. We did not make any payments to our named executive officers under the financial component of the Annual Incentive Plan because we did not meet the 5% pre-tax earnings margin required by the plan.

 

Long-Term Incentive Compensation – Performance Shares, Stock Appreciation Rights and Deferred Shares

 

Long-term incentive compensation is a critical component of our executive compensation program. We design our long-term incentive compensation to link executive compensation to the interests of our stockholders by motivating executives to increase total stockholder return over the long term. We also believe that long-term incentive compensation is an important retention tool because awards only vest if the recipient remains with the Company for at least one year after the grant.

 

The Compensation Committee uses a variety of equity-based awards to provide long-term incentive compensation for our named executive officers. In 2009, these awards consisted of performance shares (including career performance shares for Mr. Arpey), stock appreciation rights and deferred shares. The committee uses these awards to reward achievement of different goals.

 

We generally grant awards at the time of the Compensation Committee’s annual compensation review, although we grant interim awards from time to time to new hires or upon increases in responsibilities. For stock appreciation rights, our practice is to use the date the committee approves the grant as the effective date. However, if the grants are approved at the time of our earnings release, the effective date of the grant is the third business day after the earnings release. The exercise price of the stock appreciation rights is the fair market value of our common stock on that date. Our long-term incentive plans generally allow us to settle long-term incentive awards in stock, cash, or a combination of stock and cash.

 

For awards other than stock appreciation rights, we establish the targeted grant values using a standard valuation methodology developed by Hewitt Associates that provides an estimate of the present value of the future amounts likely to be realized from the award. Hewitt’s methodology takes into account the terms of the awards, including their vesting and performance criteria. We use a modified Black-Scholes valuation model to determine the value and number of stock appreciation rights awards.

 

Below is a summary of each equity-based instrument that the Compensation Committee generally awards to the named executive officers, why the Compensation Committee chooses to pay each type of award, and when and how each type of award vests.

 

Performance Shares

 

Performance shares are contractual rights to receive shares of our common stock at the end of a three-year measurement period. They are designed to reward our named executive officers when our stock performs better than the stock of our primary competitors. The actual number of performance shares (if any) ultimately distributed to the named executive officers is based on our total shareholder return compared to that of our primary competitors over that three-year 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 end of the measurement period is used to smooth out market fluctuations. Final distribution of the performance share awards for the 2009-2011 measurement period could range

from 0% to 175% of the performance shares originally granted, depending on our TSR performance during the measurement period.

 

Each year, the Compensation Committee selects the competing airlines against which our TSR is compared, based on their market capitalization, revenues and airline seat capacity. For awards under the 2009/2011 Performance Share Plan granted in July 2009, the committee included the following nine airlines: AirTran Holdings, Inc., Alaska Air Group, Inc., AMR Corporation, Continental Airlines, Inc., Delta Air Lines Inc., JetBlue Airways Corporation, Southwest Airlines Co., US Airways Group, Inc. and UAL Corporation. For the 2006/2008 Performance Share Plan, which paid out in April 2009, the group consisted of: Alaska Airlines, Continental Airlines, JetBlue Airways, Southwest Airlines, US Airways, UAL Corporation and AMR Corporation. The committee did not include Delta Air Lines or Northwest Airlines in the 2006/2008 Performance Share Plan because their stock was not listed on a national securities exchange due to their bankruptcy proceedings at that time.

 

Under the terms of the performance share awards granted from 2004 to 2007, one-half of the distributions to our named executive officers was based on our TSR, and the other half on the Compensation Committee’s assessment of our achievement of annual corporate objectives for the measurement period. In determining whether we achieved the corporate objectives, the committee was not required to use any formula or other measure or assign any particular weighting to any objective. In addition, the committee had the discretion to consider any other factor it considered important or appropriate. For more information on performance shares, please see the discussion under “Equity Incentive Plan Awards – Performance Shares” on page 38.

 

Stock Appreciation Rights

 

Stock appreciation rights are contractual rights to receive shares of our common stock over a ten-year exercise period. They are designed to reward our executives for stock price appreciation over the exercise period. They provide compensation only if the market value of our common stock appreciates from the date of grant. Stock appreciation rights 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 stock appreciation right grant. In 2009, the stock appreciation rights and other awards were approved at the time we released our second quarter earnings. Accordingly, the effective date of the stock appreciation rights granted at that time was July 20, 2009, which was three business days after the date of our earnings release.

