AMERICAN AIRLINES INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2003.

[ ]Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period From to .

Commission file number 1-2691.

American Airlines, Inc.
(Exact name of registrant as specified in its charter)

Delaware 13-1502798
(State or other (I.R.S. Employer
jurisdiction Identification No.)
of incorporation or
organization)

4333 Amon Carter Blvd.
Fort Worth, Texas 76155
(Address of principal (Zip Code)
executive offices)

Registrant's telephone number,
including area code (817) 963-1234

Not Applicable
(Former name, former address and former fiscal year , if changed
since last report)

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 X No .

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

Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.

Common Stock, $1 par value - 1,000 shares as of July 14, 2003.

The registrant meets the conditions set forth in, and is filing
this form with the reduced disclosure format prescribed by,
General Instructions H(1)(a) and (b) of Form 10-Q.

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INDEX

AMERICAN AIRLINES, INC.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations -- Three and six months ended
June 30, 2003 and 2002

Condensed Consolidated Balance Sheets -- June 30, 2003 and December
31, 2002

Condensed Consolidated Statements of Cash Flows -- Six months ended
June 30, 2003 and 2002

Notes to Condensed Consolidated Financial Statements -- June 30,
2003

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4. Controls and Procedures

PART II: OTHER INFORMATION

Item 1. Legal Proceedings

Item 6. Exhibits and Reports on Form 8-K

SIGNATURE

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN AIRLINES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions)

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

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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)

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

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AMERICAN AIRLINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)

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

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, these
financial statements contain all adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows for the periods
indicated. Results of operations for the periods presented herein
are not necessarily indicative of results of operations for the
entire year. American Airlines, Inc. (American or the Company) is a
wholly owned subsidiary of AMR Corporation (AMR). For further
information, refer to the consolidated financial statements and
footnotes thereto included in the American Airlines, Inc. Annual
Report on Form 10-K for the year ended December 31, 2002 (2002 Form
10-K). Certain amounts have been reclassified to conform with the
2003 presentation.

The Company's Regional Affiliates include two wholly owned
subsidiaries of AMR, American Eagle Airlines, Inc. and Executive
Airlines, Inc. (collectively, AMR Eagle), and two independent
carriers, Trans States Airlines, Inc. (Trans States) and Chautauqua
Airlines, Inc. (Chautauqua). For the six months ended June 30,
2002, American had a fee per block hour agreement with Chautauqua
and revenue prorate agreements with AMR Eagle and Trans States.
Effective January 1, 2003, American converted the AMR Eagle
carriers from a revenue prorate agreement to a fee per block hour
agreement (see Note 17). For the six months ended June 30, 2003,
American also had fee per block hour agreements with Trans States
and Chautauqua.

2.In February 2003, American asked its labor leaders and other
employees for approximately $1.8 billion in annual savings through
a combination of changes in wages, benefits and work rules. The
requested $1.8 billion in savings was divided by work group as
follows: $660 million - pilots; $620 million - Transportation
Workers Union represented employees; $340 million - flight
attendants; $100 million - management and support staff; and $80
million - agents and representatives. References in this document
to American's three major unions include: the Allied Pilots
Association (the APA); the Transportation Workers Union (the TWU);
and the Association of Professional Flight Attendants (the APFA).

On March 31, 2003, American announced that it had reached
agreements with its three major unions (the Labor Agreements). It
also reported various changes in the pay plans and benefits for non-
unionized personnel including officers and other management (the
Management Reductions). The anticipated cost savings arising from
the Labor Agreements and the Management Reductions met the targeted
annual savings of $1.8 billion.

On April 24, 2003 and April 25, 2003, the three major unions
certified the ratification of the Labor Agreements with some
modifications (the Modified Labor Agreements). The principal
modifications were a shorter duration and the ability to initiate
the process of re-negotiating the Modified Labor Agreements after
three years. Even with these modifications, the Modified Labor
Agreements continue to meet the targeted annual savings.

Of the approximately $1.8 billion in estimated annual savings,
approximately $1.0 billion relate to wage and benefit reductions
while the remaining approximately $.8 billion is expected to be
accomplished through changes in work rules, which will result in
additional job reductions. As a result of these additional job
reductions, the Company incurred $60 million in severance charges
in the second quarter of 2003 (see Note 5 for additional
information). Wage reductions became effective on April 1, 2003 for
officers and May 1, 2003 for all other employees. Reductions
related to benefits and work rule changes will be phased in over
time. In connection with the changes in wages, benefits and work
rules, the Company granted approximately 38 million shares of AMR
stock to American's employees in the form of stock options which
will vest over a three year period with an exercise price of $5 per
share (see Note 12 for additional information).

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

In addition, subsequent to the ratification of the Modified Labor
Agreements, the Company reached concessionary agreements with
certain vendors, lessors, lenders (see Notes 9 and 13 for
additional information) and suppliers (collectively, the Vendors,
and the agreements, the Vendor Agreements). Generally, under the
terms of these Vendor Agreements the Company will receive the
benefit of lower rates and charges for certain goods and services,
and more favorable rent and financing terms with respect to certain
of its aircraft. In return for these concessions, the Company
anticipates that it will issue - over time - up to 3.0 million
shares of AMR's common stock to Vendors. As of June 30, 2003,
approximately 2.2 million shares have been issued to Vendors.

The Company's revenue environment has improved during the second
quarter of 2003 as reflected in improved unit revenues (revenue per
available seat mile) in May and June 2003. Even with this
improvement however, the Company's revenues are still depressed
relative to historical levels and the Company's recent losses have
adversely affected its financial condition. The Company therefore
needs to see continued improvement in the revenue environment to
return it to sustained profitability at acceptable levels.

To maintain sufficient liquidity as the Company implements its plan
to return to sustained profitability, the Company will need
continued access to additional funding, most likely through a
combination of financings and asset sales. In addition, the
Company's ability to return to sustained profitability will depend
on a number of risk factors, many of which are largely beyond the
Company's control. Among other things, the following factors have
had and/or may have a negative impact on the Company's business and
financial results: the uncertain financial and business
environment the Company faces, the struggling economy, high fuel
prices and the availability of fuel, the residual effects of the
war in Iraq, conflicts in the Middle East, the residual effects of
the SARS outbreak, historically low fare levels, the competitive
environment, uncertainties with respect to the Company's
international operations, changes in its business strategy, actions
by U.S. or foreign government agencies, the possible occurrence of
additional terrorist attacks, or the inability of the Company to
satisfy existing liquidity requirements or other covenants in
certain of its credit arrangements (see Note 13 for additional
information). In particular, if the revenue environment
deteriorates beyond normal seasonal trends, or the Company is
unable to access the capital markets or sell assets, it may be
unable to fund its obligations and sustain its operations.

3.The 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". 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):

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

4.In April 2003, the President signed the Emergency Wartime
Supplemental Appropriations Act, 2003 (the Act) which includes
aviation-related assistance provisions. The Act authorized payment
of (i) $100 million to compensate air carriers for the direct costs
associated with the strengthening of flight deck doors and locks
and (ii) $2.3 billion to reimburse air carriers for increased
security costs which was distributed in proportion to the amounts
each carrier had paid or collected in passenger security and air
carrier security fees to the Transportation Security Administration
as of the Act's enactment (the Security Fee Reimbursement). In
addition, the Act suspends the collection of the passenger security
fee from June 1, 2003 until October 1, 2003 and authorizes the
extension of war-risk insurance through August 31, 2004 (and
permits further extensions until December 31, 2004). The Act also
limits the total cash compensation for the two most highly
compensated named executive officers in 2002 for certain airlines,
including the Company, during the period April 1, 2003 to April 1,
2004 to the amount of salary received by such officers, or their
successors, in 2002. A violation of this executive compensation
provision would require the carrier to repay the government for the
amount of the Security Fee Reimbursement. The Company does not
anticipate any difficulties in complying with this limitation on
executive compensation and believes the likelihood of repaying the
government for the amount of the Security Fee Reimbursement is
remote. The Company's Security Fee Reimbursement was $315 million
(net of $3 million and $43 million in payments to independent
regional carriers and AMR Eagle, respectively, who operated under
revenue prorate agreements during a portion of the period covered
by the compensation) and was recorded as a reduction to operating
expenses during the second quarter of 2003. The Company's
compensation for the direct costs associated with strengthening
flight deck doors will be recorded as a reduction to capitalized
flight equipment as such amounts are received.

