##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K þ
    
    Annual Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934For fiscal year ended December 31, 2004.o
    
    Transition Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission file number 1-2691. American Airlines, Inc. 
  Delaware
    
    13-1502798(State or other jurisdiction
    
    (I.R.S. Employer Identification No.of incorporation or organization)
 4333 Amon Carter Blvd.Fort Worth, Texas
    
    76155(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone
number, including area code     
(817) 963-1234
Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of exchange on which registeredNONE
    
    NONE
 Securities registered pursuant to Section 12(g) of the Act: NONE 
  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o No þ. American Airlines, Inc. is a wholly-owned subsidiary of AMR Corporation, and there is no market for the registrants common stock. As
of February 18, 2005, 1,000 shares of the registrants common stock were outstanding. The registrant meets the conditions set forth in, and is filing this form with the reduced disclosure format prescribed by, General
Instructions I(1)(a) and (b) of Form 10-K.




---



TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. CONSOLIDATED FINANCIAL STATEMENTSITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESComputation of Ratio of Earnings to Fixed ChargesConsent of Independent Registered Public Accounting FirmCertification of CEO Pursuant to Rule 13a-14(a)Certification of CFO Pursuant to Rule 13a-14(a)Certification Pursuant to Section 906    Table of Contents  
 PART I 
 
 ITEM 1. BUSINESS American Airlines, Inc. (American, or the Company), the principal subsidiary of AMR Corporation
(AMR), was founded in 1934. All of Americans common stock is owned by AMR. On April 9, 2001,
American (through a wholly owned subsidiary, TWA Airlines LLC (TWA LLC)) purchased substantially
all of the assets and assumed certain liabilities of Trans World Airlines, Inc. (TWA), the eighth
largest U.S. carrier at the time of the transaction. American is the largest scheduled passenger airline in the world. At the end of 2004, American
provided scheduled jet service to approximately 150 destinations throughout North America, the
Caribbean, Latin America, Europe and the Pacific. In addition, American has capacity purchase
agreements with two wholly owned subsidiaries of AMR, American Eagle Airlines, Inc. and Executive
Airlines, Inc. (collectively, AMR Eagle), and two independent regional carriers, Chautauqua
Airlines, Inc. and Trans States Airlines, Inc. (collectively, the American Connection carriers). The
AMR Eagle and American Connection carriers provide connecting service to smaller markets throughout
the United States, Canada and the Caribbean. American is also one of the largest scheduled air
freight carriers in the world, providing a wide range of freight and mail services to shippers
throughout its system. A. Recent Events The Company has incurred very large operating and net losses during the past four years, as shown
in the following table: Year Ended December 31,(in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Operating loss
    
    $
    (421
    )
    
    $
    (1,129
    )
    
    $
    (3,313
    )
    
    $
    (2,274
    )Net loss
    
    
    (821
    )
    
    
    (1,318
    )
    
    
    (3,495
    )
    
    
    (1,562
    )
 These losses reflect, among other things, a substantial decrease in the Companys revenues in 2001
and 2002. This revenue decrease was primarily driven by (i) a steep fall-off in the demand for air
travel, particularly business travel, primarily caused by weakness in the U.S. economy, (ii)
reduced pricing power, resulting mainly from greater cost sensitivity on the part of travelers
(especially business travelers), increasing competition from low-cost carriers (LCCs) and the
continuing increase in pricing transparency resulting from the use of the Internet and (iii) the
aftermath of the terrorist attacks of September 11, 2001 (Terrorist Attacks), which accelerated and
exacerbated the trend of decreased demand and reduced industry revenues. The Company believes that
its reduced pricing power resulting from the factors listed in clause (ii) above will persist
indefinitely and possibly permanently. Passenger traffic rebounded in 2003 and 2004, reflecting a general improvement in the U.S. and
several other economies served by the Company, the diminishing impact of the Terrorist Attacks on
demand and lower fares. However, the Companys pricing power remained depressed in 2003 due to a
continuation of the factors listed in clause (ii) of the preceding paragraph, and declined in 2004
due to significant increases in overall industry capacity that exceeded the growth in demand, and
more frequent and more deeply discounted fare sales initiated by competitors, including competitors
currently operating under the protection of Chapter 11 of the Bankruptcy Code. The Companys 2004 operating and financial results were also adversely affected by the significant
increases in the price of jet fuel. Fuel price increases during 2004 resulted in a year-over-year
increase of 33.7 cents per gallon. This price increase negatively impacted fuel expense by $1
billion during the year. Continuing high fuel prices, additional increases in the price of fuel,
and/or disruptions in the supply of fuel, would further adversely affect the Companys financial
condition and its results of operations. 1




---



##### Table of Contents



In response to the challenges faced by the Company, during the past four years the Company has
implemented several restructuring and other initiatives:  
    Following the Terrorist Attacks, the Company reduced its operating
schedule by approximately 20 percent and reduced its workforce by
approximately 20,000 jobs.  
    In 2002, the Company announced a series of initiatives to reduce
its annual costs by $2 billion. These initiatives are being
implemented through 2005, and involve: (i) scheduling
efficiencies, (ii) fleet simplification, (iii) streamlined
customer interaction, (iv) distribution modifications, (v)
in-flight product changes, (vi) operational changes and (vii)
headquarters/administration efficiencies. As a result of these
initiatives, the Company reduced an estimated 7,000 jobs by March
2003.  
    In February 2003, the Company asked its employees for
approximately $1.8 billion in annual savings through a combination
of changes in wages, benefits and work rules. In April 2003,
American reached agreements with its three unions (the Labor
Agreements) and also implemented various changes in the pay plans
and benefits for non-unionized personnel, including officers and
other management (the Management Reductions). The Labor Agreements
and Management Reductions resulted in $1.8 billion in annual savings including a workforce reduction of
approximately 9,300 jobs. In addition, American reached
concessionary agreements with certain vendors, lessors, lenders
and suppliers (collectively, the Vendors, and the agreements, the
Vendor Agreements), resulting in approximately $200 million in
annual cost savings. Generally, under the terms of these Vendor
Agreements, American received the benefit of lower rates and
charges for certain goods and services, and more favorable rent
and financing terms with respect to certain of its aircraft.  
    Subsequent to the April 2003 Labor Agreements the Company announced the Turnaround Plan. The
Turnaround Plan is the Companys strategic framework for returning
to sustained profitability and emphasizes: (i) lower costs, (ii)
an increased focus on what customers truly value and are prepared
to pay for, (iii) increased union and employee involvement in the
operation of the Company and (iv) the need for a more sound
balance sheet/financial structure.  
    In the latter part of 2003 and throughout 2004, the Company
continued to work  under the basic tenets of the Turnaround Plan
 with its unions and employees to identify and implement
additional initiatives designed to increase efficiencies and
revenues and reduce costs. These initiatives included: (i) the
return of under-used gate space and the consolidation of the
Companys terminal space, (ii) the de-peaking of its hub at Miami,
the reduction in the size of its St. Louis hub and the
simplification of its domestic operations, (iii) the acceleration
of the retirement of certain aircraft and the cancellation or
deferral of aircraft deliveries, (iv) the improvement of aircraft
utilization across its fleet and an increase in seating density on
certain fleet types, (v) the sale of certain non-core assets, (vi)
the expansion of its international network, where the Company
believes that higher revenue generating opportunities currently
exist, (vii) the implementation of an on-board food purchase
program and new fees for ticketing services and (viii) numerous
other initiatives.  
    As part of its effort to build greater employee involvement, the
Company has worked to make its labor unions and its employees, its
business partners on the need for continuous improvement under the
Turnaround Plan. Among other things, the senior management of the
Company meets regularly with union officials to discuss the
Companys financial results as well as the competitive landscape.
These discussions include: (i) the Companys cost reduction and
revenue enhancement initiatives and (ii) a review of initiatives,
in-place or contemplated, at other airlines and the impact of
those initiatives on the Companys competitive posture. The Companys ability to become profitable and its ability to continue to fund its obligations on
an ongoing basis will depend on a number of factors, some of which are largely beyond the Companys
control. Some of the risk factors that affect the Companys business and financial results are
discussed in the Risk Factors listed in Item 7. As the Company seeks to improve its financial
condition, it must continue to take steps to generate additional revenues and significantly reduce
its costs. Although the Company has a number of initiatives underway to address the cost and
revenue challenges, the ultimate success of these initiatives is not known at this time and cannot
be assured. It will be very difficult, absent continued restructuring of its operations, for the
Company to continue to fund its obligations on an ongoing basis or to become profitable if the
overall industry revenue environment does not improve and fuel prices remain at historically high
levels for an extended period. 2




---



##### Table of Contents



B. Competition Major CompetitorsThe domestic airline industry is fiercely competitive. Currently, any U.S. air
carrier deemed fit by the U.S. Department of Transportation (DOT) is free to operate scheduled
passenger service between any two points within the U.S. and its possessions. Most major air
carriers have developed hub-and-spoke systems and schedule patterns in an effort to maximize the
revenue potential of their service. American operates five hubs: Dallas/Fort Worth (DFW), Chicago
OHare, Miami, St. Louis and San Juan, Puerto Rico. United Air Lines (United) also has a hub
operation at Chicago OHare. Delta Air Lines (Delta) previously operated a hub at DFW. In January
2005, however, Delta ceased hub operations at DFW. The American Eagle carriers increase the number
of markets the Company serves by providing connections at Americans hubs and certain other major
airports  Boston, Los Angeles, Raleigh/Durham and New Yorks LaGuardia and John F. Kennedy
International Airports. The American Connection carriers provide connecting service to American
through St. Louis. Americans competitors also own or have marketing agreements with regional
carriers which provide similar services at their major hubs and other locations. On most of its domestic non-stop routes, the Company faces competing service from at least one, and
sometimes more than one, domestic airline including: AirTran Airways, Alaska Airlines, America West
Airlines, ATA Airlines, Continental Airlines (Continental), Delta, Frontier Airlines, JetBlue
Airways, Northwest Airlines (Northwest), Southwest Airlines, United and US Airways, and their
affiliated regional carriers. Competition is even greater between cities that require a
connection, where the major airlines compete via their respective hubs. In addition, the Company
faces competition on some of its routes from carriers operating point-to-point service on such
routes. The Company also competes with all-cargo and charter carriers and, particularly on shorter
segments, ground and rail transportation. On all of its routes, pricing decisions are affected, in
large part, by the need to meet competition from other airlines. The Company must compete with carriers that have recently reorganized or are reorganizing,
including under the protection of Chapter 11 of the Bankruptcy Code. It is possible that one or
more other competitors may seek to reorganize in or out of Chapter 11. Successful completion of
such out-of-court or Chapter 11 reorganizations could present the Company with competitors with
lower operating costs derived from renegotiated labor, supply and financing contracts. International Air TransportationIn addition to its extensive domestic service, the Company
provides international service to the Caribbean, Canada, Latin America, Europe and the Pacific.
The Companys operating revenues from foreign operations were approximately 35 percent of the
Companys total operating revenues in 2004 and 27 and 29 percent of the Companys total operating
revenues in 2003 and 2002, respectively. Additional information about the Companys foreign
operations is included in Note 14 to the consolidated financial statements. In providing international air transportation, the Company competes with foreign investor-owned
carriers, state-owned carriers and U.S. airlines that have been granted authority to provide
scheduled passenger and cargo service between the U.S. and various overseas locations. The major
U.S. air carriers have some advantage over foreign competitors in their ability to generate traffic
from their extensive domestic route systems. In some cases, however, foreign governments limit
U.S. air carriers rights to carry passengers beyond designated gateway cities in foreign
countries. To improve access to each others markets, various
U.S. and foreign air carriers 
including American  have established marketing relationships with other airlines and rail
companies. American currently has marketing relationships with Aer Lingus, Air Pacific, Air Tahiti
Nui, Alaska Airlines, British Airways, Cathay Pacific, China Eastern Airlines, Deutsche Bahn, EL
AL, EVA Air, Finnair, Gulf Air, Hawaiian Airlines, Iberia, Japan Airlines, Lan Airlines, Mexicana,
Qantas Airways, SN Brussels, SNCF, Southern Winds, Swiss International Air Lines, TACA Group, the
TAM Group and Turkish Airlines. In the coming years, the Company expects to develop these programs
further and to evaluate new alliances with other carriers. 3




---



##### Table of Contents



American is also a founding member of the oneworld alliance, which includes Aer Lingus, British
Airways, Cathay Pacific, Finnair, Lan Airlines, Iberia, and Qantas. The oneworld alliance links the
networks of the member carriers to enhance customer service and smooth connections to the
destinations served by the alliance, including linking the carriers frequent flyer programs and
access to the carriers airport lounge facilities. Several of Americans major competitors are
members of marketing/operational alliances that enjoy antitrust immunity. To the extent that
American and British Airways, the largest members of the oneworld alliance, are restricted in their
relationship because they lack antitrust immunity, the carriers are at a competitive disadvantage
vis-à-vis other alliances that have antitrust immunity. Following permission from the DOT to
codeshare on a wide number of flights beyond the carriers gateways in the United Kingdom and the
United States, American and British Airways implemented their first phase of codeshare services in
2003 and expanded this cooperation further in 2004. Price CompetitionThe airline industry is characterized by substantial and intense price
competition. Fare discounting by competitors has historically had a negative effect on the
Companys financial results because the Company is generally required to match competitors fares
because failing to match would provide even less revenue. In January 2005, Delta implemented a
U.S.-wide simplified fare structure initiative, which the Company matched in most domestic markets.
The Company expects this simplified fare initiative to initially have a negative impact on its
2005 revenues. The longer-term impact on revenues is unclear at this time. During recent years, a number of new LCCs have entered the domestic market and several major
airlines, including the Company, have implemented efforts to lower their costs. Lower cost
structures enable airlines to offer lower fares. In addition, several air carriers have recently
reorganized or are reorganizing under Chapter 11 of the United States Bankruptcy Code, including
United and US Airways. In the past, air carriers involved in reorganizations have undertaken
substantial fare discounting in order to maintain cash flows and preserve their customer base.
Further fare reductions, domestic and international, may therefore occur in the future. If fare
reductions are not offset by increases in passenger traffic, changes in the mix of traffic that
improve yields (passenger revenue per passenger mile) and/or cost reductions, the Companys
operating results will be negatively impacted. Distribution SystemsThe growing use of electronic ticket distribution systems provides the
Company with an opportunity to lower its distribution costs. However, the continuous increase in
pricing transparency resulting from the use of the Internet has enabled cost-conscious customers to
more easily obtain the lowest fare on any given route. The Company continues to expand the
capabilities of its Internet website  AA.com  and the use of electronic ticketing throughout the
Companys network. In addition, the Company has marketing agreements with Orbitz and other
Internet travel services. The majority of the tickets for travel on American and the AMR Eagle carriers continue to be sold
by travel agents. In 2002, American announced that it would no longer pay base commissions on
tickets issued by travel agents in the United States, Puerto Rico, and Canada (which generally were
five percent of the price of a ticket, capped at a maximum of $20 for a domestic roundtrip
itinerary and $100 for an international roundtrip). As discussed in Item 3 Legal Proceedings, the
Company is subject to legal challenges related to these changes. American continues, however, to
pay certain commissions to travel agents in connection with special revenue programs. American
believes that other domestic carriers also no longer pay base commissions on tickets issued by
travel agents in the U.S., Puerto Rico and Canada, but pay certain commissions in connection with
their own special revenue programs. Accordingly, airlines compete, not only with respect to the
price of the tickets sold, but also with respect to the amount of special revenue program
commissions that may be paid. In addition, American has been actively pursuing reducing base
commissions for international points of sale. The Company also establishes incentive programs with corporate customers to increase revenues. The
Company believes that its network breadth and local market presence in key cities allow it to have
some advantages over other competitors. C. Regulation GeneralThe Airline Deregulation Act of 1978, as amended, eliminated most domestic economic
regulation of passenger and freight transportation. However, the DOT and the Federal Aviation
Administration (FAA) still exercise certain regulatory authority over air carriers. The DOT
maintains jurisdiction over the approval of international codeshare agreements, international route
authorities and certain consumer protection and competition matters, such as advertising, denied
boarding compensation and baggage liability. 4




---



##### Table of Contents



The FAA regulates flying operations generally, including establishing personnel, aircraft and
certain security standards. As part of that oversight, the FAA has implemented a number of
requirements that the Company is incorporating into its maintenance programs. The Company is
progressing toward the completion of over 100 airworthiness directives including McDonnell Douglas
MD-80 metal-mylar insulation replacement, enhanced ground proximity warning systems, McDonnell
Douglas MD-80 main landing gear piston improvements, Boeing 757 and Boeing 767 pylon improvements,
Boeing 737 elevator and rudder improvements and Airbus A300 structural improvements. Based on its
current implementation schedule, the Company expects to be in compliance with the applicable
requirements within the required time periods. The Department of Justice (DOJ) has jurisdiction over airline antitrust matters. The U.S. Postal
Service has jurisdiction over certain aspects of the transportation of mail and related services.
Labor relations in the air transportation industry are regulated under the Railway Labor Act, which
vests in the National Mediation Board (NMB) certain regulatory functions with respect to disputes
between airlines and labor unions relating to union representation and collective bargaining
agreements. InternationalInternational air transportation is subject to extensive government regulation. The
Companys operating authority in international markets is subject to aviation agreements between
the U.S. and the respective countries or governmental authorities (such as the European Union), and
in some cases, fares and schedules require the approval of the DOT and/or the relevant foreign
governments. Moreover, alliances with international carriers may be subject to the jurisdiction
and regulations of various foreign agencies. Bilateral agreements between the U.S. and various
foreign governments of countries served by the Company are periodically subject to renegotiation.
Changes in U.S. or foreign government aviation policies could result in the alteration or
termination of such agreements, diminish the value of route authorities, or otherwise adversely
affect the Companys international operations. In addition, at some foreign airports, an air
carrier needs slots (landing and take-off authorizations) before the air carrier can introduce new
service or increase existing service. The availability of such slots is not assured and the
inability of the Company to obtain and retain needed slots could therefore inhibit its efforts to
compete in certain international markets. SecurityIn November 2001, the Aviation and Transportation Security Act (ATSA) was enacted. The
ATSA created a new government agency, the Transportation Security Administration (TSA), which is
part of the Department of Homeland Security and is responsible for aviation security. The ATSA
mandates that the TSA provide for the screening of all passengers and property, including U.S.
mail, cargo, carry-on and checked baggage, and other articles that will be carried aboard a
passenger aircraft. The ATSA also provides for increased security in flight decks of aircraft and
requires federal air marshals to be present on certain flights. Effective February 1, 2002, the ATSA imposed a $2.50 per enplanement security service fee ($5
one-way maximum fee), which is being collected by the air carriers and submitted to the government
to pay for these enhanced security measures. Additionally, for the years 2002, 2003 and 2004, air
carriers were required to submit to the government an amount equal to what the air carriers paid
for screening passengers and property in 2000. After 2004, this fee may be assessed based upon some
other allocation. However, air carriers will continue to submit to the government an amount equal
to what the carriers paid for screening passengers and property in 2000 until further notice. The
budget for fiscal year 2006 submitted by President Bush contains a spending proposal for the
Department of Homeland Security that would increase the per enplanement security service fee to
$5.50 ($8 one-way maximum fee for multiple segments). American and other carriers have announced
their opposition to this proposal as there is no assurance that any increase in fees could be
passed on to customers. Airline FaresAirlines are permitted to establish their own domestic fares without governmental
regulation. The DOT maintains authority over certain international fares, rates and charges, but
applies this authority on a limited basis. In addition, international fares and rates are
sometimes subject to the jurisdiction of the governments of the foreign countries which the Company
serves. While air carriers are required to file and adhere to international fare and rate tariffs,
substantial commissions, overrides and discounts to travel agents, brokers and wholesalers
characterize many international markets. 5




---



##### Table of Contents



Airport AccessThe FAA has designated New York John F. Kennedy, New York LaGuardia, and
Washington Reagan airports as high-density traffic airports. The high-density rule limits the
number of Instrument Flight Rule operations  take-offs and landings  permitted per hour and
requires that a slot support each operation. In April 2000, the Wendell H. Ford Aviation
Investment and Reform Act for the 21st Century (Air 21 Act) was enacted. It will
eliminate slot restrictions at New York John F. Kennedy and New York LaGuardia airports in 2007.
The Company expects that the elimination of these slot restrictions could create operational
challenges, but does not expect the elimination of these slot restrictions to have a material
adverse impact on the Companys financial condition, results of operations or cash flows. As a result of agreements reached with the FAA in 2004, the Company reduced operations at Chicago
OHare during certain peak times to improve dependability. Currently, the FAA permits the purchasing, selling, leasing or transferring of slots except those
slots designated as international, essential air service or Air 21 Act slots (certain slots at the
New York John F. Kennedy, New York LaGuardia, and Washington Reagan airports). Trading of any
domestic slot is permitted subject to certain parameters. Some foreign airports, including London
Heathrow, a major European destination for American, also have slot allocations. Most foreign
authorities do not officially recognize the purchasing, selling or leasing of slots. In addition, the Wright Amendment restricts certain flight operations at Dallas Love Field to a
limited geographic area. To the extent these flight restrictions are lifted in the future, it could
have an adverse financial impact on the Company. Although the Company is constrained by slots, it currently has sufficient slot authorizations to
operate its existing flights. However, there is no assurance that the Company will be able to
obtain slots to expand its operations and change its schedules in the future because, among other
factors, slot allocations are subject to changes in government policies. Environmental MattersThe Company is subject to various laws and government regulations
concerning environmental matters and employee safety and health in the U.S. and other countries.
U.S. federal laws that have a particular impact on the Company include the Airport Noise and
Capacity Act of 1990 (ANCA), the Clean Air Act, the Resource Conservation and Recovery Act, the
Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response,
Compensation and Liability Act (CERCLA or the Superfund Act). Certain operations of the Company
are also subject to the oversight of the Occupational Safety and Health Administration (OSHA)
concerning employee safety and health matters. The U.S. Environmental Protection Agency (EPA),
OSHA, and other federal agencies have been authorized to promulgate regulations that have an impact
on the Companys operations. In addition to these federal activities, various states have been
delegated certain authorities under the aforementioned federal statutes. Many state and local
governments have adopted environmental and employee safety and health laws and regulations, some of
which are similar to or stricter than federal requirements. The ANCA recognizes the rights of airport operators with noise problems to implement local noise
abatement programs so long as they do not interfere unreasonably with interstate or foreign
commerce or the national air transportation system. Authorities in several cities have promulgated
aircraft noise reduction programs, including the imposition of nighttime curfews. The ANCA
generally requires FAA approval of local noise restrictions on aircraft. While the Company has had
sufficient scheduling flexibility to accommodate local noise restrictions imposed to date, the
Companys operations could be adversely affected if locally-imposed regulations become more
restrictive or widespread. 6




---



##### Table of Contents



American has been named as a potentially responsible party (PRP) for contamination at the former
Operating Industries, Inc. Landfill in Monterrey Park, CA (OII). Americans alleged volumetric
contributions at OII are small when compared with those of other PRPs. American is participating
with a number of other PRPs in a Steering Committee that has conducted extensive negotiations with
the EPA and state officials in recent years. Members of the Steering Committee, including
American, have entered into a series of partial consent decrees with EPA and the State of
California which address specific aspects of investigation and cleanup at OII. To date American
has paid approximately $1.25 million toward its share of cleanup costs under those consent decrees.
Together with a number of other small-volume PRPs at OII, American seeks a settlement that will
enable it to resolve all of its remaining past and present liabilities at OII in exchange for a
one-time, lump-sum settlement payment. The amount of Americans potential contribution towards
such a settlement is not yet known but American expects that its payments will be immaterial. American also has been named as a PRP for contamination at the Double Eagle Superfund Site in
Oklahoma City, OK (Double Eagle). Americans alleged volumetric contributions are small when
compared with those of other PRPs. American is participating with a number of other PRPs at Double
Eagle in a Joint Defense Group that is actively conducting settlement negotiations with the EPA and
state officials. The group is seeking a settlement on behalf of its members that will enable
American to resolve its past and present liabilities at Double Eagle in exchange for a one-time,
lump-sum settlement payment. American expects that its payment will be immaterial. American, along with most other tenants at the San Francisco International Airport (SFIA), has been
ordered by the California Regional Water Quality Control Board to engage in various studies of
potential environmental contamination at the airport and to undertake remedial measures, if
necessary. In 1997, the SFIA pursued a cost recovery action in the U.S. District Court of Northern
California against certain airport tenants to recover past and future costs associated with
historic airport contamination. American entered an initial settlement for accrued past costs in
2000 for $850,000. In 2004, American resolved its liability for all remaining past and future
costs. Based on SFIAs cost projections, the value of Americans second settlement is
approximately $4 million payable over a 30 year period. Miami-Dade County (the County) is currently investigating and remediating various environmental
conditions at the Miami International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American has been named a PRP for the
contamination at MIA. See Item 3, Legal Proceedings, for additional information. In 1999, American was ordered by the New York State Department of Environmental Conservation
(NYSDEC) to conduct remediation of environmental contamination located at Terminals 8 and 9 at New
Yorks John F. Kennedy International Airport (JFK). American is seeking to recover a portion of the
JFK remediation costs from previous users of the Terminals 8 and 9 premises. In 2004, American
entered a Consent Order with NYSDEC for the remediation of a JFK off-terminal hangar facility.
American expects that the projected costs associated with the JFK remediations will be immaterial. In 1996, American, along with other tenants at the Luis Munoz Marin International Airport in San
Juan, Puerto Rico (SJU) was notified by the SJU Port Authority that it considered American
potentially responsible for environmental contamination at the airport. In 2003, the SJU Port
Authority requested that American, among other airport tenants, fund an ongoing subsurface
investigation and site assessment. American denied liability for the related costs. No further
action has been taken against American. The Company does not expect these matters, individually or collectively, to have a material impact
on its financial condition, results of operations or cash flows. See Note 4 to the consolidated
financial statements for additional information. 7