 

Deferred Shares

 

Deferred shares are the contractual right to receive shares of our common stock upon the completion of three years of service following the grant date. Since deferred shares are not subject to the achievement of any performance objectives, the value of the deferred shares at the time of vesting depends entirely on the value of our common stock at that time. The Compensation Committee believes that deferred shares are important for the long term retention of our named executive officers because they provide a guaranteed award for their continued service through the three-year service period.

 

Career Performance Shares

 

Recognizing that Mr. Arpey’s pay was significantly below market, in 2005 the Compensation Committee evaluated various alternatives to address the need to retain him. Based on recommendations from Deloitte Consulting and Hewitt Associates, in 2005 the committee entered into an agreement with Mr. Arpey under which he would be granted a minimum of 58,000 shares of our common stock (called “career performance shares”) each year from 2005 through and including 2009. These awards do not vest until 2015. The career performance share agreement also reflects the committee’s desire to retain Mr. Arpey because of his knowledge of the airline business, his

contributions to the airline’s success, and its confidence that Mr. Arpey has the vision and managerial capability to oversee our success.

 

Under the agreement, the actual number of career performance shares Mr. Arpey is entitled to receive in July 2015 is based on the Compensation Committee’s subjective evaluation of our performance during 2005 to 2015 under a list of criteria. Depending on this assessment, the committee can decide to pay Mr. Arpey 0% to 175% of the career performance shares originally granted to him. For more information on the career performance shares, see the discussion under “Equity Incentive Plan Awards – Career Performance Shares” on page 38.

 

2009

 

The values the Compensation Committee targeted for the long-term incentive grants to our named executive officers in 2007, 2008 and 2009 have been approximately the same as the value targeted in 2006. The values reported in the stock and option awards columns in the “Fiscal Year 2007, 2008 and 2009 Summary Compensation Table” on page 34 for 2009 are lower than the values reported in those columns for 2008 and 2007. Those differences are due to variability between our modeling estimates and the actual stock price on the date of grant. Also, the stock appreciation rights values reflected in the option awards column are based on valuation assumptions required under accounting rules that are different from the assumptions used for determining compensation value. Except for Mr. Arpey’s awards, the value of these long-term incentive awards was generally targeted to the median of the values of long-term incentive awards granted to the persons holding similar positions in the Comparator Group, although the committee made adjustments based on internal pay equity, economic and other concerns. Our targeted long-term incentive value for Mr. Arpey is significantly below the median in the Comparator Group, but is generally in line with average annual long-term incentive compensation granted to CEOs in the Peer Group.

 

In setting compensation for 2009, the Compensation Committee changed the mix of long-term equity awards in an effort to reduce the large swings in realized compensation that had been experienced in the prior several years. Upon the advice of the committee’s compensation consultants, the committee increased the percentage of value represented by deferred shares and stock appreciation rights and correspondingly reduced the percentage of value represented by performance shares. The committee granted long-term equity awards to the named executive officers in approximately the following proportions:

 

Mix of Long-Term Equity Awards

 

 

As a result, while the total targeted value of the long-term incentive awards we granted to our named executive officers in 2009 was approximately equal to the targeted values in 2006 through 2008, approximately 70% of the potential long-term incentive compensation awarded to them in 2009 is dependent upon our financial and operating performance (including, in the case of stock appreciation rights, appreciation in our stock price), compared to 80% in 2008.

For performance share awards under the 2006/2008 Performance Share Plan, in April 2009 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%. The committee also determined that achievement of our corporate objectives during that period was well in excess of 75%. Because TSR is the only performance measure used to determine performance shares distributed to all of the other participants in that plan, with the consent of the named executives and our other senior officers, the committee based the final distribution of performance shares entirely on TSR. As a result, on April 15, 2009, our named executive officers received 75% of the awards originally granted to them under the 2006/2008 Performance Share Plan.

 

Retirement

 

Our named executive officers are eligible to participate in the Retirement Benefit Plan of American Airlines, Inc. for Agents, Management, Specialists, Support Personnel and Officers (the “Retirement Benefit Plan”). This is a defined benefit plan that provides compensation to all of our eligible employees during their retirement. Our named executive officers are also eligible to participate in the Supplemental Executive Retirement Plan (the “Non-Qualified Plan”). The Non-Qualified Plan is designed to address limitations on benefits paid under the Retirement Benefit Plan pursuant to the Employee Retirement Income Security Act of 1974 (“ERISA”). No changes were made to our retirement plans in 2009. See “2009 Pension Benefits Table” and the accompanying narrative discussion and footnotes that follow the table, beginning on page 44, and “Post-Employment Compensation,” beginning on page 47, for further details regarding our retirement plans.