5.During the last two years, as a result of the events of September 11,
2001 and subsequent related activities, the Company has recorded a
number of Special charges. In 2003, the Company recorded additional
Special charges and other charges as discussed below:

Aircraft Charges

In the second quarter of 2003, the Company determined that certain
accruals for future lease return and other costs, initially
recorded as a component of Special charges in the consolidated
statement of operations were no longer necessary. In the second
quarter of 2003, the Company recorded a $20 million reduction to
Special charges to finalize these accruals.

Employee Charges

In the first quarter of 2003, as a part of its 2002 restructuring
initiatives, the Company incurred $25 million in severance charges
which are included in Special charges in the consolidated statement
of operations.

The Company estimates that it will reduce approximately 8,000 jobs
by June 2004 in conjunction with the Management Reductions and the
Modified Labor Agreements discussed in Note 2. This reduction in
workforce, which will affect all work groups (pilots, flight
attendants, mechanics, fleet service clerks, agents, management and
support staff personnel), has been and will continue to be
accomplished through various measures, including part-time work
schedules, furloughs in accordance with collective bargaining
agreements, and permanent layoffs. As a result of this reduction
in workforce, during the second quarter of 2003, the Company
recorded an employee charge of approximately $60 million, primarily
for severance related costs, which is included in Special charges.
Cash outlays for the $60 million employee charge will be incurred
over a period of up to twelve months.

Also in conjunction with the Modified Labor Agreements and the
Management Reductions, during the second quarter of 2003, the
Company reduced its vacation accrual by $85 million to reflect new
lower pay scales and maximum vacation caps, which was recorded as a
reduction to Special charges.

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

In connection with the Modified Labor Agreements, the Company
agreed to forgive a $26 million receivable from one its three major
unions. During the second quarter of 2003, the Company recorded a
$26 million Special charge to write-off the receivable.

In addition, as discussed in Note 6, the Company recognized a
curtailment loss of $46 million related to its defined benefit
pension plans.

Facility Exit Costs

In the second quarter of 2003, the Company determined that certain
excess airport space will not be used by the Company in the future.
As a result, the Company recorded a $45 million charge, primarily
related to the fair value of future lease commitments and the write-
off of certain prepaid rental amounts. Cash outlays related to the
accrual of future lease commitments will occur over the remaining
lease term, which extends through 2017.

Other

On July 16, 2003, the Company announced that it will reduce the
size of its St. Louis hub, effective November 1, 2003, and close
its St. Louis reservations office, effective September 15, 2003.
As a result of these actions, the Company expects to record some
additional charges in the third and fourth quarters of 2003.
Although the Company cannot estimate the amount of these charges at
the time of the filing of this Form 10-Q, they are expected to
include employee severance and benefits charges, facility exit
costs and aircraft charges.

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):

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

6.In the second quarter of 2003, as a result of the Modified 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 thereafter, respectively. In addition,
assumptions with respect to interest rates used to discount lump sum
benefit payments available under certain plans were updated. In
conjunction with the remeasurement, the Company recorded an increase
in its minimum pension liability, primarily due to changes in discount
rates, which resulted in an additional charge to stockholders' equity
as a component of other comprehensive loss of $334 million.
Furthermore, as a result of workforce reductions related to the
Modified Labor Agreements and Management Reductions, the Company
recognized a curtailment loss of $46 million related to its defined
benefit pension plans, in accordance with Statement of Financial
Accounting Standards No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits" (SFAS 88), which is included in Special charges in the
consolidated statement of operations.

The following table provides a statement of funded status as of
April 22, 2003 and December 31, 2002 for the Company's defined
benefit pension plans (in millions):

7.The Company has restricted cash and short-term investments related
to projected workers' compensation obligations and various other
obligations. As of June 30, 2003, projected workers' compensation
obligations were secured by restricted cash and short-term
investments of $387 million and various other obligations were
secured by restricted cash and short-term investments of $163
million. In the first quarter of 2003, the Company redeemed $339
million of tax-exempt bonds that were backed by standby letters of
credit secured by restricted cash and short-term investments
resulting in a reduction in restricted cash and short-term
investments. Of the $339 million of tax-exempt bonds that were
redeemed, $253 million were accounted for as operating leases.
Payments to redeem these tax-exempt special facility revenue bonds
are generally considered prepaid facility rentals and will reduce
future operating lease commitments. The remaining $86 million of
tax-exempt bonds that were redeemed were accounted for as debt and
had original maturities in 2014 through 2024.

As of June 30, 2003 the Company had approximately $202 million in
fuel prepayments and credit card holdback deposits classified as
Other current assets and Other assets in the condensed consolidated
balance sheet.

In June 2003, the Company sold its interest in Worldspan, a
computer reservations company, for $180 million in cash and a $39
million promissory note, resulting in a gain of $17 million which
is included in Other income (loss) in the consolidated statement of
operations.

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

8.As of June 30, 2003, the Company had commitments to acquire the
following aircraft: two Boeing 767-300ERs in 2003 and an aggregate
of 47 Boeing 737-800s and nine Boeing 777-200ERs in 2006 through
2010. Future payments for all aircraft, including the estimated
amounts for price escalation, will approximate $70 million during
the remainder of 2003, $0 million in 2004, $118 million in 2005 and
an aggregate of approximately $2.6 billion in 2006 through 2010.
Boeing Capital Corporation has agreed to provide backstop financing
for all Boeing aircraft deliveries in 2003. In return, American
has granted Boeing a security interest in certain advance payments
previously made and in certain rights under the aircraft purchase
agreement between American and Boeing.

As discussed in the notes to the consolidated financial statements
included in the Company's 2002 Form 10-K, Miami-Dade County is
currently investigating and remediating various environmental
conditions at the Miami International Airport (MIA) and funding the
remediation costs through landing fees and various cost recovery
methods. American and AMR Eagle have been named as potentially
responsible parties (PRPs) for the contamination at MIA. During
the second quarter of 2001, the County filed a lawsuit against 17
defendants, including American, in an attempt to recover its past
and future cleanup costs (Miami-Dade County, Florida v. Advance
Cargo Services, Inc., et al. in the Florida Circuit Court). In
addition to the 17 defendants named in the lawsuit, 243 other
agencies and companies were also named as PRPs and contributors to
the contamination. American's and AMR Eagle's portion of the
cleanup costs cannot be reasonably estimated due to various
factors, including the unknown extent of the remedial actions that
may be required, the proportion of the cost that will ultimately be
recovered from the responsible parties, and uncertainties regarding
the environmental agencies that will ultimately supervise the
remedial activities and the nature of that supervision. In
addition, the Company is subject to environmental issues at various
other airport and non-airport locations for which it has accrued
$87 million at June 30, 2003. 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.

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

In addition, certain of the concessionary 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 Bankruptcy Code. If any one of these events
were to occur, the Company would be responsible for approximately
$11 million in additional lease payments as of June 30, 2003. This
amount will increase to $230 million prior to the expiration of the
provision on December 31, 2005. Such amounts are being treated as
contingent rentals and will only be recognized if they become due.

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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 June 30, 2003 were as follows (these amounts reflect
concessions as a result of the Vendor Agreements):

(1) As of June 30, 2003, included in Accrued liabilities
and Other liabilities and deferred credits on the accompanying
condensed consolidated balance sheets is approximately $1.3
billion relating to rent expense being recorded in advance of
future operating lease payments.

