11. Retirement Benefits

The Company sponsors defined benefit and defined contribution pension plans for eligible employees. The defined benefit plans provide benefits for participating employees based on years of service and average compensation for a specified period of time before retirement. The Company uses a December 31 measurement date for all of its defined benefit plans.

Modifications to Retirement and Life Insurance Benefits

On March 7, 2012, the Company announced that, in working with Creditors’ Committee and the Pension Benefit Guarantee Corporation (PBGC), it developed a solution that would allow the Company to pursue a freeze of its defined benefit pension plans for non-pilot employees instead of seeking termination. On September 14, 2012, the Company sent formal legal notice to all defined benefit plan participants and beneficiaries announcing that it was freezing each of the defined benefit pension plans. The freeze of these plans became effective as scheduled on November 1, 2012. Eligible non-pilot employees began to receive a replacement benefit under the $uper $aver 401(k) Plan on November 1, 2012, with the Company matching employee contributions up to 5.5 percent of eligible earnings. With the ratification of a new collective bargaining agreement by pilots on December 7, 2012, pilots began to receive a replacement benefit in the form of a Company contribution to the $uper $aver 401(k) Plan of 14 percent of eligible earnings for work performed beginning on November 1, 2012.

Effective November 8, 2012, the U.S. Treasury Department and the Internal Revenue Service published a Final Regulation establishing the process by which the Company could seek to amend certain structural aspects of the Pilot A Plan, a defined benefit plan. Under that process, the Company applied to the PBGC for a determination that it met the standard to amend the Plan to remove the lump-sum benefit feature and other similar optional forms of benefit. On December 13, 2012, the PBGC issued its determination that the Company has met the standard for amendment set forth in the Final Regulation. On November 23, 2012, the Company filed a motion in the Bankruptcy Court seeking approval of the A Plan amendment. After a hearing on December 19, 2012, the Court granted the motion. On December 21, 2012, the Company amended the A Plan to remove the lump-sum and other similar optional forms of benefit for commencements after December 31, 2012. A small group of American pilots is appealing the Bankruptcy Court’s decision authorizing American to eliminate the lump sum and other similar optional forms of benefit. This is the same group of pilots that is appealing the Bankruptcy Court’s decisions authorizing American to reject the pilot CBA and approving the new pilot CBA. All of these appeals have been consolidated, and are pending in the U.S. District Court for the Southern District of New York.

The Company also terminated the Pilot B Plan, a defined contribution plan, on November 30, 2012. Plan B assets will be distributed to pilots in mid-2013.

On September 14, 2012, the Company notified active employees of its plans to modify its subsidized retiree medical coverage on November 1, 2012. Those who initiate retiree medical coverage on or after November 1, 2012 will go into a new retiree medical program. For those who retire before age 65, two medical options will be available, but the Company will not be subsidizing them. Those who retire at age 65 and over may purchase a guaranteed-issue Medicare supplement plan. Flight attendants and TWU-represented employees will receive a refund of their prefunding retiree medical contributions within 120 days of November 1, 2012.

On March 23, 2012, the Bankruptcy Court entered a Stipulation and Order providing for the appointment of a committee of retired independent and unionized AMR employees (the “Retiree Committee”), and on May 3, 2012 appointed five members to the Retiree Committee. On August 15, 2012, the Company filed a proceeding in the Bankruptcy Court seeking a determination on the issue of vesting for former employees who retired and initiated retiree medical coverage before November 1, 2012. The Court held a hearing on January 23, 2013 and has not ruled on this matter as of the date of this report. On September 20, 2012, the Company opened negotiations with the Retiree Committee, seeking a consensual agreement to terminate subsidized retiree medical coverage and life insurance coverage. Those negotiations are continuing.

As a result of the modifications to the retirement benefits as discussed above, a portion of the pension and postretirement benefits liability, primarily relating to retiree medical and other benefits, was classified as liabilities subject to compromise as of December 31, 2012.

