AMR has agreed to “freeze” the Retirement Benefit Plan of American Airlines, Inc. for

Employees Represented by the Transport Workers Union (TWU) of America, AFL-CIO (“the

Plan”). This is the alternative to terminating the Plan and turning it over to the Pension Benefit

Guaranty Corporation (“PBGC”). Keeping the Plan up and running is advantageous to TWU

members in several ways.

The Plan currently allows Participants to retire between ages 60-65 without taking any

reduction to their normal retirement benefit (the retirement benefit a qualified participant would

receive at age 65). Participants between ages 55-60, with 15 years of service, take only a 3%

reduction per year to their normal retirement benefit. These generous early retirement benefits

are entirely preserved under the freeze agreed to by AMR. Under a termination of the Plan, all

subsidized early retirement benefits are eliminated. Participants can still retire early, but they

will have to take the actuarial reduction to their normal retirement benefit for each year that they

retire between ages 55 and 65. This could mean a reduction to a Participant’s normal retirement

benefit of more than 6% per year of retirement prior to age 65.

For a normal retirement benefit of $1,000.00 per month and an actuarial reduction of 6%

65

$1,000.00

$1,000.00

64

$1,000.00

$940.00

63

$1,000.00

$880.00

62

$1,000.00

$820.00

61

$1,000.00

$760.00

60

$1,000.00

$700.00

59

$970.00

$640.00

58

$940.00

$580.00

57

$910.00

$520.00

56

$880.00

$460.00

55

$850.00

$400.00

Under this scenario, a member who retired at age 60 would have a 30% lower monthly

pension under a terminated plan than he would have under the frozen Plan. At age 55, a member

would have a 47% lower monthly pension under a terminated plan compared to the frozen Plan.

Thus, benefits for early retirees under the frozen Plan agreed to by AMR are considerably more

generous than they would be under a terminated plan taken over by the PBGC.

The PBGC “insures” defined benefit plans. The Plan pays annual premiums to the

PBGC, and, in the event the Plan is terminated, the PBGC takes over the Plan and pays the

benefits. However, benefits payable by the PBGC are subject to benefit maximum amounts set

by law and those maximum benefit amounts could reduce a participant’s pension benefit that

would otherwise be payable by the Plan. The maximum benefit amounts are also subject to

change and could be reduced if the PBGC’s funding position continues to decline as it has in

recent years. According to the PBGC’s latest Annual Report, “As of September 30, 2011, we had

single-employer assets totaling $79 billion, an increase of about $1.5 billion from the close of the

previous fiscal year. Our single-employer liabilities (measured in present value though they will

be paid over decades) totaled $93 billion.” That is a $14 billion shortfall in PBGC’s funding.

Relying on the PBGC to pay members’ benefits 5, 10 or 20 years into the future is not a sure bet.

Freezing the Plan means that the benefit amount an employee has earned as of the freeze

date will not change at this time. Unlike the PBGC guarantees, frozen benefits are not subject to

any maximum benefit payment amounts – they are equal to the benefit a participant has earned.

And, while no additional accruals will be earned under the Plan after the freeze date, current

Participants continue to earn service toward vesting so those with fewer than five years of

vesting service (generally required to receive a benefit under the Plan) can continue working

toward benefit eligibility.

Freezing a defined benefit plan requires the Plan sponsor, in this case AMR, to continue

funding the Plan as it would if the Plan had not been frozen. “Accrued liabilities”, which are the

costs of employees’ future benefits, must be funded just like an on-going plan. The Plan remains

subject to all the legal requirements of ERISA, which is the law that protects workers’ pensions.

A frozen plan can be amended in the future to “unfreeze” benefit accruals. This means

that AMR and the TWU retain the option to unfreeze the Plan and allow Participants to begin

accruing new pension benefits. This option is not available once a plan has been terminated.

***

While a frozen Plan will not provide for future benefit accruals, and there is no guarantee

that AMR might not in the future seek to terminate the plan, this approach is preferable to Plan

termination now because it keeps generous early retirement benefits, currently preserves the

benefits which members have worked toward over their careers without a maximum benefit

ceiling, and maintains the option of unfreezing the Plan in the future.