 

Travel Perquisites and Other Benefits

 

The named executive officers also participate in a variety of health and welfare and other benefits that we provide to our other U.S.-based employees. The Compensation Committee has 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, including unlimited air transportation on American Airlines and American Eagle Airlines. Instead of perquisites frequently provided to executive officers of other public companies, such as automobile lease payments, club memberships, financial planning fees and split dollar life insurance, we provide personal allowances to our named executive officers. We describe these and other perquisites we provide them in footnote (5) to the “Fiscal Year 2007, 2008 and 2009 Summary Compensation Table” on page 35.

 

No changes were made to the perquisites and benefits offered to our named executive officers in 2009.

 

Post-Employment and Change in Control Benefits

 

Following their employment with us, the named executive officers are eligible for the benefits, perquisites and privileges that we generally provide to all of our other salaried employees. These include severance, pro-rated incentive compensation and equity distributions, and a limited number of other benefits. We describe these benefits further in the narrative discussion under “Post-Employment Compensation” beginning on page 47. The Compensation Committee has determined that it is important to provide these post-termination benefits, perquisites and privileges to our named executive officers to attract and retain them.

 

The named executive officers are also entitled to immediate vesting of equity incentive awards and payment under the Non-Qualified Plan upon a change in control of the Company. We describe these benefits further in the narrative discussion under “Change In Control” beginning on page 51. The events used to define “change in control” were chosen 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 third party 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 them the benefit of the awards that were awarded to them before the change in control, and to waive the service and other conditions applicable to those awards. The committee believes this is appropriate because such a change could reasonably be expected to materially alter our policies and objectives, and result in a material change in the composition of management. The committee has determined that these change in control provisions are common for equity incentive awards and benefit plans like ours, and that they are thus necessary and appropriate to attract and retain our named executive officers.

 

We have also entered into executive termination benefit agreements with our named executive officers for terminations associated with a change in control. We describe these agreements further in the narrative discussion under “Change In Control” beginning on page 51. The Compensation Committee believes it is important to provide these agreements because: (a) the airline industry has been and remains subject to potential future consolidation and economic contingencies; (b) they 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 such change in control; (c) they help ensure that the executive will remain with us for a reasonable period after a change in control, enabling a smooth transition to new management; (d) they are in common use in our industry; and (e) they help us attract senior leaders to the Company. The events used to define “change in control” under these agreements were chosen for the same reasons as those described for our long-term incentive awards and Non-Qualified Plan. However, the executive termination agreements include a “double trigger.” This means that in order for the benefits to be paid, the change in control must be followed by a termination of the named executive officer’s employment. The double trigger is intended to encourage the executive to remain with the Company for a period of time following a change in control to help smooth the transition to new management.

 

No changes were made to the post-termination and change in control benefits offered to our named executive officers in 2009.

 

Recoupment Policy

 

In March 2009, the Compensation Committee approved a policy that allows us to recoup 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 compensation paid to our named executive officers to $1 million in some circumstances. 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 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

EXECUTIVE COMPENSATION

 

Fiscal Year 2007, 2008 and 2009 Summary Compensation Table

 

The following Fiscal Year 2007, 2008 and 2009 Summary Compensation Table contains information regarding compensation paid to our Chief Executive Officer, Chief Financial Officer and three other most highly compensated executive officers in the years 2007, 2008 and 2009.

 

 

 

 

Fiscal Year 2009 Grants of Plan-Based Awards Table

 

The table below lists each grant or award made in 2009 to our named executive officers under our equity and non-equity incentive plans.

 

 

Discussion Regarding Fiscal Year 2007, 2008 and 2009 Summary Compensation Table and Fiscal Year 2009 Grants of Plan-Based Awards Table

 

General

 

As described in “Compensation Discussion and Analysis – The Primary Components of Our Compensation Program,” beginning on page 26, the base salary we pay to our named executive officers is generally designed to be 15% of their targeted annual compensation. The short-term incentive compensation they are awarded is generally designed to be 15% of their targeted annual compensation. However, we have not paid any annual bonuses to our named executive officers since 2001. The long-term incentive compensation awarded to them is generally designed to be 70% of their targeted annual compensation.