---



##### Table of Contents



D. Labor The airline business is labor intensive. Wages, salaries and benefits represented approximately 33
percent of the Companys consolidated operating expenses for the year ended December 31, 2004. The
average full-time equivalent number of employees of the Company for the year ended December 31,
2004 was 79,400. The majority of these employees are represented by labor unions and covered by collective
bargaining agreements. Relations with such labor organizations are governed by the Railway Labor
Act. Under this act, the collective bargaining agreements among the Company and these
organizations generally do not expire but instead become amendable as of a stated date. If either
party wishes to modify the terms of any such agreement, it must notify the other party in the
manner described in the agreement. After receipt of such notice, the parties must meet for direct
negotiations, and if no agreement is reached, either party may request the National Mediation Board
(NMB) to appoint a federal mediator. If no agreement is reached in mediation, the NMB may declare
at some time that an impasse exists, and if an impasse is declared, the NMB proffers binding
arbitration to the parties. Either party may decline to submit to arbitration. If arbitration is
rejected by either party, a 30-day cooling off period commences. During that period (or after),
a Presidential Emergency Board (PEB) may be established, which examines the parties positions and
recommends a solution. The PEB process lasts for 30 days and is followed by another cooling off
period of 30 days. At the end of a cooling off period, unless an agreement is reached or action
is taken by Congress, the labor organization may strike and the airline may resort to self-help,
including the imposition of any or all of its proposed amendments and the hiring of new employees
to replace any striking workers. In April 2003, American reached agreements with its three major unions  the Allied Pilots
Association (the APA), the Transport Workers Union of America (AFL-CIO) (the TWU) and the
Association of Professional Flight Attendants (the APFA) (previously described as the Labor
Agreements). The Labor Agreements substantially reduced the labor costs associated with the
employees represented by the unions. In conjunction with the Labor Agreements, American
implemented various changes in the pay plans and benefits for non-unionized personnel, including
officers and other management (the Management Reductions). While the parties may begin discussions
in 2006, the Labor Agreements do not become amendable until 2008. The non-union employees formerly with TWA LLC have been integrated into Americans work force.
With respect to the integration of unionized employees formerly employed by TWA LLC, American
reached integration agreements with the APA (with respect to pilot integration) and the APFA (with
respect to flight attendant integration). American and the TWU participated in arbitration and
resolved certain unionized ground employee integration issues in late February and early March
2002. In early April 2002, the NMB declared American and TWA LLC a single carrier for labor
relations purposes and designated Americans incumbent unions as the collective bargaining
representatives of the relevant work groups at both American and TWA LLC. Since Americans unions
thereafter represented the relevant employees at both carriers, the integration mechanisms
applicable to the unions at American could then begin to be effected. The integration of the
unionized work groups has occurred in accordance with those mechanisms. E. Fuel The Companys operations and financial results are significantly affected by the availability and
price of jet fuel. The Companys fuel costs and consumption for the years 2002 through 2004 were: Average
    
    
    Percent ofGallons
    
    
    
    
    
    
    Cost Per
    
    
    AmericansConsumed
    
    
    Total Cost
    
    
    Gallon
    
    
    OperatingYear
    
    (in millions)
    
    
    (in millions)
    
    
    (in cents)
    
    
    Expenses2002
    
    
    3,163
    
    
    $
    2,415
    
    
    
    76.0
    
    
    
    12.52003
    
    
    2,956
    
    
    
    2,586
    
    
    
    87.5
    
    
    
    14.02004
    
    
    3,014
    
    
    
    3,653
    
    
    
    121.2
    
    
    
    19.2
 8




---



##### Table of Contents



The impact of fuel price changes on the Company and its competitors depends on various factors,
including hedging strategies. The Company has a fuel hedging program in which it enters into jet
fuel, heating oil and crude oil hedging contracts to dampen the impact of the volatility of jet
fuel prices. During 2004, 2003 and 2002, the Companys fuel hedging program reduced the Companys
fuel expense by approximately $91 million, $139 million and $4 million, respectively. As of
December 31, 2004, the Company had hedged, with option contracts, approximately 15 percent of its
estimated first quarter 2005 fuel requirements and minimal amounts of its estimated fuel
requirements thereafter. A deterioration of the Companys liquidity position could negatively
affect the Companys ability to hedge fuel in the future. See the Risk Factors under Item 7 for
additional information regarding fuel. Additional information regarding the Companys fuel program is also included in Item 7(A) 
Quantitative and Qualitative Disclosures about Market Risk and in Note 7 to the consolidated
financial statements. F. Frequent Flyer Program American established the AAdvantage frequent flyer program (AAdvantage) to develop passenger
loyalty by offering awards to travelers for their continued patronage. The Company believes that
the AAdvantage program is one of its competitive strengths. AAdvantage members earn mileage credits
for flights on American, AMR Eagle and certain other participating airlines, or by using services
of other program participants, including bank credit card issuers, hotels, car rental companies and
phone service companies. American sells mileage credits and related services to the other
companies participating in the program. American reserves the right to change the AAdvantage
program at any time without notice and may end the program with six months notice. Mileage credits can be redeemed for free, discounted or upgraded travel on American, AMR Eagle or
other participating airlines, or for other travel industry awards. Once a member accrues
sufficient mileage for an award, the member may book award travel. Most travel awards are subject
to capacity controlled seating. Mileage credit does not expire, provided a customer has any type
of qualifying activity at least once every 36 months. American uses the incremental cost method to account for the portion of its frequent flyer
liability incurred when AAdvantage members earn mileage credits by flying on American or AMR Eagle.
Americans frequent flyer liability is accrued each time a member accumulates sufficient mileage
in his or her account to claim the lowest level of free travel award (25,000 miles) and the award
is expected to be used for free travel. American includes fuel, food, and reservations/ticketing
costs in the calculation of incremental cost. These estimates are generally updated based upon the
Companys 12-month historical average of such costs. American also accrues a frequent flyer
liability for the mileage credits that are expected to be used for travel on participating airlines
based on historical usage patterns and contractual rates. Revenue earned from selling AAdvantage miles to other companies is recognized in two components.
The first component represents the revenue for air transportation sold and is valued at current
market rates. This revenue is deferred and recognized over the period the mileage is expected to
be used, which is currently estimated to be 28 months. The second revenue component, representing
the marketing products sold and administrative costs associated with operating the AAdvantage
program, is recognized immediately. At December 31, 2004 and 2003, American estimated that approximately ten million free travel awards
were expected to be redeemed for free travel on American and AMR Eagle. In making the estimate of
free travel awards, American has excluded mileage in inactive accounts, mileage related to accounts
that have not yet reached the lowest level of free travel award, and mileage in active accounts
that have reached the lowest level of free travel award but which are not expected to ever be
redeemed for free travel on American or participating airlines. The Companys total liability for
future AAdvantage award redemptions for free, discounted or upgraded travel on American, AMR Eagle
or participating airlines as well as unrecognized revenue from selling AAdvantage miles to other
companies was approximately $1.4 billion and $1.2 billion (and is recorded as a component of Air
traffic liability in the consolidated balance sheets), representing 20.3 percent and 19.5 percent
of Americans total current liabilities, at December 31, 2004 and 2003, respectively. 9




---



##### Table of Contents



The number of free travel awards used for travel on American and AMR Eagle in 2004 and 2003 was 2.6
million and 2.5 million, respectively, representing approximately 7.5 percent and 7.8 percent of
passengers boarded, respectively. The Company believes displacement of revenue passengers is
minimal given the Companys load factors, its ability to manage frequent flyer seat inventory, and
the relatively low ratio of free award usage to total passengers boarded. Changes to the percentage of the amount of revenue deferred, deferred recognition period,
percentage of awards expected to be redeemed for travel on participating airlines, cost per mile
estimates or the minimum award level accrued could have a significant impact on the Companys
revenues or incremental cost accrual in the year of the change as well as in future years. G. Other Matters Seasonality and Other FactorsThe Companys results of operations for any interim period are not
necessarily indicative of those for the entire year, since the air transportation business is
subject to seasonal fluctuations. Higher demand for air travel has traditionally resulted in more
favorable operating and financial results for the second and third quarters of the year than for
the first and fourth quarters. Fears of terrorism or war, fare initiatives, fluctuations in fuel
prices, labor actions, weather and other factors could impact this seasonal pattern. Unaudited
quarterly financial data for the two-year period ended December 31, 2004 is included in Note 15 to
the consolidated financial statements. In addition, the results of operations in the air
transportation business have also significantly fluctuated in the past in response to general
economic conditions. No material part of the business of American is dependent upon a single customer or very few
customers. Consequently, the loss of the Companys largest few customers would not have a
materially adverse effect upon the Company. InsuranceThe Company carries insurance for public liability, passenger liability, property damage
and all-risk coverage for damage to its aircraft. As a result of the Terrorist Attacks, aviation insurers significantly reduced the amount of
insurance coverage available to commercial air carriers for liability to persons other than
employees or passengers for claims resulting from acts of terrorism, war or similar events
(war-risk coverage). At the same time, these insurers significantly increased the premiums for
aviation insurance in general. The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines
until August 31, 2005 covering losses to employees, passengers, third parties and aircraft. In
addition, the Secretary of Transportation may extend the policy until December 31, 2005, at his
discretion. However, there is no assurance that it will be extended. If the U.S. government does
not extend the policy beyond August 31, 2005, the Company will attempt to purchase similar coverage
with narrower scope from commercial insurers at an additional cost. To the extent this coverage is
not available at commercially reasonable rates, the Companys results of operations would be
negatively affected. While the price of commercial insurance has declined in recent years, in the
event commercial insurance carriers further reduce the amount of insurance coverage available to
the Company, or significantly increase its cost, the Companys operations and/or financial position
and results of operations would be adversely affected. Other Government MattersIn time of war or during a national emergency or defense oriented
situation, American and other air carriers can be required to provide airlift services to the Air
Mobility Command under the Civil Reserve Air Fleet program. In the event the Company has to provide
a substantial number of aircraft and crew to the Air Mobility Command, its operations could be
adversely impacted. 10




---



##### Table of Contents



Available InformationThe Company makes its annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 available free of charge under the Investor
Relations page on its website, www.aa.com, as soon as reasonably practicable after such reports are
electronically filed with the Securities and Exchange Commission. In addition, the Companys code
of ethics, which applies to all employees of the Company including the Companys Chief Executive
Officer (CEO), Chief Financial Officer (CFO) and Controller, is posted under the Investor Relations
page on its website, www.aa.com. The Company intends to disclose any amendments to the code
of ethics, or waivers of the code of ethics on behalf of the CEO, CFO or Controller, under the
Investor Relations page on the Companys website, www.aa.com. The Companys Board of
Directors Governance Policies (the Governance Policies) are available on the Companys website,
www.aa.com. Upon request, copies of the Governance Policies are available at no cost. 11




---



##### Table of Contents



ITEM 2. PROPERTIES Flight Equipment  Operating Owned and leased aircraft operated by the Company at December 31, 2004 included: AverageCapital
    
    
    Operating
    
    
    
    
    
    
    AgeEquipment Type
    
    Seating Capacity
    
    
    Owned
    
    
    Leased
    
    
    Leased
    
    
    Total
    
    
    (Years)American Airlines AircraftAirbus A300-600R
    
    
    267
    
    
    
    10
    
    
    
    
    
    
    
    24
    
    
    
    34
    
    
    
    15Boeing 737-800
    
    
    142
    
    
    
    67
    
    
    
    
    
    
    
    10
    
    
    
    77
    
    
    
    5Boeing 757-200
    
    
    187
    
    
    
    87
    
    
    
    6
    
    
    
    50
    
    
    
    143
    
    
    
    10Boeing 767-200 Extended Range
    
    
    158
    
    
    
    4
    
    
    
    11
    
    
    
    1
    
    
    
    16
    
    
    
    18Boeing 767-300 Extended Range
    
    
    212
    
    
    
    45
    
    
    
    2
    
    
    
    11
    
    
    
    58
    
    
    
    11Boeing 777-200 Extended Range
    
    
    232
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    4McDonnell Douglas MD-80
    
    
    129
    
    
    
    144
    
    
    
    75
    
    
    
    135
    
    
    
    354
    
    
    
    16Total
    
    
    
    
    
    
    402
    
    
    
    94
    
    
    
    231
    
    
    
    727
    
    
    
    12
 Of the operating aircraft
listed above, 17 McDonnell Douglas MD-80s - - 11 owned, four
operating leased and two capital leased - - were in temporary storage as of December 31, 2004. Flight Equipment  Non-Operating Owned and leased aircraft not operated by the Company at December 31, 2004 included: OperatingEquipment Type
    
    Owned
    
    
    Leased
    
    
    TotalAmerican Airlines AircraftBoeing 767-200
    
    
    9
    
    
    
    
    
    
    
    9Boeing 767-200 Extended Range
    
    
    3
    
    
    
    1
    
    
    
    4Fokker 100
    
    
    
    
    
    
    4
    
    
    
    4McDonnell Douglas MD-80
    
    
    7
    
    
    
    2
    
    
    
    9Total
    
    
    19
    
    
    
    7
    
    
    
    26
 In the fourth quarter of 2004, the Company decided to permanently retire seven owned McDonnell
Douglas MD-80s which were previously in temporary storage. As part of the Companys fleet simplification initiative, American has agreed to sell certain
aircraft. As of December 31, 2004, remaining owned aircraft to be delivered under these agreements
include three Boeing 767-200 Extended Range and one Boeing 767-200 aircraft. The Company is actively marketing its remaining Boeing 767-200 owned non-operating aircraft and
does not anticipate bringing these aircraft back into service. For information concerning the estimated useful lives and residual values for owned aircraft, lease
terms for leased aircraft and amortization relating to aircraft under capital leases, see Notes 1
and 5 to the consolidated financial statements. 12




---



##### Table of Contents



Lease expirations for the leased aircraft included in the preceding table of operating flight
equipment as of December 31, 2004, are: 2010andEquipment Type
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterAmerican Airlines AircraftAirbus A300-600R
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3
    
    
    
    18Boeing 737-800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Boeing 757-200
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    9
    
    
    
    1
    
    
    
    31Boeing 767-200 Extended Range
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    9Boeing 767-300 Extended Range
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    8McDonnell Douglas MD-80
    
    
    10
    
    
    
    
    
    
    
    1
    
    
    
    12
    
    
    
    6
    
    
    
    18110
    
    
    
    2
    
    
    
    16
    
    
    
    29
    
    
    
    11
    
    
    
    257
 Substantially all of the Companys aircraft leases include an option to purchase the aircraft
or to extend the lease term, or both, with the purchase price or renewal rental to be based
essentially on the market value of the aircraft at the end of the term of the lease or at a
predetermined fixed amount. A very large majority of the Companys owned aircraft are encumbered. Ground Properties The Company leases, or has built as leasehold improvements on leased property: most of its airport
and terminal facilities; its maintenance and training facilities in Fort Worth, Texas; its
principal overhaul and maintenance bases at Tulsa International Airport (Tulsa, Oklahoma), Kansas
City International Airport (Kansas City, Missouri) and Alliance Airport (Fort Worth, Texas); its
regional reservation offices; and local ticket and administration offices throughout the system.
American has entered into agreements with the Tulsa Municipal Airport Trust; the Alliance Airport
Authority, Fort Worth, Texas; the New York City Industrial Development Agency; and the Dallas/Fort
Worth, Chicago OHare, Newark, San Juan, and Los Angeles airport authorities to provide funds for
constructing, improving and modifying facilities and acquiring equipment which are or will be
leased to the Company. The Company also uses public airports for its flight operations under lease
or use arrangements with the municipalities or governmental agencies owning or controlling them and
leases certain other ground equipment for use at its facilities. For information concerning the estimated lives and residual values for owned ground properties,
lease terms and amortization relating to ground properties under capital leases, and acquisitions
of ground properties, see Notes 1 and 5 to the consolidated financial statements. 13




---



##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS On July 26, 1999, a class action lawsuit was filed, and in November 1999 an amended complaint was
filed, against AMR Corporation, American Airlines, Inc., AMR Eagle Holding Corporation, Airlines
Reporting Corporation, and the Sabre Group Holdings, Inc. in the United States District Court for
the Central District of California, Western Division (Westways World Travel, Inc. v. AMR Corp.,
et al.). The lawsuit alleges that requiring travel agencies to pay debit memos to American for
violations of Americans fare rules (by customers of the agencies): (1) breaches the Agent
Reporting Agreement between American and AMR Eagle and the plaintiffs; (2) constitutes unjust
enrichment; and (3) violates the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
The certified class includes all travel agencies who have been or will be required to pay money to
American for debit memos for fare rules violations from July 26, 1995 to the present. The
plaintiffs seek to enjoin American from enforcing the pricing rules in question and to recover the
amounts paid for debit memos, plus treble damages, attorneys fees, and costs. The Company intends
to vigorously defend the lawsuit. Although the Company believes that the litigation is without
merit, a final adverse court decision could impose restrictions on the Companys relationships with
travel agencies, which could have an adverse impact on the Company. On May 17, 2002, the named plaintiffs in Hall, et al. v. United Airlines, et al., pending
in the United States District Court for the Eastern District of North Carolina, filed an amended
complaint alleging that between 1995 and the present, American and over 15 other defendant airlines
conspired to reduce commissions paid to U.S.-based travel agents in violation of Section 1 of the
Sherman Act. The plaintiffs are seeking monetary damages and injunctive relief. The
court granted class action certification to the plaintiffs on September 17, 2002, defining the
plaintiff class as all travel agents in the United States, Puerto Rico, and the United States
Virgin Islands, who, at any time from October 1, 1997 to the present, issued tickets, miscellaneous
change orders, or prepaid ticket advices for travel on any of the defendant airlines. The case
was stayed as to US Airways and United Airlines, since they filed for bankruptcy. Defendant
carriers filed a motion for summary judgment on December 10, 2002, which the court granted on
October 30, 2003. The 4th Circuit Court of Appeals affirmed the order dismissing all
claims against the Defendant carriers on December 9, 2004. Between April 3, 2003 and June 5, 2003, three lawsuits were filed by travel agents some of whom
have opted out of the Hall class action (above) to pursue their claims individually against
American Airlines, Inc., other airline defendants, and in one case against certain airline
defendants and Orbitz LLC. (Tam Travel et. al., v. Delta Air Lines et. al., in the United
States District Court for the Northern District of California  San Francisco (51 individual
agencies), Paula Fausky d/b/a Timeless Travel v. American Airlines, et. al,in the United
States District Court for the Northern District of Ohio Eastern Division (29 agencies) and
Swope Travel et al. v. Orbitz et. al. in the United States District Court for the Eastern
District of Texas Beaumont Division (6 agencies)). Collectively, these lawsuits seek damages and
injunctive relief alleging that the certain airline defendants and Orbitz LLC: (i) conspired to
prevent travel agents from acting as effective competitors in the distribution of airline tickets
to passengers in violation of Section 1 of the Sherman Act; (ii) conspired to monopolize the
distribution of common carrier air travel between airports in the United States in violation of
Section 2 of the Sherman Act; and that (iii) between 1995 and the present, the airline defendants
conspired to reduce commissions paid to U.S.-based travel agents in violation of Section 1 of the
Sherman Act. These cases have been consolidated in the United States District Court for the
Northern District of Ohio Eastern Division. American is vigorously defending these lawsuits. A
final adverse court decision awarding substantial money damages or placing restrictions on the
Companys distribution practices would have an adverse impact on the Company. On May 13, 2002, the named plaintiffs in Always Travel, et. al. v. Air Canada, et. al.,
pending in the Federal Court of Canada, Trial Division, Montreal, filed a statement of claim
alleging that between 1995 and the present, American, the other defendant airlines, and the
International Air Transport Association conspired to reduce commissions paid to Canada-based travel
agents in violation of Section 45 of the Competition Act of Canada. The named plaintiffs sought
monetary damages and injunctive relief and to certify a nationwide class of travel agents. On
December 10, 2004, the court approved a motion by the plaintiffs to dismiss this action. 14




---



##### Table of Contents



On August 14, 2002, a class action lawsuit was filed against American Airlines, Inc. in the United
States District Court for the Central District of California, Western Division (All World
Professional Travel Services, Inc. v. American Airlines, Inc.). The lawsuit alleges that
requiring travel agencies to pay debit memos for refunding tickets after September 11, 2001: (1)
breaches the Agent Reporting Agreement between American and plaintiff; (2) constitutes unjust
enrichment; and (3) violates the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO).
The alleged class includes all travel agencies who have or will be required to pay moneys to
American for an administrative service charge, penalty fee, or other fee for processing refunds
on behalf of passengers who were unable to use their tickets in the days immediately following the
resumption of air carrier service after the tragedies on September 11, 2001. On April 1, 2004, the
court denied plaintiffs motion for class certification. On or about October 14, 2004, an amended
class action complaint was filed. On January 12, 2005, the court dismissed the action without
prejudice. On August 19, 2002, a class action lawsuit seeking monetary damages was filed, and on May 7, 2003
an amended complaint was filed in the United States District Court for the Southern District of New
York (Power Travel International, Inc. v. American Airlines, Inc., et al.) against
American, Continental Airlines, Delta Air Lines, United Airlines, and Northwest Airlines, alleging
that American and the other defendants breached their contracts with the agency and were unjustly
enriched when these carriers at various times reduced their base commissions to zero. The as yet
uncertified class includes all travel agencies accredited by the Airlines Reporting Corporation
whose base commissions on airline tickets were unilaterally reduced to zero by the defendants.
The case is stayed as to United Airlines, since it filed for bankruptcy. American is vigorously
defending the lawsuit. Although the Company believes that the litigation is without merit, a final
adverse court decision awarding substantial money damages or forcing the Company to pay agency
commissions would have an adverse impact on the Company. Miami-Dade County (the County) is currently investigating and remediating various environmental
conditions at the Miami International Airport (MIA) and funding the remediation costs through
landing fees and various cost recovery methods. American has been named as a PRP for the
contamination at MIA. During the second quarter of 2001, the County filed a lawsuit against 17
defendants, including American Airlines, Inc., in an attempt to recover its past and future cleanup
costs (Miami-Dade County, Florida v. Advance Cargo Services, Inc., et al. in the Florida
Circuit Court). The Company is vigorously defending the lawsuit. In addition to the 17 defendants
named in the lawsuit, 243 other agencies and companies were also named as PRPs and contributors to
the contamination. The case is currently stayed while the parties pursue an alternative dispute
resolution process. The County has proposed draft allocation models for remedial costs for the
Terminal and Tank Farm areas of MIA. While it is anticipated that American and AMR Eagle will be
allocated equitable shares of remedial costs, the Company does not expect the allocated amounts to
have a material adverse effect on the Company. Four cases (each being a purported class action) have been filed against American arising from the
disclosure of passenger name records by a vendor of American. The cases are: Kimmell v. AMR,
et al. (U. S. District Court, Texas), Baldwin v. AMR, et al. (U. S. District Court,
Texas), Rosenberg v. AMR, et al. (U. S. District Court, New York) and Anapolsky v. AMR,
et al. (U.S. District Court, New York). The Kimmell suit was filed in April 2004. The
Baldwin and Rosenberg cases were filed in May 2004. The Anapolsky suit was
filed in September 2004. The suits allege various causes of action, including but not limited to,
violations of the Electronic Communications Privacy Act, negligent misrepresentation, breach of
contract and violation of alleged common law rights of privacy. In each case plaintiffs seek
statutory damages of $1000 per passenger, plus additional unspecified monetary damages. The
Company is vigorously defending these suits and believes the suits are without merit. However, a
final adverse court decision awarding a maximum amount of statutory damages would have an adverse
impact on the Company. 15




---



##### Table of Contents



American is defending three lawsuits, filed as class actions but not certified as such, arising
from allegedly improper failure to refund certain governmental taxes and fees collected by the
Company upon the sale of nonrefundable tickets when such tickets are not used for travel. The
suits are: Coleman v. American Airlines, Inc., No. 101106, filed December 31, 2002,
pending (on appeal) before the Supreme Court of Oklahoma. The Coleman Plaintiffs seek actual
damages (not specified) and interest. Hayes v. American Airlines, Inc., No. 04-3231,
pending in the United States District Court for the Eastern District of New York, filed July 2,
2004. The Hayes Plaintiffs seek unspecified damages, declaratory judgment, costs, attorneys fees,
and interest. Harrington v. Delta Air Lines, Inc., et. al., No. 04-12558, pending in the
United States District Court for the District of Massachusetts, filed November 4, 2004. The
Harrington plaintiffs seek unspecified actual damages (trebled), declaratory judgment, injunctive
relief, costs, and attorneys fees. The suits assert various causes of action, including breach of
contract, conversion, and unjust enrichment. The Company is vigorously defending the suits and
believes them to be without merit. On July 12, 2004, a consolidated class action complaint, that was subsequently amended on November
30, 2004, was filed against American Airlines, Inc. and the Association of Professional Flight
Attendants (APFA), the Union which represents the Companys flight attendants (Ann M. Marcoux,
et al., v. American Airlines Inc., et al. in the United States District Court for the Eastern
District of New York). While a class has not yet been certified, the lawsuit seeks on behalf of all
of Americans flight attendants or various subclasses to set aside, and to obtain damages allegedly
resulting from, the April 2003 Collective Bargaining Agreement referred to as the Restructuring
Participation Agreement (RPA). The RPA was one of three labor agreements the Company successfully
reached with its unions in order to avoid filing for bankruptcy in 2003. In a related case
(Sherry Cooper, et al. v. TWA Airlines, LLC, et al., also in the United States District
Court for the Eastern District of New York), the court denied a preliminary injunction against
implementation of the RPA on June 30, 2003. The Marcoux suit alleges various claims against the
Union and American relating to the RPA and the ratification vote on the RPA by individual Union
members, including: violation of the Labor Management Reporting and Disclosure Act (LMRDA) and the
APFAs Constitution and By-laws, violation by the Union of its duty of fair representation to its
members, violation by the Company of provisions of the Railway Labor Act through improper coercion
of flight attendants into voting or changing their vote for ratification, and violations of the
Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO). Although the Company believes
the case against it is without merit and both the Company and the Union are vigorously defending
the lawsuit, a final adverse court decision invalidating the RPA and awarding substantial money
damages would have an adverse impact on the Company. 16