At June 30, 2003, the Company had 261 aircraft under operating
leases and 99 aircraft under capital leases - which includes both
operating and non-operating aircraft. 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 at a predetermined
fixed amount.

10.Accumulated depreciation of owned equipment and property at June
30, 2003 and December 31, 2002 was $8.2 billion and $7.8 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at June 30, 2003 and December 31, 2002 was
$1.0 billion and $971 million, respectively.

11.The Company has experienced significant cumulative losses and as a
result generated certain net operating losses available to offset
future taxes payable. As a result of the cumulative operating
losses, a valuation allowance was established against the full
amount of the Company's net deferred tax asset as of December 31,
2002. 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. During 2003, the
Company continued to record a valuation allowance against its net
deferred tax assets, which results in no tax benefit being recorded
for the pretax losses and the charge to Accumulated other
comprehensive loss resulting from the minimum pension liability
adjustment discussed in Note 6. The Company's deferred tax asset
valuation allowance increased $550 million in 2003, to $1.2 billion
as of June 30, 2003.

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13
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

12.In March 2003, the Board of Directors of AMR approved the issuance
of additional shares of AMR common stock to employees and Vendors
in connection with ongoing negotiations concerning concessions. The
maximum number of shares authorized for issuance was 30 percent of
the number of shares of AMR's common stock outstanding on March 24,
2003 (156,359,955) or approximately 46.9 million shares. From the
foregoing authorization, the Company expects to issue up to 3.0
million shares to Vendors. As of June 30, 2003, approximately 2.2
million shares have been issued to Vendors at an average price of
$4.81 on the date of grant. Also in March 2003, the AMR Board of
Directors adopted the 2003 Employee Stock Incentive Plan (2003
Plan) to provide equity awards to employees in connection with
wage, benefit and work rule concessions. Under the 2003 Plan, all
American employees are eligible to receive stock awards which may
include stock options, restricted stock and deferred stock. In
April 2003, the Company reached final agreements with the unions
representing American employees (the Modified Labor Agreements, see
Note 2). In connection with the changes in wages, benefits and
work rules, the Modified Labor Agreements provide for the issuance
of up to 37.9 million shares of AMR stock in the form of stock
options. Approximately 37.9 million stock options were granted to
employees at an exercise price of $5.00 per share, which is equal
to the closing price of AMR's common stock (NYSE) on April 17,
2003. These shares will vest over a three-year period and will
expire on April 17, 2013. These options were granted to members of
the APA, the TWU, the APFA, agents, other non-management personnel
and certain management employees.

13.During the six-month period ended June 30, 2003, American
borrowed approximately $458 million under various debt agreements
which are secured by aircraft. These agreements have effective
interest rates which are fixed and mature over various periods of
time through 2013. As of June 30, 2003, the effective interest
rate on these agreements ranged up to 8.81 percent.

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

As part of the Vendor Agreements discussed in Note 2, American
entered into an agreement to transfer 33 Fokker 100 aircraft (with
minimal net book value as of June 30, 2003) to a lender in the
third quarter of 2003. In return, the lender has agreed to
restructure approximately $130 million in debt related to certain
of these aircraft. In addition, American will provide shares of
AMR common stock to the lender as discussed in Note 2. However, the
restructured debt agreement contains certain provisions that would
require American to repay certain 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 Bankruptcy
Code. The Company expects to recognize a significant gain as a
result of this restructuring, with the majority of the gain
recognized in the third quarter of 2003, and the remainder
recognized on December 31, 2005, if none of the above events have
occurred.

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AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

American has a fully drawn $834 million credit facility that
expires December 15, 2005. On March 31, 2003, American and certain
lenders in such facility entered into a waiver and amendment that
(i) waived, until May 15, 2003, the requirement that American
pledge additional collateral to the extent the value of the
existing collateral was insufficient under the terms of the
facility, (ii) waived American's liquidity covenant for the quarter
ended March 31, 2003, (iii) modified the financial covenants
applicable to subsequent periods, and (iv) increased the applicable
margin for advances under the facility. On May 15, 2003, American
pledged an additional 30 (non-Section 1110 eligible) aircraft
having an aggregate net book value as of April 30, 2003 of
approximately $450 million. Pursuant to the modified financial
covenants, American is required to maintain at least $1.0 billion
of liquidity, consisting of unencumbered cash and short-term
investments, for the second quarter 2003 and beyond. While the
Company was in compliance with the covenant at June 30, 2003, if
the Company is adversely affected by the risk factors discussed in
Note 2 or elsewhere in this Report, it is uncertain whether the
Company will be able to satisfy this liquidity requirement through
the expiration of the facility at the end of 2005. Failure to do so
or obtain a waiver of this requirement would result in a default
under this facility and would likely trigger defaults under a
significant number of other debt arrangements.

In addition, the required ratio of EBITDAR to fixed charges under
the facility has been decreased until the period ending December
31, 2004, and the next test of such cash flow coverage ratio will
not occur until March 31, 2004. The amendment also provided for a
50 basis point increase in the applicable margin over London
Interbank Offered Rate (LIBOR), which resulted in an effective
interest rate (as of June 30, 2003) of 4.73 percent. The interest
rate will be reset again on September 17, 2003. At American's
option, interest on the facility can be calculated on one of
several different bases. For most borrowings, American would
anticipate choosing a floating rate based upon LIBOR.

As of June 30, 2003, AMR has issued guarantees covering
approximately $935 million of American's tax-exempt bond debt and
American has issued guarantees covering approximately $636 million
of AMR's unsecured debt. In addition, as of June 30, 2003, AMR and
American have issued guarantees covering approximately $521 million
of AMR Eagle's secured debt, and AMR has issued guarantees covering
an additional $176 million of AMR Eagle"s secured debt.

14.Financial Accounting Standards Board Interpretation No. 46,
"Consolidation of Variable Interest Entities" (Interpretation 46),
requires the primary beneficiary of a variable interest entity to
include the assets, liabilities, and results of the activities of
the variable interest entity in its consolidated financial
statements, as well as disclosure of information about the assets
and liabilities, and the nature, purpose and activities of
consolidated variable interest entities. In addition,
Interpretation 46 requires disclosure of information about the
nature, purpose and activities of unconsolidated variable interest
entities in which the Company holds a significant variable
interest. The provisions of Interpretation 46 are effective
immediately for any interests in variable interest entities
acquired after January 31, 2003 and effective beginning in the
third quarter of 2003 for all variable interests acquired before
February 1, 2003. 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 $2.1 billion of
these bonds (with total future payments of approximately $5.2
billion as of June 30, 2003) are guaranteed by American, AMR, or
both. The Company is currently evaluating the applicability of
Interpretation 46 to these airport lease arrangements, certain
aircraft lease arrangement and other arrangements, and the possible
impact on its future consolidated results of operations and
consolidated balance sheet.

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15
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

Financial Accounting Standards Board Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
(Interpretation 45), requires disclosures in interim and annual
financial statements about obligations under certain guarantees
issued by the Company. Furthermore, it requires recognition at the
beginning of a guarantee of a liability for the fair value of the
obligation undertaken in issuing the guarantee, with limited
exceptions including: 1) a parent's guarantee of a subsidiary's
debt to a third party, and 2) a subsidiary's guarantee of the debt
owed to a third party by either its parent or another subsidiary of
that parent. The disclosure requirements are effective for this
filing and have been included in Notes 6, 7 and 8 to the
consolidated financial statements in the 2002 Form 10-K. The
initial recognition and initial measurement provisions are only
applicable on a prospective basis for guarantees issued or modified
after December 31, 2002. This interpretation has had no impact on
the Company's consolidated statement of operations or condensed
consolidated balance sheets.

