UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
~ ANNUAL REPORT PURSUANT TO SECTION 13 OR lS(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR lS(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO ____ _
Commission file number 0-23642
NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2700 Lone Oak Parkway, Eagan, Minnesota
(Address of principal executive offices)
41-1905580
(I.RS. Employer Identification No.)
55121
(Zip Code)
Registrant's telephone number, including area code (612) 726-2111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Quarterly Interest Bonds due 2039 The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Name of each exchange on which registered
The Nasdaq National Market
The Nasdaq National Market
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~ No D
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ~
The aggregate market value of the voting stock held by nonaffiliates of the registrant as of February 28,
2003 was $435 million.
As of February 28, 2003, there were 85,833,408 shares of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the registrant's Proxy
Statement for its Annual Meeting of Stockholders to be held on April 25, 2003.
Item 1. BUSINESS
orthwe t Airlines Corporation ("NWA Corp." and, together with it ubsidiaries, the "Company")
i the indirect parent corporation of Northwe t Airlines, Inc. ("Northwest"). Northwest operates the
world fourth largest airline, a measured by revenue pa enger miles ("RPMs"), and is engaged in the
bu ines of tran porting passengers and cargo. Northwest began operations in 1926. Northwest's
bu ine focuses on the development of a global airline network through its strategic as ets that
include:
domestic hubs at Detroit, Minneapolis/St. Paul and Memphis;
an exten ive Pacific route system with a hub in Tokyo;
a trans-Atlantic alliance with KLM Royal Dutch Airlines ("KLM"), which operates through a
hub in Amsterdam; and
a global alliance with Continental Airlines, Inc. ("Continental").
Northwest has developed strategies that are designed to utilize these assets to the Company's
competitive advantage.
The Company maintains a Web site at http://www.nwa.com. Annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, all amendments to those reports, and
other information about the Company are available free of charge through this Web site at
http://irnwa.com as soon as reasonably practicable after those reports are electronically filed with or
furnished to the Securities and Exchange Commission.
Operations and Route Network
Northwest operate ubstantial domestic and international route networks and directly serves more
than 175 cities in 24 countries in North America, Asia and Europe.
Domestic System
Northwest operates its domestic system through its hubs at Detroit, Minneapolis/St. Paul and
Memphis.
Detroit. Detroit is the ninth largest origination/destination hub in the U.S. Northwest and its two
regional carriers, Pinnacle Airlines, Inc. ("Pinnacle Airlines") and Mesaba Aviation, Inc. ("Mesaba"),
which operate their flights under the Northwest "NW" code and are identified as Northwest Airlink,
together serve over 140 cities from Detroit. For the six months ended June 30, 2002, Northwest and its
Airlink carrier enplaned 57% of originating passengers from Detroit, while the next large t competitor
enplaned 11 %.
The Company was responsible for managing and supervising the design and construction of a new
$1.2 billion passenger terminal at Detroit Metropolitan Wayne County Airport. This new terminal was
completed in February 2002 and offers 97 gates, 106 ticket-counter positions, 14 security check points,
nearly 85 shops and restaurants, four WorldClubs, an 11,500-space parking facility, covered curbside
drop-off areas and 18 luggage carousels. The new terminal also offers international-to-domestic
connections within the same facility. In addition, a new hotel in the terminal was completed in
December 2002.
Minneapolis/St. Paul. Minneapolis/St. Paul is the eighth largest origination/destination hub in the
U.S. Northwest and its Airlink carriers together serve over 155 cities from Minneapolis/St. Paul. For the
six months ended June 30, 2002, Northwest and its Airlink carriers enplaned 68% of originating
pa sengers from this hub, while the next largest competitor enplaned 6%.
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Minneapolis/St. Paul International Airport is undergoing a $2.7 billion construction program. The
major components completed include a 50% increase in vehicle parking, an additional 15 mainline jet
gates and 30 commuter gates. A new north/south runway, automated people movers and improved
runways are scheduled to be completed in phases through 2010.
Memphis. Memphis is the fifteenth largest origination/destination hub in the U.S. Northwest and
its Airlink carriers serve 88 cities from Memphis. For the six months ended June 30, 2002, they
enplaned approximately 52% of originating passengers from this hub, while the next largest competitor
enplaned approximately 20%.
The Memphis-Shelby County Airport Authority i undergoing a $400 million airport renovation
and expansion scheduled to be completed in 2004. The airfield portion of the program provides nearly
$300 million in airfield improvements including a new 13,000-foot runway, which opened in late 2000.
The completed $60 million terminal renovation included the redesign of eight gates to accommodate
Nort~west regional jet service, 15 additional regional jet gates, a new WorldClub, and 11 new ticket
counter positions. This program also includes $40 million in vehicle parking expansion and roadwork
modifications, much of which was deferred ~fter September 11, 2001.
International System
Northwest operates international flights to the Pacific and the Atlantic regions from its Detroit and
Minneapolis/St. Paul hubs as well as from Boston, Newark, Honolulu, Los Angeles, New York, San
Francisco, Seattle and Washington, D.C.
Pacific. Northwest has served the Pacific market since 1947 and has one of the worlds largest
Pacific route networks. Northwest's Pacific operations are concentrated at Narita International Airport
in Tokyo where it has 344 permanent weekly takeoff and landing slots, the most for any non-Japanese
carrier. As a result of a 1947 U.S.-Japan bilateral aviation agreement, Northwest has the right to
operate unlimited frequencies between any point in the U.S. and Japan as well as extensive "fifth
freedom" rights. "Fifth freedom" rights allow Northwest to operate service from any gateway in Japan
to points beyond Japan and to carry Japanese originating passengers. Northwest and United
Airlines, Inc. ("United") are the only U.S. passenger carriers that have ' fifth freedom" rights from
Japan. Northwest uses these slots and rights to operate a network linking seven U.S. gateways and
twelve Asian destinations via Tokyo. The Asian destinations include Bangkok, Beijing, Busan, Guam,
Hong Kong, Kaohsiung, Manila, Saipan, Seoul, Shanghai, Singapore and Taipei.
Atlantic. Northwest and KLM operate an extensive trans-Atlantic network pursuant to a
commercial and operational joint venture. This joint venture benefits from having antitrust immunity
which allows for coordinated pricing, scheduling, product development and marketing. In 1992, the U.S.
and the Netherlands entered into an "open-skies" bilateral aviation treaty which authorizes the airlines
of each country to provide international air transportation between any U.S.-Netherlands city pair and
to operate connecting service to destinations in other countries. Northwest and KLM operate joint
service between 13 U.S. cities and Amsterdam. Code-sharing between Northwest and KLM has been
implemented on flights to 58 European, six Middle Eastern, eight African, three Asian and
approximately 165 U.S. cities. Code-sharing is an agreement under which an airline's flights can be
marketed under the two-letter designator code of another airline, thereby allowing the two carriers to
provide joint service with one aircraft. Northwest and KLM have eight years remaining under their
current joint venture agreement.
Alliances
Northwest has strengthened its network through alliance partnerships. Long-term alliances are the
most effective way for Northwest to enter global markets that it would not be able to serve alone and,
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due to the synergie hared by the partners, these alliances are the most economic way to expand
globally. Alliance can improve the cu tamer travel experience through code- haring, integration of
frequent flyer program , through check-in of luggage and reciprocal airport lounge acce s, while al o
providing airline benefit a sociated with joint marketing, sharing of airport facilities and ervices and
joint procurement of certain goods and services. Northwest and its alliance partners currently provide a
global network to over 720 citie in 118 countries in the U.S., Canada, Asia, India, the South Pacific,
Europe, the Middle East, Africa Mexico, the Caribbean, Central America and South America.
Northwest has a commercial alliance with Continental Airlines through 2025 that includes
exten ive code-sharing, frequent flyer program reciprocity, airport club sharing, and other cooperative
activities. The combined network has increased Northwest's presence in the South and Northeast U.S.,
as well as to Central and South America. Northwest's and Continental's code-sharing agreement
includes more than 250 destinations. Cities served by these code-share flights number eight in Central
America, three in South America, 19 in Mexico, eleven in the Caribbean, 13 in Canada, six in Asia and
over 190 in the U.S. Northwest also has domestic frequent flyer and/or code-sharing agreements with
Alaska Airlines, American Eagle Airlines, America West Airlines, Inc., Big Sky Airlines, ExpressJet
Airlines Gulfstream International Airlines, Hawaiian Airlines and Horizon Air.
In the Pacific, Northwest has code-sharing and frequent flyer agreements with Air China, Malaysia
Airlines and Japan Air System. The partnership with Japan Air System will continue with its successor,
JAL Group, which operates more domestic routes in Japan than any other carrier. Northwest also has
frequent flyer programs with Jet Airways of India, Garuda Indonesia, Cebu Pacific Airlines and Pacific
Island Aviation.
In addition to its extensive relationship with KLM in the Atlantic, Northwest has code-sharing and
reciprocal frequent flyer programs with Air Alps Aviation, KLM cityhopper, KLM exel, and KLM uk
and has frequent flyer reciprocity with Jet Airways, Kenya Airways, Malev Hungarian Airlines and
Transavia.
In August 2002, the Company announced that it had signed a cooperative marketing agreement
with Continental and Delta Air Lines, Inc. ("Delta"). The marketing agreement is designed to connect
the three carriers' domestic and international networks and provide for code sharing, frequent flyer
program reciprocity and reciprocal airport club programs. Northwest, Continental and Delta reached an
agreement in January 2003, with the U.S. Department of Justice ("DOJ") on conditions related to the
marketing agreement and were prepared to accept some of the additional conditions that the U.S.
Department of Transportation ("DOT") sought to impose. However, several of the DOT's conditions
were not acceptable to the three carriers. Northwest, Delta and Continental subsequently resubmitted
their agreements to the DOT with alternative conditions under which the airlines are prepared to
proceed. The DOT has issued a notice requesting comments on the revised agreements by March 18,
2003. The DOT has stated that the review period will end on April 2, 2003. In the event the conditions
in dispute are not resolved, the DOT may elect to commence an enforcement proceeding if Northwest,
Delta and Continental implement the marketing agreement. Northwest and KLM are also in
discussions regarding mutual waivers of provisions in their joint venture agreement that are related to
the full implementation of the marketing agreement.
Regional Partnerships
Northwest has exclusive marketing agreements with two regional carriers: Pinnacle Airlines and
Mesaba. Under the agfeements these regional carriers operate their flights under the Northwest "NW"
code and are identified as Northwest Airlink carriers. The primary purpose of these marketing
agreements is to provide more frequent service to small and mid-sized cities, which increases
connecting traffic at Northwest's hubs.
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Pinnacle Airlines is a majority owned subsidiary of Northwest. Effective March 1, 2002, the
Company entered into a new Airline Services Agreement ("ASA'') with Pinnacle Airlines. The new ASA
is a capacity purchase agreement, under which Pinnacle Airlines operates flights on behalf of the
Company and is compensated at specified rates for each completed block hour and cycle, as well as for
specified fixed costs based on the size of its fleet.
In 2002, Northwest acquired 18 44-seat Bombardier Canadian Regional Jet ("CRJ") 440 series
aircraft and three .SO-seat CRJ-200 aircraft, bringing the total number of CRJ-200/440 aircraft in
operation to 51. Over the next three years, Northwest is scheduled to take delivery of 78 additional
CRJ-200/440 regional jets. The 51 CRJ-200/440 aircraft presently in operation are subleased to and
operated by Pinnacle Airlines. Of the 78 CRJ aircraft scheduled to be delivered over the next three
years, Northwest has committed to sublease 44 to Pinnacle Airlines to be used in its operations. The
balance of the CRJ aircraft have not been committed to any carrier.
The Company owns 27.8% of the common stock of Mesaba Holdings, Inc., the holding company of
Mesaba. The Company also has warrants to acquire Mesaba Holdings, Inc. common stock, none of
which were in-the-money as of December 31, 2002. Northwest and Mesaba signed a 10-year ASA
effective July 1, 1997, under which Northwest determines Mesaba's pricing, aircraft scheduling and fleet
composition. Mesaba operates a fleet of 113 regional jet and turbo-prop aircraft, which includes 36
69-seat AVRO RJ85 aircraft and 49 34-seat SAAB 340 aircraft leased or subleased from Northwest.
Cargo
In 2002, cargo accounted for 7.8% of the Company's operating revenues, with the majority of its
cargo revenues originating in or destined for Asia. Through its Tokyo and Anchorage cargo hubs,
Northwest serves most major air freight markets between the U.S. and the Pacific with 12 Boeing
747-200 freighter aircraft. Northwest is the largest cargo carrier among U.S. passenger airlines based on
revenue and the only one to operate a dedicated freighter fleet.
The trans-Pacific market is anticipated to be a leading growth market for the air freight industry,
with most of the growth expected to originate from the high-yield express business. Northwest is able to
participate in the express business due to its extensive network across the Pacific, its hubs at Tokyo and
Anchorage that allow for the efficient transfer of freight, and its dedicated freighter fleet. The
Company also provides service under a five-year capacity purchase agreement with DHL Worldwide
Express to provide daily freighter service from DHL's U.S. hub operations in Cincinnati to various
points in Asia. In addition, Northwest and Japan Airlines operate under a long-term cargo alliance
agreement.
Other Activities
MLT Inc. MLT Inc. ("MLT"), an indirect wholly owned subsidiary of NWA Corp., is among the
largest vacation wholesale companies in the U.S. MLT develops and markets Worry Free Vacation
programs that include air transportation, hotel accommodations and car rentals. In addition to its
Worry-Free Vacations charter program, MLT markets and supports Northwest's WorldVacations brand
packaged vacations to destinations throughout the U.S., Canada, Mexico, the Caribbean, Europe and
Asia, primarily on Northwest. These vacation programs, in addition to providing a competitive and
quality tour product, increase the sale of Northwest services and promote and support new and existing
Northwest destinations. In 2002, MLT had $460 million in revenues.
WORLDSPAN. The Company holds a 33.7% partnership interest in WORLDSPAN, L.P.
("WORLDSPAN"). WoRLDSPAN operates and markets a global computer reservations and passenger
processing system ("CRS"). A CRS is used by travel agents, corporate accounts and internet consumers
to make airline, hotel, car and other travel reservations and to issue airline tickets. Delta and AMR
Corporation own 40% and 26.3% of WORLDSPAN, respectively. On March 3, 2003, an agreement was
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ianed b Tra el Tran action Proce ing Corporation, an entity formed by Citigroup Venture Capital
Equity Partner LP and Teacher ' Merchant Bank, to purcha e WORLD P from the three airline
owner . Thi tran action, which i cheduled to be completed in mid-2003, is ubject to financing,
go rnment approv 1 and various other do ing condition .
Orbitz. orth t along with Continental Delta United and American Airline , jointly own a
multi-airline tra el Web ite, Orbitz LLC ("Orbitz '), that allow traveler to purchase their airline,
hot l and car rental ervice online. Northwe t hold a 15.6% interest in Orbitz. This Web site provide
a comprehen ive lection of online airfare , including Internet-only fares, and other travel information
and cu tamer f atures. Th Web site i managed independently from the owner airlines.
Frequent Flyer Program. Northwest operates a frequent flyer marketing program known as
"WorldP rk " under which mileage credits are earned by flying on Northwest or its alliance partners
and b u ing the ervices of participating credit card banks, hotel , long-di tance companies, car rental
firm and other non-airline partners. Northwe t sells mileage credits to the other companies
participating in the program. The program was designed to retain and increase the business of frequent
traveler b offering incentives for their continued patronage.
Under the WorldPerks program, miles earned are accumulated in an account for each member and
do not expire. Mileage credit can be redeemed for free or upgraded travel on Northwest and other
participating airlines or for other travel industry awards. Additional features include a three-tier elite
incenti e and reward structure program.
Regulation
General. The Airline Deregulation Act of 1978, as amended, eliminated domestic economic
regulation of passenger and freight transportation in many regards. Nevertheless, the industry remains
r gulat d in a number of areas. The DOT has jurisdiction over international route authorities, CRSs
and certain con umer protection matters, such as advertising, denied boarding compensation and
baggage liability. orthwest is ubject to DOT regulations because it holds certificates of public
convenience and neces ity a well as air carrier operating certificates. The Federal Aviation
Administration ("FAA'') regulates flight operations, including air space control and aircraft and security
tandards. The DOJ has jurisdiction over airline competition matters, including merger and
acqui ition . Other federal agencies have jurisdiction over postal operations, use of radio facilities by
aircraft and certain other a pects of Northwest's operations.
Inteniational Service. Northwest operates its international routes under route certificates issued by
the DOT Sub tantial portions of Northwest's Pacific route certificates are permanent and do not
require renewal by the DOT Certain other international route certificates are temporary and subject to
peri die r newal. orthwe t reque ts exten ions of these certificates when and as appropriate. The
DOT typically renews temporary authoritie on routes when the authorized carrier is providing a
reasonable level of service. With respect to foreign air transportation, the DOT must approve
agreement betwe n air carriers, including code-sharing agreements, and may grant antitrust immunity
for tho e agre ment .
orthwest's rights to operate to foreign countries, including Japan, China and other countries in
the Pacific and Europe are governed by aviation agreements between the U.S. and the respective
for ign countrie . Many aviation agreements permit an unlimited number of carriers to operate
between the U.S. and _
the respective foreign country, while other aviation agreements limit the number
of carrier and flight on a given international route. From time to time, the U.S. or its foreign country
counterpart ma eek to renegotiate or cancel an aviation agreement. In the event an aviation
agreement i amended or canceled, uch a change could adversely affect Northwests ability to maintain
or expand air ervice to the re pective foreign country.