---



##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Omitted under the reduced disclosure format pursuant to General Instructions I(2)(c) of Form 10-K. 
 PART II 
 
 ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS American Airlines, Inc. is a wholly-owned subsidiary of AMR Corporation and there is no market for
the Registrants Common Stock. 
 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Omitted under the reduced disclosure format pursuant to General Instructions I(2)(a) of Form 10-K. 17




---



##### Table of Contents



ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Forward-Looking Information The discussions under Business, Properties and Legal Proceedings and the following discussions
under Managements Discussion and Analysis of Financial Condition and Results of Operations and
Quantitative and Qualitative Disclosures about Market Risk contain various forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the Companys expectations
or beliefs concerning future events. When used in this document and in documents incorporated
herein by reference, the words expects, plans, anticipates, indicates, believes,
forecast, guidance, outlook and similar expressions are intended to identify forward-looking
statements. Forward-looking statements include, without limitation, the Companys expectations
concerning operations and financial conditions, including changes in capacity, revenues, and costs,
future financing plans and needs, overall economic conditions, plans and objectives for future
operations, and the impact on the Company of its results of operations in recent years and the
sufficiency of its financial resources to absorb that impact. Other forward-looking statements
include statements which do not relate solely to historical facts, such as, without limitation,
statements which discuss the possible future effects of current known trends or uncertainties, or
which indicate that the future effects of known trends or uncertainties cannot be predicted,
guaranteed or assured. All forward-looking statements in this report are based upon information
available to the Company on the date of this report. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result of new information,
future events, or otherwise. The risk factors listed at the end of this Item 7 (see Risk Factors),
in addition to other possible risk factors not listed, could cause the Companys actual results to
differ materially from those expressed in forward-looking statements. Overview The Company has incurred very large operating and net losses during the past four years, as shown
in the following table: Year Ended December 31,(in millions)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Operating loss
    
    $
    (421
    )
    
    $
    (1,129
    )
    
    $
    (3,313
    )
    
    $
    (2,274
    )Net loss
    
    
    (821
    )
    
    
    (1,318
    )
    
    
    (3,495
    )
    
    
    (1,562
    )
 These losses reflect, among other things, a substantial decrease in the Companys revenues in 2001
and 2002. This revenue decrease was primarily driven by (i) a steep fall-off in the demand for air
travel, particularly business travel, primarily caused by weakness in the U.S. economy, (ii)
reduced pricing power, resulting mainly from greater cost sensitivity on the part of travelers
(especially business travelers), increasing competition from LCCs and the continuing increase in
pricing transparency resulting from the use of the Internet and (iii) the aftermath of the
Terrorist Attacks, which accelerated and exacerbated the trend of decreased demand and reduced
industry revenues. The Company believes that its reduced pricing power resulting from the factors
listed in clause (ii) above will persist indefinitely and possibly permanently. Passenger traffic rebounded in 2003 and 2004, reflecting a general improvement in the U.S. and
several other economies served by the Company, the diminishing impact of the Terrorist Attacks on
demand and lower fares. However, the Companys pricing power remained depressed in 2003 due to a
continuation of the factors listed in clause (ii) of the preceding paragraph, and declined in 2004
due to significant increases in overall industry capacity that exceeded the growth in demand, and
more frequent and more deeply discounted fare sales initiated by competitors, including competitors
currently operating under the protection of Chapter 11 of the Bankruptcy Code. The Companys 2004 operating and financial results were also adversely affected by the significant
increases in the price of jet fuel. Fuel price increases during 2004 resulted in a year-over-year
increase of 33.7 cents per gallon. This price increase negatively impacted fuel expense by $1
billion during the year. Continuing high fuel prices, additional increases in the price of fuel,
and/or disruptions in the supply of fuel, would further adversely affect the Companys financial
condition and its results of operations. 18




---



##### Table of Contents



In response to the challenges faced by the Company, during the past four years the Company has
implemented several restructuring and other initiatives:  
    Following the Terrorist Attacks, the Company reduced its operating
schedule by approximately 20 percent and reduced its workforce by
approximately 20,000 jobs.  
    In 2002, the Company announced a series of initiatives to reduce
its annual costs by $2 billion. These initiatives are being
implemented through 2005, and involve: (i) scheduling
efficiencies, (ii) fleet simplification, (iii) streamlined
customer interaction, (iv) distribution modifications, (v)
in-flight product changes, (vi) operational changes and (vii)
headquarters/administration efficiencies. As a result of these
initiatives, the Company reduced an estimated 7,000 jobs by March
2003.  
    In February 2003, the Company asked its employees for
approximately $1.8 billion in annual savings through a combination
of changes in wages, benefits and work rules. In April 2003,
American reached agreements with its three unions and also
implemented various changes in the pay plans and benefits for
non-unionized personnel, including officers and other management.
The Labor Agreements and Management Reductions resulted in $1.8 billion in annual savings including a
workforce reduction of approximately 9,300 jobs. In addition,
American reached concessionary agreements with certain vendors,
lessors, lenders and suppliers, resulting in approximately $200
million in annual cost savings. Generally, under the terms of
these Vendor Agreements, American received the benefit of lower
rates and charges for certain goods and services, and more
favorable rent and financing terms with respect to certain of its
aircraft.  
    Subsequent to the April 2003 Labor Agreements the Company announced the Turnaround Plan. The
Turnaround Plan is the Companys strategic framework for returning
to sustained profitability and emphasizes: (i) lower costs, (ii)
an increased focus on what customers truly value and are prepared
to pay for, (iii) increased union and employee involvement in the
operation of the Company and (iv) the need for a more sound
balance sheet/financial structure.  
    In the latter part of 2003 and throughout 2004, the Company
continued to work  under the basic tenets of the Turnaround Plan
 with its unions and employees to identify and implement
additional initiatives designed to increase efficiencies and
revenues and reduce costs. These initiatives included: (i) the
return of under-used gate space and the consolidation of the
Companys terminal space, (ii) the de-peaking of its hub at Miami,
the reduction in the size of its St. Louis hub and the
simplification of its domestic operations, (iii) the acceleration
of the retirement of certain aircraft and the cancellation or
deferral of aircraft deliveries, (iv) the improvement of aircraft
utilization across its fleet and an increase in seating density on
certain fleet types, (v) the sale of certain non-core assets, (vi)
the expansion of its international network, where the Company
believes that higher revenue generating opportunities currently
exist, (vii) the implementation of an on-board food purchase
program and new fees for ticketing services and (viii) numerous
other initiatives.  
    As part of its effort to build greater employee involvement, the
Company has worked to make its labor unions and its employees, its
business partners on the need for continuous improvement under the
Turnaround Plan. Among other things, the senior management of the
Company meets regularly with union officials to discuss the
Companys financial results as well as the competitive landscape.
These discussions include: (i) the Companys cost reduction and
revenue enhancement initiatives and (ii) a review of initiatives,
in-place or contemplated, at other airlines and the impact of
those initiatives on the Companys competitive posture. The Companys ability to become profitable and its ability to continue to fund its obligations on
an ongoing basis will depend on a number of factors, some of which are largely beyond the Companys
control. Some of the risk factors that affect the Companys business and financial results are
discussed in the Risk Factors found at the end of this Item 7. As the Company seeks to improve its
financial condition, it must continue to take steps to generate additional revenues and
significantly reduce its costs. Although the Company has a number of initiatives underway to
address the cost and revenue challenges, the ultimate success of these initiatives is not known at
this time and cannot be assured. It will be very difficult, absent continued restructuring of its
operations, for the Company to continue to fund its obligations on an ongoing basis or to become
profitable if the overall industry revenue environment does not improve and fuel prices remain at
historically high levels for an extended period. 19




---



##### Table of Contents



Cash, Short-Term Investments, Restricted Assets and Deposits At December 31, 2004, the Company had $2.9 billion in unrestricted cash and short-term investments
and $478 million in restricted cash and short-term investments. Significant Indebtedness and Future Financing During 2002, 2003 and 2004, in addition to refinancing its $834 million credit facility (see
discussion in Note 6 to the consolidated financial statements), the Company raised an aggregate of
approximately $3.8 billion of financing, mostly to fund capital commitments (mainly for aircraft
and ground properties) and operating losses. As of the date of this Form 10-K, the Company believes
that it should have sufficient liquidity to fund its operations for the foreseeable future,
including repayment of debt and capital leases, capital expenditures and other contractual
obligations. However, to maintain sufficient liquidity as the Company continues to implement its
restructuring and cost reduction initiatives, and because the Company has significant debt
obligations maturing in the next several years, as well as substantial pension funding obligations,
the Company will need access to additional funding. The Companys possible financing sources
primarily include: (i) a limited amount of additional secured aircraft debt (a very large majority
of the Companys owned aircraft, including virtually all of the Companys Section 1110-eligible
aircraft, are encumbered) or sale-leaseback transactions involving owned aircraft, (ii) debt
secured by new aircraft deliveries, (iii) debt secured by other assets, (iv) securitization of
future operating receipts, (v) the sale or monetization of certain assets and (vi) unsecured debt.
However, the availability and level of these financing sources cannot be assured, particularly in
light of Americans reduced credit ratings, high fuel prices, historically weak revenues and the
financial difficulties being experienced in the airline industry. The inability of the Company to
obtain additional funding would have a material negative impact on the ability of the Company to
sustain its operations over the long-term. The Companys substantial indebtedness could have important consequences. For example, it could
(i) limit the Companys ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes, or adversely affect the terms on which
such financing could be obtained; (ii) require the Company to dedicate a substantial portion of its
cash flow from operations to payments on its indebtedness, thereby reducing the funds available for
other purposes; (iii) make the Company more vulnerable to economic downturns; (iv) limit its
ability to withstand competitive pressures and reduce its flexibility in responding to changing
business and economic conditions; and (v) limit the Companys flexibility in planning for, or
reacting to, changes in its business and the industry in which it operates. Credit Ratings Americans credit ratings are significantly below investment grade. Additional reductions in its
credit ratings could further increase its borrowing or other costs and further restrict the
availability of future financing. Credit Facility Covenants On December 17, 2004, American refinanced its $834 million bank credit facility, which was
scheduled to mature in December 2005. The total amount of the new credit facility is $850 million,
all of which has been borrowed by American. The new credit facility consists of a $600 million
senior secured revolving credit facility, with a final maturity on June 17, 2009, and a $250
million term loan facility, with a final maturity on December 17, 2010 (the Revolving Facility and
the Term Loan Facility, respectively, and collectively, the Credit Facility). Americans
obligations under the Credit Facility are guaranteed by AMR. 20




---



##### Table of Contents



The Credit Facility contains a covenant requiring American to maintain, as defined, unrestricted
cash, unencumbered short term investments and amounts available for drawing under committed
revolving credit facilities of not less than $1.5 billion for each quarterly period through
September 30, 2005 and $1.25 billion for each quarterly period thereafter. In addition, the Credit
Facility contains a covenant requiring AMR to maintain a ratio of cash flow (defined as
consolidated net income, before interest expense (less capitalized interest), income taxes,
depreciation and amortization and rentals, adjusted for certain gains or losses and non-cash items)
to fixed charges (comprising interest expense (less capitalized interest) and rentals) of at least
the amount specified below for each period of four consecutive quarters ending on the dates set
forth below: Four Quarter Period Ending
    
    Cash Flow Coverage RatioDecember 31, 2004
    
    0.90:1.00March 31, 2005
    
    0.85:1.00June 30, 2005
    
    0.85:1.00September 30, 2005
    
    0.90:1.00December 31, 2005
    
    1.10:1.00March 31, 2006
    
    1.20:1.00June 30, 2006
    
    1.25:1.00September 30, 2006
    
    1.30:1.00December 31, 2006
    
    1.30:1.00March 31, 2007
    
    1.35:1.00June 30, 2007
    
    1.40:1.00September 30, 2007
    
    1.40:1.00December 31, 2007
    
    1.40:1.00March 31, 2008 (and each fiscal quarter
thereafter)
    
    1.50:1.00
 American and AMR were in compliance with these covenants as of December 31, 2004 and expect to be
able to continue to comply with these covenants, but there are no assurances that they will be able
to do so through the expiration of the facility. Failure to comply with these covenants would
result in a default under the Credit Facility which   if the Company did not take steps to obtain
a waiver of, or otherwise mitigate, the default   could result in a default under a significant
amount of the Companys other debt. See Note 6 to the consolidated financial statements for more information regarding the Credit
Facility. Financing Activity The Company issued the following debt during the year ended December 31, 2004 (in millions): 7.25% secured notes due 2009
    
    $
    180Credit facility *
    
    
    850$
    1,030
    In addition, in February 2004, AMR transferred $315 million in proceeds from its 4.50 senior
convertible notes due 2009 to American. See Note 6 to the consolidated financial statements for additional information regarding the debt
issuances listed above. 21




---



##### Table of Contents



Other Operating and Investing Activities The Companys cash flow from operating activities improved in 2004. Net cash provided by operating
activities during the year ended December 31, 2004 was $420 million, an increase of $211 million
over 2003. Net cash provided by operating activities in 2003 included the receipt of a $515
million federal income tax refund and the receipt of $315 million from the U.S. government under
the Emergency Wartime Supplemental Appropriations Act (the Appropriations Act), offset by $521
million of redemption payments under operating leases for special facility revenue bonds. The
Company does not expect to receive significant additional federal income tax refunds. During 2003, the Company sold its interests in Worldspan, a computer reservations company, and
Hotwire, a discount travel website. The Company received $180 million in cash and a $39 million
promissory note for its interest in Worldspan. It received $84 million in cash, $80 million of
which was recognized as a gain, for its interest in Hotwire. In addition, during 2003, the Company
sold a portion of its interest in Orbitz, a travel planning website, in connection with an Orbitz
initial public offering and a secondary offering resulting in total proceeds of $65 million, and a
gain of $70 million. During 2004, the Company sold its remaining interest in Orbitz resulting in total proceeds of $185
million and a gain of $146 million. Working Capital American historically operates with a working capital deficit, as do most other airline companies.
In addition, the Company has historically relied heavily on external financing to fund capital
expenditures. More recently, the Company has also relied on external financing to fund operating
losses. Off Balance Sheet Arrangements American has determined that it holds a significant variable interest in, but is not the primary
beneficiary of, certain trusts that are the lessors under 87 of its aircraft operating leases.
These leases contain a fixed price purchase option, which allows American to purchase the aircraft
at a predetermined price on a specified date. However, American does not guarantee the residual
value of the aircraft. As of December 31, 2004, future lease payments required under these leases
totaled $2.9 billion. Special facility revenue bonds have been issued by certain municipalities primarily to purchase
equipment and improve airport facilities that are leased by American and accounted for as operating
leases. Approximately $1.7 billion of these bonds (with total future payments of approximately
$4.6 billion as of December 31, 2004) are guaranteed by American, AMR, or both. Approximately $532
million of these special facility revenue bonds contain mandatory tender provisions that require
American to make operating lease payments sufficient to repurchase the bonds at various times: $104
million in 2005, $28 million in 2006, $100 million in 2007, $188 million in 2008 and $112 million
in 2014. Although American has the right to remarket the bonds, there can be no assurance that
these bonds will be successfully remarketed. Any payments to redeem or purchase bonds that are not
remarketed would generally reduce existing rent leveling accruals or be considered prepaid facility
rentals and would reduce future operating lease commitments. Approximately $112 million of special
facility revenue bonds with mandatory tender provisions were successfully remarketed in 2004. In addition, the Company has other operating leases, primarily for aircraft, with total future
lease payments of $4.8 billion as of December 31, 2004. Entering into aircraft leases allows the
Company to obtain aircraft without immediate cash outflows. 22




---



##### Table of Contents



As discussed in Note 5 to the consolidated financial statements, the Company reached concessionary
agreements with certain lessors in 2003. Certain of the Vendor Agreements provide that the
Companys obligations under the related lease revert to the original terms if certain events
(Events) occur prior to December 31, 2005, including: (i) an event of default under the related
lease (which generally occurs only if a payment default occurs), (ii) an event of loss with respect
to the related aircraft, (iii) rejection by the Company of the lease under the provisions of
Chapter 11 of the U.S. Bankruptcy Code or (iv) the Companys filing for bankruptcy under Chapter 7
of the U.S. Bankruptcy Code. If any one of these Events were to occur, the Company would be
responsible for approximately $72 million in additional operating lease payments and $59 million in
additional payments related to capital leases as of December 31, 2004. This amount will increase
to approximately $119 million in operating lease payments and $111 million in payments related to
capital leases prior to the expiration of the provision on December 31, 2005. These amounts are
being accounted for as contingent rentals and will only be recognized if they become payable. Commitments The Company is required to make contributions to its defined benefit pension plans. These
contributions are required under the minimum funding requirements of the Employee Retirement Income
Security Act (ERISA). The Companys estimated 2005 contributions to its defined benefit pension
plans are approximately $310 million. This estimate reflects the provisions of the Pension Funding
Equity Act of 2004. (The effect of the Pension Funding Equity Act was to defer a portion of the
minimum required contributions that would have been due for the 2004 and 2005 plan years.) Due to
uncertainties regarding significant assumptions involved in estimating future required
contributions to its defined benefit pension plans, such as interest rate levels, the amount and
timing of asset returns, and the impact of proposed legislation, the Company is not able to
reasonably estimate its future required contributions beyond 2005. However, based on the current
regulatory environment and market conditions, the Company expects that its 2006 minimum required
contributions will exceed its 2005 expected contributions. As of December 31, 2004, the Company had commitments to acquire two Boeing 777-200ERs in 2006 and
an aggregate of 47 Boeing 737-800s and seven Boeing 777-200ERs in 2013 through 2016. Future
payments for all aircraft, including the estimated amounts for price escalation, will approximate
$101 million in 2006, and an aggregate of approximately $3.0 billion in 2011 through 2016. The
Company has backstop financing for its aircraft deliveries in 2006. The Company has contracts related to facility construction or improvement projects, primarily at
airport locations. The contractual obligations related to these projects totaled approximately $462
million as of December 31, 2004. The Company expects to make payments related to these projects as
follows: $234 million in 2005, $153 million in 2006, $68 million in 2007 and $7 million in 2008. In
addition, the Company has an information technology support related contract that requires minimum
annual payments of $152 million through 2013. The Company has capacity purchase agreements with two regional airlines, Chautauqua Airlines, Inc.
(Chautauqua) and Trans States Airlines, Inc. (collectively the American Connection carriers) to
provide Embraer EMB-140/145 regional jet services to certain markets under the brand American
Connection. Under these arrangements, the Company pays the American Connection carriers a fee per
block hour to operate the aircraft. The block hour fees are designed to cover the American
Connection carriers fully allocated costs plus a margin. Assumptions for certain costs such as
fuel, landing fees, insurance, and aircraft ownership are trued up to actual values on a pass
through basis. In consideration for these payments, the Company retains all passenger and other
revenues resulting from the operation of the American Connection regional jets. Minimum payments
under the contracts are $96 million in 2005, $70 million in 2006, $71 million in 2007, $72 million
in 2008 and $20 million in 2009. However, based on expected utilization, the Company expects to
make payments of $174 million in 2005, $177 million in 2006, $179 million in 2007, $181 million in
2008, $184 million in 2009 and $721 million in 2010 and beyond. In addition, if the Company
terminates the Chautauqua contract without cause, Chautauqua has the right to put its 15 Embraer
aircraft to the Company. If this were to happen, the Company would take possession of the aircraft
and become liable for lease obligations totaling approximately $21 million per year with lease
expirations in 2018 and 2019. 23




---



##### Table of Contents



Effective January 2003, American Airlines and AMR Eagle implemented a capacity purchase agreement.
Under this agreement, American pays AMR Eagle a fee per block hour and departure to operate
regional aircraft. The block hour and departure fees are designed to cover AMR Eagles costs
(before taxes) plus a margin. Certain costs such as fuel, landing fees, and aircraft ownership are
trued up to actual values on a pass through basis. In consideration for these payments, American
retains all passenger and other revenue resulting from the AMR Eagle airline operation. In
addition, American incurs certain expenses in connection with the operation of its affiliate
relationship with AMR Eagle. These amounts primarily relate to marketing, passenger and ground
handling costs. The current agreement will expire on December 31, 2005. The following table summarizes the combined capacity purchase activity for the American Connection
carriers and AMR Eagle for 2004 and 2003 (in millions): Year Ended December 31,2004
    
    
    2003Revenues:Regional Affiliates
    
    $
    1,876
    
    
    $
    1,519Other
    
    
    78
    
    
    
    66$
    1,954
    
    
    $
    1,585Expenses:Regional payments
    
    $
    1,869
    
    
    $
    1,550Other incurred expenses
    
    
    235
    
    
    
    207$
    2,104
    
    
    $
    1,757
 In addition, passengers connecting to Americans flights from American Connection and AMR Eagle
flights generated passenger revenues for American flights of $1.4 billion and $1.3 billion in 2004
and 2003, respectively, which are included in Revenues  Passenger in the consolidated statements
of operations. See Note 13 to the consolidated financial statements for additional information regarding the
capacity purchase arrangement with AMR Eagle. Results of Operations Americans net loss in 2004 was $821 million, an improvement of $497 million over Americans net
loss in 2003 of $1.3 billion. The year-over-year improvement in the Companys 2004 operating
results reflects the benefit of the cost reduction initiatives in the Companys restructuring
program, which is described above, dampened by the weak revenue environment and the increase in
fuel costs. The Companys 2004 results include a $146 million gain on the sale of the Companys
remaining investment in Orbitz and $10 million in special charges. The Companys 2003 results
include several special items which are discussed in detail in the notes to the consolidated
financial statements, including (i) $315 million in security cost reimbursements received under the
Appropriations Act (see Note 2 to the consolidated financial statements), (ii) $407 million in
special charges (see Note 2 to the consolidated financial statements), (iii) $150 million in gains
on the sale of the Companys investments in Hotwire and Orbitz (see Note 3 to the consolidated
financial statements) and (iv) a $175 million reduction in previously accrued federal income taxes
and related interest. In addition, the Company did not record a tax benefit associated with its
2004 or 2003 losses. 24




---



##### Table of Contents



Revenues 2004 Compared to 2003The Companys revenues increased approximately $1.2 billion, or 6.9
percent, to $18.6 billion. Americans passenger revenues increased by 4.8 percent, or $689 million,
on a capacity (available seat mile) (ASM) increase of 5.3 percent. Americans passenger load
factor increased 2.0 points to 74.8 percent while passenger revenue yield per passenger mile
decreased by 3.1 percent to 11.54 cents. This resulted in a decrease in passenger revenue per
available seat mile (RASM) of 0.5 percent to 8.63 cents. In 2004, American derived approximately 66
percent of its passenger revenues from domestic operations and approximately 34 percent from
international operations. Following is additional information regarding Americans domestic and
international RASM and capacity: Year Ended December 31, 2004RASM
    
    
    Y-O-Y
    
    
    ASMs
    
    
    Y-O-Y(cents)
    
    
    Change
    
    
    (billions)
    
    
    ChangeDomestic
    
    
    8.47
    
    
    
    (2.1
    )%
    
    
    118
    
    
    
    1.1
    %International
    
    
    8.97
    
    
    
    2.8
    
    
    
    56
    
    
    
    15.4Latin America
    
    
    8.78
    
    
    
    (3.3
    )
    
    
    28
    
    
    
    18.6Europe
    
    
    9.25
    
    
    
    8.4
    
    
    
    23
    
    
    
    9.1Pacific
    
    
    8.79
    
    
    
    14.9
    
    
    
    5
    
    
    
    27.7
 The Companys Regional Affiliates include carriers with which it has capacity purchase agreements:
AMR Eagle and two independent carriers, Trans State Airlines, Inc. (Trans States) and Chautauqua
Airlines, Inc. (Chautauqua). Regional Affiliates passenger revenues, which are based on industry standard proration agreements
for flights connecting to American flights, increased $357 million, or 23.5 percent, to $1.9
billion as a result of increased capacity and load factors. See Note 13 to the consolidated
financial statements for more information. Cargo revenues increased 12.0 percent, or $67 million, primarily due to a 10.2 percent increase in
cargo ton miles. Operating Expenses 2004 Compared to 2003The Companys total operating expenses increased 2.7 percent, or $497
million, to $19.0 billion in 2004 compared to 2003. Americans mainline operating expenses per ASM
in 2004 decreased 4.1 percent compared to 2003 to 9.73 cents. This decrease in operating expenses
per ASM is due primarily to the Companys cost savings initiatives and occurred despite the benefit
in 2003 of the receipt of a grant from the U.S. government and a 38.5 percent increase in
Americans price per gallon of fuel (net of the impact of fuel hedging) in 2004 relative to 2003. (in millions) Year endedDecember 31,
    
    
    Change
    
    
    PercentageOperating Expenses
    
    2004
    
    
    from 2003
    
    
    ChangeWages, salaries and benefits
    
    $
    6,224
    
    
    $
    (607
    )
    