15.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 2002, the Company completed an impairment analysis for route
acquisition costs in accordance with SFAS 142. The analysis did not
result in an impairment charge. In addition, the Company completed
an impairment analysis related to its $1.3 billion of goodwill and
determined the Company's entire goodwill balance 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 various valuation methods, ultimately
using an allocation of AMR's fair value, which was determined using
market capitalization as the primary indicator of fair value. As a
result, the Company recorded a one-time, non-cash charge, effective
January 1, 2002, of $889 million (net of a tax benefit of $363
million) to write-off all of American's goodwill. This charge is
nonoperational in nature and is reflected as a cumulative effect of
accounting change in the consolidated statements of operations.

16.The Company includes changes in minimum pension liabilities,
changes in the fair value of certain derivative financial
instruments that qualify for hedge accounting and unrealized gains
and losses on available-for-sale securities in comprehensive loss.
For the three months ended June 30, 2003 and 2002, comprehensive
loss was $(475) million and $(487) million, respectively. In
addition, for the six months ended June 30, 2003 and 2002,
comprehensive loss was $(1,527) million and $(1,842) million,
respectively. The difference between net loss and comprehensive
loss is due primarily to the adjustment to the Company's minimum
pension liability, as discussed in Note 6, and the accounting for
the Company's derivative financial instruments under Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended (SFAS 133).

American enters into jet fuel, heating oil and crude swap and
option contracts to protect against increases in jet fuel prices.
Beginning in March 2003, the Company revised its hedging strategy
and, in June 2003, terminated substantially all of its contracts
with maturities beyond March 2004. During the second quarter of
2003, the termination of these contracts resulted in the collection
of approximately $41 million in settlement of the contracts. The
gain on these contracts will continue to be deferred in Accumulated
other comprehensive loss until the time the original underlying jet
fuel hedged is used.

At June 30, 2003, American had fuel hedging agreements with broker-
dealers on approximately 725 million gallons of fuel products,
which represented approximately 29 percent of its expected fuel
needs for the remainder of 2003, approximately 21 percent of its
expected first quarter 2004 fuel needs and an insignificant
percentage of its expected fuel needs beyond the first quarter of
2004. The fair value of the Company's fuel hedging agreements at
June 30, 2003, representing the amount the Company would receive to
terminate the agreements, totaled $115 million, compared to $212
million at December 31, 2002, and is included in Other current
assets.

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16
AMERICAN AIRLINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

17.American sells tickets for flights on its AMR Eagle affiliate
regional carriers which are subsidiaries of AMR. In 2002, 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 mileage proration
agreements, plus a specified connect incentive fee for passengers
connecting with American flights which was recorded as a reduction
to passenger revenue. Furthermore, American provided various
marketing, management and operational services to AMR Eagle, for
which AMR Eagle reimbursed American.

Effective January 2003, American Airlines and AMR Eagle implemented
a preliminary "Fee Per Departure" agreement. Under this agreement,
American pays AMR Eagle a fee per block hour and departure to
operate regional aircraft. The initial block hour and departure
fees were designed to cover AMR Eagle's fully allocated costs and
were in effect for the first quarter of 2003. Effective April
2003, the Company revised the block hour and departure fees to
incorporate a margin. Assumptions for highly volatile or
uncontrollable 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 revenues resulting from the Eagle operation, and certain
marketing and ground handling expenses related to AMR Eagle's
operation are absorbed directly by American. The current agreement
will expire on December 31, 2003.

-14-
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

RESULTS OF OPERATIONS

For the Six Months Ended June 30, 2003 and 2002

Summary American Airlines, Inc.'s (a wholly owned subsidiary of AMR
Corporation (AMR)) net loss for the six months ended June 30, 2003 was
$1.2 billion compared to a net loss of $1.9 billion for the same
period in 2002. American's operating loss of $919 million decreased
$434 million compared to the same period in 2002. The Company's
second quarter 2003 results include $315 million in security cost
reimbursements received under the Emergency Wartime Supplemental
Appropriations Act, 2003 (the Act) (see Note 4 to the condensed
consolidated financial statements for additional information).

The Company's 2003 revenues increased year-over-year due to the
Company's change to a fee per block hour agreement from a revenue
prorate agreement with American Eagle Airlines, Inc. and Executive
Airlines, Inc. (collectively, AMR Eagle), discussed below and in Note
17 to the condensed consolidated financial statements, which was
effective January 1, 2003. Excluding the impact of the Company's
change to a fee per block hour agreement with AMR Eagle, the Company's
2003 revenues continue to decrease year-over-year. The Company's
revenues through April continued to be negatively impacted by the
economic slowdown, the war in Iraq and the outbreak of SARS. These
trends however, began to reverse in May and June. The Company's
revenues increased $450 million, to $8.4 billion, from the same period
last year as a result of the Company's fee per block hour agreement
with AMR Eagle. However, American's passenger revenues decreased by
4.1 percent, or $293 million, in 2003 as compared to the same period
in 2002. American's domestic passenger revenue per available seat
mile (RASM) increased increased 0.4 percent, to 8.62 cents, on a
capacity decrease of 5.9 percent, to 57.7 billion available seat miles
(ASMs). International RASM decreased to 8.50 cents, or 1.9 percent,
on a capacity increase of 1.7 percent. The decrease in international
RASM was due to a 22.8 percent and 0.8 percent decrease in Pacific and
Latin American RASM slightly offset by a 1.4 percent increase in
European RASM. The increase in international capacity was driven by a
16.9 percent and 3.0 percent increase in Pacific and European ASMs,
respectively, slightly offset by a 1.7 percent reduction in Latin
American ASMs.

The Company's Regional Affiliates include two wholly owned
subsidiaries of AMR, American Eagle Airlines, Inc. and Executive
Airlines, Inc. and two independent carriers, Trans States Airlines,
Inc. (Trans States) and Chautauqua Airlines, Inc. (Chautauqua). In
2002, American had a fee per block hour agreement with Chautauqua, and
prorate agreements with AMR Eagle and Trans States. In 2003, American
had fee per block hour agreements with all three carriers. Regional
Affiliates revenue increased $665 million due primarily to the change
to fee per block hour agreements from prorate agreements with AMR
Eagle and Trans States in 2003. Certain amounts from 2002 related to
Regional Affiliates have been reclassified to conform with the 2003
presentation.

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18
The Company's operating expenses increased 0.2 percent, or $16
million. Wages, salaries and benefits decreased 6.0 percent, or $239
million, primarily due to the Modified Labor Agreements and Management
Reductions discussed in Note 2 to the condensed consolidated financial
statements. Aircraft fuel expense increased 15.0 percent, or $168
million, due primarily to a 23.8 percent increase in American's
average price per gallon of fuel. Regional payments increased $711
million due primarily to the fee per block hour agreement with AMR
Eagle in 2003. Commissions, booking fees and credit card expense
decreased 12.7 percent, or $75 million, due to a 5.1 percent decrease
in passenger revenues and the benefit from the changes in the
commission structure implemented in March 2002, somewhat offset by the
increase in Regional Affiliates revenue. Maintenance, materials and
repairs decreased 27.8 percent, or $133 million, due primarily to a
decrease in airframe and engine volumes at the Company's maintenance
bases resulting from a variety of factors including the retirement of
aircraft, the timing of sending engines to repair vendors and a
decrease in the number of flights; reduced aircraft utilization; and
the receipt of certain vendor credits. The Company expects
maintenance, materials and repairs costs to increase as aircraft
utilization increases and the benefit from retiring aircraft subsides.
Aircraft rentals decreased $71 million, or 16.6 percent, due primarily
to concessionary agreements with certain lessors and the removal of
leased aircraft from service in prior periods. Food service decreased
14.1 percent, or $49 million, due primarily to reductions in the level
of food service. Other operating expenses decreased 5.8 percent, or
$68 million, due to decreases in contract maintenance work that
American performs for other airlines, and decreases in travel and
incidental costs, advertising and promotion costs, insurance, and data
processing expenses. Special charges for the six month period ended
June 30, 2003 include (i) a $20 million aircraft related credit to
finalize prior accruals, (ii) $49 million in facility exit costs and
(iii) $72 million in employee charges. See Note 5 to the condensed
consolidated financial statements for additional information regarding
Special charges. U.S. government grant includes a $315 million
benefit recognized for the reimbursement of security service fees from
the U.S. government under the Act.

