SMUCox School of Business

January 31, 2005

2

AMR INVESTMENT SERVICES, INC.

1) OVERSEE MANAGEMENT OF AMERICAN AIRLINES $16.5 BILLION PENSION PLANS

2) MANAGE $3.0+ BILLION IN SHORT-TERM CASH FOR AMERICAN AIRLINES

3) MANAGE $7.7 BILLION IN SHORT-TERM CASH FOR EXTERNAL CLIENTS

4) MANAGER / ADMINISTRATOR OF $12.7 BILLION AMERICAN AADVANTAGE MUTUAL FUND FAMILY

3

DEFINED BENEFIT PLAN ISSUES IN THE NEWS

• FEW DB PLANS BEING STARTED– DB PLANS BEING FROZEN

– SOME CONVERTED TO CASH BALANCE OR DC• IMPLICATIONS FOR WORKERS

• MASSIVE UNDERFUNDING– PERFECT STORM OF LOWER INTEREST RATES AND INVESTMENT RETURNS

• PLAN TERMINATIONS– RESULT IN LOWER BENEFITS TO BENEFICIARIES

• BUSH PLAN FOR PENSION REFORM– SIMPLIFIED FUNDING STANDARDS

– ADDITIONAL STRAINS ON NON-INVESTMENT GRADE COMPANIES

– REDUCED BENEFITS FOR SOME

4

AMERICAN AIRLINES PENSION PLANS

• FIXED BENEFIT PLANS -- $7.3 BILLION

• PILOT VARIABLE BENEFIT PLAN -- $3.8 BILLION

• 401(K) SALARY DEFERRAL PLAN -- $5.4 BILLION

5

IMPORTANCE OF ASSET ALLOCATION

The Asset Allocation Decision:

How to distribute investment dollars among a variety of asset classes.

Copyright 1990-1993 Ibbotson Associates, Chicago, Illinois

Determinants of Portfolio Performance

Security Selection 4.6%Luck 2.1%

Market Timing 1.8%

Asset Allocation Policy 91.5%

6

DIFFERENT APPROACHES TO ASSET ALLOCATION

• MATCH ASSETS TO LIABILITIES / INCOME REQUIREMENTS

• ESTABLISH LONG-TERM ALLOCATION AND REBALANCE– USING EFFICIENT FRONTIER ANALYSES

• QUANTITATIVELY ANALYZE VALUATION LEVELS OF DIFFERENT MARKETS– EARNINGS YIELD VERSUS TEN-YEAR BOND YIELD

• FUNDAMENTAL ANALYSIS

7

ROLE OF SPONSOR IN FIXED BENEFIT PLANS

• TO PROVIDE BENEFITS PROMISED AT THE LOWEST COST

• ENSURE PROPER FUNDING

• INTEGRATE INVESTMENT POLICIES WITH CORPORATE FINANCIAL POLICIES, GOALS AND CHARACTERISTICS (I.E., ASSET ALLOCATION / EQUITY PHILOSOPHY, ETC.)

8

FIXED BENEFIT PLAN PHILOSOPHY

• MINIMIZE VOLATILITY / RISK TO OFFSET CYCLICAL NATURE OF AIRLINE AND MINIMIZE COMPETITIVE DISADVANTAGE– ASSET / LIABILITY BOND HEDGE

– USE VALUE APPROACH TO EQUITIES

– LONG-TERM ORIENTATION

• ENHANCE RETURNS TO MINIMIZE COST– OVERWEIGHT INTERNATIONAL, EMERGING

MARKETS, AND PRIVATE EQUITY

9

FIXED BENEFIT PLANSMARKET VALUE OF ASSETS vs. ACCUMULATED BENEFIT

OBLIGATION

5.305.90

7.30

5.50

6.20

2.913.54

3.30

4.55 4.565.17

5.605.30

5.70

8.10

3.24 3.25

4.28 4.284.73

2.61

5.01 4.705.20

2.02.53.03.54.04.55.05.56.06.57.07.58.08.59.09.5

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Assets Liabilities

BEGINNING - OF - YEAR VALUE

BIL

LIO

NS

OF

DO

LL

AR

S

10

AA FIXED BENEFIT PLANS12/31/04

HEDGED ASSET / LIABILITY BONDS $2.8 BILLION 38%

U.S. EQUITIES $2.2 BILLION 30%

EAFE EQUITIES $1.6 BILLION 22%

EMERGING MARKET INVESTMENTS $401 MILLION 6%

ALTERNATIVE INVESTMENTS (PRIVATE EQUITY, REAL ESTATE PARTNERSHIPS, VENTURE CAPITAL)