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Operations to and from foreign countries are subject to the applicable laws and regulations of
those countries. There are restrictions on the number and timing of operations at certain international
airports served by Northwest, including Tokyo. Additionally, slots for international flights are subject to
certain restrictions on use and transfer.
The European Commission ("EC") had commenced a review of all trans-Atlantic airline alliances,
including the Northwest/KLM alliance. In 2002, the EC granted antitrust clearance to the Northwest/
KLM trans-Atlantic airline alliance.
Ai,port Security. On November 19, 2001, Congres passed, and the President signed into law, the
Aviation and Transportation Security Act ('viation Security Act'). This law federalizes substantially all
aspects of civil aviation security and requires, among other things, the implementation of certain
security measures by airlines and airports, such as the requirement that all passenger bags be screened
for explosives. Funding for airline and airport security under the law is provided in part by a $2.50 per
segment ticket tax, subject to a $10 per roundtrip cap; however, the Company is responsible for costs in
excess of this fee, which through 2004 cannot exceed the Company's 2000 passenger screening expense
level. Implementation of the requirements of the Aviation Security Act will result in increased costs for
the Company and its passengers.
Airport Access. Four of the nation's airports, Chicago O'Hare, New York (LaGuardia and
Kennedy International) and Washington, D.C. (Ronald Reagan National), have been designated by the
FAA as "high density traffic airports," and the number of takeoffs and landings at such airpor s
("slots") have been limited during certain peak demand time periods. Currently, the FAA permits the
buying, selling, trading or leasing of the e slots, subject to certain re trictions. Legislation passed in
March 2000 resulted in the elimination of lot restrictions at Chicago O'Hare on July 1 2002 and will
do so at New York (LaGuardia and Kennedy International) on January 1, 2007. The Company believes
these changes will not have a material adverse impact on its operations or operating results.
Labor. The Railway Labor Act ("RLA'') governs the labor relation of employers and employees
engaged in the airline industry. Comprehensive provisions are set forth in the RLA establishing the
right of airline employees to organize and bargain collectively along craft or class lines and imposing a
duty upon air carriers and their employees to exert every reasonable effort to make and maintain
collective bargaining agreements. The RLA contains detailed procedures that must be exhausted before
a lawful work stoppage may occur. Pursuant to the RLA, Northwest has collective bargaining
agreements with six domestic unions representing 11 separate employee groups. In addition, Northwest
has agreements with four unions representing its employees in countries throughout Asia; such
agreements are not subject to the RLA.
Noise Abatement. The Airport Noise and Capacity Act of 1990 ('NCA'') recognizes the right of
airport operators with special noise problems to implement local noise abatement procedures as long as
such procedures do not interfere unreasonably with the interstate and foreign commerce of the national
air transportation system. As a result of litigation and pressure from airport area residents, airport
operators have taken local actions over the years to reduce aircraft noise. These actions include
restrictions on night operations, restrictions on frequency of aircraft operations and various operational
procedures for noise abatement. While Northwest has sufficient operational and scheduling flexibility to
accommodate current local noise restrictions, its operations could be adversely affected if locally
imposed regulations become more restrictive or widespread.
In April 1999 the European Union ("EU") enacted a rule that would have prohibited the
registration in Europe of aircraft with "hushkits" after April 1, 2000. Northwest opposed such a rule as
it would have inhibited its operations in Europe as well as reduce the Company's fleet strategy options
in relation to older aircraft, which are often retired and sold in Europe, Africa and Asia. The U.S.
government has formally protested this regulation as a violation of the international noise standards
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e tablished by the International Civil Aviation Organization ("ICAO"), and in March 2000, the U.S.
filed a fomrnl petition with the !CAO. The EU adopted a noise directive effective April 1, 2002, which
revoke the earlier hush.kit rule. A a result, hush.kitted aircraft may be prohibited from operations only
at "city airport " engaged olely in point-to-point services between or within European States and
which have no runway with a take-off run of more than 2,000 meters. In addition, the directive
establishes a process for EU Member States to adopt noise policies that are consistent with the !CAO
noise standard adopted in 2001.
Under the direction of the !CAO, world governments also have under consideration creation of a
new more stringent noise standard than that contained in the ANCA. The U.S. is a participant in these
discussions. A new ICAO noise standard was adopted in 2001 which established more stringent noise
requirements for newly manufactured aircraft after January 1, 2006. As adopted, the new rule is not
accompanied by a mandatory phase-out of in-service Chapter 3 aircraft, including certain aircraft
operated by Northwest.
Safety. The FAA has jurisdiction over aircraft maintenance and operations, including equipment,
dispatch, communications, training, flight personnel and other matters affecting air safety. To ensure
compliance with its regulations, the FAA requires all U.S. airlines to obtain operating, airworthiness
and other certificates, which are subject to suspension or revocation for cause.
The Company's aircraft require various levels of maintenance or "checks" and periodically undergo
complete overhauls. Maintenance efforts are monitored closely by the FAA, with FAA representatives
present at the Company's maintenance facilities. The FAA has issued several Airworthiness Directives
("ADs"), which mandate changes to an air carrier's maintenance program for older aircraft. These ADs
(which include structural modifications to certain aircraft) were issued to ensure that the oldest portion
of the nation's transport aircraft fleet remains airworthy. The Company is currently, and expects to
remain, in compliance with all applicable requirements under the FAA-issued ADs.
A combination of FAA and Occupational Safety and Health Administration regulations on both
the federal and state levels apply to all of Northwest's ground-based operations.
Environmental. The Company is subject to regulation under various environmental laws and
regulations, which are administered by numerous state and federal agencies, including the Clean Air
Act, the Clean Water Act and Comprehensive Environmental Response, Compensation and Liability
Act of 1980 ("CERCLA''). In addition, many state and local governments have adopted environmental
laws and regulations to which the Company's operations are subject.
In February 1998, the Environmental Protection Agency ("EPA'') and the FAA signed a
Memorandum of Agreement ("MOA'') to develop a voluntary process with the airline industry to
reduce emissions that lead to ozone formation. The MOA includes a proposal with a voluntary engine
retrofit program to reduce emissions from aircraft engines. As a result of the MOA, air carriers, the
EPA, the FAA and local and state regulators have had discussions regarding the scope and content of a
voluntary emissions reduction program. However, these discussions have not yet resulted in an agreed
upon program.
Northwest has been identified, along with other airlines, as a potentially responsible party at
various environmental sites. Management believes that Northwest's share of liability for the cost of the
remediation of these sites, if any, will not have a material adverse effect on the Company's financial
statements.
Civil Reserve Air Fleet Program. Northwest is a participant in the Civil Reserve Air Fleet Program,
pursuant to which Northwest has agreed to make available, during the period beginning October 1,
2002 and ending September 30, 2003, 34 Boeing 747-200/400 passenger aircraft, 21 DCl0-30 passenger
aircraft and 12 Boeing 747-200 freighter aircraft for use by the U.S. military under certain stages of
8
readiness related to national emergencies. The program is a standby arrangement that lets the U.S.
Department of Defense Air Mobility Command, headquartered at Scott Air Force Base in Illinois, call
on as many as 67 contractually committed Northwest aircraft and their crews to supplement military
airlift capabilities.
On February 8, 2003, the U.S. Secretary of Defense authorized a "Stage 1' mobilization of the
Civil Reserve Air Fleet, the lowest activation level. Northwest is required to make four passenger and
two freighter aircraft available as a result of this Stage 1 mobilization. Under the requirements of a
Stage 2 mobilization, an additional 11 passenger and two freighter Northwest aircraft would be
required. The remaining Civil Reserve Air Fleet would be mobilized under a Stage 3 mobilization,
which for Northwest would involve a total of 55 passenger and 12 freighter aircraft. The additional
aircraft required under Stage 2 or Stage 3 mobilization could have a significant adverse impact on the
Company's results of operations.
Frequent Flyer. The DOT is conducting a review of the frequent flyer programs of the larger U.S.
airlines. The focus of the review relates to limitations placed by carriers on the availability of award
seats and the adequacy of consumer notices concerning such limitations. The outcome of this matter
cannot presently be determined.
Risk Factors Related to Northwest and the Airline Industry
Industry Competition
The airline industry is highly competitive. Northwest's competitors include all the other major
domestic airlines as well as foreign, national, regional and new entrant airlines, some of which have
more financial resources or lower cost structures than Northwe t. On mo t of Northwest' route , it
competes with at least one of these carriers. Airline revenues are sensitive to numerous factors, and the
actions of other carriers in the areas of pricing, scheduling and promotions can have a substantial
impact on overall industry revenues. Such factors may become even more significant in periods when
the industry experiences large losses, as airlines under financial stress may institute pricing structures
intended to achieve near term survival rather than long term viability.
Industry Revenue Environment
Since early 2001, the U.S. airline industry has suffered a significant decline in revenues versus what
would have been expected based on historical growth trends. This shortfall has been caused by a
number of factors.
The rapid growth of low cost airlines has had a profound impact on industry revenues. Using the
advantage of low unit costs, these carriers offer lower fares, particularly those targeted at business
passengers, in order to shift demand from larger, more-established airlines. As a result of growth, these
low cost carriers now transport nearly 25% of all domestic U.S. passengers compared to less than 10%
a decade ago. They now compete for, and thus influence industry pricing on, approximately 75% of all
domestic U.S. passenger ticket sales compared to less than 20% a decade ago. As a result of their
better financial performance, low cost carriers are expected to continue to grow their market share.
While the advent of Internet travel Web sites has driven significant distribution cost savings for
airlines, it has had a large negative impact on airline revenues. Having access to "perfect pricing
information", air travel consumers have become more efficient at finding lower fare alternatives than in
the past. The increased price consciousness of travelers, as well as the growth in distribution channels,
has further motivated airlines to price aggressively to gain fare advantages through certain channels.
The U.S. airline industry is one of the most heavily taxed of all industries. Taxes and fees now
represent approximately 25% of what a passenger pays for an average domestic airline ticket, a
percentage even greater than that for alcohol and tobacco products. These taxes and fees have grown
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ignificantly in the pa t decade, mo t recently with the introduction of a $2.50 ecurity fee imposed on
ach pa nger flight egment, ubj ct to a $10 per roundtrip cap. The company believes that every
dollar of tax or fee increa e impo ed on airline pa enger roughly translate into a dollar of reduced
airlin r nue, particularly over the long run.
The attack of September 11, 2001 materially impacted and continue to impact air travel. Concerns
about furth r t rrori t attacks, which are unlikely to abate any time soon have had a negative impact
on air travel demand. Furthermore, security procedures introduced at airports since the attacks have
increa ed, both in reality and in perception, the inconvenience of flying and thus further reduced
demand.
While the factors noted are believed to be lasting if not permanent, and could in fact worsen over
time, ome of the current airline industry revenue shortfall is believed to be cyclical in nature. U.S.
airlin revenues have historically been and continue to be influenced by the strength of the U.S.
conomy. Furthermore, airline busines revenues are greatly influenced by the growth in corporate
profitability. The current sluggishness of both the economy and corporate profitability is adver ely
affecting airline revenues.
The airline industry revenue decline has been further exacerbated in early 2003. In January,
United Airlines introduced a new pricing structure, reducing its highest business fares by 40-50%. This
action and the re ulting match by other airlines has reduced average fares without a corresponding
increase in demand. The threat of a war with Iraq has also materially affected future airline bookings,
particularly for international travel.
Industry Seasonality
The airline industry is both cyclical and easonal in nature. Due to seasonal fluctuations, the
Company s operating results for any interim period are not necessarily indicative of those for the entire
year. The Company's second and third quarter operating results have historically been more favorable
due to increased lei ure travel on domestic and international routes during the spring and summer
months.
Labor
Wages, salaries and benefits are the Company's largest costs, representing 41 % of the Company's
operating revenues in 2002. In light of the current revenue environment, a number of other airlines are
attempting to significantly reduce labor expenses in order to get overall costs in line with revenues.
orthwe t has begun preliminary discussions with certain labor groups, and is similarly seeking
permanent reductions in wage, benefit structures and work rules. The Company cannot predict the
outcome of negotiations to amend its labor contracts at this time.
10
As of December 31, 2002, the Company had approximately 44,300 full-time equivalent employees
of whom approximately 2,200 were foreign nationals working primarily in Asia. Unions repre ent
approximately 91 % of the Company's employees. Collective bargaining agreement provide standard
for wages, hours of work, working conditions, settlement of di pute and other matter . The major
agreements with domestic employees became amendable or will become amendable on variou dates as
follows:
Employee Group
Pilots ................. .
Agents and Clerks .... ... .
Equipment Service
Employees and Stock
Clerks ............... .
Flight Attendants ........ .
Mechanics and Related
Employees ........... .
Government Regulations
Approximate
umber of
Full-time Equivalent
Employees Covered Union
Air Line Pilot Association,
5,600 International . .. . . ........... . .
International A ociation of
9,700 Machini ts & Aero pace Worker
International A ociation of
6,500 Machini t & Aerospace Workers
International Brotherhood of Team ters,
Chauffeur , Warehou emen &
9,300 Helpers of America .... . .. .... . .
Aircraft Mechanic Fraternal
7,700 Association ...... . ........... .
Amendable
Date
9/13/03
2/25/03
2/25/03
5/30/05
5/11/05
Airlines are subject to extensive regulatory requirements. In the la t several years, Congres ha
passed laws and the FAA has issued a number of maintenance directive and other regulation . The e
requirements impose substantial costs on airlines. Additional law , regulation , taxe and airport rate
and charges have been proposed from time to time that could significantly increase the cost of airline
operations or reduce revenues. Congress and the DOT have also proposed the regulation of airline '
responses to their competitors' activities. The ability of U.S. carriers to operate international route is
subject to change because the applicable arrangements between the U.S. and foreign governments may
be amended from time to time, or because appropriate slots or facilitie may not be available.
Northwest cannot give assurance that laws or regulations enacted in the future will not adversely affect
it.
Aircraft Fuel
Because fuel costs are a significant portion of Northwest's operating cost (12.7% for 2002),
significant changes in fuel costs would materially affect its operating results. Fuel prices continue to be
susceptible to, among other factors, political unrest in Venezuela and a possible war with Iraq. Due to
these and other events that would affect the global supply of aircraft fuel, Northwe t may experience
higher fuel prices or have to curtail scheduled services. A one-cent change in the cost of a gallon of
fuel (based on 2002 consumption) would impact operating expenses by approximately $1.6 million per
month. Changes in fuel prices may have a greater impact on Northwest than some of its competitors
because of the composition of its fleet. The Company hedges some of its future fuel purchases to
protect against potential spikes in price. However, these hedging strategies may not always be effective.
11
Increased In urance Co t
Following S ptember 11, 2001 aviation insurers significantly increased airline insurance premiums.
Total aviation and property insurance expen e were $94 million higher in 2002 than in 2000. As a
result of fir t the Airline Stabilization Act and subsequently the Homeland Security Act, the federal
government assume mo t war risk coverage. This coverage is scheduled to expire on August 31, 2003.
While the government may again extend the deadline for when it will discontinue providing excess war
risk coverage the Company cannot assure that any extension will occur, or if it does, how long the
extension will last. Should the government stop providing excess war risk coverage to the airline
industry, it is expected that the premiums charged by aviation insurers for this coverage would be
ubstantially higher than the premiums currently charged by the government Significant increases in
insurance premiums could negatively impact the financial condition and results of operations of the
Company.
Indebtedness and Other Obligations
The Company has substantial levels of indebtedness. As of December 31, 2002, the Company had
long-term debt and capital lease obligations, including current maturities, of $6.98 billion. Of this
indebtedness, 40% bears interest at floating rates. The amount of long-term debt that matures in 2003
is $281 million. Additionally, $623 million matures in 2004, $1.43 billion in 2005, $563 million in 2006
and $673 million in 2007. As of December 31, 2002, the principal portion of future minimum lease
payments under capital leases were $65 million for 2003, $46 million for 2004, $40 million for 2005,
$29 million for 2006 and $32 million for 2007. These levels of indebtedness do not include the
obligation to redeem $226 million of convertible preferred stock in 2003 and non-recourse mandatorily
redeemable preferred securities of one of the Company's subsidiaries of $553 million. The amount of
the Company's indebtedness could limit its ability to obtain additional financing or could adversely
affect the Company's future financing costs, either of which could negatively affect the ability to
operate its business or make future capital expenditures. The Company's ability to service its
indebtedness and obligations could be adversely affected by many factors, including general economic
conditions and other factors beyond the Company's control.