Other income (expense), historically a net expense, increased $79
million due to the following: Interest income decreased 41.7 percent,
or $15 million, due primarily to decreasing short-term investment
balances and a decrease in interest rates. Interest expense increased
$46 million, or 18.4 percent, resulting primarily from the increase in
the Company's long-term debt.

The Company has experienced significant cumulative losses and as a
result generated certain net operating losses available to offset
future taxes payable. As a result of the cumulative operating losses,
a valuation allowance was established against the full amount of the
Company's net deferred tax asset as of December 31, 2002. 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. During 2003, the Company continued to record a
valuation allowance against its net deferred tax assets, which results
in no tax benefit being recorded for the pretax losses and the charge
to Accumulated other comprehensive loss resulting from the minimum
pension liability adjustment discussed in Note 6 to the condensed
consolidated financial statements. The Company's deferred tax asset
valuation allowance increased $550 million in 2003, to $1.2 billion as
of June 30, 2003.

The effective tax rate for the three months ended June 30, 2002 was
impacted by a $40 million charge resulting from a provision in
Congress' economic stimulus package that changed the period for
carrybacks of net operating losses (NOLs). This change allowed the
Company to carry back 2001 and 2002 NOLs for five years, rather than
two years under the previous law, allowing the Company to more quickly
recover its NOLs. The extended NOL carryback did however result in
the displacement of foreign tax credits taken in prior years. These
credits are now expected to expire before being utilized by the
Company, resulting in this charge.

OTHER INFORMATION

In February 2003, American asked its labor leaders and other employees
for approximately $1.8 billion in annual savings through a combination
of changes in wages, benefits and work rules. The requested $1.8
billion in savings was divided by work group as follows: $660 million
- - pilots; $620 million - Transportation Workers Union represented
employees; $340 million - flight attendants; $100 million - management
and support staff; and $80 million - agents and representatives.
References in this document to American's three major unions include:
the Allied Pilots Association (the APA); the Transportation Workers
Union (the TWU); and the Association of Professional Flight Attendants
(the APFA).

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19
On March 31, 2003, American announced that it had reached agreements
with its three major unions (the Labor Agreements). It also reported
various changes in the pay plans and benefits for non-unionized
personnel including officers and other management (the Management
Reductions). The anticipated cost savings arising from the Labor
Agreements and the Management Reductions met the targeted annual
savings of $1.8 billion.

On April 24, 2003 and April 25, 2003, the three major unions certified
the ratification of the Labor Agreements with some modifications (the
Modified Labor Agreements). The principal modifications were a
shorter duration and the ability to initiate the process of re-
negotiating the Modified Labor Agreements after three years. Even with
these modifications, the Modified Labor Agreements continue to meet
the targeted annual savings.

Of the approximately $1.8 billion in estimated annual savings,
approximately $1.0 billion relate to wage and benefit reductions while
the remaining approximately $.8 billion is expected to be accomplished
through changes in work rules, which will result in additional job
reductions. As a result of these additional job reductions, the
Company incurred $60 million in severance charges in the second
quarter of 2003 (see Note 5 to the condensed consolidated financial
statements for additional information). Wage reductions became
effective on April 1, 2003 for officers and May 1, 2003 for all other
employees. Reductions related to benefits and work rule changes will
be phased in over time. In connection with the changes in wages,
benefits and work rules, the Company granted approximately 38 million
shares of AMR stock to American's employees in the form of stock
options which will vest over a three year period with an exercise
price of $5 per share (see Note 12 for additional information).

In addition, subsequent to the ratification of the Modified Labor
Agreements, the Company reached concessionary agreements with certain
vendors, lessors, lenders and suppliers (collectively, the Vendors,
and the agreements, the Vendor Agreements). Generally, under the
terms of these Vendor Agreements the Company will receive the benefit
of lower rates and charges for certain goods and services, and more
favorable rent and financing terms with respect to certain of its
aircraft. In return for these concessions, the Company anticipates
that it will issue - over time - up to 3.0 million shares of AMR's
common stock to Vendors. As of June 30, 2003, approximately 2.2
million shares have been issued to Vendors.

The Company's revenue environment has improved during the second
quarter of 2003 as reflected in improved unit revenues (revenue per
available seat mile) in May and June 2003. Even with this improvement
however, the Company's revenues are still depressed relative to
historical levels and the Company's recent losses have adversely
affected its financial condition. The Company therefore needs to see
continued improvement in the revenue environment to return it to
sustained profitability at acceptable levels.

To maintain sufficient liquidity as the Company implements its plan to
return to sustained profitability, the Company will need continued
access to additional funding, most likely through a combination of
financings and asset sales. In addition, the Company's ability to
return to sustained profitability will depend on a number of risk
factors, many of which are largely beyond the Company's control.
Among other things, the following factors have had and/or may have a
negative impact on the Company's business and financial results: the
uncertain financial and business environment the Company faces, the
struggling economy, high fuel prices and the availability of fuel, the
residual effects of the war in Iraq, conflicts in the Middle East, the
residual effects of the SARS outbreak, historically low fare levels,
the competitive environment, uncertainties with respect to the
Company's international operations, changes in its business strategy,
actions by U.S. or foreign government agencies, the possible
occurrence of additional terrorist attacks, or the inability of the
Company to satisfy existing liquidity requirements or other covenants
in certain of its credit arrangements. In particular, if the revenue
environment deteriorates beyond normal seasonal trends, or the Company
is unable to access the capital markets or sell assets, it may be
unable to fund its obligations and sustain its operations.

-17-

20
During 2001 and 2002, the Company raised approximately $7.5 billion of
funding to finance capital commitments and to fund operating losses.
The Company expects that it will need continued access to the capital
markets until such time as the Company returns to sustained
profitability. The Company had approximately $1.8 billion in
unrestricted cash and short-term investments as of June 30, 2003. The
Company also had available possible future financing sources,
including, but not limited to: (i) a limited amount of additional
secured aircraft debt (after giving effect to the July 2003 enhanced
equipment trust certificates transaction described below, virtually
all of the Company's Section 1110-eligible aircraft are encumbered),
(ii) sale-leaseback transactions of owned property, including aircraft
and real estate, (iii) securitization of future operating receipts,
(iv) unsecured debt and (v) the potential sale of certain non-core
assets. However, the availability and level of these financing sources
cannot be assured, particularly in light of the fact that the Company
has fewer unencumbered assets available than it had in the past. To
the extent that the Company's revenues deteriorate and it is unable to
access capital markets and raise additional capital, the Company may
be unable to fund its obligations and sustain its operations.

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

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

American's credit ratings are significantly below investment grade. In
February 2003, Moody's the senior unsecured ratings of American and
the ratings of most of American's secured debt. Also in February 2003,
Standard & Poor's lowered its long-term corporate credit ratings for
American and lowered the secured debt rating of American. American's
short-term rating was withdrawn. Ratings on most of American's non-
enhanced equipment trust certificates were also lowered. In March
2003, Standard & Poor's further lowered its long-term corporate credit
ratings for American and lowered the secured debt rating of American.
Ratings on most of American's non-enhanced equipment trust
certificates were also lowered. These previous reductions have
increased the Company's borrowing costs. On June 9, 2003, Moody's
affirmed the ratings of American, removed the ratings from review for
possible downgrade, and gave the ratings a negative outlook. On June
20, 2003, Standard & Poor's raised its ratings of American and removed
the ratings from CreditWatch. Additional significant reductions in
American's credit ratings would further increase its borrowing or
other costs and further restrict the availability of future financing.

