AMR CORP - 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 1-8400.

AMR Corporation
(Exact name of registrant as specified in its charter)

Delaware 75-1825172
(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 - 158,841,199 shares as of July 14, 2003.

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INDEX

AMR CORPORATION

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

AMR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In millions, except per share amounts)

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

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AMR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (In millions)

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

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AMR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In millions)

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

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AMR CORPORATION
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. The
condensed consolidated financial statements include the accounts of
AMR Corporation (AMR or the Company) and its wholly owned
subsidiaries, including its principal subsidiary American Airlines,
Inc. (American). For further information, refer to the consolidated
financial statements and footnotes thereto included in the AMR 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, 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. This
change does not have any impact on the Company's consolidated
financial statements, but has changed the results of the Company's
wholly owned subsidiaries on an individual basis. 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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AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

In addition, subsequent to the ratification of the Modified Labor
Agreements, the Company and American 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 or American
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.

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AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

3.The Company accounts for its 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 and loss per share amounts if
the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation (in millions, except
per share amounts):

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 $358 million
(net of payments to independent regional affiliates) 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.

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AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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.

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.

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AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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):

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):

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AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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 $221 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.

8.As of June 30, 2003, the Company had commitments to acquire the
following aircraft: two Boeing 767-300ERs, 12 Embraer regional jets
and seven Bombardier CRJ-700s in 2003; an aggregate of 74 Embraer
regional jets and six Bombardier CRJ-700s in 2004 through 2006; 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 $407
million during the remainder of 2003, $755 million in 2004, $711
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. In
addition, the Company has pre-arranged financing or backstop
financing for all of its 2003 Embraer and Bombardier aircraft
deliveries and a portion of its post 2003 deliveries.

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.

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12
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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.

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 jet aircraft and 30 turboprop
aircraft under operating leases and 99 jet aircraft and 55
turboprop 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.

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13
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

10.Accumulated depreciation of owned equipment and property at June
30, 2003 and December 31, 2002 was $8.8 billion and $8.4 billion,
respectively. Accumulated amortization of equipment and property
under capital leases at June 30, 2003 and December 31, 2002 was
$1.0 billion and $974 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 $533 million in 2003,
to $903 million as of June 30, 2003.

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 the Company'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, from treasury stock, at an average price of $4.81 on the
date of grant resulting in a re-allocation from Treasury stock to
Additional paid-in capital of $128 million. 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 and
AMR Eagle borrowed approximately $641 million under various debt
agreements which are secured by aircraft. These agreements have
effective interest rates which are fixed or variable based on
London Interbank Offered Rate (LIBOR) plus a spread and mature over
various periods of time through 2019. 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.

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14
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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.

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 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.

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15
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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.

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 AMR,
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 $1.4 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 AMR 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
utilizing 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 $988 million ($6.37 per
share, net of a tax benefit of $363 million) to write-off all of
AMR'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 $(417) million and $(496) million, respectively. In
addition, for the six months ended June 30, 2003 and 2002,
comprehensive loss was $(1,480) million and $(1,984) 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).

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16
AMR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)

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.

17.The following table sets forth the computations of basic and
diluted loss per share before cumulative effect of accounting
change (in millions, except per share data):

For the three and six months ended June 30, 2003 approximately nine
million and five million potential dilutive shares, respectively,
were not added to the denominator, because inclusion of such shares
would be antidilutive, as compared to approximately five million
and seven million shares, respectively, for the three and six
months ended June 30, 2002.

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

RESULTS OF OPERATIONS

For the Three Months Ended June 30, 2003 and 2002

Summary AMR Corporation's (AMR or the Company) net loss during the
second quarter of 2003 was $75 million, or $.47 per share, as compared
to a net loss of $495 million, or $3.19 per share for the same period
in 2002. AMR's operating earnings of $87 million increased $688
million compared to the same period in 2002. The Company's second
quarter 2003 results include $358 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). AMR's
principal subsidiary is American Airlines, Inc. (American).