The Company also has several noncontributory pension plans covering substantially all of its
employees. As of December 31, 2002, the Company's pension plans were underfunded by $3.95 billion,
as calculated in accordance with SFAS No. 87. As of December 31, 2002, on a current liability basis
utilized for cash funding purposes, the plans were underfunded by approximately $3.1 billion. The
Company's 2003 pension contributions associated with the 2003 plan year are estimated to be
$468 million. The Company also had, as of December 31, 2002, $223 million of mandatory
contributions related to the 2002 plan year remaining to be paid in 2003. On November 5, 2002, the
Company submitted an application to the Internal Revenue Service for authorization to reschedule
2003 plan year contributions under the Pension Plans for contract and salaried employees and
anticipates receiving notice from the Internal Revenue Service by April 2003. The Company has also
submitted an application to the Department of Labor to permit the Company to contribute to the
pen ion plans the common stock of Pinnacle Airlines Corp., a wholly owned subsidiary, in lieu of
making certain required contributions in cash. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations", Pension Funding Obligations, for further discussion of
the Company's pension obligations.
In addition, Northwest operates in a capital-intensive industry. Periodically, Northwest is required
to make ignificant capital expenditures for new aircraft and related equipment. There can be no
a urance that ufficient financing will be available for all aircraft and other capital expenditures.
12
Foreign Currency Exposure
Northwest conducts a significant portion of its operations in foreign locations. As a result,
Northwest has operating revenues and, to a lesser extent, operating expenses, as well as assets and
liabilities, denominated in foreign currencies, principally the Japanese yen. Fluctuations in such foreign
currencies can significantly affect Northwest's operating performance and the value of its assets located
outside of the United States. From time to time, Northwest uses financial instruments to hedge its
exposure to the Japanese yen. However, these hedging strategies may not always be effective.
Forward-Looking Statements
Certain of the statements made in "Item 1. Business", "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this annual report are
forward-looking and are based upon information available to the Company on the date hereof. The
Company through its management may also from time to time make oral forward-looking statements.
In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995,
the Company is hereby identifying important factors that could cause actual results to differ materially
from those contained in any forward-looking statement made by or on behalf of the Company. Any
such statement is qualified by reference to the following cautionary statements.
It is not reasonably possible to itemize all of the many factors and specific events that could affect
the outlook of an airline operating in the global economy. As noted elsewhere in this annual report,
such risks and uncertainties include, among others, the future level of air travel demand, the
Company's future load factors and yields, the airline pricing environment, increased costs for security,
the cost and availability of aviation insurance coverage and war risk coverage, the general economic
condition of the U. S. and other regions of the world, the price and availability of jet fuel, the
possibility of war with Iraq, the possibility of additional terrorist attacks or the fear of such attacks,
labor negotiations both at other carriers and the Company, low-fare carrier expansion, capacity
decisions of other carriers, actions of the U.S. and foreign governments, foreign currency exchange rate
fluctuation, inflation and other factors discussed herein. Additional information with respect to these
factors and these and other events that could cause differences between forward-looking statements and
future actual results is contained in "Risk Factors Related to Northwest and the Airline Industry"
above.
Developments in any of these areas, as well as other risks and uncertainties detailed from time to
time in the Company's Securities and Exchange Commission filings, could cause the Company's results
to differ from results that have been or may be projected by or on behalf of the Company. The
Company cautions that the foregoing list of important factors is not inclusive. The Company undertakes
no obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. These statements deal with the Company's expectations about
the future and are subject to a number of factors that could cause actual results to differ materially
from the Company's expectations.
13
Item 2. PROPERTIES
Flight Equipment
As shown in the following table, Northwest operated a fleet of 439 aircraft at December 31, 2002,
consisting of 371 narrow-body and 68 wide-body aircraft. Northwest's purchase commitments for
aircraft as of December 31, 2002 are also provided.
Aircraft
Average on
Seating Capital Operating Age Firm
Aircraft 'Iype Capacity Owned Lease Lease Total (Years) Order
Passenger Aircraft
Airbu
A319 . 124 45 12 57 1.6 21
A320. 148 41 4 31 76 8.5 8
A330-200 233-243 10
A330-300 298 14
Boeing:
727 149 8 8 24.1
757-200 180-184 23 14 19 56 11.5
757-300 224 7 7 0.2 9
747-200 353-446 13 5 18 21.9
747-400 403 4 12 16 9.1
McDonnell Douglas:
DC9 78-125 154 13 167 32.0
DClO 273 13 9 22 24.1
-
308 18 101 427 18.7 62
Freighter Aircraft
Boeing 747-200F 5 7 12 20.9
Total Northwest Operated Aircraft 313 18 108 439 18.8(1) 62(2)
Regional Aircraft
AVRO RJ85 69 11 25 36 4.2
CRJ-200/440 50/44 51 51 1.2 78(3)
SAAB 340 30-34 49 49 5.1
Total Airlink Operated Aircraft 11 125 136 3.4 78
Total Aircraft 324 18 233 575 15.1 140
(1) Excluding DC9 aircraft, the average age of Northwest operated aircraft is 10.7 years.
(2) Financing commitments available for use by the Company are in place for all of these aircraft.
(3) The e aircraft will be leased or subleased to and operated by regional carriers, and the Company has the option to finance
these aircraft through long-term oper ting lease commitments from the manufacturer, and if the manufacturer does not
provide the financing, the Company is not required to take delivery of the aircraft.
The DC9 aircraft have considerable remaining technological life, based upon the cycle life
(capacity for number of landings) expected by the manufacturer and other factors. The Company also
believes that these aircraft have economic value for the Company given its route network and
maintenance programs. The Company estimates that its DC9 aircraft could fly on average more than 10
additional years beyond 2002 based upon the manufacturer's expected cycle life for such aircraft and
their projected annual utilization by Northwest.
For further information related to the Company's aircraft leases and commitments, see Notes 4
and 10 to the Consolidated Financial Statements.
14
Other Property and Equipment
Northwest's primary office are located at or near the Minneapolis/St. Paul International Airport.
The Company owns a 160-acre ite east of the Minneapoli /St. Paul International Airport containing
the Company's corporate offices. Additional owned buildings include reservation center in Baltimore,
Detroit, Tampa and Chisholm, Minne ota, and a data processing center in Eagan, Minne ota. The
Company owns property in Tokyo, including a 1.3-acre site in downtown Tokyo and a 33-acre land
parcel, 512-room hotel and flight kitchen located near Tokyo' Narita International Airport.
Northwest lea e the majority of it airport facilitie , upport ervice building and ales and
reservations offices. These leases generally run for periods of Jes than one year to 30 year and contain
provisions for periodic adju tment of lea e rate . At most airport that it rve , Northwest ha entered
into use agreement which provide for the non-exclu ive use of runway , taxiway and other facilitie .
Landing fees under these agreement normally are based on the number of landings and weight of
aircraft. The Company leases re ervation center in or near Minneapoli /St. Paul and Seattle.
Maintenance bases under operating lease are locat d in Minneapoli /St. Paul and Duluth Minnesota.
The Company also operates 30 city ticket office . In certain ca e , the Company ha con tructed a
facility on leased land, which reverts to the Jes or upon expiration of the lea e. The e facilities includ
cargo buildings in Anchorage, Boston, Los Angele , New York (JFK), San Franci co and Honolulu;
support buildings at the Minneapolis/St. Paul International Airport; a line maintenance hangar in
Seattle; and a two-bay DClO hangar in Detroit.
On October 15, 2002, the Company announced that it would clo e it Atlanta aircraft maintenance
facility, its reservations center in Long Beach, California and three city ticket office . Maintenance
activity performed at the Atlanta facility was ub equently tran ferred to the Company' facilitie in
Minneapolis and Duluth.
Item 3. LEGAL PROCEEDINGS
Chase v. Northwest Airlines and Airline Reporting Corporation (U.S. D.C. Ea tern District of
Michigan, Civ. Action No. 96-74711). Northwe ti a defendant in an antitru t cla action filed in
U.S. District Court for the Eastern District of Michigan in October 1996. The action purports to be
brought on behalf of a class defined as all persons who purchased tickets on certain routes into
Northwest's hubs at Detroit, Minneapolis/St. Paul and Memphis from October 11, 1992 to the pre ent.
The complaint alleges that Northwest' impo ition of re triction prohibiting the ale of "hidden city"
tickets constitutes monopolization in violation of the Sherman Act. The complaint seeks injunctive
relief, unspecified damages for the class, and costs and attorneys' fees. The attorneys for the plaintiff in
Chase have also filed three additional class actions in the ame court again t other airlines and
Northwest with parallel allegations similar to those in Chase, including allegations that the defendant
airlines conspired to deter hidden city ticketing. These cases are: Keystone Business Machines, Inc. v.
US. Airways and Northwest Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72474)
BLT Contracting, Inc. v. US. Airways, Northwest Airlines and the Airline Reporting Corporation (U.S. D.C.
Eastern District of Michigan, Civ. Action No. 99-72988), and Volk and Nitrogenous Industries Corp. v.
US. Airways, Northwest Airlines, Delta Air Lines, and the Airline Reporting Corporation (U.S. D.C.
Eastern District of Michigan, Civ. Action No. 99-72987). All have been assigned to the Judge in the
Chase case. Northwest believes these cases are without merit and intends to defend against them. In
November 2000, the plaintiffs filed their class certification motion and defendants filed their summary
judgment motion. On May 16, 2002, the Court entered an Order granting plaintiff ' motion for clas
certification and denying defendants' motion for summary judgment. The Court has not yet set a trial
date.
Midwestern Machinery Co., Inc. v. Northwest Airlines, Inc. (U.S. D.C. District of Minne ota, Civ.
Action No. 97-1438). In June 1997, Midwestern Machinery Co. and several individuals filed an
15
antitru t clas action against Northwest in the U.S. Di trict Court for Minne ota. The complaint alleges
that Northwe t's acqui ition of Republic Airlines in 1986 resulted in a substantial reduction in
competition in violation of Section 7 of the Clayton Act. Northwest believes the lawsuit to be without
merit and intends to defend against the claim. In February 2001, the Court granted the plaintiff's
motion for class certification. On February 5, 2003, the Court entered an Order granting Northwest's
motion for summary judgment and dismissing the case. The plaintiffs have appealed the Court's Order
granting summary judgment.
Hall v. United Air Lines, et al. (U.S. D.C. Eastern District of North Carolina, Civ. Action No. 7-00
CV-123-BR(l)). In October 1999, a purported class action was filed in State Court in North Carolina
by a North Carolina travel agent, on behalf of herself and similarly situated North Carolina travel
agents, challenging actions by most major airlines, including Northwest, to reduce travel agent base
commissions from 8 percent to 5 percent and alleging several state law theories of liability, including
conspiracy. In June 2000, the plaintiff filed a voluntary dismissal and then filed a new case in federal
court. The new case is a class action, now on behalf of a nation-wide class of travel agents, alleging an
unlawful agreement among airlines to reduce commissions in violation of the Sherman Act, and is
based on the same factual allegations. On November 13, 2001, the court granted the plaintiff's motion
to amend the complaint to include allegations that other commission reductions in 1997 and 1998 were
the result of unlawful agreements among the airline defendants in violation of the Sherman Act. The
complaint was subsequently amended again to allege that commission reductions in March 2002 were
also the result of an unlawful agreement among the airline defendants. Northwest believes the case to
be without merit and intends to defend against the claim. On September 17, 2002, the Court entered
an Order granting plaintiffs' motion for class certification. Defendants' motion for summary judgment is
pending. The Court has set a trial date in April 2003.
McCoy-Johnson v. Northwest Airlines (U.S. D.C. Western District of Tennessee, Civ. Action
No. 2-99-CV-2994GV). In November 1999, a purported class action was filed against Northwest by a
Northwest passenger in federal court alleging violations of Section 2 of the Sherman Act. The plaintiff
alleges that Northwest has monopolized or attempted to monopolize air transportation on certain
routes into and out of its three domestic hubs through a variety of exclusionary practices. The plaintiff
purports to sue on behalf of all similarly situated passengers who purchased tickets on Northwest for
travel on certain routes into or out of its three hubs since at least as early as April 1995. In
March 2001, a second case, Rodney v. Northwest Airlines (U.S. D.C. Western District of Tennessee, Civ.
Action No. 01-2167GV), was filed in the same court as a related case by the same counsel. The
allegations in the Rodney case are substantially the same as those in the McCoy-Johnson case. In
July 2001, the lawyers representing the plaintiffs in McCoy-Johnson and Rodney filed another
companion lawsuit, Sax v. Northwest (U.S D.C. Western District of Tennessee, Civ. Action
No. 01-2582GV). The allegations in the Sax case are substantially the same as those in the McCoy-
Johnson and Rodney cases. Northwest believes these cases to be without merit and intends to defend
against the claims. The plaintiffs' motion for class certification is pending.
Spirit Airlines v. Northwest Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action
No. 00-71535). In March 2000, Spirit Airlines filed a Sherman Act monopolization complaint against
Northwest in the U.S. District Court for the Eastern District of Michigan alleging that Northwest had
monopolized, or attempted to monopolize, air transportation service between Detroit and Philadelphia
and between Detroit and Boston in 1996 by engaging in predatory pricing and other actions to exclude
Spirit from those markets. Northwest believes the case to be without merit and intends to defend
against the claim. Northwest's motion for summary judgment is pending.
In addition, in the ordinary course of its business, the Company is party to various other legal
actions which the Company believes are incidental to the operation of its business. The Company
believes that the outcome of the proceedings to which it is currently a party (including those described
16
above) will not have a material adverse effect on the Company's consolidated financial statements
taken as a whole.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter
of 2002.
MANAGEMENT
Executive Officers of the Registrant
Richard H. Anderson, age 47, has served as Chief Executive Officer of NWA Corp. and Northwest
since April 2001 and was elected a director of both companies in September 2001. He has served in a
number of executive positions since joining Northwest in 1990, including Executive Vice President and
Chief Operating Officer from December 1998 to April 2001, Executive Vice President-Technical
Operations and Airport Affairs from April 1998 to December 1998 and Senior Vice President-Technical
Operations and Airport Affairs from January 1997 to April 1998. From 1994 to 1996, he served as
Senior Vice President-Labor Relations, State Affairs and Law, and from 1990 to 1994 he served as Vice
President-Deputy General Counsel. Prior to joining Northwest, Mr. Anderson was Staff Vice President
and Deputy General Counsel of Continental Airlines. Mr. Anderson also serves on the board of
directors of Medtronic, Inc. and Mesaba Holdings, Inc.
Douglas M. Steenland, age 51, has served as President of NWA Corp. and Northwest since
April 2001 and was elected a director of both companies in September 2001. He has served in a
number of executive positions since joining Northwest in 1991, including Executive Vice President and
Chief Corporate Officer from September 1999 to April 2001, Executive Vice President-Alliances,
General Counsel and Secretary from January 1999 to September 1999, Executive Vice President,
General Counsel and Secretary from June 1998 to January 1999, and Senior Vice President, General
Counsel and Secretary from July 1994 to June 1998. Prior to joining Northwest, Mr. Steenland was a
senior partner at the Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson and Hand.
Mr. Steenland also serves on the board of directors of Mesaba Holdings, Inc.
Bernard L. Han, age 38, was appointed Executive Vice President and Chief Financial Officer of
the Company in October 2002. Prior to joining the Company, Mr. Han held several executive positions
at America West Airlines, Inc. between January 1996 and September 2002, including Executive Vice
President and Chief Financial Officer and Senior Vice President-Marketing and Planning. Between
1988 and 1995 Mr. Han held various finance and marketing positions at American Airlines and
Northwest Airlines.
J. Timothy Griffin, age 51, has served as Executive Vice President-Marketing and Distribution of
Northwest since January 1999. From June 1993 to January 1999, he served as Senior Vice President-
Market Planning and Systems. Prior to joining Northwest in 1993, Mr. Griffin held senior positions with
Continental Airlines and American Airlines.
Philip C. Haan, age 47, has served as Executive Vice President-International, Sales and
Information Services of Northwest since January 1999. From December 1995 to January 1999, he
served as Senior Vice President-International Services. Mr. Haan joined Northwest in 1991 as Vice
President-Revenue Management.
James G. Mathews, age 52, joined Northwest as Vice President-Finance and Chief Accounting
Officer in November 2000. From May 1997 to October 2000, Mr. Mathews served as Chief Financial
and Administrative Officer of CARE-USA (an international relief and development agency) and from
1992 to 1997 Mr. Mathews held various executive positions at Delta Air Lines, Inc., including
Corporate Treasurer.
17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the symbol
NWAC. The table below hows the high and low sales prices for the Company' common tock during
2002 and 2001:
Quarter
1st ..... . . . .... . .. . ...... ..... . ... ..... .
2nd ....................................
3rd .... . ............................... .
4th . . .. .. .................. . ...
2002
High
20.92
20.69
12.24
8.87
Low
13.56
10.66
6.33
4.71
As of February 28, 2003, there were 1,884 stockholders of record.