$305 MILLION 4%

11

AA PILOT VARIABLE FUND12/31/04

DOMESTIC EQUITIES $2.8 BILLION

EAFE EQUITIES $798 MILLION

EMERGING MARKET EQUITIES $172 MILLION

74%

21%

5%

12

401(K) PLANS

• GENERAL– INCREASING IN SIZE AND USAGE AS PRIMARY

RETIREMENT PLAN

– INCREASING DESIRE FOR MORE OPTIONS AND FLEXIBILITY

– INCREASING SHORT-TERM ORIENTATION

• CURRENT ISSUES – DIVERSIFICATION

– COMPANY STOCK

– LATE TRADING

– MARKET TIMING

– FIDUCIARY TRUST

13

$UPER $AVER INVESTMENT OPTIONS

Fund Type AMR Investments Other Managers

Cash AA Credit Union -- --TIPS AA TIPS Fund -- --Short Term Bond AA Bond Fund -- --Intermediate Bond AA Bond Fund -- Fidelity US BondHigh Yield Bond AA Bond Fund -- T.Rowe PriceBalanced AA Fund -- Fidelity PuritanLarge Cap Value AA Fund -- Dodge & CoxLarge Cap Growth AA Fund AA S&P 500 Index Janus FundMid Cap Value AA Fund -- DreyfusMid Cap Growth -- -- T.Rowe PriceSmall Cap Value AA Fund -- BergerSmall Cap Growth -- AA SmallCap Index DreyfusInternational Equity AA Fund AA Int’l EquityIndx Fidelity Int’lEmerging Markets(max 10% investment)

AA Fund -- Dreyfus

Sector Fund – Tech.(max 10% investment)

-- -- T.RowePriceScience&Tech

Lifestyle Funds Conservative Moderate Aggressive

--

AMR Stock(max 10% investment)

-- -- Company Stock Fund

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401(K) PLAN12/31/04

CREDIT UNION 16.4%

BONDS 5.1%

TOTAL BONDS 21.5%

BALANCED (INCLUDING LIFESTYLE PORTFOLIOS)

DOMESTIC EQUITIES

9.8%

51.5%

EAFE EQUITIES

EMERGING MARKET

10.3%

2.5%

TOTAL EQUITIES 74.1%

OTHER (PARTICIPANT LOANS) 4.4%

15

TOP 10 INVESTMENT TIPSSHARED WITH AA EMPLOYEES

#1 DON’T PROCRASTINATE OR DELAY

#2 AVOID BUYING LAST YEAR’S PERFORMANCE

#3 PATIENCE IS A VIRTUE -- BE A LONG-TERM INVESTOR

#4 TIMING THE STOCK MARKET CAN BE HAZARDOUS TO YOUR FINANCIAL HEALTH

#5 BUY LOW … SELL HIGH

#6 BUY NO-LOAD, LOW-COST INVESTMENTS

#7 GET PROTECTION FROM INFLATION

#8 DON’T PUT ALL OF YOUR EGGS IN ONE BASKET

#9 GO FOR TAX-DEFERRED FIRST

#10 THE EARLY BIRD GETS THE WORM

16

THE COST OF WAITING TO SAVE

Saving $2,000 per year from:

Amount Invested

Value at Age 65

$10,000

$110,000

$210,000

$310,000

Age 25-35 Age 35-65 Age 50-65

$291,546

$20,000

$60,000

$226,566

$30,000$54,304

A CASE FOR BEING INVESTEDValue of $1 Invested From 1/1/62 Through 12/31/04

$69.64

$11.46

$21.91

$0

$10

$20

$30

$40

$50

$60

$70

$80

S&P 500 T-Bills S&P 500

Top 10 MonthsOct-74 16.57%Jan-87 13.40Jan-75 12.51Aug-82 12.17Jan-76 11.99Oct-82 11.52Dec-91 11.43Aug-84 11.28Nov-80 10.95Nov-62 10.86

(Less 10 Best Months)

Source: Hotchkis and Wiley Capital Management; Frank Russell18

18

HISTORICAL PERSPECTIVE ON U.S. EQUITY RETURNSS&P 10-Year Return Just Above Long-Term Average

Source: OFI Institutional Asset Management

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

S&P 500 S&P 500 Trailing 10-Year Return

79-YrAverage10.4%

S&P 500 Annualized 10-Year Return Through:December 1979 (Decade of the 70s) 5.9%December 1989 (Decade of the 80s) 17.5%December 1999 (Decade of the 90s) 18.2%December 31, 2004 12.1%

19

S&P VALUE/GROWTH INDICESJanuary 1, 1975 through December 31, 2004

*The standard deviation measures the variability of monthly returns versus their average monthly return.

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

14.5% 15.0% 15.5% 16.0% 16.5% 17.0%

Volatility (Standard Deviation)*

Ave

rage

Ann

ualiz

ed T

otal

Ret

urn

S&P Value

S&P 500

S&P Growth

20

Boeing

MARKET

I

II

III

IV

HIGH

HIGHLOW

9.4

%

GROWTH

P/E20.2 X

QUADRANT ANALYSISDECEMBER 31, 2004

Washington Mutual

EDS