    
    (8.9
    )%
    
    
    (a
    )Aircraft fuel
    
    
    3,653
    
    
    
    1,067
    
    
    
    41.3
    
    
    
    (b
    )Regional payments to AMR Eagle
    
    
    1,700
    
    
    
    308
    
    
    
    22.1
    
    
    
    (c
    )Depreciation and amortization
    
    
    1,124
    
    
    
    (89
    )
    
    
    (7.3
    )Other rentals and landing fees
    
    
    1,066
    
    
    
    (18
    )
    
    
    (1.7
    )Commissions, booking fees and
credit card expense
    
    
    1,107
    
    
    
    43
    
    
    
    4.0Maintenance, materials and repairs
    
    
    821
    
    
    
    107
    
    
    
    15.0
    
    
    
    (d
    )Aircraft rentals
    
    
    588
    
    
    
    (78
    )
    
    
    (11.7
    )
    
    
    (e
    )Food service
    
    
    552
    
    
    
    (54
    )
    
    
    (8.9
    )Other operating expenses
    
    
    2,184
    
    
    
    (100
    )
    
    
    (4.4
    )Special charges
    
    
    10
    
    
    
    (397
    )
    
    
    (97.5
    )
    
    
    (f
    )U.S. government grant
    
    
    
    
    
    
    315
    
    
    NM
    
    
    
    (g
    )Total operating expenses
    
    $
    19,029
    
    
    $
    497
    
    
    
    2.7
    %
 25




---



##### Table of Contents



(a)
    Wages, salaries and benefits decreased due to lower wage rates and reduced headcount
primarily as a result of the Labor Agreements and Management Reductions, discussed in
the Companys 2003 Form 10-K, which became effective in the second quarter of 2003.
This decrease was offset to some degree by increased headcount related to capacity
increases.(b)
    Aircraft fuel expense increased due to a 38.5 percent increase in the Companys
price per gallon of fuel (net of the impact of fuel hedging), and a 2.0 percent
increase in the Companys fuel consumption.(c)
    Regional payments to AMR Eagle increased primarily as a result of increased
capacity.(d)
    Maintenance, materials and repairs increased primarily due to increased aircraft
utilization, the benefit from retiring aircraft subsiding and increases in contractual
rates in certain flight hour agreements for outsourced aircraft engine maintenance.(e)
    Aircraft rentals decreased primarily due to the removal of leased aircraft from the
fleet in the second half of 2003 as part of the Companys restructuring initiatives and
concessionary agreements with certain lessors, which reduced future lease payment
amounts and resulted in the conversion of 30 operating leases to capital leases in the
second quarter of 2003.(f)
    Special charges for 2004 included (i) the reversal of reserves previously
established for aircraft return costs of $20 million, facility exit costs of $21
million and employee severance of $11 million, (ii) $21 million in aircraft charges and
(iii) $41 million in employee charges. Special charges for 2003 included approximately
(i) $341 million in aircraft charges offset by a $20 million credit to adjust prior
accruals, (ii) $92 million in employee charges, (iii) $62 million in facility exit
costs and a (iv) $68 million gain resulting from a transaction involving 33 of the
Companys Fokker 100 aircraft and related debt. See a further discussion of Special
charges in Note 2 to the consolidated financial statements.(g)
    U.S. government grant for 2003 reflects the reimbursement of security service fees
from the U.S. government under the Appropriations Act. Effective January 1, 2005, in
order to more accurately reflect the expected useful life of its aircraft, the Company changed its estimate
of the depreciable lives of certain American aircraft types from 25 to 30 years. The Company expects this change in estimate to result in a decrease
in annual depreciation expense of approximately $100 million in 2005. Other Income (Expense) Other income (expense) consists of interest income and expense, interest capitalized and
miscellaneous  net. 2004 Compared to 2003Interest income increased $10 million, or 18.5 percent, to $64 million due
primarily to increases in short-term investment balances and interest rates. Interest expense
increased $126 million, or 24.0 percent, to $650 million resulting primarily from the increase in
the Companys long-term debt coupled with increases in interest rates, and an $84 million reduction
in interest expense in 2003 related to the agreement reached with the IRS discussed below.
Miscellaneous-net for 2004 includes a $146 million gain on the sale of the Companys remaining
interest in Orbitz. Income Tax Benefit 2004The Company did not record a net tax benefit associated with its 2004 losses due to the
Company providing a valuation allowance, as discussed in Note 8 to the consolidated financial
statements. 2003The Company did not record a net tax benefit associated with its 2003 losses due to the
Company providing a valuation allowance. Additionally, in 2003, the Company reached an agreement
with the IRS covering tax years 1990 through 1995. As a result of this agreement, the Company
recorded a $91 million tax benefit to reduce previously accrued income tax liabilities and an $84
million reduction in interest expense to reduce previously accrued interest related to the accrued
income tax liabilities. 26




---



##### Table of Contents



Outlook The Company expects to incur a loss in the first quarter of 2005. However, the size of the loss is
uncertain due to external factors beyond the Companys control such as fuel prices and the revenue
environment. The Company currently expects first quarter mainline unit costs to be approximately
9.9 cents. Capacity for Americans mainline jet operations is expected to be essentially flat in the first
quarter of 2005 compared to the first quarter of 2004 with domestic capacity decreasing about four
percent and international capacity increasing about twelve percent. Capacity for Americans
mainline jet operations is expected to increase about 2.6 percent for the full year 2005 compared
to the full year 2004, with domestic capacity decreasing about one percent and international
capacity increasing about eleven percent. Other Information Environmental MattersAmerican has been notified of potential liability with regard to several
environmental cleanup sites and certain airport locations. At sites where remedial litigation has
commenced, potential liability is joint and several. Americans alleged volumetric contributions
at all but one of these sites are minimal compared to others. American does not expect these
matters, individually or collectively, to have a material impact on its results of operations,
financial position or liquidity. Additional information is included in Part C of Item 1 and Note 4
to the consolidated financial statements. Risk Factors The Companys ability to become profitable and its ability to continue to fund its obligations on
an ongoing basis will depend on a number of risk factors, many of which are largely beyond the
Companys control. Among other things, the following factors have had and/or may have a negative
impact on the Companys business and financial results: Economic and Other ConditionsThe airline industry is affected by changes in international,
national, regional and local economic, business and financial conditions, inflation, war, terrorist
attacks, political instability (or the threat thereof), consumer preferences and spending patterns,
demographic trends, disruptions to the air traffic control system, consumer perceptions of airline
safety, costs of safety, security and environmental measures, and the weather. Substantial IndebtednessThe Company has, and will continue to have, a significant amount of
indebtedness. In addition, the Company may incur
substantial additional debt, including secured debt, in the future. As discussed earlier in this
Report, the Companys substantial indebtedness could have important consequences. For example, it
could (i) limit the Companys ability to obtain additional financing for working capital, capital
expenditures, acquisitions and general corporate purposes, or adversely affect the terms on which
such financing could be obtained; (ii) require the Company to dedicate a substantial portion of its
cash flow from operations to payments on its indebtedness, thereby reducing the funds available for
other purposes; (iii) make the Company more vulnerable to economic downturns; (iv) limit its
ability to withstand competitive pressures and reduce its flexibility in responding to changing
business and economic conditions; and (v) limit the Companys flexibility in planning for, or
reacting to, changes in its business and the industry in which it operates. Credit Facility CovenantsAmerican has a fully drawn $850 million Credit Facility, which consists
of a $600 million Revolving Facility with a final maturity on June 17, 2009 and a $250 million Term
Loan Facility with a final maturity on December 17, 2010. The Credit Facility contains a liquidity
covenant and a ratio of cash flow to fixed charges covenant. American and AMR were in compliance
with these covenants as of December 31, 2004 and expect to be able to continue to comply with these
covenants, but there are no assurances that they will be able to do so through the expiration of
the Credit Facility. Failure to comply with these covenants would result in a default under the
Credit Facility which - - if the Company did not take steps to obtain a waiver of, or otherwise
mitigate, the default - - could result in a default under a significant amount of the Companys
other debt. 27




---



##### Table of Contents



Fuel Prices / SupplyDue to the competitive nature of the airline industry, there can be no
assurance that the Company will be able to pass on increased fuel prices to its customers by
increasing its fares. In fact, recent history would indicate that the Company has a very limited
ability to pass along the increased costs of fuel. Likewise, increased fare competition and lower
revenues may offset any potential benefit of lower fuel prices. As of December 31, 2004, the
Company had hedged approximately 15 percent of its expected first quarter 2005 fuel requirements,
and minimal amounts of its expected fuel requirements beyond March 31, 2005. While the Company does not currently anticipate a significant reduction in fuel availability,
dependency on foreign imports of crude oil and the possibility of changes in government policy on
jet fuel production, transportation and marketing make it impossible to predict the future
availability of jet fuel. In the event there is an outbreak of hostilities or other conflicts in
oil producing areas or elsewhere, there could be reductions in the production and/or importation of
crude oil and/or significant increases in the cost of fuel. If there were major reductions in the
availability of jet fuel or significant increases in its cost, or if current high prices are
sustained for a significant period of time, the Companys business would be adversely affected. Increasing Competition and Historically Low Fare LevelsService over almost all of the Companys
routes is highly competitive and fares remain at historically low levels. The Company faces
vigorous competition from major domestic airlines, national, regional, all-cargo and charter
carriers, foreign air carriers, LCCs, and, particularly on shorter segments, ground and rail
transportation. Increasingly, the Company faces significant competition from LCCs and
marketing/operational alliances formed by its competitors. The percentage of routes on which the
Company competes with carriers having substantially lower operating costs has grown significantly
over the past decade, and the Company now competes with LCCs on most of its domestic network. In
addition, the Company must compete with carriers that have recently reorganized or are
reorganizing, including under the protection of Chapter 11 of the Bankruptcy Code. It is possible
that one or more other competitors may seek to reorganize in or out of Chapter 11. Successful
completion of such out-of-court or Chapter 11 reorganizations could present the Company with
competitors with lower operating costs derived from renegotiated labor, supply and financing
contracts. Certain alliances have been granted immunity from anti-trust regulations by governmental
authorities for specific areas of cooperation, such as joint pricing decisions. To the extent
alliances formed by its competitors can undertake activities that are not available to the Company,
the Companys ability to effectively compete may be hindered. Pricing decisions are significantly affected by competition from other airlines. Fare discounting
by competitors has historically had a negative effect on the Companys financial results because
the Company is generally required to match competitors fares because failing to match would
provide even less revenue. More recently, the Company has faced increased competition from
carriers with simplified fare structures, which are generally preferred by travelers. In addition,
in January 2005, Delta implemented a U.S.-wide simplified fare structure initiative, which the
Company matched in most domestic markets. No assurance can be given that any fare reduction or
fare simplification initiative will be offset by increases in passenger traffic, a reduction in
costs or changes in the mix of traffic that would improve yields. In addition, several air
carriers have recently reorganized or are reorganizing under Chapter 11 of the United States
Bankruptcy Code, including United and US Airways. It is possible that other competitors may seek to
reorganize in or out of Chapter 11. Historically, air carriers involved in reorganizations have
undertaken substantial fare discounting in order to maintain cash flows and enhance customer
loyalty. Increased Pricing TransparencyThe increased use of the Internet as a travel distribution channel
is resulting in a continuous increase in pricing transparency. The Internet has enabled cost
conscious customers, including business travelers, to more easily obtain the lowest fare on any
given route, which has reduced the Companys pricing power. Cost Reduction EffortsAs discussed in the Overview to this Item, the Company continues to seek
to reduce its costs. The ability of the Company to further reduce its costs, particularly without
affecting operational performance and service levels, is not assured. 28




---



##### Table of Contents



Credit RatingsSince the Terrorist Attacks, Americans credit ratings have been lowered to
significantly below investment grade. These reductions have increased borrowing costs and otherwise
adversely affected borrowing terms, and limited borrowing options. Additional
reductions in the credit ratings could further increase borrowing or other costs and further
restrict the availability of future financing. Availability and Terms of FinancingTo maintain sufficient liquidity as the Company continues to
implement its restructuring and cost reduction initiatives, and because the Company has significant
debt obligations maturing in the next several years, as well as substantial pension funding
obligations, the Company will need continued access to additional financing, but there can be no
assurance that such financing will be available on acceptable terms, if at all. The Companys
ability to obtain future financing or to sell assets could be adversely affected because American
has fewer unencumbered assets available than in years past. A very large majority of the Companys
aircraft assets (including virtually all of the aircraft eligible for the benefits of Section 1110
of the U.S. Bankruptcy Code) have been encumbered. In addition, the market value of the Companys
aircraft assets has declined in recent years and those assets may not maintain their current market
value. Moreover, the Companys recent financial results, its substantial indebtedness, the
difficult revenue environment it faces, and its reduced credit ratings, coupled with high fuel
prices and the financial difficulties experienced in the airline industry, adversely affect the
availability and terms of financing for the Company. The inability of the Company to obtain
additional financing on acceptable terms would have a material adverse impact on its operations. Changing Business StrategyThe Company evaluates its assets on an ongoing basis with a view to
maximizing their value to the Company and determining which are core to its operations. It also
regularly evaluates its business strategy. The Company may change its business strategy in the
future and may not pursue some of the goals stated herein. Government RegulationFuture results of the Companys operations may vary based upon any actions
which the governmental agencies with jurisdiction over the Companys operations may take, including
the granting and timing of certain governmental approvals (including foreign government approvals)
needed for codesharing alliances and other arrangements with other airlines, restrictions on
competitive practices (e.g., court orders, or agency regulations or orders, that would curtail an
airlines ability to respond to a competitor), the adoption of regulations that impact customer
service standards (e.g., new passenger security standards), and the adoption of more restrictive
locally-imposed noise restrictions. Conflicts OverseasPrior to the war in Iraq, the increased threat of U.S. military involvement in
overseas operations had a significant adverse impact on the Companys business, financial position
(including access to capital markets) and results of operations and on the airline industry in
general. Furthermore, the war in Iraq had a significant adverse impact on international and
domestic revenues and future bookings. The continuing conflict in Iraq, or other conflicts or
events in the Middle East or elsewhere, may result in similar adverse impacts. Terrorist AttacksThe Terrorist Attacks had a material adverse impact on the Company. The
occurrence of another terrorist attack (whether domestic or international and whether against the
Company or another entity) would again have a material adverse impact on the Company, its finances
and/or its operations. Uncertainty in International OperationsThe Companys current international activities and
prospects could be adversely affected by factors such as reversals or delays in the opening of
foreign markets, exchange controls, currency and political risks, taxation and changes in
international government regulation of the Companys operations, including the inability to obtain
or retain needed route authorities and/or slots. DiseasesIn 2003, there was an outbreak of Severe Acute Respiratory Syndrome (SARS), which
primarily had an adverse impact on the Companys Pacific operations. If there were another
outbreak of a disease (such as SARS) that affects travel behavior, it could have a material adverse
impact on the Companys operations. Uncertainty of Future Collective Bargaining Agreements and EventsThe Companys operations could be
adversely affected by failure of the Company to reach agreement with any labor union representing
the Companys employees. In addition, a dispute between the Company and an employee work group
(outside the confines of a collective bargaining agreement) could adversely impact the Companys
operations. 29




---



##### Table of Contents



Insurance Costs and Availability of InsuranceThe Company carries insurance for public liability,
passenger liability, property damage and all-risk coverage for damage to its aircraft. As a result
of the Terrorist Attacks, aviation insurers significantly reduced the amount of insurance coverage
available to commercial air carriers for liability to persons other than employees or passengers
for claims resulting from acts of terrorism, war or similar events (war-risk coverage). At the
same time, these insurers significantly increased the premiums for aviation insurance in general.
The U.S. government has agreed to provide commercial war-risk insurance for U.S. based airlines
until August 31, 2005, covering losses to employees, passengers, third parties and aircraft. In
addition, the Secretary of Transportation may extend the policy until December 31, 2005, at his
discretion. However, there is no assurance that it will be extended. If the U.S. government does
not extend the policy beyond August 31, 2005, the Company will attempt to purchase similar coverage
with narrower scope from commercial insurers at an additional cost. To the extent this coverage is
not available at commercially reasonable rates, the Companys results of operations would be
negatively affected. While the price of commercial insurance has declined in recent years, in the
event commercial insurance carriers further reduce the amount of insurance coverage available to
the Company, or significantly increase its cost, the Companys operations and/or financial position
and results of operations would be adversely affected. Executive RetentionSince the Terrorist Attacks, several key executives have elected to retire
early or leave the Company for more financially favorable opportunities at other companies. There
can be no assurance that the Company will be able to retain its key executives. The inability of
the Company to retain key executives, or attract and retain additional qualified executives, could
have a negative impact on the Company. Dependence on TechnologyThe Company is increasingly dependent on technology to operate its
business. Any substantial or repeated failures of the Companys computer or communications systems
could impact the Companys customer service, result in the loss of important data, loss of
revenues, and increased costs, and generally harm the Companys business. Like all companies, the
Companys computer and communication systems may be vulnerable to disruptions due to events beyond
the Companys control, including natural disasters, power failures, equipment failures, and
computer viruses and hackers. The Company has implemented various technology security initiatives
and disaster recovery plans, but there can be no assurance that these measures are adequate to
prevent disruptions of the Companys systems. 30




---



##### Table of Contents



ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk Sensitive Instruments and Positions The risk inherent in the Companys market risk sensitive instruments and positions is the potential
loss arising from adverse changes in the price of fuel, foreign currency exchange rates and
interest rates as discussed below. The sensitivity analyses presented do not consider the effects
that such adverse changes may have on overall economic activity, nor do they consider additional
actions management may take to mitigate the Companys exposure to such changes. Therefore, actual
results may differ. The Company does not hold or issue derivative financial instruments for
trading purposes. See Note 7 to the consolidated financial statements for accounting policies and
additional information. Aircraft FuelThe Companys earnings are affected by changes in the price and availability of
aircraft fuel. In order to provide a measure of control over price and supply, the Company trades
and ships fuel and maintains fuel storage facilities to support its flight operations. The Company
also manages the price risk of fuel costs primarily by using jet fuel, heating oil, and crude oil
hedging contracts. Market risk is estimated as a hypothetical 10 percent increase in the December
31, 2004 and 2003 cost per gallon of fuel. Based on projected 2005 fuel usage, such an increase
would result in an increase to aircraft fuel expense of approximately $343 million in 2005,
inclusive of the impact of fuel hedge instruments outstanding at December 31, 2004, and assumes the
Companys fuel hedging program remains effective under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities. Comparatively, based on
projected 2004 fuel usage, such an increase would have resulted in an increase to aircraft fuel
expense of approximately $247 million in 2004, inclusive of the impact of fuel hedge instruments
outstanding at December 31, 2003. The change in market risk is due to the increase in fuel prices
and a decrease in the amount of fuel hedged. As of December 31, 2004, the Company had hedged, with
option contracts, approximately five percent of its estimated 2005 fuel requirements, or
approximately 15 percent of its estimated first quarter 2005 fuel requirements, and a minimal
amount of its estimated fuel requirements thereafter. Comparatively, as of December 31, 2003 the
Company had hedged, with option contracts, approximately 21 percent of its estimated first quarter
2004 fuel requirements, 16 percent of its second quarter 2004 estimated fuel requirements and six
percent of its estimated fuel requirements for the remainder of 2004. A deterioration of the
Companys liquidity position could negatively affect the Companys ability to hedge fuel in the
future. Foreign CurrencyThe Company is exposed to the effect of foreign exchange rate fluctuations on
the U.S. dollar value of foreign currency-denominated operating revenues and expenses. The
Companys largest exposure comes from the British pound, Euro, Canadian dollar, Japanese yen and
various Latin American currencies. The Company does not currently have a foreign currency hedge
program related to its foreign currency-denominated ticket sales. The result of a uniform 10
percent strengthening in the value of the U.S. dollar from December 31, 2004 and 2003 levels
relative to each of the currencies in which the Company has foreign currency exposure would result
in a decrease in operating income of approximately $93 million and $77 million for the years ending
December 31, 2005 and 2004, respectively, due to the Companys foreign-denominated revenues
exceeding its foreign-denominated expenses. This sensitivity analysis was prepared based upon
projected 2005 and 2004 foreign currency-denominated revenues and expenses as of December 31, 2004
and 2003, respectively. 31




---



##### Table of Contents



InterestThe Companys earnings are also affected by changes in interest rates due to the impact
those changes have on its interest income from cash and short-term investments, and its interest
expense from variable-rate debt instruments. The Companys largest exposure with respect to
variable-rate debt comes from changes in the London Interbank Offered Rate (LIBOR). The Company had
variable-rate debt instruments representing approximately 44 percent and 45 percent of its total
long-term debt at December 31, 2004 and 2003, respectively. If the Companys interest rates
average 10 percent more in 2005 than they did at December 31, 2004, the Companys interest expense
would increase by approximately $20 million and interest income from cash and short-term
investments would increase by approximately $7 million. In comparison, at December 31, 2003, the
Company estimated that if interest rates averaged 10 percent more in 2004 than they did at December
31, 2003, the Companys interest expense would have increased by approximately $13 million and
interest income from cash and short-term investments would have increased by approximately $4
million. These amounts are determined by considering the impact of the hypothetical interest rates
on the Companys variable-rate long-term debt and cash and
short-term investment balances at December 31, 2004 and 2003. Market risk for fixed-rate long-term debt is estimated as the potential increase in fair value
resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately
$254 million and $245 million as of December 31, 2004 and 2003, respectively. The fair values of
the Companys long-term debt were estimated using quoted market prices or discounted future cash
flows based on the Companys incremental borrowing rates for similar types of borrowing
arrangements. OtherThe Company holds investments in certain other entities which are subject to market risk.
However, the impact of such market risk on earnings is not significant due to the immateriality of
the carrying value and the geographically diverse nature of these holdings. 32




---



##### Table of Contents



ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    34Consolidated Statements of Operations
    
    35Consolidated Balance Sheets
    
    36-37Consolidated Statements of Cash Flows
    
    38Consolidated Statements of Stockholders Equity (Deficit)
    
    39Notes to Consolidated Financial Statements
    
    40-67
 33




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and StockholderAmerican Airlines, Inc. We have audited the accompanying consolidated balance sheets of American Airlines, Inc. as of
December 31, 2004 and 2003 and the related consolidated statements of operations, stockholders
equity (deficit) and cash flows for each of the three years in the period ended December 31, 2004.
These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of American Airlines, Inc. at December 31, 2004 and
2003 and the consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 in conformity with U.S. generally accepted accounting
principles. As discussed in Note 11 to the consolidated financial statements, effective January 1, 2002 the
Company changed its method of accounting for its goodwill and other intangible assets as required
by Statement of Financial Accounting Standards No. 142, Accounting for Goodwill and Other
Intangible Assets. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of American Airlines, Inc.s internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 22, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP
 Dallas, Texas
February 22, 2005 34




---



##### Table of Contents



AMERICAN AIRLINES, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(in millions)
 Year Ended December 31,2004
    
    
    2003
    
    
    2002RevenuesPassenger
    
    $
    15,021
    
    
    $
    14,332
    
    
    $
    14,439Regional Affiliates
    
    
    1,876
    
    
    
    1,519
    
    
    
    99Cargo
    
    
    625
    
    
    
    558
    
    
    
    557Other
    
    
    1,086
    
    
    
    994
    
    
    
    897Total operating revenues
    
    
    18,608
    
    
    
    17,403
    
    
    
    15,992ExpensesWages, salaries and benefits
    
    
    6,224
    
    
    
    6,831
    
    
    
    7,954Aircraft fuel
    
    
    3,653
    
    
    
    2,586
    
    
    
    2,415Regional payments to AMR Eagle
    
    
    1,700
    
    
    
    1,392
    
    
    
    Depreciation and amortization
    
    
    1,124
    
    
    
    1,213
    
    
    
    1,209Other rentals and landing fees
    
    
    1,066
    
    
    
    1,084
    
    
    
    1,110Commissions, booking fees and credit card expense
    
    
    1,107
    
    
    
    1,064
    
    
    
    1,087Maintenance, materials and repairs
    
    
    821
    
    
    
    714
    
    
    
    962Aircraft rentals
    
    
    588
    
    
    
    666
    
    
    
    815Food service
    
    
    552
    
    
    
    606
    
    
    
    693Other operating expenses
    
    
    2,184
    
    
    
    2,284
    
    
    
    2,445Special charges
    
    
    10
    
    
    
    407
    
    
    
    625U.S. government grant
    
    
    
    
    
    
    (315
    )
    
    
    (10
    )Total operating expenses
    
    
    19,029
    
    
    
    18,532
    
    
    
    19,305Operating Loss
    
    
    (421
    )
    
    
    (1,129
    )
    
    
    (3,313
    )Other Income (Expense)Interest income
    
    
    64
    
    
    
    54
    
    
    
    70Interest expense
    
    
    (650
    )
    
    
    (524
    )
    
    
    (521
    )Interest capitalized
    
    
    77
    
    
    
    66
    
    
    
    80Related party interest  net
    
    
    (2
    )
    
    
    7
    
    
    
    18Miscellaneous  net
    
    
    111
    
    
    
    117
    
    
    
    (3
    )(400
    )
    
    
    (280
    )
    
    
    (356
    )Loss Before Income Taxes and Cumulative Effect of
Accounting Change
    
    
    (821
    )
    
    
    (1,409
    )
    
    
    (3,669
    )Income tax benefit
    
    
    
    
    
    
    (91
    )
    
    
    (1,063
    )Loss Before Cumulative Effect of Accounting Change
    
    
    (821
    )
    
    
    (1,318
    )
    