The Company's second quarter 2003 revenues continued to decrease year-
over-year, but at a slower rate than its capacity. In April, the
Company's revenues continued to be negatively impacted by the economic
slowdown, the war in Iraq and the outbreak of Severe Acute Respiratory
Syndrome (SARS). In May and June however, these trends reversed and
while capacity was down year-over-year, the Company showed unit
revenue (passenger revenue per available seat mile) improvement.
Overall, the Company's revenues decreased approximately $184 million,
or 4.1 percent, to $4.3 billion in the second quarter of 2003 from the
same period last year. American's passenger revenues decreased by 5.4
percent, or $203 million, in the second quarter of 2003 as compared to
the same period in 2002. American's second quarter domestic passenger
revenue per available seat mile (RASM) however, increased 4.0 percent,
to 8.81 cents, on a capacity decrease of 9.6 percent, to 29.0 billion
available seat miles (ASMs). International RASM decreased to 8.57
cents, or 1.2 percent, on a capacity decrease of 2.7 percent. The
decrease in international RASM was due to a 20.3 percent and 1.8
percent decrease in Pacific and Latin American RASM, respectively,
slightly offset by a 2.4 percent increase in European RASM. The
decrease in international capacity was driven by a 9.5 percent, 2.4
percent and 1.8 percent reduction in Pacific, European and Latin
American ASMs, respectively.

The Company's Regional Affiliates include two wholly owned
subsidiaries, 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). 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' traffic
increased 18.0 percent while capacity increased 20.1 percent, to
approximately 2.1 billion ASMs. Certain amounts from 2002 related to
Regional Affiliates have been reclassified to conform with the 2003
presentation.

The Company's operating expenses decreased 17.1 percent, or $872
million. Wages, salaries and benefits decreased 12.1 percent, or $257
million, primarily due to the Modified Labor Agreements and Management
Reductions discussed in Note 2 to the condensed consolidated financial
statements. Commissions, booking fees and credit card expense
decreased 16.4 percent, or $51 million, due primarily to the benefit
from the changes in the commission structure implemented in March 2002
and a 4.6 percent decrease in passenger revenues. Maintenance,
materials and repairs decreased 34.4 percent, or $98 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 $37 million, or 17.3
percent, due primarily to concessionary agreements with certain
lessors and the removal of leased aircraft from service in prior
periods. Food service decreased 16.1 percent, or $29 million, due
primarily to reductions in the level of food service. Other operating
expenses decreased 15.4 percent, or $107 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 second quarter of 2003 include (i) a $20 million
aircraft related credit to finalize prior accruals, (ii) $49 million
in facility exit costs and (iii) $47 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 $358 million benefit recognized for the reimbursement
of security service fees from the U.S. government under the Act.

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18
Other income (expense), historically a net expense, increased $43
million due to the following: Interest income decreased 55.6 percent,
or $10 million, due primarily to decreasing short-term investment
balances and decreases in interest rates. Interest expense increased
$26 million, or 15.9 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 $150 million in the second quarter of
2003, to $903 million as of June 30, 2003.

The effective tax rate for the three months ended June 30, 2002 was
impacted by a $30 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.

(*) Excludes $441 million, or 1.09 cents per ASM, and $32 million,
or .07 cents per ASM, of expenses incurred related to Regional
Affiliates in 2003 and 2002, respectively. Calculated using
American mainline jet operations ASMs. Therefore both the
numerator and the denominator exclude Regional Affiliates. The
Company believes that excluding costs related to Regional
Affiliates provides a measure which is more comparable to
American's historical operating expenses per ASM.
(**) Calculated using American mainline jet operations ASMs.

Note 1: Certain amounts have been reclassified to conform with the
2003 presentation.
Note 2: American Airlines, Inc. 2003 operating expenses include
expenses incurred related to fee per block hour
agreements with Regional Affiliates - American Eagle,
Executive, Trans States and Chautauqua, whereas 2002 operating
expenses include expenses incurred related to fee per
block hour agreements with Regional Affiliate - Chautauqua.

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19
Operating aircraft at June 30, 2003, included:

The average aircraft age for American's aircraft is 10.9 years and 6.9
years for AMR Eagle aircraft.

In addition, the following owned and leased aircraft were not operated
by the Company as of June 30, 2003: six operating leased McDonnell
Douglas DC-9s, three operating leased McDonnell Douglas MD-80s, 16
owned Fokker 100s, ten owned Embraer 145s and 16 capital leased and
one owned Saab 340B.