2001
High
33.06
27.75
27.63
18.71
Low
19.00
20.50
9.04
11.25
Since 1989, NWA Corp. has not declared or paid any dividends on its common stock and does not
currently intend to do so. Under the provisions of certain of the Company's bank credit agreements,
NWA Corp.'s ability to pay dividends on or repurchase its common stock is restricted. Any future
determination to pay cash dividends will be at the discretion of the Board of Directors, subject to
applicable limitations under Delaware law, and will be dependent upon the Company's results of
operations, financial condition, contractual restrictions and other factors deemed relevant by the Board
of Directors.
The following table summarizes information as of December 31, 2002, relating to equity
compensation plans of the Company pursuant to which grants of options, restricted stock units or other
rights to acquire shares may be granted in the future.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category .......... .
Equity Compensation Plans
Approved by Security
Holders(l) .......... .
Equity Compensation Plans
not Approved by Security
Holders(2) .......... .
Total ................ .
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights.
(a)
5,272,462
6,317,276(3)
11,589,738
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights*
(b)
$23.36
27.39(4)
$25.35(4)
Number of Shares
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(Excluding Securities
Reflected in Column (a))
(c)
3,110,680
5,145,926
8,256,606
(1) These plans are the Company's 1990 Stock Option Plan and 2001 Stock Incentive Plan.
(2) These plans are the Company's 1999 Stock Incentive Plan and the 1998 Pilots Stock Option Plan.
(3) Includes 1,180,549 shares of restricted stock.
( 4) Weighted average exercise price of outstanding options; excludes restricted stock units.
See Note 7 to the Consolidated Financial Statements for additional information regarding the
Company's equity compensation plans.
18
ITEM 6. SELECTED FINANCIAL DATA
NORTHWEST AIRLINES CORPORATION
Statements of Operations (In millions, except per share data)
Operating revenues
Passenger .
Cargo
Other . . .... . .
Operating expenses .
Operating income (loss) ..
Operating margin . .. .
Net income (loss) ....... .
Earnings (los ) per common hare:
Basic ......... . .
Diluted ......... . .. . ... .
Balance Sheets (In millions)
Cash, cash equivalents and unre trict d short-term inve tm nts
Total assets ..... . .... .. .......... . .... . .. . . .
Long-term debt, including current maturities . ........... .
Long-term obligations under capital leases, including current obligations
Mandatorily redeemable preferred security of ub idiary
Preferred redeemable stock ........ .
Common stockholders' equity (deficit)(3)
Operating Statistics( 4)
Scheduled service:
Available seat miles (ASM) (million ) .
Revenue passenger miles (RPM) (million )
Passenger load factor ... . . . . .. . ... .
Revenue passenger (million ) .. . . . .. .
Pas enger revenue per RPM (yield) .... .
Passenger revenue per scheduled ASM (RASM)
Total available seat miles (ASM) (millions) .
Operati ng revenue per total ASM(S) . .
Operating expense per total ASM(6) .....
Cargo ton mile (millions) . . . . . . . . . . .
Cargo revenue per ton mile .... . . ... . .
Fuel gallons consumed (millions) . .. . . . . .
Average fuel cost per gallon, excluding taxe .
Number of operating aircraft at year end ...
Full-time equivalent employee at year end ..
2002
$ 8,025
735
729
9,489
10,335
- - -
(846)
(8.9) %
$ (798)
$ (9.32)
$ (9.32)
$ 2,097
13,289
6,531
451
553
226
(2,262)
93,417
72,027
77.1%
52.7
10.76
8.30
93,583
9.11
9.50
2,221
33.08
1,896
69.33
439
44,323
Year Ended December 31
2001(1) 2000 1999 1998(2)
$ 8,417 $ 9,653 $ 8,692 7,607
720 857 732 635
768 730 709 686
9,905 11,240 10133 8,928
10,773 10,671 9,419 9119
- -- - - - - - -
( 6 ) 569 714 (191)
(8.8) % 5.1% 7.0% (2.1) %
(423) $ 256 $ 300 $ (2 5)
(5.03) 3.09 $ 3.69 $ (3.48)
(5.03) 2.77 $ 3.26 $ (3.4 )
$ 2,512 $ 693 $ 749 $ 480
12,975 10,877 10,584 10,281
5,051 3,242 3,666 4 001
5 6 556 597 655
492 55 626 564
227 232 243 261
(431) 23l (52) (477)
98,356 103,356 99,446 91,311
73,126 79,12 74,168 66,73
74.3% 76.6% 74.6% 73.1%
54.1 58.7 56.l 50.5
11.24\t 12.04 11.58 11.26
8.36 9.21 8.64 8.23
9 ,544 103,517 99,572 91 398
9.17 10.01 9.44 9.12
9.67 9.33 8.68 9.05
2,161 2,502 2,336 l 95
33.28 34.25 31.31 3-.41
2,029 2,113 2,039 1,877
79.26 82.99 53.55 53.60
428 424 410 409
45,708 53,491 51, 23 50,565
(1) 2001 was affected by ignifica ntly reduced demand for travel resulting from the September 11 2001 terrorist attacks. The
Company recognized $461 million of grant income from the U.S. Government under the Ai r Transportation Safety and
System Stabilization Act, which was recorded as other non-operating income.
(2) 1998 was affected by labor-related disruptions, which included work actions, a 30-day cooling off period, an 18-day ce ation
of flight operations due to the pilots' strike, a seven-day gradual resumption of flight operations and a rebuilding of traffic
demand.
(3) No dividends have been paid on common stock for any period presented.
( 4) All statistic exclude Pinnacle Airlines, a wholly-owned Northwest Airlink regional carrier, which i con i tent with how the
Company reports stati tics to the DOT and is comparable to statisitics reported by other major network airlines.
(5) Excludes the revenues of Northwest's fleet of 747 freighter aircraft MLT Inc., and NBA transportation program.
(6) Reconciliation of passenger service operating expen e u ed to calculate operating expense per total ASM to total operating
expenses:
2002 2001 2000 1999 1998
(in millions)
Passenger service operating expenses . .. .. . . . .. . . $ 8,889 $ 9,526 $ 9,657 $8 643 $8,268
747 Freighter operations .... ... . . .. .. 486 474 466 377 344
MLT and Pinnacle, net of intercompany eliminations . 490 464 404 334 2 0
Unusual item .. . .. . ..... .. . . . .. .. . 435 277 127 49 217
(Gain)/loss on a ets and NBA transportaion . 35 32 17 16 10
- - - - - - - - -
Operating expenses . .... . . . . . .. ...... $10,335 $10,773 $10,671 $9,419 $9 119
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
orthwe t Airline Corporation ( 'NWA Corp.") i a holding company who e principal indirect
operating ubsidiary i orthwe t Airline , Inc. ("Northwe t"). The Consolidated Financial Statements
include the accounts of NWA Corp. and all consolidated subsidiaries ( collectively, the "Company").
The Company reported a net lo s of $798 million for the year ended December 31, 2002, compared
with a net loss of $423 million in 2001. Loss per common hare was $9.32 in 2002 compared with loss
per common share of $5.03 in 2001. Operating los wa $846 million in 2002 compared with operating
loss of $868 million in 2001. Operating revenues for the year ended December 31, 2002 decreased by
$416 million compared to 2001 primarily due to a decline in busines travel caused by an economic
slowdown in the United State , weaknes in the Asian economies and reduced demand for travel
resulting from the September 11, 2001 terrorist attacks.
Full year 2002 results included $464 million in unusual pre-tax charges, principally comprised of
$352 million attributable to the accelerated retirement of certain Boeing 747-200 and DCl0-30 aircraft,
$53 million of costs as ociated with the closure of several facilities, $32 million related to benefit costs
and other asset write-downs, and a $27 million partial write-down of the Company's receivable from the
U.S. Government related to the grant under the Air Transportation Safety and System Stabilization Act
("Airline Stabilization Act '). In addition, the effective tax rate reflected a provision of $15 million for
tax credits the Company expects to expire unused.
Full year 2001 re ults included $300 million in unusual pre-tax charges related to $161 million of
reductions in the estimated market values of aircraft, $89 million retroactive wages and benefits as a
result of labor contract settlements, $27 million of employee severance costs following the events of
September 11, 2001 and $23 million in other non-operating charges. These charges were offset by
$461 million of grant income from the U.S. government under the Airline Stabilization Act and a
$27 million gain from the sale of the Company's investment in Continental Airlines, Inc.
Substantially all of the Company's results of operations are attributable to its principal indirect
operating subsidiary, Northwest, which accounted for approximately 95% of the Company's 2002
consolidated operating revenues and expenses. The Company's results of operations also include other
subsidiaries, of which MLT Inc. ("MLT") and Pinnacle Airlines, Inc. ("Pinnacle Airlines") are the most
significant. The following discussion pertains primarily to Northwest and, where indicated, MLT and
Pinnacle Airlines.
Northwest and Airline Industry Current Status
The current U.S. airline indu try environment i the wor t in hi tory. Since early 2001, the U.S.
airline industry has suffered a significant decline in revenues versus what would have been expected
based on historical growth trends. This shortfall has been caused by a number of factors.
The rapid growth of low cost airlines has had a profound impact on industry revenues. Using the
advantage of low unit costs, these carriers offer lower fares, particularly those targeted at business
pa sengers, in order to shift demand from larger, more-established airlines. A a result of growth, these
low cost carriers now transport nearly 25% of all domestic U.S. passengers compared to less than 10%
a decade ago. They now compete for, and thus influence industry pricing on, approximately 75% of all
dome tic U.S. pas enger ticket sales compared to less than 20% a decade ago. As a result of their
better financial performance, low cost carriers are expected to continue to grow their market share.
While the advent of Internet travel Web sites has driven significant distribution cost avings for
airline , it ha had a large negative impact on airline revenues. Having acces to "perfect pricing
information , air travel consumers have become more efficient at finding lower fare alternative than in
20
the past. The increased price consciousness of traveler a well a the proliferation of di tribution
channels has further motivated airline to price more aggre ively to gain fare advantage through
certain channels.
The U.S. airline industry is one of the mo t heavily taxed of all indu trie . Taxes and fees now
represent approximately 25% of what a pas enger pay for an average dome tic airline ticket, a
percentage even greater than that for alcohol and tobacco product . The e taxes and fee hav grown
significantly in the past decade, most recently with the introduction of a $2.50 ecurity fee impo ed on
each passenger flight egment, subject to a $10 per roundtrip cap. The company believe that every
dollar of tax or fee increase imposed on airline pa engers roughly tran lat into a dollar of reduced
airline revenue, particularly over the long run.
The attacks of September 11 2001 materially impacted and continue to impact air travel. Concerns
about further terrorist attacks, which are unlikely to abate any time oon have had a negative impact
on air travel demand. Furthermore, ecurity procedure introduced at airport ince the attack have
increased, both in reality and in perception, the inconvenience of flying and thu further reduced
demand.
While the factors noted are believed to be lasting, if not p rmanent, and could in fact wor en over
time, some of the current airline indu try revenue hortfall i believed to b cyclical in nature. U.S.
airline revenues have historically been and continue to be influenced by th trength of the US.
economy. Furthermore, airline bu ines revenue are greatly influenc d by the growth in corporate
profitability. The current luggishne of both the economy and corporat profitability i adver ely
affecting airline revenues.
The airline industry revenue decline ha been further exacerbated in early 2003. In January,
United Airlines introduced a new pricing tructure, reducing it highe t bu ine fare by 40-50%. Thi
action and the resulting match by other airline ha reduced average fare without a corre ponding
increase in demand. The threat of a war with Iraq ha al o materially aff cted future airline booking ,
particularly for international travel.
In addition to the impact on industry revenue, the September 11, 2001 event cau ed a ignificant
rise in certain operating costs particularly for aviation and property in urance. Total aviation and
property insurance expense nearly tripled in 2002, to $121 million. The e co t could ri e further hould
coverage presently provided by the government under the Homeland Security Act, which ha been
extended until August 31, 2003, no longer be available.
During the past year, two major U.S. airline , US Airway , Inc. and United Air Line , Inc., have
filed for Chapter 11 bankruptcy protection. Current trends make it likely that the airline indu try will
continue to post significant losses, at least through 2003.
In response to the industry environment, the Company ha taken everal tep to mitigate the
impact on its results of operations and financial condition. These steps included a ignificant reduction
in scheduled capacity on an available eat mile basi , a reduction in work force of 12 000 employee
deferral of certain aircraft orders previously scheduled for delivery in 2003 through 2005 for an average
of two years, closure of maintenance facilitie , flight crew bases, re ervation and ale facilitie and
deferrals and cancellations of discretionary and other non-operationally critical pending. For the year
ended December 31, 2002, capacity wa 9.6% below 2000 levels.
While the Company has already taken these significant co t reduction teps, it believe additional
measures will be nece ary in thi new and permanently changed revenue environment. Wage , alarie
and benefits made up 41 % of the Company's 2002 operating revenues and will need to be a major
component of future cost reduction initiatives. The Company ha begun di cussion with it labor
unions in an effort to align wages, benefits and work rules with the new revenu environment and to
21
remain comp titive with tho e airlines achieving permanent cost reduction through bankruptcy
proceeding .
Results of Operations-2002 Compared to 2001
Operating Revenues. Operating revenues decreased 4.2% ($416 million). System passenger
revenue decreased 5.7% ($466 million), excluding Northwest' wholly owned regional carrier affiliate
Pinnacle Airlines. The decrease in ystem pa enger revenues was primarily attributable to a 1.5%
decrea e in traffic and a 4.3% decline in yields. System passenger load factor increased 2.8 points to
77.1 % for the year ended December 31, 2002. Pinnacle Airlines passenger revenues, net of
intercompany liminations increased 36.9% ($73 million) to $271 million due to increased capacity
from 21 Bombardier Canadian Regional Jet ("CRJ') aircraft added in 2002 and higher rates under a
new airline ervices agreement with Northwest that was effective March 1, 2002.
The following analysis by market is based on information reported to the U.S. Department of
Transportation ( 'DOT ') and excludes Pinnacle Airlines:
System Domestic Pacific Atlantic
2002
Passenger revenues (in millions) ....................... . $7,753 $5,284 $1,557 $912
Increase (Decrease) from 2001:
Passenger revenues (in millions) ....................... . (466) (351) (120) 5
Percent .... . .................................. . (5.7)% (6.2)% (7.2)% 0.7%
Scheduled service ASMs ( capacity) ..................... . (5.0)% (4.3)% (6.7)% (5.2)%
Scheduled service RPMs (traffic) ...................... . (1.5)% (2.3)% (0.4)% (0.7)%
Passenger load factor ............................... . 2.8pts. 1.5pts. 5.3pts. 3.7pts.
Yield .......................................... . (4.3)% (4.0)% (6.9)% 1.4%
Passenger RASM ...................... .. .. . . ..... . (0.7)% (2.1)% (0.6)% 6.1%
Domestic pa senger revenues decreased primarily due to lower yields and capacity, partially offset
by a higher passenger load factor.
Pacific passenger revenues decreased due to lower yields and capacity, partially offset by a higher
load factor. Capacity was reduced as a result of the September 11, 2001 terrorist attacks and yields
were lower due to weakness in the Asian economies and a decline in the relative value of the Japanese
yen. The average yen per U.S. dollar exchange rates for the years ended December 31, 2002 and 2001
were 126 and 121, respectively, a 4.2% weakening in the buying power of the yen. Additional
information regarding the Company's yen exposure and currency hedging activities is provided in
"Item 7a. Quantitative and Qualitative Disclosures about Market Risk".
Atlantic passenger revenues were effectively flat, as higher load factors and slightly improved yields
were mostly offset by a reduction in capacity. Capacity was reduced as a result of the September 11,
2001 terrorist attacks and weakened U.S. and international economies.
Cargo revenues increased 2.1 % ($15 million) to $735 million due to a 2.8% increase in cargo ton
mil partially off et by a 0.6% decline in revenue per ton mile. Cargo revenues consist of freight and
mail carried on pa senger aircraft and the Company's 12 747-200F dedicated freighters. Freight revenue
increased 7.4% ($46 million), including a benefit of approximately $27 million in the fourth quarter
re ulting from the west coast dockworkers lockout. However, the freight revenue increase was partially
off et by a 29.6% ($31 million) de rease in mail revenue due largely to lower volume from U.S.
Gov rnment re trictions on transportation of packages larger than 16 ounces on passenger aircraft.
22
Other revenue , the principal component of which are MLT (a wholly-owned ubsidiary) oth r
transportation fees and charter revenue , decreased 5.1 % ($39 million). Thi decline wa primarily due
to reduced revenues from MLT, KLM Royal Dutch Airline ("KLM ') joint ventur ettlem nt ,
ticketing and handling fees and support services partially off et by an increa e in frequ nt flyer
program partnership revenue.
Operating Expenses. Operating expenses decreased 4.1 % ($438 million).