Curtailment and Plan Amendment in the Third Quarter of 2012

In accordance with ASC 715 “Retirement Benefits” (ASC 715), in the third quarter of 2012 the Company remeasured its defined benefit pension and retiree medical plans as a result of modifications to its retirement plans and reductions in certain work groups (see above and Note 1 to the consolidated financial statements). The Company updated its significant actuarial assumptions used for the remeasurements including the discount rate, which was lowered to 4.10 percent and 3.80 percent for the defined benefit pension plans and retiree medical plans, respectively.

The remeasurement of the defined benefit plans resulted in an actuarial loss of $1.9 billion offset by a curtailment gain of $1.8 billion. In addition, a loss of $58 million, representing unamortized prior service cost as of the remeasurement date of the frozen defined benefit plans, is included as a component of reorganization items, net.

Further, as a result of modifications to its retiree medical plans, the Company recognized a negative plan amendment of $1.9 billion, which is included as a component of actuarial gain arising in current year in other comprehensive income and will be amortized over the future service life of the active plan participants for whom the benefit was eliminated, or approximately 8 years. In addition, a net credit of $124 million, representing unamortized prior service credits of $157 million offset by a curtailment loss of $33 million, is included as a component of reorganization items, net.

Year End Information

The following table provides a reconciliation of the changes in the pension and retiree medical and other benefit obligations and fair value of assets for the years ended December 31, 2012 and 2011, and a statement of funded status as of December 31, 2012 and 2011 (in millions):


	Pension Benefits						Retiree Medical and Other Benefits
	2012			2011			2012			2011
Reconciliation of benefit obligation
Obligation at January 1	$	14,568		$	12,968		$	3,122		$	3,097
Service cost		341			386			46			61
Interest cost		729			757			128			174
Actuarial (gain) loss		2,345			1,237			104			(63	)
Plan amendments		301			—			(1,904	)		(3	)
Curtailments		(1,841	)		—			33			—
Benefit payments		(548	)		(780	)		(117	)		(144	)

Obligation at December 31	$	15,895		$	14,568		$	1,412		$	3,122

Reconciliation of fair value of plan assets
Fair value of plan assets at January 1	$	8,132		$	7,773		$	205		$	234
Actual return on plan assets		1,204			614			26			(6	)
Employer contributions		277			525			97			121
Benefit payments		(548	)		(780	)		(117	)		(144	)

Fair value of plan assets at December 31	$	9,065		$	8,132		$	211		$	205

Funded status at December 31	$	(6,830	)	$	(6,436	)	$	(1,201	)	$	(2,917	)


Amounts recognized in the consolidated balance sheets
Current liability	$	21		$	2		$	—		$	147
Noncurrent liability		6,809			6,434			1,201			2,770

	$	6,830		$	6,436		$	1,201		$	2,917


Amounts recognized in other comprehensive loss
Net actuarial loss (gain)	$	3,943		$	4,179		$	(78	)	$	(181	)
Prior service cost (credit)		301			68			(1,844	)		(179	)

	$	4,244		$	4,247		$	(1,922	)	$	(360	)


For plans with accumulated benefit obligations exceeding the fair value of plan assets	Pension Benefits				Retiree Medical and Other Benefits
	2012		2011		2012		2011
Projected benefit obligation (PBO)	$	15,895	$	14,568	$	—	$	—
Accumulated benefit obligation (ABO)		15,866		12,935		—		—
Accumulated postretirement benefit obligation (APBO)		—		—		1,412		3,122
Fair value of plan assets		9,065		8,132		211		205
ABO less fair value of plan assets		6,801		4,803		—		—

At December 31, 2012 and 2011, pension benefit plan assets of $259 million and $143 million, respectively, and retiree medical and other benefit plan assets of $208 million and $203 million, respectively, were invested in shares of certain mutual funds.

The following tables provide the components of net periodic benefit cost for the years ended December 31, 2012, 2011 and 2010 (in millions):


	Pension Benefits
	2012			2011			2010
Components of net periodic benefit cost
Defined benefit plans:
Service cost	$	341		$	386		$	366
Interest cost		729			757			737
Expected return on assets		(676	)		(657	)		(593	)
Curtailments		58			—			—
Amortization of:
Prior service cost		10			13			13
Unrecognized net loss		211			154			154

Net periodic benefit cost for defined benefit plans		673			653			677
Defined contribution plans		218			179			168

	$	891		$	832		$	845

The estimated net loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $77 million.