    
    (2,606
    )Cumulative Effect of Accounting Change, Net of
Applicable Income Taxes
    
    
    
    
    
    
    
    
    
    
    (889
    )Net Loss
    
    $
    (821
    )
    
    $
    (1,318
    )
    
    $
    (3,495
    )
 The accompanying notes are an integral part of these financial statements. 35




---



##### Table of Contents



AMERICAN AIRLINES, INC.CONSOLIDATED BALANCE SHEETS(in millions, except shares and par value)
 December 31,2004
    
    
    2003AssetsCurrent AssetsCash
    
    $
    117
    
    
    $
    118Short-term investments
    
    
    2,787
    
    
    
    2,474Restricted cash and short-term investments
    
    
    478
    
    
    
    527Receivables, less allowance for uncollectible
accounts (2004 - $58; 2003 - $61)
    
    
    821
    
    
    
    760Inventories, less allowance for obsolescence
(2004 - $329; 2003 - $374)
    
    
    450
    
    
    
    475Other current assets
    
    
    233
    
    
    
    232Total current assets
    
    
    4,886
    
    
    
    4,586Equipment and PropertyFlight equipment, at cost
    
    
    18,619
    
    
    
    18,275Less accumulated depreciation
    
    
    6,315
    
    
    
    5,47212,304
    
    
    
    12,803Purchase deposits for flight equipment
    
    
    277
    
    
    
    277Other equipment and property, at cost
    
    
    4,839
    
    
    
    4,658Less accumulated depreciation
    
    
    2,474
    
    
    
    2,3142,365
    
    
    
    2,34414,946
    
    
    
    15,424Equipment and Property Under Capital LeasesFlight equipment
    
    
    1,914
    
    
    
    2,285Other equipment and property
    
    
    168
    
    
    
    1662,082
    
    
    
    2,451Less accumulated amortization
    
    
    984
    
    
    
    1,0861,098
    
    
    
    1,365Other AssetsRoute acquisition costs and airport
operating and gate lease rights, less
accumulated amortization (2004 - $270; 2003
- $248)
    
    
    1,194
    
    
    
    1,221Other assets
    
    
    3,338
    
    
    
    3,8754,532
    
    
    
    5,096Total Assets
    
    $
    25,462
    
    
    $
    26,471
 The accompanying notes are an integral part of these financial statements. 36




---



##### Table of Contents



AMERICAN AIRLINES, INC.CONSOLIDATED BALANCE SHEETS(in millions, except shares and par value)
 December 31,2004
    
    
    2003Liabilities and Stockholders Equity (Deficit)Current LiabilitiesAccounts payable
    
    $
    945
    
    
    $
    910Accrued salaries and wages
    
    
    517
    
    
    
    507Accrued liabilities
    
    
    1,336
    
    
    
    1,333Air traffic liability
    
    
    3,183
    
    
    
    2,799Payable to affiliates
    
    
    359
    
    
    
    153Current maturities of long-term debt
    
    
    475
    
    
    
    465Current obligations under capital leases
    
    
    104
    
    
    
    170Total current liabilities
    
    
    6,919
    
    
    
    6,337Long-Term Debt, Less Current Maturities
    
    
    8,787
    
    
    
    9,073Obligations Under Capital Leases,
Less Current Obligations
    
    
    1,061
    
    
    
    1,156Other Liabilities and CreditsDeferred gains
    
    
    470
    
    
    
    520Pension and postretirement benefits
    
    
    4,743
    
    
    
    4,803Other liabilities and deferred credits
    
    
    3,587
    
    
    
    4,2378,800
    
    
    
    9,560Commitments and ContingenciesStockholders Equity (Deficit)Common stock  $1 par value;
1,000 shares authorized, issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    3,273
    
    
    
    3,023Accumulated other comprehensive loss
    
    
    (772
    )
    
    
    (893
    )Accumulated deficit
    
    
    (2,606
    )
    
    
    (1,785
    )(105
    )
    
    
    345Total Liabilities and Stockholders Equity (Deficit)
    
    $
    25,462
    
    
    $
    26,471
 The accompanying notes are an integral part of these financial statements. 37




---



##### Table of Contents



AMERICAN AIRLINES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in millions)
 Year Ended December 31,2004
    
    
    2003
    
    
    2002Cash Flow from Operating Activities:Net loss
    
    $
    (821
    )
    
    $
    (1,318
    )
    
    $
    (3,495
    )Adjustments to reconcile net loss to net cash provided
(used) by operating activities:Depreciation
    
    
    976
    
    
    
    1,071
    
    
    
    1,069Amortization
    
    
    148
    
    
    
    142
    
    
    
    140Provisions for asset impairments and special charges
    
    
    21
    
    
    
    190
    
    
    
    372Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    889Gain on sale of investments
    
    
    (146
    )
    
    
    (154
    )
    
    
    Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    (589
    )Additional tax refunds due to tax law change
    
    
    
    
    
    
    
    
    
    
    330Redemption payments under operating leases for
special facility revenue bonds
    
    
    
    
    
    
    (521
    )
    
    
    Change in assets and liabilities:Decrease (increase) in receivables
    
    
    (83
    )
    
    
    615
    
    
    
    (6
    )Decrease in inventories
    
    
    7
    
    
    
    49
    
    
    
    48Decrease in accounts payable
and accrued liabilities
    
    
    (102
    )
    
    
    (237
    )
    
    
    (61
    )Increase (decrease) in air traffic liability
    
    
    377
    
    
    
    184
    
    
    
    (154
    )Increase in other liabilities and deferred credits
    
    
    32
    
    
    
    244
    
    
    
    107Other, net
    
    
    11
    
    
    
    (56
    )
    
    
    (29
    )Net cash provided (used) by operating activities
    
    
    420
    
    
    
    209
    
    
    
    (1,379
    )Cash Flow from Investing Activities:Capital expenditures, including purchase deposits on
flight equipment
    
    
    (391
    )
    
    
    (330
    )
    
    
    (1,385
    )Net (increase) decrease in short-term investments
    
    
    (313
    )
    
    
    (640
    )
    
    
    536Net decrease (increase) in restricted cash and short-term
investments
    
    
    49
    
    
    
    256
    
    
    
    (248
    )Proceeds from sale of equipment and property and
Investments
    
    
    233
    
    
    
    387
    
    
    
    210Other
    
    
    (12
    )
    
    
    23
    
    
    
    (24
    )Net cash used for investing activities
    
    
    (434
    )
    
    
    (304
    )
    
    
    (911
    )Cash Flow from Financing Activities:Proceeds from:Issuance of long-term debt
    
    
    1,030
    
    
    
    353
    
    
    
    2,645Sale-leaseback transactions
    
    
    
    
    
    
    
    
    
    
    91Funds transferred from affiliates, net
    
    
    455
    
    
    
    491
    
    
    
    11Payments on long-term debt and capital lease obligations
    
    
    (1,472
    )
    
    
    (731
    )
    
    
    (456
    )Net cash provided by financing activities
    
    
    13
    
    
    
    113
    
    
    
    2,291Net (decrease) increase in cash
    
    
    (1
    )
    
    
    18
    
    
    
    1Cash at beginning of year
    
    
    118
    
    
    
    100
    
    
    
    99Cash at end of year
    
    $
    117
    
    
    $
    118
    
    
    $
    100Activities Not Affecting CashFlight equipment acquired through seller financing
    
    $
    
    
    
    $
    554
    
    
    $
    Capital lease obligations incurred
    
    $
    13
    
    
    $
    140
    
    
    $
    Reduction to capital lease and other obligations
    
    $
    
    
    
    $
    (190
    )
    
    $
    
 The accompanying notes are an integral part of these financial statements. 38




---



##### Table of Contents



AMERICAN AIRLINES, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)(in millions)
 AccumulatedAdditional
    
    
    Other
    
    
    RetainedCommon
    
    
    Paid-in
    
    
    Comprehensive
    
    
    EarningsStock
    
    
    Capital
    
    
    Loss
    
    
    (Deficit)
    
    
    TotalBalance at January 1, 2002
    
    $
    
    
    
    $
    2,596
    
    
    $
    (145
    )
    
    $
    3,028
    
    
    $
    5,479Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,495
    )
    
    
    (3,495
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    (1,122
    )
    
    
    
    
    
    
    (1,122
    )Changes in fair value of
derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    143
    
    
    
    
    
    
    
    143Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Income tax effect
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    
    
    
    
    (54
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,534
    )Transactions with Parent (Note 13)
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Other
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Balance at December 31, 2002
    
    
    
    
    
    
    2,598
    
    
    
    (1,184
    )
    
    
    (467
    )
    
    
    947Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,318
    )
    
    
    (1,318
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    
    
    
    
    337Changes in fair value of
derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,027
    )Transactions with Parent (Note 13)
    
    
    
    
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    425Balance at December 31, 2003
    
    
    
    
    
    
    3,023
    
    
    
    (893
    )
    
    
    (1,785
    )
    
    
    345Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (821
    )
    
    
    (821
    )Minimum pension liability
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    129Changes in fair value of
derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Unrealized loss on investments
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (700
    )Transactions with Parent (Note 13)
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Balance at December 31, 2004
    
    $
    
    
    
    $
    3,273
    
    
    $
    (772
    )
    
    $
    (2,606
    )
    
    $
    (105
    )
 The accompanying notes are an integral part of these financial statements. 39




---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. Summary of Accounting Policies Basis of PresentationAmerican Airlines, Inc. (American or the Company) is a wholly-owned
subsidiary of AMR Corporation (AMR). The accompanying consolidated financial statements include the
accounts of American and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated. Certain amounts have been reclassified to conform with the 2004
presentation. Use of EstimatesThe preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the amounts
reported in the accompanying consolidated financial statements and accompanying notes. Actual
results could differ from those estimates. Restricted Cash and Short-term InvestmentsThe Company has restricted cash and short-term
investments related primarily to collateral held to support projected workers compensation
obligations and various other obligations. InventoriesSpare parts, materials and supplies relating to flight equipment are carried at
average acquisition cost and are expensed when used in operations. Allowances for obsolescence are
provided  over the estimated useful life of the related aircraft and engines  for spare parts
expected to be on hand at the date aircraft are retired from service. Allowances are also provided
for spare parts currently identified as excess and obsolete. These allowances are based on
management estimates, which are subject to change. Maintenance and Repair CostsMaintenance and repair costs for owned and leased flight equipment
are charged to operating expense as incurred, except costs incurred for maintenance and repair
under flight hour maintenance contract agreements, which are accrued based on contractual terms
when an obligation exists. Intangible AssetsRoute acquisition costs and airport operating and gate lease rights represent
the purchase price attributable to route authorities (including international airport take-off and
landing slots), domestic airport take-off and landing slots and airport gate leasehold rights
acquired. Indefinite-lived intangible assets (route acquisition costs) are tested for impairment
annually on December 31, rather than amortized, in accordance with Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). Airport operating
and gate lease rights are being amortized on a straight-line basis over 25 years to a zero residual
value. Statements of Cash FlowsShort-term investments, without regard to remaining maturity at
acquisition, are not considered as cash equivalents for purposes of the statements of cash flows. Employee AccrualsThe Company estimates the amount of potential retroactive pay expected to be
provided upon finalization of a labor agreement for work groups working under contracts that have
become amendable. These estimates are based upon managements expectation of the most likely
outcome of the contract negotiations. Measurement of Asset ImpairmentsIn accordance with Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the Company
records impairment charges on long-lived assets used in operations when events and circumstances
indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by
those assets are less than the carrying amount of those assets and the net book value of the assets
exceeds their estimated fair value. In making these determinations, the Company uses certain
assumptions, including, but not limited to: (i) estimated fair value of the assets and (ii)
estimated future cash flows expected to be generated by these assets, which are based on additional
assumptions such as asset utilization, length of service the asset will be used in the Companys
operations and estimated salvage values. 40




---



##### Table of Contents



1. Summary of Accounting Policies (Continued) Equipment and PropertyThe provision for depreciation of operating equipment and property is
computed on the straight-line method applied to each unit of property, except that major rotable
parts, avionics and assemblies are depreciated on a group basis. The depreciable lives used for
the principal depreciable asset classifications are: Depreciable LifeAmerican jet aircraft and engines
    
    20  30 yearsMajor rotable parts, avionics and assemblies
    
    Life of equipment to which applicableImprovements to leased flight equipment
    
    Term of leaseBuildings and improvements (principally on
leased land)
    
    10-30 years or term of leaseFurniture, fixtures and other equipment
    
    3-10 yearsCapitalized software
    
    3-10 years
 Effective January 1, 2005, in order to more accurately reflect the expected useful life of its
aircraft, the Company changed its estimate of the depreciable lives of certain American aircraft
types from 25 to 30 years. Residual values for aircraft, engines, major rotable parts, avionics and assemblies are generally
five to ten percent, except when guaranteed by a third party for a different amount. Equipment and property under capital leases are amortized over the term of the leases or, in the
case of certain aircraft, over their expected useful lives. Lease terms vary but are generally ten
to 25 years for aircraft and seven to 40 years for other leased equipment and property. Regional AffiliatesRevenue from ticket sales is generally recognized when service is provided.
Regional Affiliates revenues for flights connecting to American flights are allocated based on
industry standard proration agreements. Passenger RevenuePassenger ticket sales are initially recorded as a component of Air traffic
liability. Revenue derived from ticket sales is recognized at the time service is provided.
However, due to various factors, including the complex pricing structure and interline agreements
throughout the industry, certain amounts are recognized in revenue using estimates regarding both
the timing of the revenue recognition and the amount of revenue to be recognized, including
breakage. These estimates are generally based upon the evaluation of historical trends, including
the use of regression analysis and other methods to model the outcome of future events based on the
Companys historical experience, and are recorded at the time of departure. Frequent Flyer ProgramThe estimated incremental cost of providing free travel awards is accrued
when such award levels are reached. American also accrues a frequent flyer liability for the
mileage credits that are expected to be used for travel on participating airlines (based on
historical usage patterns and contractual rates). American sells mileage credits and related
services to companies participating in its frequent flyer program. The portion of the revenue
related to the sale of mileage credits, representing the revenue for air transportation sold, is
valued at current market rates and is deferred and amortized over 28 months, which approximates the
expected period over which the mileage credits are used. The remaining portion of the revenue,
representing the marketing products sold and administrative costs associated with operating the
AAdvantage program, is recognized upon sale, as the related services have been provided. The
Companys total liability for future AAdvantage award redemptions for free, discounted or upgraded
travel on American, American Eagle Airlines, Inc., and Executive Airlines, Inc. (collectively AMR
Eagle) or participating airlines as well as unrecognized revenue from selling AAdvantage miles to
other airlines was approximately $1.4 billion and $1.2 billion (and is recorded as a component of
Air traffic liability on the accompanying consolidated balance sheets) at December 31, 2004 and
2003, respectively. 41




---



##### Table of Contents



1. Summary of Accounting Policies (Continued) Tax ContingenciesThe Company has reserves for taxes and associated interest that may become
payable in future years as a result of audits by tax authorities. Although the Company believes
that the positions taken on previously filed tax returns are reasonable, it nevertheless has
established tax and interest reserves in recognition that various taxing authorities may challenge
the positions taken by the Company resulting in additional liabilities for taxes and interest. The
tax reserves are reviewed as circumstances warrant and adjusted as events occur that affect the
Companys potential liability for additional taxes, such as lapsing of applicable statutes of
limitations, conclusion of tax audits, additional exposure based on current calculations,
identification of new issues, release of administrative guidance, or rendering of a court decision
affecting a particular tax issue. Advertising CostsThe Company expenses the costs of advertising as incurred. Advertising expense
was $146 million, $149 million and $160 million for the years ended December 31, 2004, 2003 and
2002, respectively. Stock OptionsThe Company accounts for its participation in AMRs stock-based compensation plans
in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related Interpretations. Under APB 25, no compensation expense is
recognized for stock option grants if the exercise price of the Companys stock option grants is at
or above the fair market value of the underlying stock on the date of grant. The Company has
adopted the pro forma disclosure features of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), as amended by Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.
As required by SFAS 123, pro forma information regarding net loss has been determined as if the
Company had accounted for its employee stock options and awards granted using the fair value method
prescribed by SFAS 123. The fair value for the stock options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average assumptions for
2004, 2003 and 2002: risk-free interest rates ranging from 2.93% to 4.30%; dividend yields of 0%;
expected stock volatility ranging from 45% to 55%; and expected life of the options ranging from
3.6 years to 4.5 years. The following table illustrates the effect on net loss if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation (in millions): Year Ended December 31,2004
    
    
    2003
    
    
    2002Net Loss, as reported
    
    $
    (821
    )
    
    $
    (1,318
    )
    
    $
    (3,495
    )Add: Stock-based
employee
compensation expense
included in reported
net loss, net of tax
in 2002
    
    
    20
    
    
    
    19
    
    
    
    5Deduct: Total
stock-based employee
compensation expense
determined under
fair value based
methods for all
awards, net of tax
in 2002
    
    
    (84
    )
    
    
    (78
    )
    
    
    (36
    )Pro forma net loss
    
    $
    (885
    )
    
    $
    (1,377
    )
    
    $
    (3,526
    )
 New Accounting PronouncementIn December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS
123(R)). SFAS 123(R) requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair values. SFAS 123(R)
is effective for public companies beginning with the first interim period that begins after June
15, 2005 (July 1, 2005 for AMR and American). Under SFAS 123(R), the Company will recognize
compensation expense for its participation in AMRs stock-based compensation plans for the portion
of outstanding awards for which the requisite service has not yet been rendered, based on the
grant-date fair value of those awards calculated under SFAS 123 for pro forma disclosures. The
Company has not completed its evaluation of the impact of SFAS 123(R) on its financial statements. 42




---



##### Table of Contents



2. Special charges and U.S. government grant During the last few years, as a result of the events of September 11, 2001 (the Terrorist Attacks),
the depressed revenue environment, high fuel prices and the Companys restructuring activities, the
Company has recorded a number of special charges. For the years ended December 31, 2004, 2003 and
2002, the Company recorded the following to Special charges (in millions): Year Ended December 31,2004
    
    
    2003
    
    
    2002Aircraft charges
    
    $
    1
    
    
    $
    321
    
    
    $
    565Employee charges
    
    
    30
    
    
    
    92
    
    
    
    57Facility exit costs
    
    
    (21
    )
    
    
    62
    
    
    
    3Other
    
    
    
    
    
    
    (68
    )
    
    
    Total special charges
    
    $
    10
    
    
    $
    407
    
    
    $
    625
 AmountYear
    
    Description of Charge
    
    (millions)Aircraft charges2004
    
    Adjusted prior accruals for lease return and other costs
    
    $
    (20
    )Permanently retired seven McDonnell Douglas MD80 aircraft
    
    
    21$
    12003
    
    Accelerated the planned retirement of Airbus A300
aircraft and permanently retired Boeing 767-200 aircraft
and four Boeing 767-200 ER aircraft. Aircraft and
related Airbus A300 rotables were written down to fair
value. *
    
    $
    264Retired Boeing 757 leased aircraft and accrued future
lease commitments and lease return costs
    
    
    77Adjusted prior accruals for lease return and other costs
    
    
    (20
    )$
    3212002
    
    Accelerated the planned retirement of Fokker 100
aircraft. Aircraft and related rotables and excess
inventory were written down to fair value. *
    
    $
    277Retired nine leased Boeing 767-300 aircraft and
accelerated the retirement of four leased Fokker 100
aircraft. Accrued future lease commitments and lease
return costs. Excess Boeing 767-300 inventory and
related rotables were written down to fair value.
    
    
    189Accrued contract cancellation costs and other costs
related to discontinued aircraft modifications
    
    
    99$
    565
 43




---



##### Table of Contents



2. Special charges and U.S. government grant (Continued) AmountYear
    
    Description of Charge
    
    (millions)Employee charges2004
    
    Adjusted prior accruals for severance costs
related to the 2003 Management Reductions and
Labor Agreements** due to fewer furloughs than
anticipated resulting from the Companys
operational requirements and the volume of pilot
retirements
    
    $
    (11
    )Accrued primarily severance costs for
approximately 3,200 job reductions across all work
groups except flight attendants (by June 2005)
    
    
    41$
    302003
    
    Reduced approximately 9,300 jobs across all work
groups in conjunction with the Management
Reductions and the Labor Agreements** and the
reduction of the St. Louis hub. Accrued primarily
severance costs.
    
    $
    76Recognized curtailment loss as discussed in Note 10
    
    
    46Accrued severance charges related to the 2002
workforce reduction discussed below
    
    
    25Other
    
    
    4Reduced vacation accrual to reflect new lower pay
scales and maximum vacation caps and wrote off a
note receivable from one of the Companys three
major unions in conjunction with the Labor
Agreements and the Management Reductions**
    
    
    (59
    )$
    922002
    
    Reduced approximately 7,000 jobs by March 2003
across all work groups to realign workforce with

planned capacity reductions, fleet simplification,
and hub restructurings. Accrued severance and
benefits related to voluntary programs in
accordance with collective bargaining agreements
with pilot and flight attendant work groups.
    
    $
    57Facility exit costs2004
    
    Adjusted prior accruals for future lease
commitments upon completion of a space
reevaluation primarily done in connection with the
occupation of some of the space by another carrier
    
    $
    (21
    )2003
    
    Accrued the fair value of future lease commitments
and wrote-off certain prepaid rental amounts and
leasehold improvements related to certain excess
airport space
    
    $
    45Reduced the size of the St. Louis hub and accrued
the fair value of certain future lease commitments
    
    
    12Other
    
    
    5$
    62
 44




---



##### Table of Contents



2. Special charges and U.S. government grant (Continued)   *
    In determining the asset impairment charges described above, management estimated the
undiscounted future cash flows using models used by the Company in making fleet and
scheduling decisions. In determining the fair value of these aircraft, the Company
considered outside third party appraisals and recent transactions involving sales of
similar aircraft and engines. The Company also considered internal valuation models in
determining the fair value of these aircraft, and with respect to the Fokker 100
aircraft, incorporated the fact that with this grounding, no major airline operates this
fleet type.**
    In February 2003, American asked its employees for approximately $1.8 billion in annual
savings through a combination of changes in wages, benefits and work rules. In April
2003, American reached agreements with its three major unions (the Labor Agreements) to
achieve these savings and also implemented various reductions in the pay plans and
benefits for non-unionized personnel, including officers and other management (the
Management Reductions). Other In 2003, American sold 33 Fokker 100 aircraft (with a minimal net book value), issued a $23 million
non-interest-bearing note, payable in installments and maturing in December 2010, entered into
short-term leases on these aircraft and issued shares of AMR common stock. In exchange,
approximately $130 million of debt related to certain of the Fokker 100 aircraft was retired.
However, the agreement contains provisions that would require American to repay additional amounts
of the original debt if certain events occur prior to December 31, 2005, including: (i) an event of
default (which generally occurs only if a payment default occurs), (ii) an event of loss with
respect to the related aircraft, (iii) rejection by the Company of the lease under the provisions
of Chapter 11 of the U.S. Bankruptcy Code or (iv) the Companys filing for bankruptcy under Chapter
7 of the U.S. Bankruptcy Code. As a result of this transaction, including the sale of the 33
Fokker 100 aircraft, and the termination of the Companys interest rate swap agreements related to
the debt that has been retired, the Company recognized a gain of approximately $68 million in 2003.
If the certain events described above do not occur, the Company expects to recognize an additional
gain of approximately $37 million in December 2005. 45




---



##### Table of Contents



2. Special charges and U.S. government grant (Continued) Summary The following table summarizes the components of these charges and the remaining accruals for
future lease payments, aircraft lease return and other costs, facilities closure costs and employee
severance and benefit costs (in millions): Aircraft
    
    
    Facility
    
    
    EmployeeCharges
    
    
    Exit Costs
    
    
    Charges
    
    
    Other
    
    
    TotalRemaining accrual
at
January 1, 2002
    
    $
    58
    
    
    $
    20
    
    
    $
    
    
    
    $
    
    
    
    $
    78Special charges
    
    
    565
    
    
    
    3
    
    
    
    57
    
    
    
    
    
    
    
    625Non-cash charges
    
    
    (370
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (373
    )Payments
    
    
    (47
    )
    
    
    (3
    )
    
    
    (13
    )
    
    
    
    
    
    
    (63
    )Remaining accrual
at December
31, 2002
    
    
    206
    
    
    
    17
    
    
    
    44
    
    
    
    
    
    
    
    267Special charges
    
    
    341
    
    
    
    62
    
    
    
    92
    
    
    
    (68
    )
    
    
    427Adjustments
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Non-cash charges
    
    
    (264
    )
    
    
    (17
    )
    
    
    23
    
    
    
    68
    
    
    
    (190
    )Payments
    
    
    (69
    )
    
    
    (6
    )
    
    
    (133
    )
    
    
    
    
    
    
    (208
    )Remaining accrual
at December
31, 2003
    
    
    194
    
    
    
    56
    
    
    
    26
    
    
    
    
    
    
    
    276Special charges
    
    
    21
    
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    62Adjustments
    
    
    (20
    )
    
    
    (21
    )
    
    
    (11
    )
    
    
    
    
    
    
    (52
    )Non-cash charges
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21
    )Payments
    
    
    (48
    )
    
    
    (9
    )
    
    
    (21
    )
    
    
    
    
    
    
    (78
    )Remaining accrual
at December
31, 2004
    
    $
    126
    
    
    $
    26
    
    
    $
    35
    
    
    $
    
    
    