The following table pre ents operating expen e for the year ending December 31, 2002 and
de cribes significant variance from the year ending December 31, 2001:
Increase
Year ended (Decrea e) Percent
December 31 2002 from 2001 Change
(in million )
Operating Expenses
Salaries, wages and benefit ...................... . 3, 7 $ ( 5) (2.1)%
Aircraft fuel and taxe . .... .. ...... ............. . 1,439 (288) (16.7)
Depreciation and amortization .................... . 903 213 30.9
Selling and marketing ............ . .... . ......... . 03 (201) (20.0)
Aircraft maintenance materials and repairs ....... . . .. . 576 (93) (13.9)
Other rentals and landing fees ........ . ..... . . . . .. . 576 43 8.1
Aircraft rental . ... .. . . .... . ... .. ... .. ...... .. . 460 13 2.9
Other ... ......... ...... ..... . .... .. ........ . 1,700 ~) (2.3)
Total operating expenses .... ...... ... .. ...... . . . $10,335 $( 438) (4.1)%
ote
A
B
C
D
E
F
G
H
A. Salaries, wages and benefits decreased primarily due to 10.6% fewer full-time equivalent employee
and $89 million for retroactive wages and benefits related to the 2001 Aircraft Mechanic Fraternal
A sociation ("AMFA'') collective bargaining agreement. Thi decline wa partially off et by higher
average wage rates, pension, group insurance, and other po temployment benefit expen e . Pen ion
expenses increased largely due to a lower actuarial di count rate, a d cline in pen ion a et returns
and increased benefits from the 2001 AMFA contract.
B. Aircraft fuel and taxes were lower due to a 12.5% decrea e in the average fuel cost per gallon to
69.33 cents, net of hedging tran action , 6.6% fewer fuel gallon consumed a a result of reduc d
capacity and the use of more fuel efficient aircraft. Fuel hedge transaction reduced fuel co t by
$55 million in 2002 and had an immaterial effect in 2001.
C. Depreciation and amortization increased primarily du to $372 million of aircraft and relat d parts
write-downs recorded in 2002, offset by imilar charges of $161 million recorded in the third and
fourth quarters of 2001. The increase in depreciation and amortization wa partially offset by the
elimination of $24 million per year from international route and goodwill amortization record d
prior to 2002. See Note 1 to the Consolidated Financial Statement for additional discus ion of the
fleet disposition charges and international routes and goodwill no longer being amortized.
D. Selling and marketing (consisting of commissions, credit card fee , computer reservation ystem
fees, advertising and promotion expenses) decreased $109 million due primarily to the elimination
of North American base commissions in the econd quarter of 2002 and $40 million due to lower
revenues system wide.
E. Aircraft maintenance materials and repairs decreased due to lower repair volume in 2002, which
resulted from retirements and removal from service of older aircraft, a well as a higher level of
scheduled work within the routine engine and airframe maintenance cycl in 2001.
23
F. Other rental and landing fee increased primarily due to the new Detroit Midfield facility, as well
a higher rate acros the y tern due to unfunded Tran portation Security Admini tration (''TSA")
mandate .
G. Aircraft rentals increased due to additional leased aircraft, partially offset by lower variable rates
on exi ting lea es.
H. Other expense (the principal components of which include outside services, insurance, passenger
food personnel expenses, communication expenses and upplies) decreased principally due to
lower per onnel, supplies and claims expenses and reduced levels of passenger food service,
partially off et by ignificantly higher insurance costs.
Other Income and Expense. Other non-operating income decreased by $572 million, primarily due
to 461 million recognized in 2001 under the Airline Stabilization Act, higher 2002 interest expense
related to increased debt levels and lower interest income as a result of lower interest rates. In the
fourth quarter of 2002 the Company recorded a $27 million charge to write-down a portion of a
receivable from the U.S. Government to reflect the final amount received in January 2003 under the
Airline Stabilization Act. Interest expense increased 15.7% ($58 million) primarily due to the full year
2002 borrowing under the Company's revolving credit facilities and additional new financings. Higher
earnings from affiliates during 2002 were partially offset by a $27 million gain from the sale of the
Company s remaining shares of Continental recorded in 2001.
Tax Expense (Benefit). The tax benefit recorded in 2002 includes a provision of $15 million for tax
credits that are expected to expire unused. The Company's net deferred tax liability declined from
843 million at December 31, 2001 to $30 million at December 31, 2002, primarily due to the increase
in deferred tax assets relating to the Company's pension plans and the Company's 2002 losses. Given
its recent loss experience, current accounting rules do not allow its balance sheet to reflect a net tax
asset position. As a result, when future losses generate deferred tax assets that fully offset the
Company's deferred tax liabilities, no further tax benefit may be recognized with respect to those losses.
The Company expects that approximately $80 million of losses in 2003 will yield tax benefits capable of
being recognized. Consequently, pre-tax losses above $80 million are not expected to be reduced by the
recognition of future tax benefits associated with such losses. See Note 9 to the Consolidated Financial
Statements for additional di cussion of the Company's tax accounts.
Results of Operations-2001 Compared to 2000
Operating Revenues. Operating revenues decreased 11.9% ($1.34 billion). System passenger
revenues decreased 13.7% ($1.30 billion), excluding Pinnacle Airlines. The decrease in system
passenger revenues was primarily attributable to a 4.8% decrease in scheduled service ASMs and a
9.2% decrease in passenger RASM. System passenger load factor decreased 2.3 points to 74.3% for the
year ended December 31, 2001. Pinnacle Airlines passenger revenues increased 52.3% ($68 million) to
$198 million due to increased capacity resulting from 21 additional Bombardier CRJ 200 series aircraft.
24
The following analysis by market is based on information reported to the DOT and excludes
Pinnacle Airlines:
System Domestic Pacific Atlantic
2001
Passenger revenues (in millions) $ 8,219 $5,635 $1,677 $ 907
Increase (Decrease) from 2000:
Passenger revenues (in millions) ...................... . (1,304) (820) (413) (71)
Percent ...................................... . (13.7)% (12.7)% (19.7)% (7.3)%
Scheduled service ASMs (capacity) .................... . (4.8)% (4.8)% (9.2)% 3.8%
Scheduled service RPMs (traffic) ................... . . . (7.6)% (6.8)% (12.6)% (0.4)%
Passenger load factor .............................. . (2.3)pts. (1.S)pts. (3.l)pts. (3.3)pts.
Yield ......................................... . (6.6)% (6.3)% (8.1)% (7.0)%
Passenger RASM ................................ . . (9.2)% (8.3)% (11.6)% (10.7)%
Domestic passenger revenues decreased due to lower yields, passenger load factor and capacity.
Northwest experienced a decline in business and leisure travel due to the impact of the slowing U.S.
economy and the events of September 11, 2001. Approximately 78% of the decrease in domestic
passenger revenues occurred between September 1 and December 31, 2001. In response to th decline
in demand for air travel after the terrorist attacks, domestic fourth quarter capacity was reduced 14.7%,
as compared to 2000, on an ASM basis.
Pacific passenger revenues decreased due to lower yields, passenger load factor and capacity.
Approximately 64% of the decrease in Pacific passenger revenues occurred between September 1 and
December 31, 2001. In response to the reduced demand for air travel, Pacific fourth quarter capacity
was reduced 19.5%, as compared to 2000, on an ASM basis. The introduction of a reconfigured World
Business Class product, which improved seat pitch from 48 inches to 60 inches and replaced
international first class, also contributed to the reduced capacity. Passenger load factor and yields were
also impacted by the slowing Asian economies and a weakened Japanese yen. The average yen per U.S.
dollar exchange rates for the years ended December 31, 2001 and 2000 were 121 and 107 respectively,
an 11.2% weakening in the buying power of the yen. Additional information regarding the Company's
yen exposure and currency hedging activities is provided in "Item 7a. Quantitative and Qualitative
Disclosures about Market Risk".
Atlantic passenger revenues decreased due to a decline in yields and passenger load factor
resulting from the terrorist attacks on September 11, 2001. In response to the reduced demand for air
travel, Atlantic fourth quarter capacity was reduced 14.3%, as compared to 2000, on an ASM basis.
Cargo revenues decreased 16.0% ($137 million) to $720 million due to a 2.8% decline in revenue
per ton mile and 13.6% fewer cargo ton miles. These decreases resulted primarily from reduced U.S.
demand for Asian goods caused by the slowing U.S. economy, the weakened yen per U.S. dollar
exchange rate, and a decline in total cargo space on passenger aircraft as a result of the reduction in
system passenger capacity. Service began in July 2001 under a new five-year agreement with DHL
Worldwide Express to provide daily freighter service from its U.S. hub operations in Cincinnati to
various points in Asia. The Company's eleventh and twelfth freighters were placed in revenue service to
support this agreement.
Other revenues (the principal components of which are MLT, other transportation fees and charter
revenues) increased 5.2% ($38 million) primarily due to higher charter revenues and other
transportation fees.
25
Operating Expen e . Operating expen e increa ed 1.0% ($102 million).
The following table pre ent operating expen e for the year ending December 31, 2001 and
de cribe ignificant variance from the year ending December 31, 2000:
Increase
Year ended (Decrease) Percent
December 31, 2001 from 2000 Change
(in millions)
Operating Expenses
Salarie , wage and benefits ....................... $ 3,963 $353 9.8%
Aircraft fuel and taxe ........................... 1,727 (145) (7.7)
Depreciation and amortization ..................... 690 73 11.8
Selling and marketing ........................... 1,004 (196) (16.3)
Aircraft maintenance materials and repair ............ 669 29 4.5
Other rentals and landing fee ..................... 533 20 3.9
Aircraft rentals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 24 5.7
Other .... .............. ..................... 1,740 (56) (3.1)
Total operating expenses ....................... $10,773 $102 1.0%
otes
A
B
C
D
E
F
G
A. Salaries wage and benefits increased primarily due to higher wages and benefits from settled
contracts with collective bargaining units, retroactive wages and benefits of $89 million related to
the 2001 AMFA agreement and higher pension, group insurance, and other post-employment
benefits expenses.
B. Aircraft fuel and taxe declined due to a decrease of 4.5% in average fuel cost per gallon to
79.26 cent , net of hedging transactions, and 4.0% fewer fuel gallons consumed a a result of the
reduced capacity.
C. Depreciation and amortization increased primarily due to charges of $161 million related to the
reductions in the estimated market value of aircraft recorded in the third and fourth quarters of
2001, partially offset by $125 million of DClO impairments recorded in 2000. See Note 1 to the
Consolidated Financial Statements for additional discussion of the fleet disposition charge .
D. Selling and marketing ( consisting of commissions, credit card fees, computer reservation system
fees, advertising and promotion expenses) decreased primarily due to lower passenger revenue ,
u e of lower co t di tribution channels and a decline in the percentage of commissionable
tran actions. Internet sales, which typically have lower commission rates than other distribution
channels, represented approximately 13% of passenger revenues in 2001 compared with
approximately 8.0% in 2000.
E. Aircraft maintenance materials and repairs increased due to a higher level of scheduled work
within the routine engine and airframe maintenance cycle.
F. Aircraft rentals increased due to additional leased aircraft.
G. Other expen es (the principal components of which include outside services, insurance, passenger
food, personnel expenses, communication expenses and supplies) decreased principally due to
lower variable cost associated with reduced capacity and a favorable foreign currency impact on
expen e , partially offset by higher insurance co ts following the September 11, 2001 terrorist
attacks.
Other Income and Expense. The Company recognized $461 million of grant income from the U.S.
Government under the Airline Stabilization Act in 2001. Interest expense increa ed 5.4% ($19 million)
primarily due to the borrowing under the Company s revolving credit facilities. Earning of affiliated
26
companies decreased $97 million, due principally to the Company no longer recognizing it hare of
Continental Airlines, Inc.'s ( 'Continental") earning in 2001 following the al of it invc tm nt in
Continental, lower earning from WORLDSP L.P. ( WORLD P ' ) in 2001 and Orbitz, LLC' lo in
2001. Other income decreased $25 million primarily due to a $58 million gain from the ale of a
portion of Northwe t' investment in priceline.com in 2000, partially off et by a 27 million gain
recorded in 2001 on the ale of the Company' remaining investment in Continental.
Liquidity and Capital Resources
As of December 31, 2002, the Company had ca h, ca h equivalent and r trict d hort-term
investments of $2.20 billion. Thi amount included $100 million of re tricted hort-t rm inv tm nt ,
resulting in total liquidity of $2.10 billion, a decrea e in liquidity of 414 million from D c mber 31
2001. As discus ed later, the Company' cured credit facilitie were fully drawn a of December 31,
2001 and had $1 million available a of D cember 31 2002.
Cash used in operating activitie wa $284 million in 2002. Ca h flow provided by op rating
activities were $646 million in 2001 and $ 93 million in 2000. Th d crea of $930 million in op rating
cash flows from 2001 wa primarily due to $410 million of ca h r ceiv d under th Airlin Stabilization
Act grant in 2001, the January 2002 disbur ment of $216 million of aviation taxe originally due
between September 11, 2001 and January 15, 2002, but d f rred pur uant to federal authorization, a
$108 million increase in the Company' income tax refund r ceivabl and a decrea e in the air traffic
liability.
The Company operate , like it comp titor with n gativ working capital, which aggr gated
$762 million at December 31, 2002. Thi po ition is primarily attributable to the $1.22 billion air traffic
liability, largely repre enting cash received from ticket that cu tomer have purcha d in advanc and
not yet used.
Investing Activities. Investing activitie con i t primarily of the purcha e of aircraft and other
related costs including engine purcha e co t to commi ion aircraft befor entering rev nu rvic
deposits on ordered aircraft, facility improvement and ground equipment purcha e .
Investing activities consisted of the acquisition of the following aircraft for the year ended
December 31:
2002 2001 2000
Airbus A319 .......... . ...... .... ..... .. .... . ..... . 24 13 10
Airbus A320 ...................................... . 2 4
Boeing 747-400 .................................... . 2
Boeing 747-200F ................................... . 2
Boeing 757-200 ................................. . .. . 3 5
Boeing 757-300 . ... ................................ . 7
AVRO RJ85 ............. . ................. .... ... . 7
-
38 22 19
Investing activities in 2002 other than aircraft purchases include facilitie and aircraft modification
programs. Investing activities in 2001 other than aircraft purchases include $582 million in proceed
from the sale of the Company' investment in Continental. See Note 13 to the Con olidat d Financial
Statements for additional discussion of the Company's inve tment in Continental. Inve ting activitie in
2000 other than aircraft purcha es include $58 million of proceed from the ale of a portion of the
Company's investment in priceline.com.
27
In addition to th purcha ed aircraft hown in the above table the Company al o took delivery of
21 Bombardier CRJ200/440 r gional jet in each of 2002 and 2001 and nine CRJ200 regional jet m
2000. The e aircraft wer financed with long-term lev raged operating lease provided by the
manufacturer and were imultaneou ly ublea ed to Pinnacle Airline .
Financing Activities. Financing activitie in 2002 con i ted primarily of the i uance of 300 million
of 9. 75% public un ecured note due in 2007, the payment of debt and capital lease obligation , and
the financing of: (i) 18 Airbu A319 aircraft, one Boeing 747-400 aircraft, two Airbus A320 aircraft and
three Bo ing 757-300 aircraft with e crowed funds from pa -through certificate offerings i ued in
2001 (ii) two Boeing 757-300 aircraft with e crowed funds from pass-through certificate offerings i sued
in 2002; (iii) three Boeing 757-200 aircraft two Boeing 757-300 aircraft and six Airbu A319 aircraft
with long-term bank debt; (iv) one Boeing 747-400 under a sale and leaseback; and the refinancing of
three Boeing 747-400 aircraft purcha ed off capital lease.
In Augu t 2002, the Company completed an offering of $749 million of pass-through certificates to
finance or refinance the acqui ition of 11 new Airbus A319 aircraft, six new Boeing 757-300 aircraft
and three new Airbu A330 aircraft cheduled to be delivered between October 2002 and
December 2003. The pre-funded portion of cash proceeds from the offerings of certificates are invested
and held in e crow with a depo itary bank. Such funds are not assets or direct obligations of, or
guaranteed by, the Company and are therefore not included in the Consolidated Financial Statements.
As aircraft are delivered or refinanced, the Company utilize the ca h proceeds to finance the
acqui ition of the e aircraft a ecured debt financing for ownership or as non-recourse debt for
leveraged lea e financing. If a leveraged lease is obtained for any aircraft, under which the aircraft
would be old and lea ed back to orthwest, the debt associated with the aircraft will become part of
the lea e and not a direct obligation of the Company or Northwest. Lease obligations that qualify a
operating lea e under Statement of Financial Accounting Standards ("SFAS") No. 13 are disclosed in
ote 4 to the Consolidated Financial Statement . If any funds remain as deposits with the escrow agent
for pa s-through certificates at the end of the delivery period, such funds will be di tributed back to the
certificate holder , including intere t on uch amount payable by the Company. Management believes
that the likelihood funds would be di tributed from escrow back to investors and that the interest due
would be a material amount is remote. As of December 31, 2002, $668 million of the unused offering
proceeds were held in escrow to finance a portion of the aircraft scheduled for delivery in 2003.
