SMU Cox School of Business January 31, 2005

2 AMR INVESTMENT SERVICES, INC. 1) OVERSEE MANAGEMENT OF AMERICAN AIRLINES $16.5 BILLION PENSION PLANS 2) MANAGE $3.0+ BILLION IN SHORT-TERM CASH FOR AMERICAN AIRLINES 3) MANAGE $7.7 BILLION IN SHORT-TERM CASH FOR EXTERNAL CLIENTS 4) MANAGER / ADMINISTRATOR OF $12.7 BILLION AMERICAN AADVANTAGE MUTUAL FUND FAMILY

3 DEFINED BENEFIT PLAN ISSUES IN THE NEWS FEW DB PLANS BEING STARTED –DB PLANS BEING FROZEN –SOME CONVERTED TO CASH BALANCE OR DC IMPLICATIONS FOR WORKERS MASSIVE UNDERFUNDING –PERFECT STORM OF LOWER INTEREST RATES AND INVESTMENT RETURNS PLAN TERMINATIONS –RESULT IN LOWER BENEFITS TO BENEFICIARIES BUSH PLAN FOR PENSION REFORM –SIMPLIFIED FUNDING STANDARDS –ADDITIONAL STRAINS ON NON-INVESTMENT GRADE COMPANIES –REDUCED BENEFITS FOR SOME

4 AMERICAN AIRLINES PENSION PLANS FIXED BENEFIT PLANS -- $7.3 BILLION PILOT VARIABLE BENEFIT PLAN -- $3.8 BILLION 401(K) SALARY DEFERRAL PLAN -- $5.4 BILLION

5 IMPORTANCE OF ASSET ALLOCATION The Asset Allocation Decision: How to distribute investment dollars among a variety of asset classes. Copyright Ibbotson Associates, Chicago, Illinois Determinants of Portfolio Performance Security Selection 4.6% Luck 2.1% Market Timing 1.8% Asset Allocation Policy 91.5%

6 DIFFERENT APPROACHES TO ASSET ALLOCATION MATCH ASSETS TO LIABILITIES / INCOME REQUIREMENTS ESTABLISH LONG-TERM ALLOCATION AND REBALANCE –USING EFFICIENT FRONTIER ANALYSES QUANTITATIVELY ANALYZE VALUATION LEVELS OF DIFFERENT MARKETS –EARNINGS YIELD VERSUS TEN-YEAR BOND YIELD FUNDAMENTAL ANALYSIS

7 ROLE OF SPONSOR IN FIXED BENEFIT PLANS TO PROVIDE BENEFITS PROMISED AT THE LOWEST COST ENSURE PROPER FUNDING INTEGRATE INVESTMENT POLICIES WITH CORPORATE FINANCIAL POLICIES, GOALS AND CHARACTERISTICS (I.E., ASSET ALLOCATION / EQUITY PHILOSOPHY, ETC.)

8 FIXED BENEFIT PLAN PHILOSOPHY MINIMIZE VOLATILITY / RISK TO OFFSET CYCLICAL NATURE OF AIRLINE AND MINIMIZE COMPETITIVE DISADVANTAGE –ASSET / LIABILITY BOND HEDGE –USE VALUE APPROACH TO EQUITIES –LONG-TERM ORIENTATION ENHANCE RETURNS TO MINIMIZE COST –OVERWEIGHT INTERNATIONAL, EMERGING MARKETS, AND PRIVATE EQUITY

9 FIXED BENEFIT PLANS MARKET VALUE OF ASSETS vs. ACCUMULATED BENEFIT OBLIGATION Jan- 93 Jan- 94 Jan- 95 Jan- 96 Jan- 97 Jan- 98 Jan- 99 Jan- 00 Jan- 01 Jan- 02 Jan- 03 Jan- 04 Jan- 05 AssetsLiabilities BEGINNING - OF - YEAR VALUE BILLIONS OF DOLLARS

10 AA FIXED BENEFIT PLANS 12/31/04 HEDGED ASSET / LIABILITY BONDS$2.8 BILLION38% U.S. EQUITIES$2.2 BILLION30% EAFE EQUITIES$1.6 BILLION22% EMERGING MARKET INVESTMENTS$401 MILLION 6% ALTERNATIVE INVESTMENTS (PRIVATE EQUITY, REAL ESTATE PARTNERSHIPS, VENTURE CAPITAL) $305 MILLION 4%

11 AA PILOT VARIABLE FUND 12/31/04 DOMESTIC EQUITIES $2.8 BILLION EAFE EQUITIES $798 MILLION EMERGING MARKET EQUITIES $172 MILLION 74% 21% 5%

12 401(K) PLANS GENERAL –INCREASING IN SIZE AND USAGE AS PRIMARY RETIREMENT PLAN –INCREASING DESIRE FOR MORE OPTIONS AND FLEXIBILITY –INCREASING SHORT-TERM ORIENTATION CURRENT ISSUES –DIVERSIFICATION –COMPANY STOCK –LATE TRADING –MARKET TIMING –FIDUCIARY TRUST

13 $UPER $AVER INVESTMENT OPTIONS

14 401(K) PLAN 12/31/04

15 TOP 10 INVESTMENT TIPS SHARED WITH AA EMPLOYEES #1DON’T PROCRASTINATE OR DELAY #2AVOID BUYING LAST YEAR’S PERFORMANCE #3PATIENCE IS A VIRTUE -- BE A LONG-TERM INVESTOR #4TIMING THE STOCK MARKET CAN BE HAZARDOUS TO YOUR FINANCIAL HEALTH #5BUY LOW … SELL HIGH #6BUY NO-LOAD, LOW-COST INVESTMENTS #7GET PROTECTION FROM INFLATION #8DON’T PUT ALL OF YOUR EGGS IN ONE BASKET #9GO FOR TAX-DEFERRED FIRST #10THE EARLY BIRD GETS THE WORM

16 THE COST OF WAITING TO SAVE Saving $2,000 per year from: Amount Invested Value at Age 65 $10,000 $110,000 $210,000 $310,000 Age Age 35-65Age $291,546 $20,000 $60,000 $226,566 $30,000 $54,304

A CASE FOR BEING INVESTED Value of $1 Invested From 1/1/62 Through 12/31/04 Top 10 Months Oct % Jan Jan Aug Jan Oct Dec Aug Nov Nov (Less 10 Best Months) Source: Hotchkis and Wiley Capital Management; Frank Russell 18

HISTORICAL PERSPECTIVE ON U.S. EQUITY RETURNS S&P 10-Year Return Just Above Long-Term Average Source: OFI Institutional Asset Management 79-Yr Average 10.4% S&P 500 Annualized 10-Year Return Through: December 1979 (Decade of the 70s) 5.9% December 1989 (Decade of the 80s) 17.5% December 1999 (Decade of the 90s) 18.2% December 31, %

19 S&P VALUE/GROWTH INDICES January 1, 1975 through December 31, 2004 *The standard deviation measures the variability of monthly returns versus their average monthly return. S&P Value S&P 500 S&P Growth

20 Boeing MARKET I II III IV HIGH LOW 9.4 % GROWTH P/E 20.2 X QUADRANT ANALYSIS DECEMBER 31, 2004 Washington Mutual EDS