American has a fully drawn $834 million credit facility that expires
December 15, 2005. On March 31, 2003, American and certain lenders in
such facility entered into a waiver and amendment that (i) waived,
until May 15, 2003, the requirement that American pledge additional
collateral to the extent the value of the existing collateral was
insufficient under the terms of the facility, (ii) waived American's
liquidity covenant for the quarter ended March 31, 2003, (iii)
modified the financial covenants applicable to subsequent periods, and
(iv) increased the applicable margin for advances under the facility.
On May 15, 2003, American pledged an additional 30 (non-Section 1110
eligible) aircraft having an aggregate net book value as of April 30,
2003 of approximately $450 million. Pursuant to the modified
financial covenants, American is required to maintain at least $1.0
billion of liquidity, consisting of unencumbered cash and short-term
investments, for the second quarter 2003 and beyond. While the
Company was in compliance with the covenant at June 30, 2003, if the
Company is adversely affected by the risk factors discussed in Note 2
to the condensed consolidated financial statements or elsewhere in
this Report, it is uncertain whether the Company will be able to
satisfy this liquidity requirement through the expiration of the
facility at the end of 2005. Failure to do so or obtain a waiver of
this requirement would result in a default under this facility and
would likely trigger defaults under a significant number of other debt
arrangements.

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21
In addition, the required ratio of EBITDAR to fixed charges under the
facility has been decreased until the period ending December 31, 2004,
and the next test of such cash flow coverage ratio will not occur
until March 31, 2004. The amendment also provided for a 50 basis
point increase in the applicable margin over London Interbank Offered
Rate (LIBOR), which resulted in an effective interest rate (as of June
30, 2003) of 4.73 percent. The interest rate will be reset again on
September 17, 2003. At American's option, interest on the facility
can be calculated on one of several different bases. For most
borrowings, American would anticipate choosing a floating rate based
upon LIBOR.

In April 2003, the President signed the Act, which includes aviation-
related assistance provisions. The Act authorized payment of (i) $100
million to compensate air carriers for the direct costs associated
with the strengthening of flight deck doors and locks and (ii) $2.3
billion to reimburse air carriers for increased security costs which
was distributed in proportion to the amounts each carrier had paid or
collected in passenger security and air carrier security fees to the
Transportation Security Administration as of the Act's enactment (the
Security Fee Reimbursement). In addition, the Act suspends the
collection of the passenger security fee from June 1, 2003 until
October 1, 2003 and authorizes the extension of war-risk insurance
through August 31, 2004 (and permits further extensions until December
31, 2004). The Act also limits the total cash compensation for the
two most highly compensated named executive officers in 2002 for
certain airlines, including the Company, during the period April 1,
2003 to April 1, 2004 to the amount of salary received by such
officers, or their successors, in 2002. A violation of this executive
compensation provision would require the carrier to repay the
government for the amount of the Security Fee Reimbursement. The
Company does not anticipate any difficulties in complying with this
limitation on executive compensation and believes the likelihood of
repaying the government for the amount of the Security Fee
Reimbursement is remote. The Company's Security Fee Reimbursement was
$315 million (net of $3 million and $43 million in payments to
independent regional carriers and AMR Eagle, respectively, who
operated under revenue prorate agreements during a portion of the
period covered by the compensation) and was recorded as a reduction to
operating expenses during the second quarter of 2003. The Company's
compensation for the direct costs associated with strengthening flight
deck doors will be recorded as a reduction to capitalized flight
equipment as such amounts are received.

The Company has restricted cash and short-term investments related to
projected workers' compensation obligations and various other
obligations of $550 million as of June 30, 2003. In the first quarter
of 2003, the Company redeemed $339 million of tax-exempt bonds that
were backed by standby letters of credit secured by restricted cash
and short-term investments resulting in a reduction in restricted
cash and short-term investments. Of the $339 million of tax-exempt
bonds that were redeemed, $253 million were accounted for as
operating leases. Payments to redeem these tax-exempt special
facility revenue bonds are generally considered prepaid facility
rentals and will reduce future operating lease commitments. The
remaining $86 million of tax-exempt bonds that were redeemed were
accounted for as debt and had original maturities in 2014 through
2024.

As of June 30, 2003 the Company had approximately $202 million in
fuel prepayments and credit card holdback deposits classified as
Other current assets and Other assets in the condensed consolidated
balance sheet.

As discussed in Note 9 to the condensed consolidated financial
statements, the Company reached concessionary agreements with certain
lessors. The Vendor Agreements with these lessors affected the
payments, lease term, and other conditions of certain leases. As a
result of these changes to the payment and lease terms, 30 leases
which were previously accounted for as operating leases were
converted to capital leases, and one lease which was previously
accounted for as a capital lease was converted to an operating lease.
The remaining leases did not change from their original
classification. The Company recorded the new capital leases at the
fair value of the respective assets being leased. These changes did
not have a significant effect on the Company's condensed consolidated
balance sheet.

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22
In addition, certain of the concessionary 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 Bankruptcy Code. If any one of these events were to occur, the
Company would be responsible for approximately $11 million in
additional lease payments as of June 30, 2003. This amount will
increase to $230 million prior to the expiration of the provision on
December 31, 2005. Such amounts are being treated as contingent
rentals and will only be recognized if they become due.

As part of the Vendor Agreements discussed in Note 2 to the condensed
consolidated financial statements, American entered into an agreement
to transfer 33 Fokker 100 aircraft (with minimal net book value as of
June 30, 2003) to a lender in the third quarter of 2003. In return,
the lender has agreed to restructure approximately $130 million in
debt related to certain of these aircraft. In addition, American
will provide shares of AMR common stock to the lender as discussed in
Note 2 to the condensed consolidated financial statements. However,
the restructured debt agreement contains certain provisions that
would require American to repay certain 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 Bankruptcy Code. The Company
expects to recognize a significant gain as a result of this
restructuring, with the majority of the gain recognized in the third
quarter of 2003, and the remainder recognized on December 31, 2005,
if none of the above events have occurred.

Net cash provided by operating activities in the six-month period
ended June 30, 2003 was $147 million, an increase of $238 million
over the same period in 2002. Included in net cash provided by
operating activities the first six months of 2003 was the receipt of
a $515 million federal tax refund and the receipt of $315 million
from the government under the Act. Included in net cash used for
operating activities for the first six months of 2002 was
approximately $569 million received by the Company as a result of the
utilization of its 2001 NOLs. Capital expenditures for the first six
months of 2003 were $631 million, and included the acquisition of
seven Boeing 767-300ERs and two Boeing 777-200 ERs aircraft. These
capital expenditures were financed primarily through secured mortgage
and debt agreements.

During the six-month period ended June 30, 2003, American borrowed
approximately $458 million under various debt agreements which are
secured by aircraft and other property. These agreements have
effective interest rates which are fixed and mature over various
periods of time through 2013. As of June 30, 2003, the effective
interest rate on these agreements ranged up to 8.81 percent.

In June 2003, the Company sold its interest in Worldspan, a computer
reservations company, for $180 million in cash and a $39 million
promissory note, resulting in a gain of $17 million which is included
in Other income (loss) in the consolidated statement of operations.

As of June 30, 2003, the Company had commitments to acquire the
following aircraft: two Boeing 767-300ERs in 2003 and an aggregate of
47 Boeing 737-800s and nine Boeing 777-200ERs in 2006 through 2010.
Future payments for all aircraft, including the estimated amounts for
price escalation, will approximate $70 million during the remainder of
2003, $0 million in 2004, $118 million in 2005 and an aggregate of
approximately $2.6 billion in 2006 through 2010. Boeing Capital
Corporation has agreed to provide backstop financing for all Boeing
aircraft deliveries in 2003. In return, American has granted Boeing a
security interest in certain advance payments previously made and in
certain rights under the aircraft purchase agreement between American
and Boeing.