Financing activitie in 2001 consi ted primarily of the Company's borrowing in March and
ubsequent repayment in May of 1.10 billion under its revolving credit facilities, the borrowing on
September 11, 2001 of $1.12 billion under its revolving credit facilities, of which $150 million was
repaid in October 2001 a scheduled, the issuance of $300 million of 8.875% public unsecured notes
due 2006, $120 million received under airport facility revenue bonds and payment of debt and capital
lea e obligation . Financing activitie al o included the receipt of $678 million in financing for: (i) 13
Airbu A319 aircraft, even of which were financed with funds from pass-through certificates and ix
with long-term bank debt (ii) five Boeing 757-200 aircraft financed with long-term bank debt; and
(iii) four Airbus A320 aircraft, three of which were financed with fund from pa s-through certificates
and one with long-term bank debt.
In June 2001 the Company completed a pre-funded offering of $581 million of pass-through
certificate at a blended fixed coupon rate of 7.18%. Proceed from ales of the certificates were u ed
to finance the acqui ition of 14 aircraft con i ting of nine new Airbu A319 aircraft, three new Boeing
757-300 aircraft and two new Boeing 747-400 aircraft delivered between March and December 2002. In
July 2001 the Company completed an offering of $396 million of European pas -through certificate
due in 2013 at a blended floating rate of three-month London Interbank Offered Rate ( 'LIBOR ') plu
0.60% (2.23% a of December 31, 2002) to finance the acquisition of nine new Airbu A319 aircraft
and five new Airbu A320 aircraft delivered between ovember 2001 and July 2002.
28
Financing activities in 2000 consisted primarily of payment of debt and capital lease obligations,
including $165 million in term loan prepayments, and the long-term leveraged operating lease financing
through sale and leaseback of ten Airbus A319 aircraft and three AVRO RJ85 aircraft.
During 2000, the Company completed a public offering totaling $522 million of pass-through
certificates to finance the acquisition of 13 new aircraft delivered in 2000 and 2001 and to refinance ix
other aircraft delivered in 1996.
Contractual Obligations. The following table summarizes the Company's commitments to make
long-term debt and lease payments, aircraft purchases and certain other obligations for the years
ending December 31:
2003 2004 2005 2006 2007 Thereafter Total
(in millions)
Long-term debt(l) . . ..... .. ..... $ 281 $ 623 $1,430 $ 563 $ 673 $2,961 $ 6,531
Capital leases(2) ............... 65 46 40 29 32 239 451
Operating leases:(3)
Aircraft .................. .. 582 575 565 577 577 4,703 7,579
Non-aircraft ..... . . ... ..... .. 160 151 139 130 120 1,245 1,945
Aircraft commitments( 4) ......... 1,793 1,226 1,186 576 246 232 5,259
Preferred redeemable stock(5) ..... 226 226
- -
Total(6) .... . ................. $3,107 $2,621 $3,360 $1,875 $1648 $9,380 $21,991
(1) Amounts represent principal payments only. The amount due in 2005 includes $962 million of
principal outstanding on the Company's bank revolving credit facilities. See Note 3 to the
Consolidated Financial Statements for additional discus ion of long-term debt and future
maturities.
(2) Amounts represent principal payments only. See Note 4 to the Consolidated Financial Statements
for additional discussion of capital leases.
(3) Amounts represent minimum lease payments with initial or remaining terms of more than one year
and exclude related sublease rental income. See Note 4 to the Consolidated Financial Statements
for additional discussion of operating lea es.
( 4) Amounts include expenditures for aircraft and related equipment, including estimates for
contracted price escalations and predelivery deposits. The Company's firm orders for 62 new
aircraft to be operated by Northwest consist of scheduled deliveries for 14 Airbu A330-300
aircraft from 2003 through 2008, ten Airbus A330-200 aircraft from 2004 through 2008, eight
Airbus A320 aircraft from 2003 through 2006, 21 Airbus A319 aircraft from 2003 through 2006,
and nine Boeing 757-300 aircraft in 2003. Included in these firm orders are two Airbus A320 and
four Airbus A319 aircraft scheduled for delivery in 2004 and 2005, which were converted from
options to firm orders in the first quarter of 2002. Financing commitments available for use by the
Company are in place for all of the aircraft on order. As of December 31, 2002, the Company also
had firm orders for 78 Bombardier CRJ200/440 aircraft, 44 of which will be subleased to Pinnacle
Airlines. The balance of the CRJ aircraft have not been committed to any carrier. The Company
has the option to finance the CRJ200/440 aircraft through long-term operating lease commitments
from the manufacturer, and if the manufacturer doe not provide the financing, the Company is
not required to take delivery of the aircraft.
(5) See Note 6 to the Consolidated Financial Statements for additional discussion of the Company's
obligations related to the Series C preferred stock.
29
(6) The above table excludes $553 million relating to the mandatorily redeemable preferred security of
ub idiary, which can be satisfied by non cash means. See Note 5 to the Consolidated Financial
Statement for additional discussion of the mandatorily redeemable preferred security of
sub idiary.
Pension Funding Obligations. The Company has several noncontributory pension plans covering
substantially all of its employees. Funding obligations under these plans are governed by the Employee
Retirement Income Security Act of 1974 ("BRISA''). As of December 31, 2002, the Company's pension
plan were underfunded by $3.95 billion as calculated in accordance with SFAS No. 87. Also, as of
December 31, 2002, on a current liability basis utilized for cash contribution purposes, the plans were
underfunded by approximately $3.1 billion. The Company's 2003 pension contributions associated with
the 2003 plan year are estimated to be $468 million. The Company also had, as of December 31, 2002,
$223 million of mandatory contributions related to the 2002 plan year remaining to be paid in 2003.
Pension funding requirements are dependent upon various factors, including interest rate levels, asset
returns, regulatory requirements for funding purposes and changes to pension plan benefits. Absent
favorable changes to these factors, the Company will have to satisfy the underfunded amounts of its
plans through cash contributions over time.
On November 5, 2002, the Company submitted an application to the Internal Revenue Service for
authorization to reschedule 2003 plan year contributions required under the pension plans for contract
and salaried employees. This application, if approved, could allow the Company to defer some or all of
the $468 million in 2003 plan year contributions due in calendar 2003. The Company anticipates
receiving notice from the Internal Revenue Service by April 2003.
The Company has also submitted an application to the Department of Labor to permit the
Company to contribute common stock of Pinnacle Airlines Corp. to the pension plans in lieu of making
certain required contributions in cash. In January 2003, the Department of Labor issued a proposed
prohibited transaction exemption that would allow the Company to contribute common stock of
Pinnacle Airlines Corp. to satisfy a portion of the contribution requirements to Northwest's pension
plans in 2003 and 2004. The proposed prohibited transaction exemption contemplates that the pension
plans will have the right at any time to sell the shares back to the Company for cash at the greater of
the original purchase price or the then market value. Pinnacle Airlines Corp. was incorporated in
Delaware on January 10, 2002 for the sole purpose of becoming a holding company of Pinnacle
Airlines. Prior to the contribution, the Company transferred all of the outstanding stock of Pinnacle
Airlines to Pinnacle Airlines Corp. in exchange for all of the outstanding common stock of Pinnacle
Airlines Corp. and one share of Series A preferred stock of Pinnacle Airlines Corp. The Company then
contributed 1.9 million shares, or 12.9%, of the Pinnacle Airlines Corp. common stock to the pension
plan to satisfy approximately $44 million of its $223 million scheduled funding requirement for the 2002
plan year. In lieu of making cash contributions, the Company intends to contribute additional common
stock of Pinnacle Airlines Corp. to satisfy a portion of future mandatory pension contributions,
including the remainder of 2002 plan year requirements.
Credit Ratings. At December 31, 2002, the Company's Standard & Poor's corporate credit rating
and its senior unsecured credit rating were BB - and B, respectively; its Moody's Investor Services
senior implied rating and senior unsecured rating were Bl and B2, respectively; and its Fitch Ratings
senior unsecured credit rating was B+. The lowering of the Company's credit ratings could make it
more difficult to issue debt, to renew outstanding letters of credit that back certain obligations and to
obtain financial instruments used in its fuel and currency hedging programs, as well as to potentially
increase the cost of these transactions. For information regarding the impact from the lowering of the
Company's secured credit facility credit rating on June 28, 2002, see the related discussion below as
well a ote 3 to the Consolidated Financial Statements. For information regarding the Company's
receivables purchase agreement and the credit rating requirements of this agreement, see Note 13 to
30
the Consolidated Financial Statements. On February 25, 2003, Fitch Ratings downgraded the rating on
the Company's senior unsecured debt to B from B +.
Secured Credit Facilities. The Company's secured credit facilities at December 31, 2002, consisted
of a $725 million revolving credit facility ($12 million of which has been utilized to establish letters of
credit) available until October 2005, and a $250 million 364-day revolving credit facility available until
October 2003 renewable annually at the option of the lenders; however, to the extent any portion of
the $250 million facility is not renewed for an additional 364-day period, the Company may borrow up
to the entire non-renewed portion of the facility and such borrowings would then mature in
October 2005. This credit agreement is secured by the Company's Pacific route system and certain
aircraft. On June 28, 2002, Standard & Poor's downgraded the rating on the Company's secured credit
facilities to BB - from BB. With the change in credit rating, the interest rate applicable to borrowings
under these secured credit facilities increased 0.5%. Borrowings under the $725 million revolving credit
facility bore interest at a variable rate equal to the three-month LIBOR plus 2.5% (3.84% at
February 20, 2003) and borrowings under the $250 million 364-day revolving credit facility bore interest
at a variable rate equal to the three-month LIBOR plus 2.5% (3.84% at February 20, 2003). See
Note 3 to the Consolidated Financial Statements for additional discussion of these credit facilities.
Other Financings. In January 2002, through NWA Funding LLC, the Company fully repaid
$61 million outstanding under a receivables purchase agreement. Such repayment was required upon
the occurrence of certain events, including exceeding a threshold of passenger refunds as a percentage
of sales and the lowering of the Company's unsecured credit rating, both of which occurred following
the events of September 11, 2001.
During June 2002, a second receivables purchase agreement was executed by Northwest, NWA
Funding II, LLC ("NWA Funding II"), a wholly-owned, non-consolidated subsidiary of the Company,
and a certain third party purchaser (the "Purchaser") pursuant to a securitization transaction. During
June 2002, Northwest sold $114 million of accounts receivable on a non-recourse basis to NWA
Funding II, which sold $65 million of its undivided interest in such receivables to the Purchaser, subject
to specified collateral requirements. The amount of loss recognized related to receivables securitized
was not material. NWA Funding II maintains a variable undivided interest in these receivables and is
subject to losses on its share of the receivables and, accordingly, maintains an allowance for doubtful
accounts. The agreement is a one-year, $100 million revolving receivable purchase facility renewable
annually that allows Northwest to sell additional receivables to NWA Funding II and NWA Funding II
to sell variable undivided interests in these receivables to the Purchaser. NWA Funding II pays a yield
to the Purchaser equal to Al/Fl commercial paper, as well as a program fee. The agreement provides
for the early termination upon the occurrence of certain events including, among others, a strike event,
falling below a minimum liquidity requirement of $1.10 billion as of the last day of any fiscal quarter,
or the Company not meeting minimum credit ratings ( defined as any two of the following three events
occurring: (i) S&P's "Long Term Local Issuer Credit" rating below a B credit rating, (ii) Moody's
"Senior Implied" rating below a B2 credit rating, or (iii) Fitch's "Senior Unsecured Debt" rating below
a B credit rating). See Note 13 to the Consolidated Financial Statements for further discussion of NWA
Funding II.
Shelf Registration Statement. The Company currently has an effective shelf registration statement
for the issuance of $451 million of unsecured debt and pass-through certificates.
Critical Accounting Estimates
The discussion and analysis of the Company's financial condition and results of operations are
based upon the Consolidated Financial Statements, which have been prepared in accordance with
generally accepted accounting principles. The preparation of the Consolidated Financial Statements
requires the Company to make estimates and judgments that affect the reported amount of assets and
31
liabilitie , revenue and expen e , and related di clo ure of contingent a set and liabilitie at the date
of the financial tatement . Actual re ult may differ from the e e timates under different a umptions
or condition .
Critical accounting estimate are defined as tho e that are reflective of ignificant judgments and
uncertaintie , and could potentially re ult in materially different re ults under different as umption and
condition . See Note 1 to the Con olidated Financial Statement for additional di cu ion of the
application of the e estimates and other accounting policies. The Company's management discussed the
development of the estimates and di closures related to each of these matter with the audit committee
of the Company's board of director .
Aircraft Valuation and Impairments. The Company has evaluated it long-lived assets for possible
impairments in compliance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
As ets. The Company record impairment losses on long-lived assets used in operations when events
and circumstances indicate the assets might be impaired and the undiscounted cash flows estimated to
be generated by those assets are less than their carrying amounts. Impairment losses are mea ured by
comparing the fair value of the assets to their carrying amounts. In determining the need to record
impairment charge the Company is required to make certain estimates regarding such things as the
current fair market value of the asset and future net cash flows to be generated by the as et. The
current fair market value of the asset is determined by independent appraisal, and the future net cash
flows are based on assumptions such as asset utilization, expected remaining u eful lives, future market
trends and projected salvage values. Impairment charges are recorded in depreciation and amortization
expen e on the Company's Consolidated Statements of Operations. If there are ubsequent changes in
the e estimates, or if actual results differ from these e timates, such changes could impact the
Consolidated Financial Statements.
In December 2002, the Company revised its fleet plan, accelerating the retirement of 13 DCl0-30
and nine Boeing 747-200 aircraft by an average of five and six years respectively. The Company
recorded impairment charges of $352 million associated with these aircraft, engines and related
inventory as a result of the retirement acceleration. See Note 1 to the Consolidated Financial
Statements for additional discussion of impairment of long-lived assets.
The Company's 2003 operating re ults will also be impacted by an estimated $20 million of
additional depreciation expense, reflecting the combined result of the reduced average lives, a decrease
in net book value and lower salvage values. If the current fair market values and salvage values of the
impaired aircraft were decreased by 10%, the aircraft impairment charge would have increased by
$17 million and the 2003 depreciation expen e would decrease by $7 million.
Pension Liability and Expense. The Company has several noncontributory pension plans covering
substantially all of its employees. The Company accounts for its defined benefit pension plans in
accordance with SFAS No. 87, Employers' Accounting for Pensions, which requires that amounts
recognized in financial statements be determined on an actuarial basi . Benefits associated with these
plans are based primarily on years of service and, in some cases, employee compen ation. See Note 12
to the Consolidated Financial Statements for additional di cussion of actuarial as umptions used in
determining pension liability and expen e.
A significant element in determining the Company's pension expense in accordance with SFAS
o. 87 i the expected return on plan assets, which is based on historical results for imilar allocation
among asset cla ses. The difference between the expected return and the actual return on plan assets is
deferred and, under certain circum tance , amortized over future years of service. Therefore, the net
deferral of pa t as et gains (losses) ultimately affects future pension expen e.
At December 31, 2002 the Company changed its assumed expected long-term rate of return on
plan assets from 10.5% to 9.5%. In developing the expected long-term rate of return assumption, the
32
Company is provided projected returns by asset class from its pension investment advisors. Projected
returns are based primarily on broad, publicly traded equity and fixed-income indice . The Company's
expected long-term rate of return on plan assets is based on an asset allocation as umption of 70%
U.S. and international equities, with an expected long-term rate of return of 9.7% 10% private equities
with an expected long-term rate of return of 15.0%, and 20% fixed-income securities with an expected
long-term rate of return of 6.9%. These assumptions result in a 9.7% weighted average rate of return
on an annualized basis. Because of temporary fluctuations in market value , the actual asset allocation
as of December 31, 2002 was 79% equities and 21 % fixed-income in truments. The actual asset
allocation is reviewed regularly and is periodically rebalanced to the targeted allocation.
The plan assets have earned a rate of return substantially less than 9.5% in each of the last three
years. Should this trend continue, the Company s average long-tern1 hi torical rate of return in
subsequent periods may be lower and could, in turn, cause the expected return on plan assets to be
adjusted downward. If such adjustments become necessary, future pension ex.pen e would increase.
Plan assets for the Company's pension plans are managed by external inve tment management
organizations. These advisors are prohibited by the investment policies of the plan from inve ting in
Company securities, other than as part of a market index fund that could have a diminutive proportion
of such securities.
At the end of each year, the Company determines the discount rate used to measure plan
liabilities. The discount rate reflects the current rate at which the pension liabilitie could be effectively
settled at the end of the year. In estimating this rate, the Company look to rate of return on fixed-
income investments of similar duration to the liabilities in the plan that receive high, inve tment grade
ratings by recognized ratings agencies. By applying this methodology, the Company determined a
discount rate of 6.75% to be appropriate at December 31, 2002, which is a reduction of 0.75% from
the rate used at December 31, 2001.
For the year ended December 31, 2002 the net effect of accounting for changes in the Company's
pension plans decreased accumulated other comprehensive income by $1.03 billion. The negative
impact on accumulated other comprehensive income was principally due to a 12.7% decrease in the fair
value of the plan assets and the decrease in the discount rate to 6.75%. Holding all other factors
constant, a change in the discount rate used to measure plan liabilities by 0.25% would have changed
accumulated other comprehensive income by $135 million.