 

Non-Equity Incentive Plan Awards – Annual Incentive Plan

 

All of our employees, including the named executive officers, participate in the Annual Incentive Plan. The Annual Incentive Plan provides cash incentive payments upon the achievement of monthly customer service goals and annual financial goals. Under the customer service component of the plan, awards of up to $100 per month are earned if we meet our customer satisfaction and dependability targets. The financial component of the Annual Incentive Plan provides for payments if American Airlines meets threshold, target or maximum pre-tax earnings margins described in the following table:

 

 

The actual dollar amount paid under the financial component of the Annual Incentive Plan is determined as a percentage of base salary. The percentage increases with higher levels of responsibility and higher pre-tax earnings margins. The percentages of base salary that each of our named executive officers was eligible to receive in 2009 (based upon our achievement of the threshold, target or maximum performance levels) are described in the following table:

 

We did not meet any of the Annual Incentive Plan’s pre-tax earnings margin thresholds in 2009 or in any year since 2000. We therefore have not paid any short-term incentive compensation under the plan’s financial component since March 2001.

 

Equity Incentive Plan Awards

 

During its annual compensation review in July 2009, the Compensation Committee approved grants to the named executive officers of performance shares, career performance shares, deferred shares and stock appreciation rights 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 2009 Grants of Plan-Based Awards Table” shows the number of performance shares granted in 2009 under the 2009/2011 Performance Share Plan. Except as provided below, vesting of these performance shares is also generally subject to the named executive officer’s continued employment with us through April 18, 2012. In the event of the death, disability, termination other than for cause, or early retirement of a named executive officer, his performance shares will vest on a pro-rata basis, based upon the number of months that have elapsed since January 1, 2009. Payment of these shares is subject to achievement of the performance criteria in the plan. The potential payment ranges from 0% to 175% of the shares originally granted. In the event of a change in control, payment of the performance shares will be at the target level (or 100%) of the shares initially granted to each named executive officer.

 

Career Performance Shares.  In 2005, we entered into a career performance share agreement with Mr. Arpey. As required by that agreement, we granted Mr. Arpey 58,000 career performance shares in 2009. Those shares vest and become payable in 2015, but the shares granted will vest early: (a) in the event of Mr. Arpey’s death, disability, termination other than for cause, or early retirement; (b) in the event Mr. Arpey resigns for good reason; or (c) in the event of a change in control.

 

When these shares vest, the Compensation Committee will determine whether any payment of the shares will be made. Under the agreement, that determination is based on the committee’s subjective evaluation of our performance during 2005 to 2015 in the following areas: (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 the Compensation Committee may, in its judgment, deem material. Depending on this assessment, the committee can decide to pay Mr. Arpey 0% to 175% of the career performance shares originally granted to him. The committee is not required to use any formula or other measure or assign any particular weighting to any objective. The committee can also consider any other factor that it considers important or appropriate.

 

Deferred Shares.  The deferred shares granted in 2009 to each of our named executive officers vest on July 20, 2012, subject to the named executive officer’s continued employment with us through that date. In the event of the death, disability, termination other than for cause, or early retirement of a named executive officer, his 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.

 

Stock Appreciation Rights.  Stock appreciation rights 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. In the event of early retirement or disability, unexercised stock appreciation rights continue to vest and remain exercisable until their expiration. The effective date of the stock appreciation rights granted in 2009 was July 20, 2009. Upon the exercise of a stock appreciation right, we subtract the exercise price from the fair market value of one share of common stock on the day the

stock appreciation right is exercised. We multiply this amount by the number of stock appreciation rights exercised and issue to the employee the number of shares equal to that value.

 

Employment Agreement with Mr. Horton

 

To attract Mr. Horton to return to work for us, we entered into an employment agreement with him in March 2006. That agreement, as extended in July 2008, expires in March 2012. Under the agreement, Mr. Horton is entitled to an annual base salary of $600,000 (which is reviewed annually and may not be reduced after any increase), and an annual personal allowance of at least $27,000 per year. His annual target bonus is 108% of his salary. He is also eligible to participate in our benefit programs, including the Retirement Benefit Plan and the Non-Qualified Plan. The agreement grants Mr. Horton additional years of credited service under the Non-Qualified Plan, as described under “2009 Pension Benefits Table,” beginning on page 44. It also provides post-employment and change in control benefits, as described under “Post-Employment Compensation,” beginning on page 47, and “Change In Control,” beginning on page 51. We are not a party to any other employment agreements with any of our named executive officers.

 

See “Post-Employment Compensation,” beginning on page 47, and “Change In Control,” beginning on page 51, for more information about the treatment of equity incentive plan awards upon termination of employment or after a change in control.

 

2009 Outstanding Equity Awards At Fiscal Year-End Table

 

The following table lists all of the outstanding stock and stock option/stock appreciation right awards held on December 31, 2009 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, 2009, which was $7.73. 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 stock appreciation right. The other awards listed in this column are stock appreciation rights.