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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 $2.1 billion of these bonds (with total future
payments of approximately $5.2 billion as of June 30, 2003) are
guaranteed by American, AMR, or both. These guarantees can only be
invoked in the event American defaults on the lease obligation and
certain other remedies are not available. Approximately $740 million
of these special facility revenue bonds contain mandatory tender
provisions that require American to repurchase the bonds at various
times through 2008, including $198 million in November 2003. 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 be
considered prepaid facility rentals and would reduce future operating
lease 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 Pension Plan Income
Security Act (ERISA). The Company's 2003 minimum required pension
contributions are approximately $186 million and the Company's
estimated 2004 minimum required pension contributions are $600
million. Due to uncertainties regarding significant assumptions
involved in estimating future required contributions, such as pension
plan benefit levels, interest rate levels and the amount and timing of
asset returns, the Company is not able to reasonably estimate the
amount of future required contributions beyond 2004. However, based
on the current regulatory environment and market conditions, the
Company expects its 2005 minimum required pension contributions to
significantly exceed its 2004 minimum required pension contributions.

A provision in the scope clause of American's prior contract with the
Allied Pilots Associations (APA) limited the number of available seat
miles (ASMs) and block hours that could be flown under American's
marketing code (AA) by American's regional carrier partners when
American pilots are on furlough (the so-called ASM cap). To ensure
that American remained in compliance with the ASM cap, American and
American Eagle took several steps in 2002 to reduce the number of
ASMs flown by American's wholly-owned commuter air carriers. As one
of those measures, AMR Eagle signed a letter of intent to sell
Executive Airlines, its San Juan-based subsidiary.

Another provision in the prior APA contract limited to 67 the total
number of regional jets with more than 44 seats that could be flown
under the AA code by American's regional carrier partners. As AMR
Eagle continued to accept previously-ordered Bombardier and Embraer
regional jets this cap would have been reached in early 2003. To
ensure that American remained in compliance with the 67-aircraft cap,
AMR Eagle reached an agreement to dispose of 14 Embraer ERJ-145
aircraft from its fleet. Trans States Airlines, an AmericanConnection
carrier, agreed to acquire these aircraft. Under the prior contract
between AA and the APA, Trans States would have had to operate these
aircraft under its AX code, rather than the AA* code, at its St. Louis
hub.

The Labor Agreement with the APA (one of the Modified Labor
Agreements), ratified in April 2003, modified the provisions in the
APA contract described in the immediately preceding two paragraphs to
give the Company more flexibility with its American Eagle operations.
The limitations on the use of regional jets were substantially reduced
and are now tied to 110 percent of the size of American's narrowbody
aircraft fleet. As a consequence of these modifications, it is no
longer necessary to use Trans States' AX marketing code on flights
operated by Trans States as the AmericanConnection, and AMR Eagle has
discontinued its plans to sell Executive Airlines. In addition, AMR
Eagle has revised its agreement to dispose of 14 Embraer ERJ-145
aircraft to include ten rather than 14 aircraft.

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The Company carries insurance for public liability, passenger
liability, property damage and all-risk coverage for damage to its
aircraft. As a result of the September 11, 2001 events, aviation
insurers have 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, they significantly increased the premiums for such coverage as
well as for aviation insurance in general. The U.S. government has
provided commercial war-risk insurance for U.S. based airlines until
August 12, 2003 covering losses to employees, passengers, third
parties and aircraft. The Company believes this insurance coverage
will be extended beyond August 12, 2003 because the Act provides for
the insurance to remain in place until August 31, 2004, and the
Department of Transportation has stated its intent to do so. In
addition, the Secretary of Transportation may extend the policy until
December 31, 2004, at his discretion. However, there is no guarantee
that it will be extended. In the event the commercial insurance
carriers further reduce the amount of insurance coverage available to
the Company or significantly increase the cost of aviation insurance,
or if the Government fails to renew the war-risk insurance that it
provides, the Company's operations and/or financial position and
results of operations would be materially adversely affected.

FORWARD-LOOKING INFORMATION

Statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, which represent the Company's expectations or beliefs
concerning future events. When used in this document and in
documents incorporated herein by reference, the words "expects,"
"plans," "anticipates," "believes," and similar expressions are
intended to identify forward-looking statements. Forward-looking
statements include, without limitation, the Company's expectations
concerning operations and financial conditions, including changes in
capacity, revenues, and costs, expectations as to future financing
needs, overall economic conditions and plans and objectives for
future operations, the impact on the Company of the events of
September 11, 2001 and of its results of operations for the past two
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. Forward-looking statements are subject
to a number of risk factors that could cause actual results to differ
materially from our expectations. The following factors, in addition
to other possible factors not listed, could cause the Company's
actual results to differ materially from those expressed in forward-
looking statements: the uncertain financial and business environment
the Company faces, the struggling economy, high fuel prices and the
availability of fuel, the residual effects of the war in Iraq,
conflicts in the Middle East, the residual effects of the SARS
outbreak, historically low fare levels, the competitive environment,
uncertainties with respect to the Company's international operations,
changes in its business strategy, actions by U.S. or foreign
government agencies, the possible occurrence of additional terrorist
attacks, the inability of the Company to satisfy existing liquidity
requirements or other covenants in certain of its credit agreements
and the availability of future financing. Additional information
concerning these and other factors is contained in the Company's
Securities and Exchange Commission filings, including but not limited
to the Form 10-K for the year ended December 31, 2002 and the Form 10-
Q for the quarter ended March 31, 2003.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Except as discussed below, there have been no material changes in
market risk from the information provided in Item 7A. Quantitative and
Qualitative Disclosures About Market Risk of the Company's 2002 Form
10-K.

The risk inherent in the Company's fuel related market risk sensitive
instruments and positions is the potential loss arising from adverse
changes in the price of fuel. The sensitivity analysis presented does
not consider the effects that such adverse changes may have on overall
economic activity, nor does it consider additional actions management
may take to mitigate the Company's exposure to such changes. Actual
results may differ.

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Aircraft Fuel The Company's earnings are affected by changes in the
price and availability of aircraft fuel. In order to provide a
measure of control over price and supply, the Company trades and ships
fuel and maintains fuel storage facilities to support its flight
operations. The Company also manages the price risk of fuel costs
primarily by using jet fuel, heating oil, and crude swap and option
contracts. As of June 30, 2003, the Company had hedged approximately
29 percent of its expected fuel needs for the remainder of 2003,
approximately 21 percent of its expected first quarter 2004 fuel needs
and an insignificant percentage of its expected fuel needs beyond the
first quarter of 2004, compared to approximately 32 percent of its
estimated 2003 fuel requirements, 15 percent of its estimated 2004
fuel requirements, and approximately four percent of its estimated
2005 fuel requirements hedged at December 31, 2002. Beginning in March
2003, the Company revised its hedging strategy and, in June 2003,
terminated substantially all of its contracts with maturities beyond
March 2004. The Company's reduced credit rating has limited its
ability to enter into certain types of fuel hedge contracts. A
further deterioration of its credit rating or liquidity position may
negatively affect the Company's ability to hedge fuel in the future.
For additional information see Note 16 to the condensed consolidated
financial statements.

Item 4. Controls and Procedures

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 design and operation of the Company's disclosure
controls as of June 30, 2003. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's
disclosure controls and procedures were effective. There have been no
significant changes in the Company's internal controls or in other
factors that could significantly affect internal controls.