	Retiree Medical and Other Benefits
	2012			2011			2010
Components of net periodic benefit cost
Service cost	$	46		$	61		$	60
Interest cost		128			174			165
Expected return on assets		(17	)		(20	)		(18	)
Curtailments		(124	)		—			—
Amortization of:
Prior service cost		(82	)		(28	)		(19	)
Unrecognized net loss (gain)		(9	)		(9	)		(10	)

Net periodic benefit cost	$	(58	)	$	178		$	178

The estimated net gain for the retiree medical and other postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $9 million.


	Pension Benefits						Retiree Medical and Other Benefits
	2012			2011			2012			2011
Weighted-average assumptions used to determine benefit obligations as of December 31
Discount rate		4.20	%		5.20	%		3.80	%		4.89	%
Salary scale (ultimate)		—			3.78			—			—


	Pension Benefits						Retiree Medical and Other Benefits
	2012			2011			2012			2011
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31
Discount rate 1/1/2012—9/30/2012		5.20	%		5.80	%		4.89	%		5.69	%
Discount rate 10/1/2012—12/31/2012		4.10	%		5.80	%		3.80	%		5.69	%
Salary scale (ultimate) 1/1—9/30/2012		3.78			3.78			—			—
Salary scale (ultimate) 10/1/2012—12/31/2012		—			3.78			—			—
Expected return on plan assets		8.25			8.50			8.25			8.50

As of December 31, 2012, the Company’s estimate of the long-term rate of return on plan assets was 8.00 percent based on the target asset allocation. Expected returns on longer duration bonds are based on yields to maturity of the bonds held at year-end. Expected returns on other assets are based on a combination of long-term historical returns, actual returns on plan assets achieved over the last ten years, current and expected market conditions, and expected value to be generated through active management, currency overlay and securities lending programs. The Company’s annualized ten-year rate of return on plan assets as of December 31, 2012, was approximately 10.15 percent.

The objectives of the Company’s investment policies are to: maintain sufficient income and liquidity to pay retirement benefits; produce a long-term rate of return that meets or exceeds the assumed rate of return for plan assets; limit the volatility of asset performance and funded status; and diversify assets among asset classes and investment managers.

Based on these investment objectives, a long-term strategic asset allocation has been established. This strategic allocation seeks to balance the potential benefit of improving funded position with the potential risk that the funded position would decline. The current strategic target asset allocation is as follows:


Asset Class/Sub-Class	Allowed Range
Equity		60% - 70%
Public:
U.S. Value		18% - 33%
International Value		14% - 24%
Emerging Markets		5% - 11%
Alternative Investments		0 % - 18%
Fixed Income		30% - 40%
U.S. Long Duration		30% - 40%
Other		0% - 5%
Cash Equivalents		0% - 5%

Each asset class is actively managed and, historically, the plans’ assets have produced returns, net of management fees, in excess of the expected rate of return over the last ten years. Stocks and emerging market bonds are used to provide diversification and are expected to generate higher returns over the long-term than longer duration U.S. bonds. Public stocks are managed using a value investment approach in order to participate in the returns generated by stocks in the long-term, while reducing year-over-year volatility. Longer duration U.S. bonds are used to partially hedge the assets from declines in interest rates. Alternative (private) investments are used to provide expected returns in excess of the public markets over the long-term. Additionally, the Company engages currency overlay managers in an attempt to increase returns by protecting non-U.S. dollar denominated assets from a rise in the relative value of the U.S. dollar. The Company also participates in securities lending programs to generate additional income by loaning plan assets to borrowers on a fully collateralized basis. These programs are subject to market risk.

Investments in securities traded on recognized securities exchanges are valued at the last reported sales price on the last business day of the year. Securities traded in the over-the-counter market are valued at the last bid price. The money market fund is valued at fair value which represents the net asset value of the shares of such fund as of the close of business at the end of the period. Investments in limited partnerships are carried at estimated net asset value as determined by and reported by the general partners of the partnerships and represent the proportionate share of the estimated fair value of the underlying assets of the limited partnerships. Common/collective trusts are valued at net asset value based on the fair values of the underlying investments of the trusts as determined by the sponsor of the trusts. The 103-12 investment trust is valued at net asset value which is determined by the issuer at the end of each month and is based on the aggregate fair value of trust assets less liabilities, divided by the number of units outstanding. No changes in valuation techniques or inputs occurred during the period.