    $
    187
 Cash outlays related to the accruals, as of December 31, 2004, for aircraft charges, facility exit
costs and employee charges will occur through 2014, 2018 and 2005, respectively. U.S. government grant In April 2003, the President signed the Emergency Wartime Supplemental Appropriations Act, 2003
(the Appropriations Act), which included provisions authorizing payment of $2.3 billion to
reimburse air carriers for increased security costs in proportion to the amounts each carrier had
paid or collected in passenger security and air carrier security fees to the Transportation
Security Administration (the Security Fee Reimbursement). The Companys Security Fee Reimbursement
was $315 million (net of payments to independent regional affiliates and AMR Eagle) and is included

in U.S. government grant in the accompanying consolidated statements of operations. On September 22, 2001, President Bush signed into law the Air Transportation Safety and System
Stabilization Act (the Stabilization Act). The Company received a total of $837 million from the
U.S. government under the airline compensation provisions of the Stabilization Act. For the year
ended December 31, 2002, the Company recognized approximately $10 million as a result of the
Stabilization Act, which is included in U.S. government grant on the accompanying consolidated
statements of operations. 46




---



##### Table of Contents



2. Special charges and U.S. government grant (Continued) Other In addition, the Stabilization Act provides for compensation to individual claimants who were
physically injured or killed as a result of the Terrorist Attacks. Furthermore, the Stabilization
Act provides that, notwithstanding any other provision of law, liability for all claims, whether
compensatory or punitive, arising from the terrorist-related events of September 11, 2001 against
any air carrier shall not exceed the liability coverage maintained by the air carrier. Based upon
estimates provided by the Companys insurance providers, the Company recorded a liability of
approximately $2.3 billion for claims arising from the Terrorist Attacks, after considering the
liability protections provided for by the Stabilization Act. In 2004, this liability was adjusted
to $1.9 billion based on revised estimates from the insurance carriers, due primarily to the
expiration of certain statutes of limitations. The Company has also recorded a liability of
approximately $500 million related to flight 587, which crashed on November 12, 2001. The Company
has recorded a receivable for all of these amounts, which the Company expects to recover from its
insurance carriers as claims are resolved. These insurance receivables and liabilities are
classified as Other assets and Other liabilities and deferred credits on the accompanying
consolidated balance sheets, and are based on reserves established by the Companys insurance
carriers. These estimates may be revised as additional information becomes available concerning
the expected claims. One of the Companys insurance carriers has entered liquidation. The carrier
provides approximately five percent of the Companys coverage related to the Terrorist Attacks and
flight 587, as well as other covered items. This results in approximately $80 million in
receivables, net of reserves, from the insurance carrier as of December 31, 2004. The Company
expects to recover the net receivable via the liquidation process or other means available. 3. Investments Short-term investments consisted of (in millions): December 31,2004
    
    
    2003Overnight investments and time deposits
    
    $
    222
    
    
    $
    716Corporate and bank notes
    
    
    2,214
    
    
    
    1,245U. S. government agency notes
    
    
    212
    
    
    
    496U. S. government agency mortgages
    
    
    115
    
    
    
    17Asset backed securities
    
    
    24
    
    
    
    $
    2,787
    
    
    $
    2,474 Short-term investments at December 31, 2004, by contractual maturity included (in millions): Due in one year or less
    
    $
    1,106Due between one year and three years
    
    
    1,566Due after three years
    
    
    115$
    2,787
 All short-term investments are classified as available-for-sale and stated at fair value.
Unrealized gains and losses, net of deferred taxes, are reflected as a component of Accumulated
other comprehensive loss. 47




---



##### Table of Contents



3. Investments (Continued) During 2003, the Company sold its interests in Worldspan, a computer reservations company, and
Hotwire, a discount travel website. The Company received $180 million in cash and a $39 million
promissory note for its interest in Worldspan. It received $84 million in cash, $80 million of
which was recognized as a gain, for its interest in Hotwire. In addition, during 2003, the Company
sold a portion of its interest in Orbitz, a travel planning website, in connection with an Orbitz
initial public offering and a secondary offering, resulting in total proceeds of $65 million, and a
gain of $70 million. Excluded from this gain are certain contingent payments that will be recorded
when and if received. The gains on the sale of the Companys interests in Hotwire and Orbitz are
included in Miscellaneous-net in the accompanying consolidated statement of operations. In 2004, the Company sold its remaining interest in Orbitz resulting in total proceeds of $185
million and a gain of $146 million, which is included in Miscellaneous-net in the accompanying
consolidated statement of operations. 4. Commitments, Contingencies and Guarantees As of December 31, 2004, the Company had commitments to acquire two Boeing 777-200ERs in 2006 and
an aggregate of 47 Boeing 737-800s and seven Boeing 777-200ERs in 2013 through 2016. Future
payments for all aircraft, including the estimated amounts for price escalation, will approximate
$101 million in 2006 and an aggregate of approximately $3.0 billion in 2011 through 2016. The
Company has backstop financing for all of its aircraft deliveries in 2006. American has granted Boeing a security interest in Americans purchase deposits with Boeing. These
purchase deposits totaled $277 million as of December 31, 2004 and 2003. The Company has contracts related to facility construction or improvement projects, primarily at
airport locations. The contractual obligations related to these projects totaled approximately $462
million as of December 31, 2004. The Company expects to make payments related to these projects as
follows: $234 million in 2005, $153 million in 2006, $68 million in 2007 and $7 million in 2008. In
addition, the Company has an information technology support related contract that requires minimum
annual payments of $152 million through 2013. American has capacity purchase agreements with two regional airlines, Chautauqua Airlines, Inc.
(Chautauqua) and Trans States Airlines, Inc. (collectively the American Connection carriers) to
provide Embraer EMB-140/145 regional jet services to certain markets under the brand American
Connection. Under these arrangements, the Company pays the American Connection carriers a fee per
block hour to operate the aircraft. The block hour fees are designed to cover the American
Connection carriers fully allocated costs plus a margin. Assumptions for certain costs such as
fuel, landing fees, insurance, and aircraft ownership are trued up to actual values on a pass
through basis. In consideration for these payments, the Company retains all passenger and other
revenues resulting from the operation of the American Connection regional jets. Minimum payments
under the contracts are $96 million in 2005, $70 million in 2006, $71 million in 2007, $72 million
in 2008 and $20 million in 2009. However, based on expected utilization, the Company expects to
make payments of $174 million in 2005, $177 million in 2006, $179 million in 2007, $181 million in
2008, $184 million in 2009 and $721 million in 2010 and beyond. In addition, if the Company
terminates the Chautauqua contract without cause, Chautauqua has the right to put its 15 Embraer
aircraft to the Company. If this were to happen, the Company would take possession of the aircraft
and become liable for lease obligations totaling approximately $21 million per year with lease
expirations in 2018 and 2019. The Company is a party to many routine contracts in which it provides general indemnities in the
normal course of business to third parties for various risks. The Company is not able to estimate
the potential amount of any liability resulting from the indemnities. These indemnities are
discussed in the following paragraphs. 48




---



##### Table of Contents



4. Commitments, Contingencies and Guarantees (Continued) The Companys loan agreements and other London Interbank Offered Rate (LIBOR)-based financing
transactions (including certain leveraged aircraft leases) generally obligate the Company to
reimburse the applicable lender for incremental increased costs due to a change in law that imposes
(i) any reserve or special deposit requirement against assets of, deposits with, or credit extended
by such lender related to the loan, (ii) any tax, duty, or other charge with respect to the loan
(except standard income tax) or (iii) capital adequacy requirements. In addition, the Companys
loan agreements, derivative contracts and other financing arrangements typically contain a
withholding tax provision that requires the Company to pay additional amounts to the applicable
lender or other financing party, generally if withholding taxes are imposed on such lender or other
financing party as a result of a change in the applicable tax law. These increased cost and withholding tax provisions continue for the entire term of the applicable
transaction, and there is no limitation on the maximum additional amounts the Company could be
obligated to pay under such provisions. Any failure to pay amounts due under such provisions
generally would trigger an event of default, and, in a secured financing transaction, would entitle
the lender to foreclose upon the collateral to realize the amount due. In certain transactions, including certain aircraft financing leases and loans and derivative
transactions, the lessors, lenders and/or other parties have rights to terminate the transaction
based on changes in foreign tax law, illegality or certain other events or circumstances. In such
a case, the Company may be required to make a lump sum payment to terminate the relevant
transaction. In its aircraft financing agreements, the Company generally indemnifies the financing parties,
trustees acting on their behalf and other relevant parties against liabilities (including certain
taxes) resulting from the financing, manufacture, design, ownership, operation and maintenance of
the aircraft regardless of whether these liabilities (or taxes) relate to the negligence of the
indemnified parties. The Company has general indemnity clauses in many of its airport and other real estate leases where
the Company as lessee indemnifies the lessor (and related parties) against liabilities related to
the Companys use of the leased property. Generally, these indemnifications cover liabilities
resulting from the negligence of the indemnified parties, but not liabilities resulting from the
gross negligence or willful misconduct of the indemnified parties. In addition, the Company
provides environmental indemnities in many of these leases for contamination related to the
Companys use of the leased property. Under certain contracts with third parties, the Company indemnifies the third party against legal
liability arising out of an action by the third party, or certain other parties. The terms of these
contracts vary and the potential exposure under these indemnities cannot be determined. Generally,
the Company has liability insurance protecting the Company for its obligations it has undertaken
under these indemnities. American has event risk covenants in approximately $1.9 billion of indebtedness and operating
leases as of December 31, 2004. These covenants permit the holders of such obligations to receive
a higher rate of return (between 100 and 650 basis points above the stated rate) if a designated
event, as defined, should occur and the credit ratings of such obligations are downgraded below
certain levels within a certain period of time. No designated event, as defined, has occurred as
of December 31, 2004. The Company is subject to environmental issues at various airport and non-airport locations for
which it has accrued $61 million and $72 million, which are included in Accrued liabilities on the
accompanying consolidated balance sheets, at December 31, 2004 and 2003, respectively. Management
believes, after considering a number of factors, that the ultimate disposition of these
environmental issues is not expected to materially affect the Companys consolidated financial
position, results of operations or cash flows. Amounts recorded for environmental issues are based
on the Companys current assessments of the ultimate outcome and, accordingly, could increase or
decrease as these assessments change. The Company is involved in certain claims and litigation related to its operations. In the opinion
of management, liabilities, if any, arising from these claims and litigation would not have a
material adverse effect on the Companys consolidated financial position, results of operations, or
cash flows, after consideration of available insurance. 49




---



##### Table of Contents



5. Leases American leases various types of equipment and property, primarily aircraft and airport facilities.
The future minimum lease payments required under capital leases, together with the present value
of such payments, and future minimum lease payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2004, were
(in millions): Capital
    
    
    OperatingYear Ending December 31,
    
    Leases
    
    
    Leases2005
    
    $
    211
    
    
    $
    1,0662006
    
    
    233
    
    
    
    9992007
    
    
    187
    
    
    
    9822008
    
    
    225
    
    
    
    9312009
    
    
    174
    
    
    
    8382010 and subsequent
    
    
    950
    
    
    
    7,5251,980
    
    
    $
    12,341
    (1)Less amount representing interest
    
    
    815Present value of net minimum lease payments
    
    $
    1,165
   (1)
    
    As of December 31, 2004, included in Accrued liabilities and Other liabilities and
deferred credits on the accompanying consolidated balance sheet is approximately $1.3
billion relating to rent expense being recorded in advance of future operating lease
payments. At December 31, 2004, the Company had 231 jet aircraft under operating leases and 94 jet
aircraft capital leases. The aircraft leases can generally be renewed at rates based on fair market
value at the end of the lease term for one to five years. Some aircraft leases have purchase
options at or near the end of the lease term at fair market value, but generally not to exceed a
stated percentage of the defined lessors cost of the aircraft or a predetermined fixed amount. In 2003, the Company reached concessionary agreements with certain lessors. Certain of the
agreements provide that the Companys obligations under the related lease revert to the original
terms if certain events occur prior to December 31, 2005, including: (i) an event of default under
the related lease (which generally occurs only if a payment default occurs), (ii) an event of loss
with respect to the related aircraft, (iii) rejection by the Company of the lease under the
provisions of Chapter 11 of the U.S. Bankruptcy Code or (iv) the Companys filing for bankruptcy
under Chapter 7 of the U.S. Bankruptcy Code. If any one of these events were to occur, the Company
would be responsible for approximately $72 million in additional operating lease payments and $59
million in additional payments related to capital leases as of December 31, 2004. This amount will
increase to approximately $119 million in operating lease payments and $111 million in payments
related to capital leases prior to the expiration of the provision on December 31, 2005. These
amounts are being accounted for as contingent rentals and will only be recognized if they become
payable.   50




---



##### Table of Contents



5. Leases (Continued) Special facility revenue bonds have been issued by certain municipalities primarily to improve
airport facilities (and purchase equipment) that are leased by American and accounted for as
operating leases. Approximately $1.7 billion of these bonds (with total future payments of
approximately $4.6 billion as of December 31, 2004) are guaranteed by American, AMR, or both.
Approximately $532 million of these special facility revenue bonds contain mandatory tender
provisions that require American to make operating lease payments sufficient to repurchase the
bonds at various times: $104 million in 2005, $28 million in 2006, $100 million in 2007, $188
million in 2008 and $112 million in 2014. Although American has the right to remarket the bonds,
there can be no assurance that these bonds will be successfully remarketed. Any payments to redeem
or purchase bonds that are not remarketed would generally reduce existing rent leveling accruals or
be considered prepaid facility rentals and would reduce future operating lease commitments. The
special facility revenue bonds that contain mandatory tender provisions are included in the table
above at their ultimate maturity date rather than their mandatory tender provision date.
Approximately $112 million of special facility revenue bonds with mandatory tender provisions were
successfully remarketed in 2004. Rent expense, excluding landing fees, was $1.3 billion, $1.4 billion and $1.5 billion in 2004, 2003
and 2002, respectively. American has determined that it holds a significant variable interest in, but is not the primary
beneficiary of, certain trusts that are the lessors under 87 of its aircraft operating leases.
These leases contain a fixed price purchase option, which allows American to purchase the aircraft
at a predetermined price on a specified date. However, American does not guarantee the residual
value of the aircraft. As of December 31, 2004, future lease payments required under these leases
totaled $2.9 billion. 6. Indebtedness Long-term debt consisted of (in millions): December 31,2004
    
    
    2003Secured variable and fixed rate indebtedness due through 2021
(effective rates from 2.03% - 9.16% at December 31, 2004)
    
    $
    3,732
    
    
    $
    3,981Enhanced equipment trust certificates due through 2011
(rates from 2.14% - 9.09% at December 31, 2004)
    
    
    3,707
    
    
    
    3,7476.0% - 8.5% special facility revenue bonds due through 2036
    
    
    946
    
    
    
    947Credit facility agreement due through 2010
(temporary average rate of 9.15% at December 31, 2004)
    
    
    850
    
    
    
    Credit facility agreement due in 2005
    
    
    
    
    
    
    834Other
    
    
    27
    
    
    
    299,262
    
    
    
    9,538Less current maturities
    
    
    475
    
    
    
    465Long-term debt, less current maturities
    
    $
    8,787
    
    
    $
    9,073
 Maturities of long-term debt (including sinking fund requirements) for the next five years are:
2005  $475 million; 2006  $1.0 billion; 2007  $984 million; 2008  $416 million; 2009  $1.4
billion. 51




---



##### Table of Contents



6. Indebtedness (Continued) On December 17, 2004, American refinanced its $834 million bank credit facility, which was
scheduled to mature in December 2005. The total amount of the new credit facility is $850 million.
The new credit facility consists of a $600 million senior secured revolving credit facility and a
$250 million term loan facility (the Revolving Facility and the Term Loan Facility, respectively,
and collectively, the Credit Facility). Advances under either facility can be designated, at
Americans election, as LIBOR rate advances or base rate advances. Interest accrues at the LIBOR
rate or base rate, as applicable, plus, in either case, the applicable margin. The applicable
margin with respect to the Revolving Facility can range from 3.25 percent to 5.25 percent per
annum, in the case of LIBOR advances, and from 2.25 percent to 4.25 percent per annum, in the case
of base rate advances, depending upon the senior secured debt rating of the Credit Facility. As of
December 31, 2004, the Credit Facility was fully drawn and had a temporary average interest rate of
9.15 percent as required by the debt agreement. The interest rate was reset on January 14, 2005,
resulting in a new average interest rate of 7.75 percent. The interest rate will be reset at least
every six months based on the current LIBOR rate election. The Revolving Facility matures on June 17, 2009. Commitments under the Revolving Facility will be
reduced on a quarterly basis over a period of 4.5 years, with $15 million (or 2.5 percent) of the
commitments being reduced in each of the first twelve quarters and the remainder due at maturity.
Principal amounts repaid under the Revolving Facility may be re-borrowed, up to the then-available
aggregate amount of the commitments. The Term Loan Facility matures on December 17, 2010. The Term Loan Facility will amortize on a
quarterly basis over a period of six years, with less than $1 million (or 0.25 percent) of the
principal payable quarterly in each of the first 20 quarters and the remainder due at maturity.
Principal amounts repaid under the Term Loan Facility may not be re-borrowed. The Credit Facility is secured by the same aircraft collateral as were pledged to secure the prior
bank credit facility, as well as an additional 72 aircraft (consisting of McDonnell Douglas MD-80,
Boeing 757-200 and Boeing 767-300 model aircraft). The Credit Facility includes a covenant that
requires periodic appraisal of the aircraft at current market value and requires American to pledge
more aircraft or cash collateral if the loan amount is more than 50 percent of the appraised value
(after giving effect to sublimits for specified categories of aircraft). In addition, the Credit
Facility is secured by all of Americans existing route authorities between the United States and
Tokyo, Japan, together with certain slots, gates and facilities that support the operation of such
routes. Americans obligations under the Credit Facility are guaranteed by AMR, and AMRs guaranty
is secured by a pledge of all the outstanding shares of common stock of American. The Credit Facility contains a covenant requiring American to maintain, as defined, unrestricted
cash, unencumbered short term investments and amounts available for drawing under committed
revolving credit facilities of not less than $1.5 billion for each quarterly period through
September 30, 2005 and $1.25 billion for each quarterly period thereafter. In addition, the Credit
Facility contains a covenant requiring AMR to maintain a ratio of cash flow (defined as
consolidated net income, before interest expense (less capitalized interest), income taxes,
depreciation and amortization and rentals, adjusted for certain gains or losses and non-cash items)
to fixed charges (comprising interest expense (less capitalized interest) and rentals) of at least
the amount specified below for each period of four consecutive quarters ending on the dates set
forth below: Four Quarter Period Ending
    
    Cash Flow Coverage RatioDecember 31, 2004
    
    0.90:1.00March 31, 2005
    
    0.85:1.00June 30, 2005
    
    0.85:1.00September 30, 2005
    
    0.90:1.00December 31, 2005
    
    1.10:1.00March 31, 2006
    
    1.20:1.00June 30, 2006
    
    1.25:1.00September 30, 2006
    
    1.30:1.00December 31, 2006
    
    1.30:1.00March 31, 2007
    
    1.35:1.00June 30, 2007
    
    1.40:1.00September 30, 2007
    
    1.40:1.00December 31, 2007
    
    1.40:1.00March 31, 2008 (and each fiscal quarter
thereafter)
    
    1.50:1.00
 52




---



##### Table of Contents



6. Indebtedness (Continued) The Credit Facility also contains customary events of default, including cross defaults to other
obligations and certain change of control events. Upon the occurrence of an event of default, the
outstanding obligations under the Credit Facility may be accelerated and become due and payable
immediately. American and AMR were in compliance with these covenants as of December 31, 2004. In February 2004, American issued $180 million of Fixed Rate Secured Notes due 2009, which bear
interest at 7.25 percent. As of December 31, 2004, these notes were secured by certain spare parts
and cash collateral. In 2004 AMR issued $324 million principal amount of its 4.50 percent senior convertible notes due
2024 (the 4.50 Notes) and in 2003 AMR issued $300 million principal amount of its 4.25 percent
senior convertible notes due 2023 (the 4.25 Notes). Each note is convertible into AMR common stock
at a conversion rate of 45.3515 shares for the 4.50 Notes and 57.61 shares for the 4.25 Notes, per
$1,000 principal amount of notes (which represents an equivalent conversion price of $22.05 per
share for the 4.50 Notes and $17.36 per share for the 4.25 Notes), subject to adjustment in certain
circumstances. The notes are convertible under certain circumstances, including if (i) the closing
sale price of AMRs common stock reaches a certain level for a specified period of time, (ii) the
trading price of the notes as a percentage of the closing sale price of AMRs common stock falls
below a certain level for a specified period of time, (iii) AMR calls the notes for redemption, or
(iv) certain corporate transactions occur. Holders of the notes may require AMR to repurchase all
or any portion of the 4.50 Notes on February 15, 2009, 2014 and 2019 and 4.25 Notes on September
23, 2008, 2013 and 2018 at a purchase price equal to the principal amount of the notes being
purchased plus accrued and unpaid interest to the date of purchase. AMR may pay the purchase price
in cash, common stock or a combination of cash and common stock. After February 15, 2009 and
September 23, 2008, AMR may redeem all or any portion of the 4.50 Notes and 4.25 Notes,
respectively, for cash at a price equal to the principal amount of the notes being redeemed plus
accrued and unpaid interest as of the redemption date. These notes are guaranteed by American. If
the holders of the 4.50 Notes or the 4.25 Notes require AMR to repurchase all or any portion of the
notes on the repurchase dates, it is AMRs present intention to satisfy the requirement in cash. In 2003, American transferred its two headquarters buildings located in Fort Worth, Texas to AA
Real Estate Holding L.P., a wholly owned consolidated subsidiary of American. This entity leased
the buildings back to American pursuant to a triple-net lease, and used the buildings and the lease
as security for a loan consisting of four notes, in the amount of $98 million (net of discount of
$2 million), which is reflected as debt in the accompanying consolidated balance sheet of the
Company. Each note corresponds to a separate class of AA/Ft. Worth HQ Finance Trust Lease Revenue
Commercial Mortgage-Backed Pass-Through Certificates, Series 2003 (the Certificates) issued by the
AA/Ft. Worth HQ Finance Trust, which is not a subsidiary of American, in a private placement
pursuant to Rule 144A under the Securities Act of 1933. The Certificates and corresponding notes
have an average effective interest rate of 7.2 percent and a final maturity in 2010. In 2002, the Regional Airports Improvement Corporation and the New York City Industrial Development
Agency issued facilities sublease revenue bonds at the Los Angeles International Airport and John
F. Kennedy International Airport, respectively, to provide reimbursement to American for certain
facility construction and other related costs. The Company has recorded the total amount of the
issuances of $759 million (net of $38 million discount) as long-term debt on the accompanying
consolidated balance sheet as of December 31, 2002. These obligations bear interest at fixed
rates, with an average effective rate of 8.5 percent, and mature over various periods of time, with
a final maturity in 2028. 53




---



##### Table of Contents



6. Indebtedness (Continued) Certain debt is secured by aircraft, engines, equipment and other assets having a net book value of
approximately $11.4 billion as of December 31, 2004. As of December 31, 2004, AMR has issued guarantees covering approximately $928 million of
Americans tax-exempt bond debt and American has issued guarantees covering approximately $1.3
billion of AMRs unsecured debt. In addition, as of December 31, 2004, AMR and American have
issued guarantees covering approximately $466 million of AMR Eagles secured debt. Cash payments for interest, net of capitalized interest, were $582 million, $530 million and $467
million for 2004, 2003 and 2002, respectively. 7. Financial Instruments and Risk Management As part of the Companys risk management program, American uses a variety of financial instruments,
including fuel option and collar contracts and interest rate swaps. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company is exposed to credit losses in the event of non-performance by counterparties to these
financial instruments, but it does not expect any of the counterparties to fail to meet its
obligations. The credit exposure related to these financial instruments is represented by the fair
value of contracts with a positive fair value at the reporting date, reduced by the effects of
master netting agreements. To manage credit risks, the Company selects counterparties based on
credit ratings, limits its exposure to a single counterparty under defined guidelines, and monitors
the market position of the program and its relative market position with each counterparty. The
Company also maintains industry-standard security agreements with a number of its counterparties
which may require the Company or the counterparty to post collateral if the value of selected
instruments exceed specified mark-to-market thresholds or upon certain changes in credit ratings.
The Companys outstanding posted collateral as of December 31, 2004 is included in restricted cash
and short-term investments and is not material. A deterioration of the Companys liquidity position
may negatively affect the Companys ability to hedge fuel in the future. Fuel Price Risk Management American enters into jet fuel, heating oil and crude oil hedging contracts to dampen the impact of
the volatility in jet fuel prices. These instruments generally have maturities of up to 36 months.
The Company accounts for its fuel option contracts as cash flow hedges and records the fair value
of its fuel hedging contracts in Other current assets and Accumulated other comprehensive loss on
the accompanying consolidated balance sheets. The Company determines the ineffective portion of its
fuel hedge contracts by comparing the cumulative change in the total value of the fuel hedge
contract, or group of fuel hedge contracts, to the cumulative change in the forecasted value of the
jet fuel being hedged. If the total cumulative change in value of the fuel hedge contract more
than offsets the total cumulative change in the forecasted value of the jet fuel being hedged, the
difference is considered ineffective and is immediately recognized as a component of Aircraft fuel
expense. Effective gains or losses on fuel hedging contracts are deferred in Accumulated other
comprehensive loss and are recognized in earnings as a component of Aircraft fuel expense when the
underlying jet fuel being hedged is used. The Company monitors the commodities used in its fuel hedging programs to determine that these
commodities are expected to be highly effective in offsetting changes in its forecasted jet fuel
prices. In doing so, the Company uses a regression model to determine the correlation of the
percentage change in prices of the commodities used to hedge jet fuel (e.g., WTI Crude oil and
NYMEX Heating oil) to the percentage change in prices of jet fuel over a 36 month period. The fuel
hedge contracts are deemed to be highly effective if this correlation is within 80 percent to 125
percent. 54