In 2003, AMR Eagle agreed to sell 19 ATR 42 aircraft to Federal
Express, Inc., with deliveries beginning in June 2003 and ending in
December 2004.

For the Six Months Ended June 30, 2003 and 2002

Summary AMR Corporation's (AMR or the Company) net loss for the six
months ended June 30, 2003 was $1.1 billion, or $7.11 per share, as
compared to a net loss of $2.1 billion, or $13.27 per share for the
same period in 2002. The Company's 2003 results include $358 million
in security cost reimbursements received under the Act (see Note 4 to
the condensed consolidated financial statements for additional
information). The Company's 2002 results include a one-time, non-cash
charge to record the cumulative effect of a change in accounting,
effective January 1, 2002, of $988 million, or $6.37 per share, to
write-off all of AMR's goodwill upon the adoption of Statement of
Financial Accounting Standards Board No. 142 "Goodwill and Other
Intangible Assets" (see Note 15 to the condensed consolidated
financial statements). AMR's operating loss of $782 million decreased
$548 million compared to the same period in 2002.

The Company's 2003 revenues continued 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. Overall, the
Company's revenues decreased approximately $227 million, or 2.6
percent, to $8.4 billion in 2003 from the same period in 2002.
American's passenger revenues decreased by 4.1 percent, or $293
million, in 2003 from the same period in 2002. American's domestic
revenue per available seat mile (RASM) for the six months ended June
30, however, 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.

In 2002, American had a fixed fee per block hour agreement with
Chautauqua, and prorate agreements with AMR Eagle and Trans States.
In 2003, American had fixed fee per block hour agreements with all
three carriers. Regional Affiliates' traffic increased 16.1 percent
in 2003 while capacity increased 17.5 percent, to approximately 4.1
billion ASMs. Certain amounts from 2002 related to Regional Affiliates
have been reclassified to conform with the 2003 presentation.

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20
Other revenues increased 11.4 percent, or $53 million, due primarily
to increases in ticket change fees coupled with changes to the
Company's change fee arrangements with travel agencies, increases in
airfreight service fees due primarily to fuel surcharges and increases
in AAdvantage fees.

The Company's operating expenses decreased 7.7 percent, or $775
million. Wages, salaries and benefits decreased 5.7 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 16.3 percent, or $193
million, due primarily to a 23.8 percent increase in American's
average price per gallon of fuel. Commissions, booking fees and credit
card expense decreased 18.4 percent, or $116 million, due primarily to
the benefit from the changes in the commission structure implemented
in March 2002 and a 3.5 percent decrease in passenger revenues.
Maintenance, materials and repairs decreased 24.1 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 $73 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 14.3 percent, or $50 million, due
primarily to reductions in the level of food service. Special charges
for the six months 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 $358 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 $83
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
$52 million, or 15.8 percent, resulting primarily from the increase in
the Company's long-term debt. Miscellaneous-net decreased $9 million,
due to the write-down of certain investments held by the Company
during the first quarter of 2003.

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 $533 million in 2003, to $903 million as
of June 30, 2003.

The effective tax rate for the six months ended June 30, 2002 was
impacted by a $57 million charge resulting from a provision in
Congress' economic stimulus package that changed the period for
carrybacks of net operating losses (NOLs).

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21

(*) Excludes $865 million, or 1.07 cents per ASM, and $59 million,
or .07 cents per ASM, of expenses incurred related to Regional
Affiliates in 2003 and 2002, respectively. Calculated using
American mainline jet operations ASMs. Therefore both the
numerator and the denominator exclude Regional Affiliates. The
Company believes that excluding costs related to Regional
Affiliates provides a measure is more comparable to American's
historical operating expenses per ASM.
(**) Calculated using American mainline jet operations ASMs.

Note 1: Certain amounts have been reclassified to conform with the
2003 presentation.
Note 2: American Airlines, Inc. 2003 operating expenses include
expenses incurred related to fee per block hour
agreements with Regional Affiliates - American Eagle,
Executive, Trans States and Chautauqua, whereas 2002 operating
expenses include expenses incurred related to fee per
block hour agreements with Regional Affiliate - Chautauqua.

LIQUIDITY AND CAPITAL RESOURCES

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.