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PART II: OTHER INFORMATION

Item 1. Legal Proceedings

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

On May 13, 1999, the United States (through the Antitrust Division of
the Department of Justice) sued AMR Corporation, American Airlines,
Inc., and AMR Eagle Holding Corporation in federal court in Wichita,
Kansas (United States v. AMR Corporation, et al, No. 99-1180-JTM,
United States District Court for the District of Kansas). The lawsuit
alleges that American unlawfully monopolized or attempted to
monopolize airline passenger service to and from Dallas/Fort Worth
International Airport (DFW) by increasing service when new competitors
began flying to DFW, and by matching these new competitors' fares.
The Department of Justice seeks to enjoin American from engaging in
the alleged improper conduct and to impose restraints on American to
remedy the alleged effects of its past conduct. On April 27, 2001,
the U.S. District Court for the District of Kansas granted American's
motion for summary judgment. On June 26, 2001, the U.S. Department of
Justice appealed the granting of American's motion for summary
judgment (United States v. AMR Corporation, et al, No. 01-3203, United
States District Court of Appeals for the Tenth Circuit), and on
September 23, 2002, the parties presented oral arguments to the 10th
Circuit Court of Appeals, which affirmed the summary judgment on July
3, 2003. It is unknown whether the U. S. Department of Justice will
seek a review of the 10th Circuit Court of Appeals' decision by the
U.S. Supreme Court. A final adverse court decision imposing
restrictions on the Company's ability to respond to competitors would
have an adverse impact on the Company.

Between May 14, 1999 and June 7, 1999, seven class action lawsuits
were filed against AMR Corporation, American Airlines, Inc., and AMR
Eagle Holding Corporation in the United States District Court in
Wichita, Kansas seeking treble damages under federal and state
antitrust laws, as well as injunctive relief and attorneys' fees (King
v. AMR Corp., et al.; Smith v. AMR Corp., et al.; Team Electric v. AMR
Corp., et al.; Warren v. AMR Corp., et al.; Whittier v. AMR Corp., et
al.; Wright v. AMR Corp., et al.; and Youngdahl v. AMR Corp., et al.).
Collectively, these lawsuits allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by increasing service when new competitors began flying
to DFW, and by matching these new competitors' fares. Two of the
suits (Smith and Wright) also allege that American unlawfully
monopolized or attempted to monopolize airline passenger service to
and from DFW by offering discounted fares to corporate purchasers, by
offering a frequent flyer program, by imposing certain conditions on
the use and availability of certain fares, and by offering override
commissions to travel agents. The suits propose to certify several
classes of consumers, the broadest of which is all persons who
purchased tickets for air travel on American into or out of DFW from
1995 to the present. On November 10, 1999, the District Court stayed
all of these actions pending developments in the case brought by the
Department of Justice (see above description). To date no class has
been certified. The Company intends to defend these lawsuits
vigorously. One or more final adverse court decisions imposing
restrictions on the Company's ability to respond to competitors or
awarding substantial money damages would have an adverse impact on the
Company.

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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 court
granted class action certification to the plaintiff on September 17,
2002, defining the plaintiff class as all travel agents in the United
States, Puerto Rico, and the United States Virgin Islands, who, at any
time from October 1, 1997 to the present, issued tickets,
miscellaneous change orders, or prepaid ticket advices for travel on
any of the defendant airlines. The case is stayed as to US Airways
and United Air Lines, since they filed for bankruptcy. American is
vigorously defending the lawsuit. Defendant carriers filed a motion
for summary judgment on December 10, 2002. Trial is set to begin on
February 2, 2004. A final adverse court decision awarding substantial
money damages or placing restrictions on the Company's commission
policies or practices would have an adverse impact on the Company.

Between April 3, 2003 and June 5, 2003 three lawsuits were filed by
travel agents who 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. American is
vigorously defending these lawsuits. A final adverse court decision
awarding substantial money damages or placing restrictions on the
Company's distribution practices would have an adverse impact on the
Company.

On April 26, 2002, six travel agencies filed Albany Travel Co., et al.
v. Orbitz, LLC, et al., in the United States District Court for the
Central District of California against American, United Air Lines,
Delta Air Lines, and Orbitz, LLC, alleging that American and the other
defendants: (i) conspired to prevent travel agents from acting as
effective competitors in the distribution of airline tickets to
passengers in violation of Section 1 of the Sherman Act; and
(ii) conspired to monopolize the distribution of common carrier air
travel between airports in the United States in violation of Section 2
of the Sherman Act. The named plaintiffs seek to certify a nationwide
class of travel agents, but no class has yet been certified. American
is vigorously defending the lawsuit. On November 25, 2002, the
District Court stayed this case pending a judgment in Hall et. al. v.
United Airlines, et. al. (see above description). A final adverse
court decision awarding substantial money damages or placing
restrictions on the Company's distribution practices would have an
adverse impact on the Company.

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

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On May 13, 2002, the named plaintiffs in Always Travel, et. al. v. Air
Canada, et. al., pending in the Federal Court of Canada, Trial
Division, Montreal, filed a statement of claim alleging that between
1995 and the present, American, the other defendant airlines, and the
International Air Transport Association conspired to reduce
commissions paid to Canada-based travel agents in violation of
Section 45 of the Competition Act of Canada. The named plaintiffs
seek to certify a nationwide class of travel agents. Plaintiffs'
motion for certification is set for hearing on September 2, 2003.
American is vigorously defending the lawsuit. A final adverse court
decision awarding substantial money damages or placing restrictions on
the Company's commission policies would have an adverse impact on the
Company.

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

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

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

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PART II

Item 6. Exhibits and Reports on Form 8-K

The following exhibits are included herein:

12 Computation of ratio of earnings to fixed charges for the three
and six months ended June 30, 2003 and 2002.

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).

Form 8-Ks filed under Item 5 - Other Events

On April 1, 2003, American Airlines filed a report on Form 8-K
relating to a press release issued by AMR to announce "ground breaking
accords" with the leadership of the three major unions representing
American Airlines, Inc. employees.

On April 1, 2003, American Airlines filed a report on Form 8-K
relating to a press release issued by AMR to announce that American
Airlines would be relying on the grace periods included in certain of
its debt and lease obligations while it continued to negotiate
restructuring agreements with its various stakeholders.

On April 17, 2003, American Airlines filed a report on Form 8-K
relating to a press release issued by AMR to announce that American
Airlines' employee groups rallied to ratify ground-breaking
agreements to achieve $1.8 billion in annual employee cost savings.

On April 23, 2003, American Airlines filed a report on Form 8-K
relating to a press release issued by AMR to announce AMR's first
quarter 2003 results and announce that the planned conference call
with the financial community relating to AMR's first quarter results
would not occur as previously scheduled.

On April 25, 2003, American Airlines filed a report on Form 8-K
relating to a press release issued by AMR to report the AMR Board of
Directors accepted the resignation of Donald J. Carty as CEO and
Chairman of the Company and as a director of the Company. The Board
named Edward A. Brennan as Executive Chairman and current President
and COO Gerard J. Arpey as the new Chief Executive Officer and elected
Mr. Arpey as a director of AMR.

On June 12, 2003, American Airlines filed a report on Form 8-K to
provide certain data regarding fuel, traffic and capacity, as well as
highlights from Mr. Arpey's speech at the Merrill Lynch Global
Transportation Conference and an updated fleet plan for AMR.

On June 25, 2003, American Airlines filed a report on Form 8-K to
provide unit cost expectations for the second quarter of 2003, the
weighted-average number of AMR common shares outstanding for the
second quarter of 2003 and information regarding AMR's cash position.
On July 3, 2003, American Airlines filed an amended report on Form 8-K
to provide additional information regarding the unit cost expectations
provided in the June 25, 2003 report on Form 8-K.

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

On April 23, 2003, American Airlines filed a report on Form 8-K
relating to furnish a press release issued by AMR to announce AMR's
first quarter 2003 results.

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Signature

Pursuant to the requirements 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.

Date: July 18, 2003 BY: /s/ Jeffrey C. Campbell
Jeffrey C. Campbell
Senior Vice President and Chief
Financial Officer

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