---



##### Table of Contents



7. Financial Instruments and Risk Management (Continued) For the years ended December 31, 2004, 2003 and 2002, the Company recognized net gains of
approximately $91 million, $139 million and $4 million, respectively, as a component of fuel
expense on the accompanying consolidated statements of operations related to its fuel hedging
agreements. The expense related to ineffectiveness included in the net gains recognized in 2004 and
2003 was insignificant. The expense related to ineffectiveness included in the net gain recognized
in 2002 was $12 million. The fair value of the Companys fuel hedging agreements at December 31,
2004 and 2003, representing the amount the Company would receive to terminate the agreements,
totaled $51 million and $54 million, respectively. Interest Rate Risk Management American uses interest rate swap contracts to effectively convert a portion of its fixed-rate
capital lease obligations to floating-rate obligations. The Company accounts for its interest rate
swap contracts as fair value hedges whereby the fair value of the related interest rate swap
agreement is reflected in Other assets with the corresponding liability being recorded as a
component of Obligations Under Capital Leases on the accompanying consolidated balance sheets. The
Company has no ineffectiveness with regard to its interest rate swap contracts. The fair value of
the Companys interest rate swap agreements related to capital lease obligations, representing the
amount the Company would receive if the agreements were terminated at December 31, 2004 and 2003,
was approximately $4 million and $9 million, respectively. Foreign Exchange Risk Management The Company has entered into Japanese yen currency exchange agreements to hedge certain yen-based
capital lease obligations (effectively converting these obligations into dollar-based obligations).
The Company accounts for its Japanese yen currency exchange agreements as cash flow hedges whereby
the fair value of the related Japanese yen currency exchange agreements is reflected in Other
liabilities and deferred credits and Accumulated other comprehensive loss on the accompanying
consolidated balance sheets. The Company has no ineffectiveness with regard to its Japanese yen
currency exchange agreements. The fair values of the Companys yen currency exchange agreements,
representing the amount the Company would pay to terminate the agreements, were $23 million and $33
million as of December 31, 2004 and 2003, respectively. The exchange rates on the Japanese yen
agreements range from 66.5 to 99.65 yen per U.S. dollar. Fair Values of Financial Instruments The fair values of the Companys long-term debt were estimated using quoted market prices where
available. For long-term debt not actively traded, fair values were estimated using discounted
cash flow analyses, based on the Companys current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amounts and estimated fair values of the Companys long-term
debt, including current maturities, were (in millions): December 31,2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueSecured variable and fixed rate
indebtedness
    
    $
    3,732
    
    
    $
    3,456
    
    
    $
    3,981
    
    
    $
    3,780Enhanced equipment trust
certificates
    
    
    3,707
    
    
    
    3,578
    
    
    
    3,747
    
    
    
    3,4546.0% - 8.5% special facility revenue
bonds
    
    
    946
    
    
    
    797
    
    
    
    947
    
    
    
    797Credit facility agreement
    
    
    850
    
    
    
    852
    
    
    
    834
    
    
    
    834Other
    
    
    27
    
    
    
    27
    
    
    
    29
    
    
    
    29$
    9,262
    
    
    $
    8,710
    
    
    $
    9,538
    
    
    $
    8,894
 55




---



##### Table of Contents



8. Income Taxes American, as a wholly-owned subsidiary, is included in AMRs consolidated tax return. Under the
terms of Americans tax sharing agreement with AMR, Americans provision for income taxes has been
computed on the basis that American files separate consolidated income tax returns with its
subsidiaries. The significant components of the income tax benefit for loss before cumulative effect of
accounting change were (in millions): Year Ended December 31,2004
    
    
    2003
    
    
    2002Current
    
    $
    
    
    
    $
    (91
    )
    
    $
    (804
    )Deferred
    
    
    
    
    
    
    
    
    
    
    (259
    )$
    
    
    
    $
    (91
    )
    
    $
    (1,063
    )
 The income tax provision/(benefit) includes a federal income tax provision/(benefit) of $(4)
million, $(92) million and $(1,010) million and state and other income tax provision/(benefit) of
$4 million, $1 million and $(53) million for the years ended December 31, 2004, 2003 and 2002,
respectively. The income tax benefit for loss before cumulative effect of accounting change differed from amounts
computed at the statutory federal income tax rate as follows (in millions): Year Ended December 31,2004
    
    
    2003
    
    
    2002Statutory income tax benefit
    
    $
    (287
    )
    
    $
    (493
    )
    
    $
    (1,284
    )State income tax benefit, net of federal tax effect
    
    
    (13
    )
    
    
    (26
    )
    
    
    (98
    )IRS audit settlement
    
    
    
    
    
    
    (91
    )
    
    
    Meal expense
    
    
    8
    
    
    
    10
    
    
    
    14Deferred tax assets not benefited
    
    
    286
    
    
    
    502
    
    
    
    268Expiration of foreign tax credits
    
    
    
    
    
    
    6
    
    
    
    28Other, net
    
    
    6
    
    
    
    1
    
    
    
    9Income tax benefit
    
    $
    
    
    
    $
    (91
    )
    
    $
    (1,063
    )
 The change in valuation allowance in 2004 and 2003 related primarily to net operating loss
carryforwards. The change in valuation allowance in 2002 related to the Companys uncertainty
regarding the realization of the foreign tax credit carryforwards and state net operating losses. Additionally, as of December 31, 2004 and 2003, the recording of other comprehensive income items,
primarily the minimum pension liability, resulted in a decrease to the deferred tax asset and the
related valuation allowance. As of December 31, 2002, the recording of other comprehensive income
items, primarily the minimum pension liability, resulted in a net deferred tax asset. As a result,
a valuation allowance was recorded as a component of Accumulated other comprehensive income. The
total increase in the valuation allowance was $243 million, $318 million, and $690 million in 2004,
2003, and 2002, respectively. The Company provides a valuation allowance for deferred tax assets when it is more likely than not
that some portion, or all of its deferred tax assets, will not be realized. In assessing the
realizability of the deferred tax assets, management considers whether it is more likely than not
that some portion, or all of the deferred tax assets, will be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income (including reversals
of deferred tax liabilities) during the periods in which those temporary differences will become
deductible. 56




---



##### Table of Contents



8. Income Taxes (Continued) The components of Americans deferred tax assets and liabilities were (in millions): December 31,2004
    
    
    2003Deferred tax assets:Postretirement benefits other than pensions
    
    $
    1,083
    
    
    $
    1,104Rent expense
    
    
    603
    
    
    
    782Alternative minimum tax credit carryforwards
    
    
    550
    
    
    
    554Operating loss carryforwards
    
    
    1,721
    
    
    
    949Frequent flyer obligation
    
    
    266
    
    
    
    482Gains from lease transactions
    
    
    194
    
    
    
    219Pension
    
    
    535
    
    
    
    530Other
    
    
    497
    
    
    
    607Total deferred tax assets
    
    
    5,449
    
    
    
    5,227Valuation allowance
    
    
    (1,255
    )
    
    
    (1,012
    )Net deferred tax assets
    
    
    4,194
    
    
    
    4,215Deferred tax liabilities:Accelerated depreciation and amortization
    
    
    (3,849
    )
    
    
    (3,895
    )Other
    
    
    (345
    )
    
    
    (320
    )Total deferred tax liabilities
    
    
    (4,194
    )
    
    
    (4,215
    )Net deferred tax liability
    
    $
    
    
    
    $
    
 At December 31, 2004, the Company had available for federal income tax purposes an alternative
minimum tax credit carryforward of approximately $550 million, which is available for an indefinite
period, and federal net operating losses of approximately $4.5 billion for regular tax purposes,
which will expire, if unused, beginning in 2022. The Company had available for state income tax
purposes net operating losses of $3.1 billion, which expire, if unused, in years 2006 through 2024. Cash payments (refunds) for income taxes were $1 million, $(502) million, and $(647) million for
2004, 2003, and 2002, respectively. The amounts received in 2003 and 2002 relate primarily to net
operating loss carryback claims, including a carryback claim filed as a result of a provision in
Congress economic stimulus package that changes the period for carrybacks of net operating losses
(NOLs). This change allows the Company to carry back 2001 and 2002 NOLs for five years, rather than
two years under the previous law, allowing the Company to more quickly recover its NOLs. 9. Stock Awards and Options The Company participates in AMRs 1998 and 1988 Long Term Incentive Plans, as amended,
(collectively, the LTIP Plans) whereby officers and key employees of AMR and its subsidiaries may
be granted stock options, stock appreciation rights, restricted stock, deferred stock, stock
purchase rights, other stock-based awards and/or performance-related awards, including cash
bonuses. The Company also participates in AMRs Pilot Stock Option Plan (The Pilot Plan) and its
2003 Employee Stock Incentive Plan (the 2003 Plan). The Pilot Plan granted members of the Allied
Pilots Association the option to purchase 11.5 million shares of AMR stock at $41.69 per share
(after giving effect to the 1998 stock-split), $5 less than the average fair market value of the
stock on the date of grant, May 5, 1997. These shares were exercisable immediately. In conjunction
with the Sabre spin-off, the exercise price of The Pilot Plan options was adjusted to $17.59 per
share. Under the 2003 Plan, employees of American may be granted stock options, restricted stock
and deferred stock. In 2004, 2003 and 2002, the total charge for stock compensation expense included in wages, salaries
and benefits expense, primarily related to the Companys participation in AMRs performance share
plan, was $20 million, $19 million and $8 million, respectively. No compensation expense was
recognized for stock option grants under the LTIP Plans or the 2003 Plan, since the exercise price
was equal to the fair market value of the underlying stock on the date of grant. 57




---



##### Table of Contents



10. Retirement Benefits All employees of the Company may participate in pension plans if they meet the plans eligibility
requirements. The defined benefit plans provide benefits for participating employees based on
years of service and average compensation for a specified period of time before retirement. The
Company uses a December 31 measurement date for all of its defined benefit plans. Americans pilots
also participate in a defined contribution plan for which Company contributions are determined as a
percentage of participant compensation. Effective January 1, 2001, American established a defined contribution plan for non-contract
employees in which the Company will match the employees before-tax contribution on a
dollar-for-dollar basis, up to 5.5 percent of their pensionable pay. During 2000, American
provided a one-time election for current non-contract employees to remain in the defined benefit
plan or discontinue accruing future credited service in the defined benefit plan as of January 1,
2001 and begin participation in the defined contribution plan. Effective January 1, 2002, all new
non-contract employees of the Company become members of the defined contribution plan. In addition to pension benefits, other postretirement benefits, including certain health care and
life insurance benefits (which provide secondary coverage to Medicare), are provided to retired
employees. The amount of health care benefits is limited to lifetime maximums as outlined in the
plan. Substantially all regular employees of American and employees of certain other subsidiaries
may become eligible for these benefits if they satisfy eligibility requirements during their
working lives. Certain employee groups make contributions toward funding a portion of their retiree health care
benefits during their working lives. The Company funds benefits as incurred and makes
contributions to match employee prefunding. In the second quarter of 2003, as a result of the Labor Agreements and Management Reductions
discussed in Note 2, the Company remeasured its defined benefit pension plans. The significant
actuarial assumptions used for the remeasurement were the same as those used as of December 31,
2002, except for the discount rate and salary scale, which were lowered to 6.50 percent, and 2.78
percent through 2008 and 3.78 percent thereafter, respectively. In addition, assumptions with
respect to interest rates used to discount lump sum benefit payments available under certain plans
were updated. As a result of workforce reductions related to the Labor Agreements and Management
Reductions, the Company recognized a curtailment loss of $46 million in 2003 related to its defined
benefit pension plans, which is included in Special charges in the accompanying consolidated
statements of operations. Net periodic benefit cost for defined benefit pension plans in 2003
includes eight months of expense calculated based upon the revised measurement. 58




---



##### Table of Contents



10. Retirement Benefits (Continued) The following table provides a reconciliation of the changes in the defined benefit plans benefit
obligations and fair value of assets for the years ended December 31, 2004 and 2003, and a
statement of funded status as of December 31, 2004 and 2003 (in millions): Pension Benefits
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Reconciliation of benefit obligationObligation at January 1
    
    $
    8,894
    
    
    $
    8,757
    
    
    $
    3,263
    
    
    $
    3,299Service cost
    
    
    358
    
    
    
    370
    
    
    
    75
    
    
    
    85Interest cost
    
    
    567
    
    
    
    569
    
    
    
    202
    
    
    
    218Actuarial (gain) loss
    
    
    647
    
    
    
    (96
    )
    
    
    (81
    )
    
    
    (138
    )Plan amendments
    
    
    27
    
    
    
    (90
    )
    
    
    
    
    
    
    (58
    )Benefit payments
    
    
    (471
    )
    
    
    (554
    )
    
    
    (156
    )
    
    
    (143
    )Curtailments
    
    
    
    
    
    
    (60
    )
    
    
    
    
    
    
    Settlements
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    Obligation at December 31
    
    $
    10,022
    
    
    $
    8,894
    
    
    $
    3,303
    
    
    $
    3,263Reconciliation of fair value of plan assetsFair value of plan assets at January 1
    
    $
    6,230
    
    
    $
    5,323
    
    
    $
    120
    
    
    $
    100Actual return on plan assets
    
    
    1,109
    
    
    
    1,268
    
    
    
    18
    
    
    
    25Employer contributions
    
    
    467
    
    
    
    195
    
    
    
    169
    
    
    
    138Benefit payments
    
    
    (471
    )
    
    
    (554
    )
    
    
    (156
    )
    
    
    (143
    )Settlements
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    Fair value of plan assets at December 31
    
    $
    7,335
    
    
    $
    6,230
    
    
    $
    151
    
    
    $
    120Funded statusAccumulated benefit obligation (ABO)
    
    $
    9,158
    
    
    $
    8,209
    
    
    $
    
    
    
    $
    Projected benefit obligation (PBO)
    
    
    10,022
    
    
    
    8,894
    
    
    
    
    
    
    
    Accumulated postretirement benefit
obligation (APBO)
    
    
    
    
    
    
    
    
    
    
    3,303
    
    
    
    3,263Fair value of assets
    
    
    7,335
    
    
    
    6,230
    
    
    
    151
    
    
    
    120Funded status at December 31
    
    
    (2,687
    )
    
    
    (2,664
    )
    
    
    (3,152
    )
    
    
    (3,143
    )Unrecognized loss
    
    
    1,698
    
    
    
    1,649
    
    
    
    311
    
    
    
    407Unrecognized prior service cost
    
    
    186
    
    
    
    173
    
    
    
    (71
    )
    
    
    (81
    )Unrecognized transition asset
    
    
    (2
    )
    
    
    (3
    )
    
    
    
    
    
    
    Net amount recognized
    
    $
    (805
    )
    
    $
    (845
    )
    
    $
    (2,912
    )
    
    $
    (2,817
    )
 As of December 31, 2004 and 2003, the accumulated benefit obligation exceeded the fair value of
plan assets for all of the Companys defined benefit plans. At December 31, 2004 and 2003, pension benefit plan assets of $116 million and $52 million,
respectively, and other benefits plan assets of approximately $149 million and $118 million,
respectively, were invested in shares of mutual funds managed by a subsidiary of AMR. 59




---



##### Table of Contents



10. Retirement Benefits (Continued) The following tables provide the components of net periodic benefit cost for the years ended
December 31, 2004, 2003 and 2002 (in millions): Pension Benefits2004
    
    
    2003
    
    
    2002Components of net periodic benefit costDefined benefit plans:Service cost
    
    $
    358
    
    
    $
    370
    
    
    $
    352Interest cost
    
    
    567
    
    
    
    569
    
    
    
    569Expected return on assets
    
    
    (569
    )
    
    
    (473
    )
    
    
    (501
    )Amortization of:Transition asset
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Prior service cost
    
    
    14
    
    
    
    18
    
    
    
    21Unrecognized net loss
    
    
    58
    
    
    
    106
    
    
    
    49Curtailment loss
    
    
    
    
    
    
    46
    
    
    
    Settlement loss
    
    
    
    
    
    
    
    
    
    
    33Net periodic benefit cost for
defined benefit plans
    
    
    427
    
    
    
    635
    
    
    
    522Defined contribution plans
    
    
    156
    
    
    
    175
    
    
    
    207Total
    
    $
    583
    
    
    $
    810
    
    
    $
    729
 Other Benefits2004
    
    
    2003
    
    
    2002Components of net periodic benefit costService cost
    
    $
    75
    
    
    $
    85
    
    
    $
    77Interest cost
    
    
    202
    
    
    
    218
    
    
    
    207Expected return on assets
    
    
    (11
    )
    
    
    (9
    )
    
    
    (9
    )Amortization of:Prior service cost
    
    
    (10
    )
    
    
    (9
    )
    
    
    (6
    )Unrecognized net loss
    
    
    8
    
    
    
    20
    
    
    
    Net periodic benefit cost
    
    $
    264
    
    
    $
    305
    
    
    $
    269
 The following table provides the amounts recognized in the accompanying consolidated balance sheets
as of December 31, 2004 and 2003 (in millions): Pension Benefits
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Prepaid benefit cost
    
    $
    5
    
    
    $
    3
    
    
    $
    
    
    
    $
    Accrued benefit liability
    
    
    (810
    )
    
    
    (848
    )
    
    
    (2,912
    )
    
    
    (2,817
    )Additional minimum liability
    
    
    (1,021
    )
    
    
    (1,138
    )
    
    
    
    
    
    
    Intangible asset
    
    
    194
    
    
    
    182
    
    
    
    
    
    
    
    Accumulated other
comprehensive loss
    
    
    827
    
    
    
    956
    
    
    
    
    
    
    
    Net amount recognized
    
    $
    (805
    )
    
    $
    (845
    )
    
    $
    (2,912
    )
    
    $
    (2,817
    )
 60




---



##### Table of Contents



10. Retirement Benefits (Continued) Pension Benefits
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Weighted-average
assumptions used to determine benefit obligations as of December 31Discount rate
    
    
    6.00
    %
    
    
    6.25
    %
    
    
    6.00
    %
    
    
    6.25
    %Salary scale (ultimate)
    
    
    3.78
    
    
    
    3.78
    
    
    
    
    
    
    
    
 Pension Benefits
    
    
    Other Benefits2004
    
    
    2003
    
    
    2004
    
    
    2003Weighted-average assumptions used to determine net periodic benefit cost for
  the years ended December 31Discount rate
    
    
    6.25
    %
    
    
    6.57
    %
    
    
    6.25
    %
    
    
    6.57
    %Salary scale (ultimate)
    
    
    3.78
    
    
    
    3.78
    
    
    
    
    
    
    
    Expected return on plan assets
    
    
    9.00
    
    
    
    9.00
    
    
    
    9.00
    
    
    
    9.00
 The Company estimates the long-term rate of return on plan assets will be nine percent, based on
the target asset allocation as of December 31, 2004. Expected returns on longer duration bonds are
based on yields to maturity of the bonds held at year-end. Expected returns on other assets are
based on a combination of long-term historical returns, actual returns on plan assets achieved over
the last ten years, current and expected market conditions, and expected value to be generated
through active management, currency overlay and securities lending programs. The Companys
annualized ten-year rate of return on plan assets, as of December 31, 2004, was approximately 13.3
percent. The Companys pension plan weighted-average asset allocations at December 31, by asset category,
are as follows: 2004
    
    
    2003Long duration bonds
    
    
    38
    %
    
    
    35
    %U.S. stocks
    
    
    31
    
    
    
    32International stocks
    
    
    21
    
    
    
    22Emerging markets stocks and bonds
    
    
    6
    
    
    
    6Alternative (private) investments
    
    
    4
    
    
    
    5Total
    
    
    100
    %
    
    
    100
    %
 The Companys target asset allocation is 40 percent longer duration corporate and U.S.
government/agency bonds, 25 percent U.S. value stocks, 20 percent developed international stocks,
five percent emerging markets stocks and bonds, and ten percent alternative (private) investments.
Each asset class is actively managed and the plans assets have produced returns, net of management
fees, in excess of the expected rate of return over the last ten years. Stocks and emerging market
bonds are used to provide diversification and are expected to generate higher returns over the
long-term than longer duration U.S. bonds. Public stocks are managed using a value investment
approach in order to participate in the returns generated by stocks in the long-term, while
reducing year-over-year volatility. Longer duration U.S. bonds are used to partially hedge the
assets from declines in interest rates. Alternative (private) investments are used to provide
expected returns in excess of the public markets over the long-term. Additionally, the Company
engages currency overlay managers in an attempt to increase returns by protecting non-U.S. dollar
denominated assets from a rise in the relative value of the U.S. dollar. The Company also
participates in securities lending programs in order to generate additional income by loaning plan
assets to borrowers on a fully collateralized basis. 61




---



##### Table of Contents



10. Retirement Benefits (Continued) Pre-65 Individuals
    
    
    Post-65 Individuals2004
    
    
    2003
    
    
    2004
    
    
    2003Assumed
health care trend rates at December 31Health care cost trend rate assumed for
next year
    
    
    4.5
    %
    
    
    5.0
    %
    
    
    10.0
    %
    
    
    11.0
    %Rate to which the cost trend rate is
assumed to decline (the ultimate
trend rate)
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    4.5
    %Year that the rate reaches the ultimate
trend rate
    
    
    2005
    
    
    
    2005
    
    
    
    2010
    
    
    
    2010
 A one percentage point change in the assumed health care cost trend rates would have the following
effects (in millions): One Percent Increase
    
    
    One Percent DecreaseImpact on 2004 service and interest cost
    
    $
    27
    
    
    $
    (25
    )Impact on postretirement benefit obligation
as of December 31, 2004
    
    $
    244
    
    
    $
    (233
    )
 The Company expects to contribute approximately $310 million to its defined benefit pension plans
and $13 million to its postretirement benefit plan in 2005. In addition to making contributions to
its postretirement benefit plan, the Company funds the majority of the benefit payments under this
plan. The Companys estimate of its defined benefit pension plan contributions reflects the
provisions of the Pension Funding Equity Act of 2004. The effect of the Pension Funding Equity Act
was to defer a portion of the minimum required contributions that would have been due for the 2004
and 2005 plan years. The following benefit payments, which reflect expected future service as appropriate, are expected
to be paid: Pension
    
    
    Other2005
    
    $
    460
    
    
    $
    1932006
    
    
    488
    
    
    
    1872007
    
    
    557
    
    
    
    1952008
    
    
    591
    
    
    
    2012009
    
    
    690
    
    
    
    2082010  2014
    
    
    3,498
    
    
    
    1,119
 62




---



##### Table of Contents



11. Goodwill and Other Intangible Assets Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 142 requires the Company to test goodwill
and indefinite-lived intangible assets (for American, route acquisition costs) for impairment
rather than amortize them. In so doing, the Company determined its entire goodwill balance of $1.3
billion was impaired. In arriving at this conclusion, the Companys net book value was determined
to be in excess of the Companys fair value at January 1, 2002, using American as the reporting
unit for purposes of the fair value determination. The Company determined its fair value as of
January 1, 2002 using an allocation of AMRs fair value. As a result, the Company recorded a
one-time, non-cash charge, effective January 1, 2002, of
$889 million to write-off all of its goodwill.
The tax benefit of $363 million differed from the amount computed at the statutory federal income
tax rate due to a portion of Americans goodwill not being deductible for federal tax purposes.
The charge is nonoperational in nature and is reflected as a cumulative effect of accounting change
in the accompanying consolidated statements of operations. The Company had route acquisition costs (including international slots) of $829 million as of
December 31, 2004 and 2003. The Companys impairment analysis for route acquisition costs did not
result in an impairment charge in 2004 or 2003. The following tables provide information relating to the Companys amortized intangible assets as
of December 31 (in millions): 2004AccumulatedCost
    
    
    Amortization
    
    
    Net Book ValueAmortized intangible assets:Airport operating rights
    
    $
    449
    
    
    $
    181
    
    
    $
    268Gate lease rights
    
    
    186
    
    
    
    89
    
    
    
    97Total
    
    $
    635
    
    
    $
    270
    
    
    $
    365
 2003AccumulatedCost
    
    
    Amortization
    
    
    Net Book ValueAmortized intangible assets:Airport operating rights
    
    $
    449
    
    
    $
    163
    
    
    $
    286Gate lease rights
    
    
    191
    
    
    
    85
    
    
    
    106Total
    
    $
    640
    
    
    $
    248
    
    
    $
    392
 Airport operating and gate lease rights are being amortized on a straight-line basis over 25 years
to a zero residual value. The Company recorded amortization expense related to these intangible
assets of approximately $27 million for the year ended December 31, 2004 and $26 million for each
of the years ended December 31, 2003 and 2002. The Company expects to record annual amortization
expense of approximately $25 million in each of the next five years related to these intangible
assets. 63




---



##### Table of Contents



12. Accumulated Other Comprehensive Loss The components of Accumulated other comprehensive loss are as follows (in millions): UnrealizedUnrealized
    
    
    Gain/(Loss)
    
    
    IncomeMinimum
    
    
    Gain/(Loss)
    
    
    on Derivative
    
    
    TaxPension
    
    
    on
    
    
    Financial
    
    
    Benefit/Liability
    
    
    Investments
    
    
    Instruments
    
    
    (Expense)
    
    
    TotalBalance at December 31, 2001
    
    $
    (171
    )
    
    $
    11
    
    
    $
    (75
    )
    
    $
    90
    
    
    $
    (145
    )Current year net change
    
    
    (1,122
    )
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    (1,128
    )Reclassification of derivative
financial instruments into
earnings
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Change in fair value of
derivative financial
instruments
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    138Income tax effect
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    (54
    )Balance at December 31, 2002
    