For the year ended December 31, 2002, the Company recognized consolidated pretax pension
expense of $309 million, up from $231 million in 2001. Pension expense is anticipated to increase to
approximately $400 million in 2003. Holding all other factors constant, an increase/decrease in the
expected long-term rate of return on plan assets by 0.5% would decrease/increase pension expense by
approximately $25 million in 2003. Holding all other factors constant, an increase/decrease in the
discount rate used to measure plan liabilities by 0.25% would decrease/increase pension expense by
approximately $25 million in 2003.
Revenue Recognition. Passenger ticket proceeds are recorded in the air traffic liability account at
the time of sale and represent an obligation of the Company to provide air travel in the future.
Revenue is recognized, and the air traffic liability is reduced, as passengers use these tickets for
transportation. The Company also performs monthly evaluations of this estimated liability and
recognizes any adjustments as passenger revenues for that period. These adjustments relate primarily to
ticket usage patterns, refunds, exchanges, inter-airline transactions, and other items for which final
settlement occurs in periods subsequent to the sale of the related tickets at amounts other than the
original sales price. While these factors generally follow predictable patterns that provide a reliable
basis for estimating the air traffic liability, and the Company uses historical trends and averages in its
estimates, significant changes in business conditions and/or passenger behavior that affect these
estimates could have a significant impact on the Consolidated Financial Statements. During 2002,
33
adju tment to th air traffic liability, reflecting unu ed ticket and the other factor cited above, were
abo hi torical norm by an amount that approximated one percent of pas enger revenues.
Frequent Flyer Accounting. The Company utilizes a number of estimates in accounting for its
WorldPerks frequent flyer program. The Company accounts for the frequent flyer program obligations
by recording a liability for the e timated incremental cost of flight awards expected to be redeemed. A
cu tomer i expected to redeem their mileage and a liability i recorded, when their account
accumulates the minimum number of miles needed to obtain one flight award. Additional assumptions
are made, ba ed on pa t general customer behavior, regarding the likelihood of customers using the
mile for fir t-cla s upgrades or other premiums instead of flight awards, as well as the likelihood of a
customer never redeeming the miles. The estimated incremental cost is based on the system average
co t per passenger for food and beverage, fuel, insurance, security, miscellaneous claims and
WorldPerks service center expense. If the average incremental cost of outstanding awards were
increased or decrea ed by 10%, the liability for the estimated incremental cost of flight awards
expected to be redeemed would change by $13 million.
The number of estimated travel awards outstanding at December 31, 2002, 2001 and 2000 was
approximately 7,805,000, 8,320,000 and 7,162,000, respectively. The estimated liability excludes accounts
that have never attained the minimum travel award level and awards that are expected to be redeemed
for upgrades or are not expected to be redeemed at all, but includes an estimate for partially earned
awards on accounts that previously earned an award. Northwest has recorded a liability for these
estimated awards of $127 million, $132 million and $115 million at December 31, 2002, 2001 and 2000,
respectively. The number of travel awards used for travel on Northwest during the years ended
December 31, 2002 2001 and 2000 wa approximately 1,459,000, 1,398,000 and 1,263,000, respectively.
The e awards represented an estimated 7.8%, 7.5% and 6.6% of Northwest's total RPMs for each such
year respectively. Northwest believes displacement of revenue passengers is minimal based on the low
ratio of WorldPerk award usage to revenue passenger miles and the Company's ability to manage
frequent flyer inventory through seat allocations. In June 2002, the minimum program award miles was
changed from 20 000 to 25,000 miles.
The Company defers a portion of the revenue from the sale of mileage credits to participating
partner such as credit card issuers, hotels long-distance companies, car rental firms and other
non-airline partner . The deferred revenue is recognized over the period in which the credits are
expected to be redeemed for travel. The portion of revenue that is recognized at the time of sale
represents amounts in excess of the fair value of the tickets to be redeemed.
Goodwill and Intangible Assets. In June 2001, the Financial Accounting Standards Board
("FASB") issued SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that
companies test goodwill and indefinite lived intangible assets for impairment on an annual basis rather
than amortize such assets. The Company adopted SFAS No. 142 on January 1, 2002, and as a result no
longer amortizes its indefinite lived intangible assets and goodwill. During the first quarter of 2002, the
Company performed the impairment test of its international routes and found the fair value to be in
excess of the carrying value. During the first quarter of 2003, an independent third party appraisal was
conducted for the Company's annual impairment test of its international routes and found the fair
value to be in exce s of the carrying value. During the fourth quarter of 2002, the Company also
completed its impairment test of goodwill and found the fair value to be in excess of the carrying value.
The Company's indefinite lived intangible asset derives from the U.S.-Japan bilateral aviation
agreement, which e tablishe right to carry traffic between Japan and the U.S., and extensive "fifth
freedom ' right between Japan and India, the South Pacific and other Asian destinations. "Fifth
freedom ' rights allow orthwest to operate service from any gateway in Japan to points beyond Japan
and carry J a pane e originating passengers. These rights have no termination date, and the Company
ha the supporting infrastructure (airport gate , slots and terminal facility leases) in place to operate air
34
service to Japan and beyond from its U.S. hub airports indefinitely. Governmental policy and bilateral
agreements between nations regulate international operating route authorities and alliances. The
Company's carrying value of international route authorities was $634 million at December 31, 2002.
Should any changes occur in policies, agreement , infrastructure or economic fea ibility of air service to
Japan, the Company will assess this asset for impairment and re-evaluate the economic life of these
international routes. If the life is then determined to be finite, the Company would begin amortizing
the asset. The Company's goodwill balance of $18 million relates solely to the 1997 purcha e of
Pinnacle Airlines.
Stock Based Compensation. As of December 31, 2002, the Company has tock option plans for
officers and key employees of the Company. See Note 7 to the Consolidated Financial Statements for
additional discussion of stock options. The Company historically accounted for tho e plans under the
recognition and measurement principles of Accounting Principle Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No tock-ba ed employee compen ation co t i
reflected in the consolidated statement of operations, a all option granted under those plan have an
exercise price equal to the market value of the underlying common tock on the date of grant.
In December, 2002, the FASB issued SPAS No. 148, Accounting for Stock-Based Compensation-
Transition and Disclosure, an amendment of FASB Statement No. 123. SPAS No. 148 provides alternative
methods of transition for companies that voluntarily change to the fair value based method of
accounting for stock-based compensation. It also amends the di clo ure requirement of SPAS No. 123
to require prominent disclosures in both annual and quarterly financial tatements about the method of
accounting for stock-based employee compensation and the effect of the method u ed on reported
results.
Effective January 1, 2003, the Company adopted the fair value method of recording stock-based
employee compensation contained in SPAS No. 123 and will account for this change in accounting
principle using the "pro pective method" as described by SPAS No. 148. All employee tock option
grants made on or after January 1, 2003 will be recorded as com pen ation expen e over the vesting
period based on the fair value at the date the stock-based compensation is granted. The Company also
adopted the disclosure provisions of SPAS No. 148 for the year ended December 31, 2002, and the
related disclosures are included in Note 7 to the Consolidated Financial Statements.
On January 14, 2003, the Company completed an option exchange program. Officers of the
company were able to exchange their current tock options at a ratio of two old options for one newly
issued option. The new options have a strike price of $8.31, the average of the high and low price of
the Company's common stock on the award date of January 15, 2003. The compensation expense
related to these new options will be amortized over a four-year ve ting period using the fair value
method of recording stock-based employee compensation. Certain other management employees of the
Company were able to exchange their current stock options for phantom units at a ratio of three old
options for one phantom unit. The compensation expense related to these phantom units will be
recognized over the four-year vesting period, adjusted for the current period stock price, consistent with
how phantom units have been expensed in the past. Total compensation expense related to the options
issued under the exchange program described above is anticipated to be approximately $3 million for
the year ending December 31, 2003.
Recent Accounting Pronouncements. In June 2002, the FASB issued SPAS No. 146, Accounting for
Costs Associated with Disposal or Exit Activities. SPAS No. 146 requires that a liability for a cost
associated with exit or disposal activity be recognized when the liability is incurred, rather than when an
entity commits to an exit plan. The Company adopted SPAS No. 146 on January 1, 2003. This new
statement will change the timing of liability and expense recognition related to exit or disposal
activities, but not the ultimate amount of such expenses.
35
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN
No. 45 require certain guarantees to be recorded at fair value and to provide additional disclosures
about each guarantee, or each group of similar guarantees. The Company has adopted the disclosure
requirements for the period ending December 31, 2002 and will adopt the initial recognition and
measurement provisions for guarantees issued or modified after December 31, 2002. See Note 11 to the
Consolidated Financial Statements for the Company's disclosures concerning its guarantor obligations.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN
No. 46 requires companies that control another entity through interests other than voting interests to
consolidate the controlled entity. FIN No. 46 applies to variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after
January 31, 2003. For all variable interest entities created before February 1, 2003, the provisions are
effective July 1, 2003. The Company is presently evaluating the impact of the new interpretation.
Other Information
Labor Agreements. Approximately 91 % of the Company's employees are members of collective
bargaining units. At December 31, 2002, all of the Company's union workers were under contract.
Facilities Consolidation. On October 15, 2002, the Company announced that it would close its
Atlanta aircraft maintenance facility and its reservations center in Long Beach, California. Maintenance
activity performed at the Atlanta facility was subsequently transferred to the Company's facilities in
Minneapolis and Duluth. 385 of the 1,450 employees at the Atlanta maintenance facility that were
eligible for transfer to other Northwest facilities chose not to transfer. The Long Beach reservations
center closed in December, 2002. 150 Long Beach reservationists were eligible but elected not to
transfer to the airline's six other reservations facilities, which will handle calls previously routed to Long
Beach. In addition, Northwest closed three city ticket offices. As a result of these actions,
approximately 100 management positions were eliminated in Atlanta and Long Beach. During the
fourth quarter of 2002, the Company recorded a charge of $17 million for severance costs related to
these closures.
Alliances. In August 2002, the Company announced that it had signed a cooperative marketing
agreement with Continental and Delta Air Lines, Inc. ("Delta"). The marketing agreement is designed
to connect the three carriers' domestic and international networks and provide for code sharing,
frequent flyer program reciprocity and reciprocal airport club programs. Northwest, Continental and
Delta reached an agreement in January 2003 with the U.S. Department of Justice on conditions related
to the marketing agreement and are prepared to accept most of the additional conditions that the U.S.
Department of Transportation ("DOT") sought to impose. However, several of the DOT's conditions
were not acceptable to the three carriers. Northwest, Delta and Continental subsequently resubmitted
their agreements to the DOT with alternative conditions under which the airlines are prepared to
proceed. The DOT has issued a notice requesting comments on the revised agreements by March 18,
2003. The DOT has stated that the review period will end on April 2, 2003. In the event the conditions
in dispute are not resolved, the DOT may elect to commence an enforcement proceeding if Northwest,
Delta and Continental implement the marketing agreement. Northwest and KLM are also in
discussions regarding mutual waivers of provisions in their joint venture agreement that are related to
the full implementation of the marketing agreement.
WORLDSPAN. Northwest, Delta Air Lines, Inc. and AMR Corporation hold respective partnership
interests of 33.7%, 40.0% and 26.3% in WORLDSPAN, a global Computer Reservations System.
WORLDSPAN provides travel technology for travel suppliers, travel agencies, e-commerce sites and
corporations worldwide. On March 3, 2003, an agreement was signed by Travel Transaction Processing
Corporation, an entity formed by Citigroup Venture Capital Equity Partners L.P and Teachers'
Merchant Bank, to purchase WORLDSPAN f~om the three airline owners. This transaction, which is
scheduled to be completed in mid-2003, is subject to financing, government approvals and various other
closing conditions.
36
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risks inherent in the Company's market-sen itive instruments and positions are the potential
losses arising from adverse changes in the price of fuel, foreign currency exchange rate and interest
rates, as discussed below. The sensitivity analy es pre ented do not consider the effects that such
adverse changes may have on overall economic activity nor do they consider additional actions
management may take to mitigate its exposure to such changes. Actual results may differ from the
outcomes estimated in the analysis due to factors beyond the Company's control. See Note 14 to the
Consolidated Financial Statements for accounting policie and additional information.
Aircraft Fuel. The Company's earnings are affected by change in the price and availability of
aircraft fuel. In order to provide a measure of control over near-term price and supply, the Company
trades and ships fuel and maintains fuel storage facilitie to upport it flight operation . The Company
also manages the price ri k of fuel costs primarily utilizing futures contracts traded on regulated futures
exchanges, swap agreements and options. Market ri k is e timated u ing a hypothetical 10% increase in
the December 31, 2002 co t per gallon of fuel, assuming projected 2003 fuel usage. et of hedging,
such change would result in an increase to aircraft fuel expen e of approximately $65 million in 2003,
compared to an estimated $118 million for 2002 mea ured at December 31, 2001. As of December 31
2002, the Company had hedged approximately 71 % and 60% of 2003 fir t quarter and full year fuel
requirements, re pectively, compared to 9% and 2% of the 2002 first quarter and full year
requirements, respectively, at December 31, 2001.
Foreign Cun-ency. The Company is expo ed to the effect of foreign exchange rate fluctuation on
the U.S. dollar value of foreign currency-denominated operating revenues and expense . The
Company's largest expo ure comes from the J a pane e yen. From time to time, the Company uses
financial instruments to hedge its expo ure to the Japane e yen. The re ult of a uniform 10%
strengthening in the value of the U.S. dollar from December 31, 2002 levels relative to each of the
currencies in which the Company s revenues and expense are denominated would re ult in a decrea e
in operating income of approximately $68 million for the year ending December 31, 2003, compared to
an estimated decrease of $25 million for 2002 measured at December 31 2001. This en itivity analysis
was prepared based upon projected foreign currency-denominated revenues and expenses as of
December 31, 2002 and 2001. The variance is due to the Company s foreign currency-denominated
revenues exceeding its foreign currency-denominated expen es.
The Company also has foreign currency non-cash exposure. The re ult of a 10% weakening in the
value of the U.S. dollar would result in an increa e to other income caused by the remeasurement of
net foreign currency-denominated assets as of December 31, 2002 of an e timated $2 million in 2003
compared with an estimated decrease of $12 million caused by the remeasurement of net foreign
currency denominated liabilities at December 31, 2001. This sen itivity analysis was prepared based
upon projected foreign currency-denominated assets and liabilities as of December 31, 2002 and 2001.
In 2002, the Company's yen-denominated net cash inflow was approximately 23 billion yen
(approximately $225 million) and its yen-denominated liabilities exceeded it yen-denominated asset by
an average of 5 billion yen (approximately $38 million) compared with 34 billion yen (approximately
$369 million) and 12 billion yen (approximately $97 million), respectively, in 2001. In general, each
time the yen strengthen (weakens), the Company's operating income i favorably (unfavorably)
impacted due to net yen-denominated revenues exceeding expen es and a non-operating foreign
currency loss (gain) is recognized due to the remeasurement of net yen-denominated liabilities. The
Company's operating income in 2002 was unfavorably impacted by approximately $85 million due to
the average yen being weaker in 2002 compared to 2001 and unfavorably impacted in 2001 by
approximately $12 million due to the average yen being weaker in 2001 compared to 2000. The average
yen to U.S. dollar exchange rate, including the impact of hedge activity, for the year ending
December 31, 2002, 2001 and 2000 wa 104, 92 and 104, respectively. The Japane e yen financial
37
instruments utilized to hedge net yen-denominated cash flows resulted in gains of $31 million and
$85 million in 2002 and 2001, respectively. As of December 31, 2002, the Company had entered into
forward contracts to hedge approximately 22% of its anticipated 2003 yen-denominated sales at an
average rate of 114 yen per U.S. dollar, compared to 56% of 2002 sales hedged as of December 31,
2001.
Interest. The Company's earnings are also affected by changes in interest rates due to the impact
those changes have on its interest income from cash equivalents and short-term investments and its
interest expense from floating rate debt instruments. The Company's floating rate indebtedness was
approximately 40% and 39% of the total long-term debt and capital lease obligations at December 31,
2002 and 2001, respectively. If long-term floating interest rates increased by 100 basis points during
2003 as compared to 2002, the Company's interest expense would increase by approximately
$28 million, compared to an estimated $22 million for 2002 measured at December 31, 2001. If
short-term interest rates increased by 100 basis points during 2003 as compared to 2002, the Company's
interest income from cash equivalents and short-term investments would increase by approximately
$21 million compared to an estimated $17 million for 2002 measured at December 31, 2001. These
amounts are determined by considering the impact of the hypothetical interest rates on the Company's
floating rate indebtedness, cash equivalent and short-term investment balances at December 31, 2002
and 2001.
Market risk for fixed-rate indebtedness is estimated as the potential increase in fair value resulting
from a hypothetical 100 basis point decrease in interest rates and amounts to approximately
$113 million during 2003, compared to an estimated $142 million for 2002 measured at December 31,
2001. The fair values of the Company's indebtedness were estimated using estimated or quoted market
prices and discounted future cash flows based on the Company's incremental borrowing rates for
similar types of borrowing arrangements.