The fair values of the Company’s pension plan assets at December 31, 2012 and 2011, by asset category are as follows:


	Fair Value Measurements at December 31, 2012 (in millions)
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Asset Category
Cash and cash equivalents	$	275	$	—	$	—	$	275
Equity securities
International markets^(a)(b)		2,443		—		—		2,443
Large-cap companies^(b)		1,601		—		—		1,601
Mid-cap companies^(b)		216		—		—		216
Small-cap companies^(b)		21		—		—		21
Fixed Income
Corporate bonds^(c)		—		2,094		—		2,094
Government securities^(d)		—		1,172		—		1,172
U.S. municipal securities		—		57		—		57
Alternative investments
Private equity partnerships^(e)		—		—		914		914
Common/collective and 103-12 investment trusts^(f)		—		229		—		229
Insurance group annuity contracts		—		—		2		2
Dividend and interest receivable		38		—		—		38
Due to/from brokers for sale of securities—net		1		—		—		1
Other assets—net		2		—		—		2

Total	$	4,597	$	3,552	$	916	$	9,065

Holdings are diversified as follows: 20 percent United Kingdom, 9 percent Japan, 9 percent France, 8 percent Switzerland, 8 percent Germany, 5 percent Netherlands, 5 percent Republic of Korea, 15 percent emerging markets and the remaining 22 percent with no concentration greater than 5 percent in any one country.

b)	There are no significant concentration of holdings by company or industry.

Includes approximately 79 percent investments in corporate debt with a Standard and Poor’s (S&P) rating lower than A and 21 percent investments in corporate debt with an S&P rating A or higher. Holdings include 81 percent U.S. companies, 16 percent international companies and 3 percent emerging market companies.

d)	Includes approximately 88 percent investments in U.S. domestic government securities and 12 percent in emerging market government securities. There are no significant foreign currency risks within this classification.

Includes limited partnerships that invest primarily in U.S. (92 percent) and European (8 percent) buyout opportunities of a range of privately held companies. The Master Trust does not have the right to redeem its limited partnership investment at its net asset value. Instead, the Master Trust receives distributions as the underlying assets are liquidated. It is estimated that the underlying assets of these funds will be gradually liquidated over the next 1 to 10 years. Additionally, the Master Trust has future funding commitments of approximately $331 million over the next 10 years.

Investment includes 74 percent in an emerging market 103-12 investment trust with investments in emerging country equity securities, 14 percent in Canadian segregated balanced value, income growth and diversified pooled funds and 12 percent in a common/collective trust investing in securities of smaller companies located outside the U.S., including developing markets. Requests for withdrawals must meet specific requirements with advance notice of redemption preferred.


	Fair Value Measurements at December 31, 2011 (in millions)
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Asset Category
Cash and cash equivalents	$	160	$	—	$	—	$	160
Equity securities
International markets^(a)(b)		1,939		—		—		1,939
Large-cap companies^(b)		1,462		—		—		1,462
Mid-cap companies^(b)		221		—		—		221
Small-cap companies^(b)		17		—		—		17
Fixed Income
Corporate bonds^(c)		—		1,866		—		1,866
Government securities^(d)		—		1,205		—		1,205
U.S. municipal securities		—		52		—		52
Alternative investments
Private equity partnerships^(e)		—		—		920		920
Common/collective and 103-12 investment trusts^(f)		—		172		—		172
Insurance group annuity contracts		—		—		2		2
Dividend and interest receivable		42		—		—		42
Due to/from brokers for sale of securities—net		72		—		—		72
Other assets—net		2		—		—		2

Total	$	3,915	$	3,295	$	922	$	8,132

Holdings are diversified as follows: 22 percent United Kingdom, 10 percent Japan, 9 percent France, 7 percent Switzerland, 6 percent Germany, 5 percent Netherlands, 5 percent Republic of Korea, 13 percent emerging markets and the remaining 23 percent with no concentration greater than 5 percent in any one country.

b)	There are no significant concentration of holdings by company or industry.