    
    (1,293
    )
    
    
    5
    
    
    
    68
    
    
    
    36
    
    
    
    (1,184
    )Current year net change
    
    
    337
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    334Reclassification of derivative
financial instruments into
earnings
    
    
    
    
    
    
    
    
    
    
    (146
    )
    
    
    
    
    
    
    (146
    )Change in fair value of
derivative financial
instruments
    
    
    
    
    
    
    
    
    
    
    103
    
    
    
    
    
    
    
    103Balance at December 31, 2003
    
    
    (956
    )
    
    
    2
    
    
    
    25
    
    
    
    36
    
    
    
    (893
    )Current year net change
    
    
    129
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    125Reclassification of derivative
financial instruments into
earnings
    
    
    
    
    
    
    
    
    
    
    (89
    )
    
    
    
    
    
    
    (89
    )Change in fair value of
derivative financial
instruments
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Balance at December 31, 2004
    
    $
    (827
    )
    
    $
    (2
    )
    
    $
    21
    
    
    $
    36
    
    
    $
    (772
    )
 As of December 31, 2004, the Company estimates during the next twelve months it will reclassify
from Accumulated other comprehensive loss into net earnings (loss) approximately $13 million in net
gains related to its cash flow hedges. 13. Transactions with Related Parties American invests funds, including funds of certain affiliates, if any, in a combined short-term
investment portfolio and passes through interest income on such funds at the average rate earned on
the portfolio. These amounts are classified as Payable to affiliate on the accompanying
consolidated balance sheets. American sells tickets for flights on the AMR Eagle carriers, owned by AMR Eagle Holding
Corporation, a subsidiary of AMR. Prior to 2003, the revenue collected for such tickets was
prorated between American and the AMR Eagle carriers based on the segments flown by the respective
carriers and industry standard proration agreements. The aggregate amount prorated for the
segments flown by the AMR Eagle carriers was approximately $1.2 billion for 2002. In 2002 American
also paid fees of $156 million, recorded as a reduction in passenger revenues, to AMR Eagle
primarily for passengers connecting with American flights. In addition, American provided each of
the AMR Eagle carriers, among other things, communication and reservation services, passenger and
ground handling services, and other services, including yield management and participation in
Americans frequent flyer program. In consideration for certain services provided, the AMR Eagle
carriers paid American approximately $110 million for 2002. 64




---



##### Table of Contents



13. Transactions with Related Parties (Continued) Effective January 2003, American Airlines and AMR Eagle implemented a capacity purchase agreement.
Under this agreement, American pays AMR Eagle a fee per block hour and departure to operate
regional aircraft. The block hour and departure fees are designed to cover AMR Eagles costs
(before taxes) plus a margin. Certain costs such as fuel, landing fees, and aircraft ownership are
trued up to actual values on a pass through basis. In consideration for these payments, American
retains all passenger and other revenue resulting from the AMR Eagle airline operation. In
addition, American incurs certain expenses in connection with the operation of its affiliate
relationship with AMR Eagle. These amounts primarily relate to marketing, passenger and ground
handling costs. The current agreement will expire on December 31, 2005. In
2004 and 2003, American made payments to the AMR Eagle carriers of
approximately $1.7 billion and $1.4
billion, respectively, related to the capacity purchase agreement. In addition, American incurred
costs associated with generating Regional Affiliates revenue for flights on AMR Eagle of $113
million and $93 million in 2004 and 2003, respectively, recorded in Commissions, booking fees and
credit card expense in the accompanying consolidated statements of operations. American also
incurred other costs in connection with its affiliate relationship with AMR Eagle totaling
approximately $95 million and $84 million in 2004 and 2003, respectively, primarily recorded in
Other operating expenses in the accompanying consolidated statements of operations. American paid subsidiaries of AMR approximately $23 million in 2004, $24 million in 2003 and $13
million in 2002 for ground handling services provided at selected airports, consulting services and
investment management and advisory services with respect to short-term investments and the assets
of its retirement benefit plans.In addition, in consideration for certain services provided, the
AMR Eagle carriers paid American approximately $41 million in 2004 and $36 million in 2003. American recognizes compensation expense associated with certain AMR common stock-based awards for
employees of American (see Note 9). In addition, American incurs pension and postretirement
benefit expense for American employees working at affiliates of the Company. American transfers
pension and postretirement benefit expense for these employees to its affiliates based on a
percentage of salaries and cost per employee, respectively (see Note 10). On July 1, 2000, American and AMR Investment Services, Inc. (AMRIS), a subsidiary of AMR, entered
into a five-year Credit Agreement. The maximum amount American can advance AMRIS is $100 million
and the maximum amount AMRIS can advance American is $40 million. The interest rate is equal to
the lending partys cost of funds for the current month. Payments are due when the borrowing
company has excess cash. As of December 31, 2004, no borrowings were outstanding under this Credit
Agreement. American classifies certain receivables from its parent and affiliates against paid-in-capital. In
February, 2004, AMR transferred the proceeds from the 4.50 Notes to American and, in September
2003, AMR transferred the proceeds from the 4.25 Notes to American. These transfers reduced
Americans receivable from AMR by approximately $315 million in 2004 and $293 million in 2003. As
of December 31, 2004, the Company classified a $134 million receivable from its parent against
paid-in-capital on the accompanying consolidated balance sheet. Comparatively, as of December 31,
2003, the Company classified an $383 million receivable from its parent and affiliates against
paid-in-capital on the accompanying consolidated balance sheet. American was a party to various agreements with Sabre Holdings Corporation (Sabre), a former 83
percent owned subsidiary of AMR. Effective after the close of business on March 15, 2000, AMR
distributed its entire ownership interest in Sabre as a dividend on all outstanding shares of its
common stock. In connection with the spin-off, AMR, American and Sabre terminated or amended
certain of these agreements. The effect of those amendments on the travel agreements are described
below. Travel Agreements- American and Sabre were parties to travel agreements dated July 1, 1996,
pursuant to which Sabre is entitled to purchase personal travel for its employees and retirees
at reduced fares, and business travel at a discount for certain flights on American.The
Travel Privileges Agreement expires on June 30, 2008 and the Corporate Travel Agreement
expired on June 30, 2001. In connection with the spin-off of Sabre from AMR, the Company and
Sabre agreed to allow American to provide certain Sabre employees with additional limited
travel privileges and required Sabre to indemnify American for costs related to Sabres
continued use of the Travel Privileges Agreement. 65




---



##### Table of Contents



14. Segment Reporting American is the largest scheduled passenger airline in the world. At the end of 2004, American
provided scheduled jet service to approximately 150 destinations throughout North America, the
Caribbean, Latin America, Europe and the Pacific. American is also one of the largest scheduled
air freight carriers in the world, providing a full range of freight and mail services to shippers
throughout its system. American has one operating segment. The Companys operating revenues by geographic region are summarized below (in millions): Year Ended December 31,2004
    
    
    2003
    
    
    2002Domestic
    
    $
    12,155
    
    
    $
    12,650
    
    
    $
    11,301Latin America
    
    
    3,115
    
    
    
    2,477
    
    
    
    2,357Europe
    
    
    2,678
    
    
    
    1,980
    
    
    
    1,921Pacific
    
    
    660
    
    
    
    296
    
    
    
    413Total consolidated revenues
    
    $
    18,608
    
    
    $
    17,403
    
    
    $
    15,992
 The Company attributes operating revenues by geographic region based upon the origin and
destination of each flight segment. The Companys tangible assets consist primarily of flight
equipment, which is mobile across geographic markets and, therefore, has not been allocated. 15. Quarterly Financial Data (Unaudited) Unaudited summarized financial data by quarter for 2004 and 2003 (in millions): First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2004Operating revenues
    
    $
    4,503
    
    
    $
    4,821
    
    
    $
    4,753
    
    
    $
    4,531Operating income (loss)
    
    
    (25
    )
    
    
    123
    
    
    
    (93
    )
    
    
    (426
    )Net loss
    
    
    (182
    )
    
    
    (13
    )
    
    
    (225
    )
    
    
    (401
    )2003Operating revenues
    
    $
    4,108
    
    
    $
    4,316
    
    
    $
    4,596
    
    
    $
    4,383Operating income (loss)
    
    
    (903
    )
    
    
    (16
    )
    
    
    96
    
    
    
    (306
    )Net loss
    
    
    (1,032
    )
    
    
    (133
    )
    
    
    (24
    )
    
    
    (129
    )
 66




---



##### Table of Contents



15. Quarterly Financial Data (Unaudited) (Continued) The following table summarizes the Special charges and U.S. government grant reimbursement recorded
by the Company by quarter (in millions): First
    
    
    Second
    
    
    Third
    
    
    FourthQuarter
    
    
    Quarter
    
    
    Quarter
    
    
    Quarter2004Aircraft charges
    
    $
    
    
    
    $
    (20
    )
    
    $
    
    
    
    $
    21Employee charges
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    41Facility exit costs
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (3
    )Total Special charges
    
    $
    
    
    
    $
    (31
    )
    
    $
    (18
    )
    
    $
    592003Aircraft charges
    
    $
    
    
    
    $
    (20
    )
    
    $
    39
    
    
    $
    302Employee charges
    
    
    25
    
    
    
    47
    
    
    
    4
    
    
    
    16Facility exit costs
    
    
    
    
    
    
    49
    
    
    
    1
    
    
    
    12Other
    
    
    
    
    
    
    
    
    
    
    (68
    )
    
    
    Total Special charges
    
    $
    25
    
    
    $
    76
    
    
    $
    (24
    )
    
    $
    330U.S. government grant
    
    $
    
    
    
    $
    (315
    )
    
    $
    
    
    
    $
    
 See Note 2 for a further discussion of Special charges and U.S. government grant. In addition to the above items, in the fourth quarter of 2004, the Company recognized a $146
million gain on the sale of the Companys remaining interest in Orbitz. In addition, in the fourth quarter of 2003, the Company reached an agreement with the IRS covering
tax years 1990 through 1995. As a result of this agreement, the Company recorded a $91 million tax
benefit to reduce previously accrued income tax liabilities and an $84 million reduction in
interest expense to reduce previously accrued interest related to the accrued income tax
liabilities. Also in the fourth quarter of 2003, the Company recognized an $80 million gain on the sale of the
Companys investment in Hotwire and a $70 million gain related to an Orbitz initial public offering
and a related secondary offering. 67




---



##### Table of Contents



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Managements Evaluation of Disclosure Controls and Procedures The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and
procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified by the Securities and Exchange Commission. An evaluation
was performed under the supervision and with the participation of the Companys management,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness
of the Companys disclosure controls and procedures as of December 31, 2004. Based on that
evaluation, the Companys management, including the CEO and CFO, concluded that the Companys
disclosure controls and procedures were effective as of December 31, 2004. During the quarter
ending on December 31, 2004, there was no change in the Companys internal control over financial
reporting that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting. Managements Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. The Companys internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Companys internal control over financial reporting as
of December 31, 2004 using the criteria set forth in Internal Control  Integrated Frameworkissued
by the Committee of Sponsoring Organizations of the Treadway Commission.Based on this assessment,
management believes that, as of December 31, 2004, the Companys internal control over financial
reporting was effective based on those criteria. Managements assessment of the effectiveness of internal control over financial reporting as of
December 31, 2004, has been audited by Ernst & Young LLP, the independent registered public
accounting firm who also audited the Companys consolidated financial statements. Ernst & Young
LLPs attestation report on managements assessment of the Companys internal control over
financial reporting appears below. /s/ Gerard J. ArpeyGerard J. ArpeyChairman, President and Chief Executive Officer/s/ James A. BeerJames A. BeerSenior Vice President and Chief Financial Officer
 68




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm on Internal Control over Financial
Reporting The Board of Directors and Shareholder
American Airlines, Inc. We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, that American Airlines, Inc. maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). American Airlines, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the companys internal
control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that American Airlines, Inc. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, American Airlines, Inc. maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of American Airlines, Inc. as of December
31, 2004 and 2003 and the related consolidated statements of operations, stockholders equity
(deficit) and cash flows for each of the three years in the period ended December 31, 2004. Our
report dated February 22, 2005 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP
 Dallas, Texas
February 22, 2005 69




---



##### Table of Contents



PART III   
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. 
 ITEM 11. EXECUTIVE COMPENSATION Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Omitted under the reduced disclosure format pursuant to General Instruction I(2)(c) of Form 10-K. 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth the aggregate fees paid to Ernst & Young for audit services rendered
in connection with the consolidated financial statements and reports for fiscal years 2004 and 2003
and for other services rendered during fiscal years 2004 and 2003 on behalf of the Company and its
subsidiaries, as well as all out-of-pocket costs incurred in connection with these services
(amounts in thousands): 2004
    
    
    2003Audit Fees
    
    $
    2,317
    
    
    $
    1,982Audit Related Fees
    
    
    505
    
    
    
    805Tax Fees
    
    
    206
    
    
    
    333All Other Fees
    
    
    
    
    
    
    32Total
    
    $
    3,028
    
    
    $
    3,152
  Audit Fees:Consists of fees billed for professional services rendered for the audit of the
Companys consolidated financial statements, the review of the interim condensed consolidated
financial statements included in quarterly reports, 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. In 2004 this includes completion of the
internal control audit required by Sarbanes-Oxley Section 404.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 the Companys consolidated
financial statements and are not reported under Audit Fees. These services include employee
benefit plan audits, accounting consultations and auditing work on proposed transactions, attest
services that are not required by statute or regulation, and consultations concerning financial
accounting and reporting standards.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:Consists of fees for all other services other than those reported above. In
2003, the services in this category consisted of individual income tax planning and preparation
for certain officers. These services have been discontinued as of December 31, 2003. The
Companys intent is to minimize such other services in this category in the future. 70




---



##### Table of Contents



Audit Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors The Audit Committee pre-approves all audit and permissible non-audit services provided by Ernst &
Young. These services may include audit services, audit-related services, tax services and other
services. The Audit Committee has adopted a policy for the pre-approval of services provided by
Ernst & Young. Under this policy, 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 Audit Committee has delegated pre-approval authority to the Chair of the
Committee. Pursuant to this delegation, the Chair must report any pre-approval decision by him to
the Committee at its first meeting after the pre-approval was obtained. 
 PART IV 
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)
    
    
    (1
    )
    
    The following financial statements and Independent Auditors Report are filed as part of this report:
 PageReport of Independent Registered Public Accounting Firm
    
    
    34Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003 and 2002
    
    
    35Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    36-37Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002
    
    
    38Consolidated Statements of Stockholders Equity (Deficit) for the
Years Ended December 31, 2004, 2003 and 2002
    
    
    39Notes to Consolidated Financial Statements
    
    
    40-67
 (2
    )
    
    The following financial statement schedule and Independent Auditors Report are
filed as part of this report:
 PageReport of Independent Registered Public Accounting Firm
    
    
    76Schedule II Valuation and Qualifying Accounts and
Reserves
    
    
    77
 Schedules not included have been omitted because they are not applicable or because the
required information is included in the consolidated financial statements or notes
thereto.(3
    )
    
    Exhibits required to be filed by Item 601 of Regulation S-K. (Where the amount of
securities authorized to be issued under any of Americans long-term debt agreements does
not exceed 10 percent of Americans assets, pursuant to paragraph (b)(4) of Item 601 of
Regulation S-K, in lieu of filing such as an exhibit, American hereby agrees to furnish
to the Commission upon request a copy of any agreement with respect to such long-term
debt.)
 71




---



##### Table of Contents



Exhibit10.1
    
    Information Technology Services Agreement, dated July 1, 1996, between
American and The Sabre Group, Inc., incorporated by reference to Exhibit 10.6 to The
Sabre Group Holdings, Inc.s Registration Statement on Form S-1, file number
333-09747. Confidential treatment was granted as to a portion of this document.10.2
    
    Aircraft Purchase Agreement by and between American Airlines, Inc. and
The Boeing Company, dated October 31, 1997, incorporated by reference to Exhibit
10.48 to AMR Corporations report on Form 10-K for the year ended December 31, 1997.
Confidential treatment was granted as to a portion of this document.10.3
    
    Bylaws of American Airlines, Inc., amended January 22, 2003, incorporated
by reference to Americans report on Form 10-K for the year ended December 31, 2002.10.4
    
    American Airlines, Inc. 2004 Profit Sharing Plan for Employees,
incorporated by reference to Exhibit 10.61 to AMRs report on Form 10-K for the year
ended December 31, 2003.10.5
    
    American Airlines, Inc. 2004 Annual Incentive Plan, incorporated by
reference to Exhibit 10.62 to AMRs report on Form 10-K for the year ended December
31, 2003.10.7
    
    Amended and Restated Executive Termination Benefits Agreement between
AMR, American Airlines and Ralph L. Richardi dated September 26, 2002, incorporated
by reference to Exhibit 10.54 to AMRs report on Form 10-K for the year ended
December 31, 2002.10.8
    
    Amended and Restated Executive Termination Benefits Agreement between
AMR, American Airlines and Gary F. Kennedy dated February 3, 2003, incorporated by
reference to Exhibit 10.55 to AMRs report on Form 10-K for the year ended December
31, 2002.10.9
    
    Amended and Restated Executive Termination Benefits Agreement between
AMR, American Airlines and Robert W. Reding dated May 20, 2003, incorporated by
reference to Exhibit 10.71 to AMRs report on Form 10-K for the year ended December
31, 2003.10.10
    
    Amended and Restated Executive Termination Benefits Agreement between
AMR, American Airlines and James A. Beer dated January 5, 2004, incorporated by
reference to Exhibit 10.72 to AMRs report on Form 10-K for the year ended December
31, 2003.10.11
    
    Employment agreement between AMR, American Airlines and William K. Ris,
Jr. dated November 11, 1999, incorporated by reference to Exhibit 10.73 to AMRs
report on Form 10-K for the year ended December 31, 2003.10.12
    
    Supplemental Executive Retirement Program for Officers of American
Airlines, Inc., as amended on October 15, 2002, incorporated by reference to Exhibit
10.60 to AMRs report on Form 10-K for the year ended December 31, 2002.10.13
    
    American Airlines, Inc. 2004 Employee Profit Sharing Plan, incorporated
by reference to Exhibit 10.1 to AMRs report on Form 10-Q for the quarterly period
ended March 31, 2004.10.14
    
    American Airlines, Inc. 2004 Annual Incentive Plan, incorporated by
reference to Exhibit 10.2 to AMRs report on Form 10-Q for the quarterly period
ended March 31, 2004.
 72




---



##### Table of Contents



Exhibit10.15
    
    Employment agreement between AMR, American Airlines and Robert W. Reding dated
May 21, 2003, incorporated by reference to Exhibit 10.94 to AMRs report on
Form 10-K for the year ended December 31, 2004.10.16
    
    Amended and Restated Executive Termination Benefits Agreement between
AMR, American Airlines and Jeffrey J. Brundage dated April 1, 2004, incorporated by
reference to Exhibit 10.5 to AMRs report on Form 10-Q for the quarterly period
ended March 31, 2004.10.17
    
    Letter Agreement dated November 17, 2004 and Purchase Agreement
Supplements dated January 11, 2005 between the Boeing Company and American Airlines,
Inc., incorporated by reference to Exhibit 10.99 to AMRs report on Form 10-K for
the year ended December 31, 2004. Portions of the exhibit have
been omitted pursuant to a request for confidential treatment.10.18
    
    Credit Agreement dated as of December 17, 2004, among American Airlines,
Inc., AMR Corporation, the Lenders from time to time party thereto, Citicorp USA,
Inc., as Administrative Agent for the Lenders, JPMorgan Chase Bank, N.A., as
Syndication Agent and Citigroup Global Markets Inc. and J.P. Morgan Securities Inc.,
as Joint Lead Arrangers and Joint Book-Running Managers, incorporated by reference
to Exhibit 10.103 to AMRs report on Form 10-K for the year ended December 31, 2004.10.19
    
    American Airlines, Inc. 2005 Annual Incentive Plan, incorporated by
reference to Exhibit 99.1 to AMRs current report on form 8-K dated February 4,
2005.12
    
    Computation of ratio of earnings to fixed charges for the years ended
December 31, 2004, 2003, 2002, 2001, and 2000.23
    
    Consent of Independent Registered Public Accounting Firm.31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a).32
    
    Certification pursuant to Rule 13a-14(b) and section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of
title 18, United States Code).
  (b)
    Reports on Form 8-K: Form 8-Ks filed under Item 1.01  Entry into a Material Definitive Agreement On November 22, 2004, American Airlines filed a report on Form 8-K to announce an agreement
with The Boeing Company to defer the date of delivery of certain Boeing model 737-823 and 777-223
aircraft. Form 8-Ks filed under Item 1.01  Entry into a Material Definitive Agreement, Item 2.03
Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement
of the Registrant and Item 9.01 Financial Statements and Exhibits On December 20, 2004, American Airlines filed a report on Form 8-K to announce that that the
Company had successfully completed the refinancing of its $834 million revolving bank credit
facility. Form 8-Ks furnished under Item 2.02  Results of Operations and Financial Condition On October 20, 2004, American Airlines filed a report on Form 8-K to provide a press release
issued on October 20, 2004 by its parent company, AMR Corporation, to report AMRs third quarter
2004 earnings. 73




---



##### Table of Contents



Form 8-Ks filed under Item 5.02  Departure of Directors or Principal Officers; Election
of Directors; Appointment of Principal Officers On November 17, 2004, American Airlines filed a report on Form 8-K to provide a press release
issued on November 17, 2004 to report the election of Matthew K. Rose to the Board of Directors of
American Airlines, Inc. Form 8-Ks filed under Item 8.01  Other Events On October 6, 2004, American Airlines filed a report on Form 8-K to report the Companys
September traffic. On November 3, 2004, American Airlines filed a report on Form 8-K to report the Companys
October traffic. On December 3, 2004, American Airlines filed a report on Form 8-K to report the Companys
November traffic. On December 28, 2004, American Airlines filed a report on Form 8-K to provide actual fuel
cost, unit cost and capacity and traffic information for October and November as well as certain
forecasts of unit costs, revenue performance and fuel prices, capacity estimates, liquidity
expectations and other matters for December, the fourth quarter and the full year 2004. 74




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. American Airlines, Inc. By:
    
    /s/ Gerard J. ArpeyGerard J. ArpeyChairman, President and Chief Executive Officer(Principal Executive Officer)
 Date: February 25, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
noted: /s/ Gerard J. ArpeyGerard J. ArpeyDirector, Chairman and Chief Executive Officer(Principal Executive Officer)/s/ James A. BeerJames A. BeerSenior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)/s/ John W. Bachmann
    
    /s/ Michael A. MilesJohn W. Bachmann, Director
    
    Michael A. Miles, Director/s/ David L. Boren
    
    /s/ Philip J. PurcellDavid L. Boren, Director
    
    Philip J. Purcell, Director/s/ Edward A. Brennan
    
    /s/ Joe M. RodgersEdward A. Brennan, Director
    
    Joe M. Rodgers, Director/s/ Armando M. Codina
    
    /s/ Judith RodinArmando M. Codina, Director
    
    Judith Rodin, Director/s/ Earl G. Graves
    
    /s/ Matthew K. RoseEarl G. Graves, Director
    
    Matthew K. Rose, Director/s/ Ann McLaughlin Korologos
    
    /s/ Roger T. StaubachAnn McLaughlin Korologos, Director
    
    Roger T. Staubach, Director
 Date: February 25, 2005 75




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholder
American Airlines, Inc. We have audited the consolidated financial statements of American Airlines, Inc. as of December 31,
2004 and 2003 and for each of the three years in the period ended December 31, 2004 and have issued
our report thereon dated February 22, 2005. Our audits also included Schedule II  Valuation and
Qualifying Accounts and Reserves. This schedule is the responsibility of the Companys management.
Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. /s/ Ernst & Young LLP
 Dallas, Texas
February 22, 2005 76




---



##### Table of Contents



AMERICAN AIRLINES, INC.
Schedule II  Valuation and Qualifying Accounts and Reserves
(in millions) Changescharged to
    
    
    
    
    
    
    
    
    
    
    Sales,Balance
    
    
    statement
    
    
    
    
    
    
    
    
    
    
    retire-
    
    
    Balanceat
    
    
    of
    
    
    
    
    
    
    Write-offs
    
    
    ments
    
    
    atbeginning
    
    
    operations
    
    
    
    
    
    
    (net of
    
    
    and
    
    
    end ofof year
    
    
    accounts
    
    
    Payments
    
    
    recoveries)
    
    
    transfers
    
    
    yearYear ended December 31, 2004Allowance for
obsolescence of inventories
    
    $
    374
    
    
    $
    35
    
    
    $
    
    
    
    $
    
    
    
    $
    (80
    )
    
    $
    329Allowance for
uncollectible accounts
    
    
    61
    
    
    
    8
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    58Reserves for environmental
remediation costs
    
    
    72
    
    
    
    (2
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    62Allowance for insurance
receivable
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Year ended December 31, 2003Allowance for
obsolescence of inventories
    
    
    398
    
    
    
    64
    
    
    
    
    
    

    
    
    
    
    
    (88
    )
    
    
    374Allowance for
uncollectible accounts
    
    
    65
    
    
    
    14
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    61Reserves for environmental
remediation costs
    
    
    92
    
    
    
    (12
    )
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    72Allowance for insurance
receivable
    
    
    12
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22Year ended December 31, 2002Allowance for
obsolescence of inventories
    
    
    346
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    398Allowance for
uncollectible accounts
    
    
    51
    
    
    
    27
    
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    65Reserves for environmental
remediation costs
    
    
    84
    
    
    
    25
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    92Allowance for insurance
receivable
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12
 77