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22
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. The Company expects total savings from wages,
benefits and work rule changes to be $400 million in the third quarter
of 2003 and $450 million in the fourth quarter of 2003. 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 to
the condensed consolidated financial statements for additional
information).

In addition, subsequent to the ratification of the Modified Labor
Agreements, the Company and American 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 or American
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. As of
June 30, 2003, the annual cost savings from the Vendors are estimated
to be nearly $200 million.

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.

During 2001 and 2002, the Company raised approximately $8.3 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, (v) equity and (vi) the potential sale of certain
non-core assets (including the Company's interests in AMR
Investments). 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.

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23
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.

AMR and American's credit ratings are significantly below investment
grade. In February 2003, Moody's downgraded the senior implied rating
for AMR, the senior unsecured ratings of both AMR and 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
both AMR and American, lowered the senior secured and unsecured debt
ratings of AMR, 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 both AMR and American, lowered the
senior secured and unsecured debt ratings of AMR, 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 AMR and 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 AMR and American and removed the ratings from
CreditWatch. Additional significant reductions in AMR's or American's
credit ratings would further increase its borrowing or other costs and
further restrict the availability of future financing. In March 2003,
Standard & Poor's removed AMR's common stock from the S&P 500 index.

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.

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.

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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
$358 million (net of payments to independent regional affiliates) 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 has approximately $221 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.

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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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 $384 million, an increase of $339 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 $572
million federal tax refund and the receipt of $358 million from the
government under the Act. Included in net provided by operating
activities for the first six months of 2002 was approximately $658
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
$847 million, and included the acquisition of seven Boeing 767-300ERs,
two Boeing 777-200 ERs, ten Embraer 140s and four Bombardier CRJ-700
aircraft. These capital expenditures were financed primarily through
secured mortgage and debt agreements.

During the six-month period ended June 30, 2003, American and AMR
Eagle borrowed approximately $641 million under various debt
agreements which are secured by aircraft and other property. These
agreements have effective interest rates which are fixed or variable
based on LIBOR plus a spread and mature over various periods of time
through 2019. 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, 12 Embraer regional jets
and seven Bombardier CRJ-700s in 2003; an aggregate of 74 Embraer
regional jets and six Bombardier CRJ-700s in 2004 through 2006; 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 $407 million
during the remainder of 2003, $755 million in 2004, $711 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. In addition, the
Company has pre-arranged financing or backstop financing for all of
its 2003 Embraer and Bombardier aircraft deliveries and a portion of
its post 2003 deliveries.

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.

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The following table summarizes the Company's obligations and
commitments as of June 30, 2003, to be paid in 2003 through 2007 (in
millions):

(1) Certain special facility revenue bonds issued by municipalities -
which are supported by operating leases executed by American -
are guaranteed by AMR and American.
(2) Substantially all of the 2003 commitment is supported by
committed financing.
(3) Includes expected payments based on projected volumes
rather than minimum required payments.
(4) Excludes related interest amounts.
(5) Includes noncancelable commitments to purchase goods or services,
primarily information technology support. Other commitments for
the remainder of 2003 are not significant.
(6) Amounts are as of June 30, 2003.

In addition to the commitments summarized above, 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.

OTHER INFORMATION

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.

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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.

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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Sensitive Instruments and Positions

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.

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.

13.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).

13.2 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, AMR 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, AMR filed a report on Form 8-K relating to a
press release issued by AMR to announce that American Airlines, Inc.
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, AMR 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, AMR filed a report on Form 8-K relating to a
press release issued by AMR to announce its 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, AMR 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 the Company.

On May 02, 2003, AMR filed a report on Form 8-K to provide first
quarter supplementary data and current expectations for fuel, traffic
and capacity for the second quarter.

On June 11, 2003, AMR 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, AMR 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, AMR
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.

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33
Form 8-Ks furnished under Item 9 - Regulation FD Disclosure

On April 17, 2003, AMR furnished a report on Form 8-K to announce
AMR's intent to host a conference call on April 23, 2003 with the
financial community relating to its first quarter 2003 results.

On June 4, 2003, AMR furnished a report on Form 8-K to announce
that Gerard Arpey, President and CEO of AMR Corporation, would be
speaking at the Merrill Lynch Global Transportation Conference.

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

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

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34

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.

AMR CORPORATION

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

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