American Airlines 2003 Annual Report Download - page 74

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72
10. Retirement Benefits (Continued)
Pension Benefits Other Benefits
2003 2002 2003 2002
Weighted-average assumptions used to
determine benefit obligations as of
December 31
Discount rate 6.25% 6.75% 6.25% 6.75%
Salary scale (ultimate) 3.78 3.78 - -
Pension Benefits Other Benefits
2003 2002 2003 2002
Weighted-average assumptions used to
determine net periodic benefit cost for
the years ended December 31
Discount rate 6.57% 7.50% 6.57% 7.50%
Salary scale (ultimate) 3.78 3.93 - -
Expected return on plan assets 9.00 9.25 9.00 9.25
The Company estimates the long-term rate of return on plan assets will be nine percent, based on the target asset
allocation as of December 31, 2003. 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, 2003, is
approximately 10.5 percent.
The Company’s pension plan weighted-average asset allocations at December 31, by asset category, are as
follows:
2003 2002
Long duration bonds 35% 41%
U.S. stocks 32 29
International stocks 22 20
Emerging markets stocks and bonds 6 5
Alternative (private) investments 5 5
Total 100% 100%
The Company’s target asset allocation is 40 percent longer duration corporate and U.S. government/agency
bonds, 25 percent U.S. stocks, 20 percent developed international stocks, five percent emerging markets stocks
and bonds, and ten percent alternative (private) investments. Each asset class is actively managed and has
produced returns in excess of the expected rate over the last ten years, net of management fees. 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 in order to generate additional income by loaning plan assets to borrowers on a fully
collateralized basis.