Includes approximately 83 percent investments in corporate debt with a Standard and Poor’s (S&P) rating lower than A and 17 percent investments in corporate debt with an S&P rating A or higher. Holdings include 80 percent U.S. companies, 18 percent international companies and 2 percent emerging market companies.

d)	Includes approximately 89 percent investments in U.S. domestic government securities and 11 percent in emerging market government securities. There are no significant foreign currency risks within this classification.

Investment includes 71 percent in an emerging market 103-12 investment trust with investments in emerging country equity securities, 16 percent in Canadian segregated balanced value, income growth and diversified pooled funds and 13 percent in a common/collective trust investing in securities of smaller companies located outside the U.S., including developing markets. Requests for withdrawals must meet specific requirements with advance notice of redemption preferred.

Not included in the above tables are receivables and payables for foreign currency forward contracts and futures contracts which net to approximately $2 million and collateral held on loaned securities and the obligation to return collateral on loaned securities which effectively net to zero.

Changes in fair value measurements of Level 3 investments during the year ended December 31, 2012, were as follows:


	Private Equity Partnerships			Insurance Group Annuity Contracts
Beginning balance at December 31, 2011	$	920		$	2
Actual return on plan assets:
Relating to assets still held at the reporting date		20
Relating to assets sold during the period		102
Purchases		96
Sales		(224	)

Ending balance at December 31, 2012	$	914		$	2

Changes in fair value measurements of Level 3 investments during the year ended December 31, 2011, were as follows:


	Private Equity Partnerships			Insurance Group Annuity Contracts
Beginning balance at December 31, 2010	$	795		$	3
Actual return on plan assets:
Relating to assets still held at the reporting date		53
Relating to assets sold during the period		48
Purchases		146
Sales		(122	)		(1	)

Ending balance at December 31, 2011	$	920		$	2

The fair values of the Company’s other postretirement benefit plan assets at December 31, 2012 by asset category were as follows:


	Fair Value Measurements at December 31, 2012 (in millions)
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Asset Category
Money market fund	$	9	$	—	$	—	$	9
Unitized mutual funds		—		202		—		202

Total	$	9	$	202	$	—	$	211

The fair values of the Company’s other postretirement benefit plan assets at December 31, 2011 by asset category were as follows:


	Fair Value Measurements at December 31, 2011 (in millions)
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Asset Category
Money market fund	$	4	$	—	$	—	$	4
Unitized mutual funds		—		201		—		201

Total	$	4	$	201	$	—	$	205

Investments in the unitized mutual funds are carried at the per share net asset value and include approximately 28 percent of investments in non-U.S. common stocks in 2012 and approximately 27 percent of investments in non-U.S. common stocks in 2011. Net asset value is based on the fair market value of the funds’ underlying assets and liabilities at the date of determination. Investments in the money market fund are valued at fair value which represents the net assets value of the shares of such fund as of the close of business at the end of the period.


	2012			2011
Assumed health care trend rates at December 31
Health care cost trend rate assumed for next year		7.0	%		7.5	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.5	%		4.5	%
Year that the rate reaches the ultimate trend rate		2018			2018

A one percentage point change in the assumed health care cost trend rates would have the following effects (in millions):


	One Percent Increase		One Percent Decrease
Impact on 2012 service and interest cost	$	15	$	(16	)
Impact on postretirement benefit obligation as of December 31, 2012		60		(63	)

The Company is required to make minimum contributions to its defined benefit pension plans under the minimum funding requirements of ERISA, the Pension Funding Equity Act of 2004, the Pension Protection Act of 2006, and the Pension Relief Act of 2010.

As a result of the Chapter 11 Cases, AMR contributed $272 million to its US defined benefit pension plans in 2012 to cover post-petition periods. As a result of only contributing the post-petition portion of the required contribution, the PBGC filed a lien against certain assets of the Company. The Company’s 2013 contribution to its defined benefit pension plans is subject to the Chapter 11 proceedings.

The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:


	Pension		Retiree Medical and Other
2013	$	620	$	135
2014		620		131
2015		645		124
2016		663		117
2017		699		110
2018—2022		4,011		450