38
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Stockholders and Board of Directors
Northwest Airlines Corporation
We have audited the accompanying consolidated balance sheets of Northwest Airlines Corporation
as of December 31, 2002 and 2001, and the related consolidated statements of operations, common
stockholders' equity ( deficit), and cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States. Those standards require that we plan and perform the audit to obtain reasonable a surance
about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclo ure in the financial statements. An audit
also includes assessing the accounting principles used and significant estimate made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Northwest Airlines Corporation at December 31, 2002 and 2001,
and the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2002, in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other
In tangible Assets".
Minneapolis, Minnesota
January 21, 2003
ERNST & YOUNG LLP
39
CURRENT ASSETS
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS
Cash and cash equivalents ....................................... .
Restricted short-term investments .................................. .
Accounts receivable, less allowance (2002-$19; 2001-$20) ............... .
Flight equipment pare parts, less allowance (2002-$175; 2001-$121) ....... .
Deferred income taxes .......................................... .
Maintenance and operating supplies .................. ....... ....... .
Prepaid expenses and other ...................................... .
Total current assets . ... . .. ........ . . . ........... .. .. ..... ..... .
PROPERTY AND EQUIPMENT
Flight equipment ...... ............... ......................... .
Less accumulated depreciation ........ .......................... .. .
Other property and equipment ........... ......................... .
Less accumulated depreciation .................................... .
Total property and equipment ................................... .
FLIGHT EQUIPMENT UNDER CAPITAL LEASES
Flight equipment .................... ........ .................. .
Le s accumulated amortization .................................... .
Total flight equipment under capital leases .......................... .
OTHER ASSETS
Intangible pen ion asset ......................................... .
International routes, less accumulated amortization (2002-$333; 2001-$333) ..
Investments in affiliated companies .................. . .............. .
Other ............... . ...................................... .
Total other as ets ......... ..... ............................ .. .
Total Assets ................................................... .
December 31
2002 2001
$ 2,097 $ 2,512
100 100
663 532
230 273
105 122
79 64
236 207
3,510 3,810
8,031 7,015
2,046 1,981
5,985 5,034
1,946 1,886
900 854
1,046 1,032
7,031 6,066
464 846
175 303
289 543
857 943
634 634
255 213
713 766
2,459 2,556
$13,289 $12;975
The accompanying notes are an integral part of these consolidated financial statements.
40
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Air traffic liability ............................................. .
Accrued compensation and benefits ........ ....... . .... ... .... .... . .
Accounts payable .............................................. .
Collections as agent ............................................ .
Accrued aircraft rent ........................................... .
Other accrued liabilities ......................................... .
Current maturities of long-term debt ............................... .
Current obligations under capital leases . ... . ......... ....... .... . . .. .
Total current liabilities ........................................ .
LONG-TERM DEBT . ............................................ .
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES .. .............. .
DEFERRED CREDITS AND OTHER LIABILITIES
Long-term pension and postretirement health care benefits ... .. .. .... .... .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other .................. . ......... .... .. ...... .. . ... . ...... . .
Total deferred credits and other liabilities ... .... ........ .. ... .. . ... .
MANDATORILY REDEEMABLE PREFERRED SECURITY OF SUBSIDIARY
WHICH HOLDS SOLELY NON-RECOURSE OBLIGATION OF COMPANY-
Note 5
(Redemption value 2002-$587; 2001-$530) .......................... .
PREFERRED REDEEMABLE STOCK
(Liquidation value 2002-$226; 2001-$228) .......................... .
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; shares authorized-315,000,000; shares issued
(2002-110,799,943; 2001-110,344,796) ................... .... .... . .
Additional paid-in capital ...... ..... ... ................. ......... .
Accumulated deficit ............. ... ............................ .
Accumulated other comprehensive income (loss) .................. .. ... .
Treasury stock (2002-24,999,959 shares; 2001-25,136,582 shares) .......... .
Total common stockholders' equity ( deficit) . ...................... . . .
Total Liabilities and Stockholders' Equity (Deficit) ....................... .
December 31
2002 2001
$ 1,216 $ 1,275
1,173 737
652 691
131 298
261 253
493 476
281 223
65 193
4,272 4,146
6,250 4,828
386 393
3,050 1,749
135 965
679 606
3,864 3,320
553 492
226 227
1 1
1,455 1,451
(1,316) (518)
(1,347) (305)
(1,055) (1,060)
(2,262) (431)
$13,289 $12,975
The accompanying notes are an integral part of these consolidated financial statements.
41
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Year Ended December 31
OPERATING REVENUES
Pa enger ........ . ....... . .... . ....... . .............. .
Cargo ............................................... .
Other ............................................... .
Total operating revenues ............................... .
OPERATING EXPENSES
Salaries, wages and benefits ............................... .
Aircraft fuel and taxes . . . . .. . ............................ .
Depreciation and amortization ............................. .
Selling and marketing ................................... .
Aircraft maintenance materials and repairs .................... .
Other rentals and landing fees ............................. .
Aircraft rentals ........................................ .
Other ............................................... .
Total operating expenses ............................... .
OPERATING INCOME (LOSS) ............................. .
OTHER INCOME (EXPENSE)
Airline Stabilization Act funds ............................. .
Interest expense ....................................... .
Interest capitalized ..................................... .
Interest of mandatorily redeemable preferred security holder ....... .
Investment income ..................................... .
Earnings of affiliated companies ........................... .
Other, net ........................................... .
Total other income (expense) ............................ .
INCOME (LOSS) BEFORE INCOME TAXES ................... .
Income tax expense (benefit) .............................. .
NET INCOME (LOSS) ................................... .
Preferred stock requirements ...................... : ....... .
NET INCOME (LOSS) APPLICABLE TO COMMON
2002
$ 8,025
735
729
9,489
3,878
1,439
903
803
576
576
460
1,700
10,335
(846)
(27)
(427)
25
(25)
46
37
(3)
(374)
(1,220)
(422)
(798)
2001
$ 8,417
720
768
9,905
3,963
1,727
690
1,004
669
533
447
1,740
10,773
(868)
461
(369)
29
(25)
66
(5)
41
198
(670)
(247)
(423)
(1)
2000
$ 9,653
857
730
11,240
3,610
1,872
617
1,200
640
513
423
1,796
10,671
569
(350)
23
(27)
62
92
66
(134)
435
179
256
(1)
STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (798) $ (424) $ 255
EARNINGS (LOSS) PER COMMON SHARE:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9.32) $ (5.03) $ 3.09
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9.32) $ (5.03) $ 2.77
The accompanying note are an integral part of these consolidated financial statements.
42
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
CASH FLOWS FROM OPERATING ACTMTIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization ...... ..................... . ..... .
Ineome tax expense (benefit) ....... ..... ... .. . ..... ... .... .... .
Net receipts (payments) of income taxes .... .. ...... .... .... . ..... .
Pension and other postretirement benefit contributions les than expense .... .
Sale proceeds of frequent flyer miles less than revenue . .... .. . ... ..... .
Net loss (earnings) of affiliates .......... .. ............ .. ....... .
Other, net .................... ...... ... ..... . ...... . . ... . .
Changes in certain assets and liabilities:
Decrease (increase) in accounts receivable ....................... .
Decrease (increase) in flight equipment spare parts ................. .
Decrease (increase) in supplies, prepaid expenses and other ........... .
Increase (decrease) in air traffic liability ......................... .
Increase (decrease) in accounts payable ......................... .
Increase (decrease) in other liabilities ...... . ....... ... .......... .
Increase (decrease) in accrued liabilities ......................... .
Net cash provided by (used in) operating activities ................ .
CASH FLOWS FROM INVESTING ACTMTIES
Capital expenditures .......................................... .
Purchases of short-term investments ............................... .
Proceeds from maturities of short-term investments .................... .
Proceeds from sale of property, equipment and other assets ............... .
Investments in affiliated companies and other, net .......... . .......... .
Net cash used in investing activities . . ......................... .
CASH FLOWS FROM FINANCING ACTMTIES
Payment of long-term debt .................. . .................. .
Payment of capital lease obligations ............................... .
Payment of short-term borrowings ........................... . .... .
Proceeds from long-term debt ................................... .
Proceeds from short-term borrowings ..................... . ........ .
Proceeds from sale and leaseback transactions . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net ................................................ .
Net cash provided by (used in) financing activities ................. .
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............ .
Cash and cash equivalents at beginning of period ....................... .
Cash and cash equivalents at end of period ............................ .
Available to be borrowed under credit facilities ......................... .
Year Ended December 31
2002 2001 2000
$ (798) $ (423) $ 256
903 690 617
(422) (247) 179
122 (24) (61)
139 189 72
(5) ( 48) (161)
(37) 64 (65)
128 46 (26)
(38) 102 (31)
(14) 8 (2)
(68) 79 (54)
(24) 16 (27)
(46) 91 97
(164) 220 43
40 ~ ) 56
- - - - - -
(284) 646 893
(1,588) (1,253) (672)
(334) (205) (194)
391 135 198
15 602 97
(36) _ _
(9) _ _
(8)
(1,552) (730) (579)
(201) (152) (1,268)
(58) (65) (60)
(2) (1,261)
1,740 2,102 614
1,245
136 84 387
(194) (50) (43)
1,421 1,903 __Q]Q)
(415) 1,819 (56)
2,512 693 749
- - -
$2,097 $ 2,512 $ 693
$ 1 $ $ 1,116
The accompanying notes are an integral part of these consolidated financial statements.
43
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(In millions)
Accumulated
Common Stock Additional Other
Paid-In Accumulated Comprehensive Treasury
Shares Amount Capital Deficit Income (Loss) Stock Total
Balance January 1, 2000 . . . . . . . . . . . . 109.6
Net income .................... .
Other comprehensive income .. ...... .
Comprehensive income, net of tax ... .
Accretion of Series C Preferred Stock .. .
Series C Preferred Stock converted to
Common Stock .. .... ... . .... . . . 0.3
Common Stock held in rabbi trusts .... .
Other ........................ . 0.2
Balance December 31, 2000 . . . . . . . . . . 110.1
Net loss . ...................... .
Other comprehensive loss ........ ... .
Comprehensive loss, net of tax ...... .
Accretion of Series C Preferred Stock . . .
Series C Preferred Stock converted to
Common Stock ............... . .
Common Stock held in rabbi trusts .... .
Other ........................ .
0.2
Balance December 31, 2001 . . . . . . . . . . 110.3
Net loss ..................... .. .
Other comprehensive loss ........... .
Comprehensive loss, net of tax ...... .
Series C Preferred Stock converted to
Common Stock . . . . . . . . . . . . . . . . . 0.1
Common Stock held in rabbi trusts ... ..
Other . . . . . . . . . . . . . . . . . . . . . . . . . 0.4
Balance December 31, 2002 . . . . . . . . . . 110.8
$1
1
1
$1
$1,454
11
(11)
5
1,459
6
(16)
2
1,451
1
(3)
6
$1,455
$ (349)
256
(1)
(94)
(423)
(1)
(518)
(798)
$(1,316)
$ (9)
4
(5)
(300)
(305)
(1,042)
$(1,347)
$(1,149) $ (52)
256
4
19
(1,130)
260
(1)
11
8
5
231
(423)
(300)
(723)
(1)
6
70 54
2
(1,060) (431)
(798)
(1,042)
(1,840)
1
5 2
6
$(1,055) $(2,262)
The accompanying notes are an integral part of these consolidated financial statements.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I-Summary of Significant Accounting Policies
Basis of Presentation: Northwest Airlines Corporation ("NWA Corp.") is a holding company
whose principal indirect operating subsidiary is Northwest Airlines, Inc. ("Northwest"). The
consolidated financial statements include the accounts of NWA Corp. and all consolidated subsidiaries
( collectively, the "Company"). All significant intercompany transactions have been eliminated.
Investments in 20% to 50% owned companies, as well as Orbitz, LLC and NWA Funding II, LLC, are
accounted for by the equity method. Other investments are accounted for by the cost method.
Certain prior year amounts have been reclassified to conform to the current year financial
statement presentation.
Business: Northwest's operations comprise approximately 95% of the Company's consolidated
operating revenues and expenses. Northwest is a major air carrier engaged principally in the
commercial transportation of passengers and cargo, directly serving more than 175 cities in 24 countries
in North America, Asia and Europe. Northwest's global airline network includes domestic hubs at
Detroit, Minneapolis/St. Paul and Memphis, an extensive Pacific route system with a hub in Tokyo, a
trans-Atlantic alliance with KLM Royal Dutch Airlines ("KLM"), which operates through a hub in
Amsterdam, and a global alliance with Continental Airlines, Inc. ("Continental").
Flight Equipment Spare Parts: Flight equipment spare parts are carried at the lower of average
cost or market and are expensed when consumed in operation. An allowance for depreciation is
provided at rates which depreciate cost, less residual value, over the estimated useful lives of the
related aircraft. Inventory sales at amounts greater or less than their carried values are recorded in a
reserve account and therefore do not generate gain or loss recognition for income statement purposes.
Property, Equipment and Depreciation: Owned property and equipment are stated at cost. Property
and equipment acquired under capital leases are stated at the lower of the present value of minimum
lease payments or fair market value at the inception of the lease. Property and equipment are
depreciated to residual values using the straight-line method over the estimated useful lives of the
assets, which generally range from four to 25 years for flight equipment and three to 32 years for other
property and equipment. Leasehold improvements are generally amortized over the remaining period
of the lease or the estimated service life of the related asset, whichever is less. Property and equipment
under capital leases are amortized over the lease terms or the estimated useful lives of the assets.
The Company accounts for certain airport leases under the Emerging Issues Task Force ("EITF")
Issue No. 99-13, Application of EITF Issue No. 97-10, The Effect of Lessee Involvement in Asset
Construction, and FASB Interpretation No. 23, Leases of Certain Property Owned by a Governmental Unit
or Authority, to Entities that Enter into Leases with Governmental Entities, which requires the financing
related to certain guaranteed airport construction projects committed to after September 23, 1999, to
be recorded on the balance sheet. These capitalized expenditures of $201 million at December 31,
2002, are recorded in other property and equipment with the corresponding obligation included in
long-term obligations under capital leases, and relate to airport improvements at Minneapolis-St. Paul,
Memphis, Knoxville and Seattle.
Airframe and Engine Maintenance: Routine maintenance, airframe and engine overhauls are
charged to expense as incurred, except engine overhaul costs covered by third-party maintenance
agreements, which are accrued on the basis of hours flown. Modifications that enhance the operating
performance or extend the useful lives of airframes or engines are capitalized and amortized over the
remaining estimated useful life of the asset.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies (Continued)
International Routes and Goodwill: The Company's international routes result from the U.S.-Japan
bilateral aviation agreement, which establishes rights to carry traffic between Japan and the U.S., and
extensive ' fifth freedom" rights from Japan to India, the South Pacific and other Asian destinations.
Fifth freedom" rights allow Northwest to operate service from any gateway in Japan to points beyond
Japan and carry Japanese originating passengers. These rights have no termination date, and the
Company has the supporting infrastructure ( airport gates, slots and terminal facility leases) in place to
operate air service to Japan from its U.S. hub and gateway airports indefinitely. The Company's
goodwill balance of $18 million relates solely to the 1997 purchase of Pinnacle Airlines. Through the
end of 2001, the international routes and goodwill were amortized on a straight-line basis over 40 years.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
that companies test goodwill and indefinite lived intangible assets for impairment on an annual basis
rather than amortize such assets. The Company adopted SFAS No. 142 on January 1, 2002, and as a
result no longer amortizes its international routes and goodwill.
During the first quarter of 2002, the Company performed the impairment test of its international
routes and found the fair value to be in excess of the carrying value. During the first quarter of 2003,
an independent third party appraisal was conducted for the Company's annual impairment test of its
international routes and found the fair value to be in excess of the carrying value. During the fourth
quarter of 2002, the Company also completed its impairment test of goodwill and found the fair value
to be in excess of the carrying value.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies (Continued)
The following table presents net income (loss) and earning (los ) per hare for comparable
periods in 2002, 2001 and 2000 adjusted for amortization of goodwill and indefinite lived intangible
assets, which are not tax effected since the e expenses were not deductible for tax purpo e :
Twelve Month Ended
December 31,
2002 2001 2000
(in million , except per
hare amounts)
Reported net income (loss) .............. . . ... . .. .. . ........... . $ (79 ) $ ( 423) 256
Goodwill amortization ........................................ . 1 1
International route amortization ...... . .......... . . . . . . . . . ....... . 23 23
- -
Adjusted net income (loss) .......... . .. .. . . ......... .. . ... ..... . $ (798) (399) 280
Basic earnings per share:
Reported earnings (loss) per common share .... . . ...... .... . . .... . . (9.32) (5.03) 3.09
Goodwill amortization ......................... . ...... . . ... . . 0.01 0.01
International route amortization .................. .. .. . ...... .. . 0.28 0.28
- - - -
Adjusted basic earnings (loss) per share .............. . ........... . $(9.32) (4.74) $3.38
Diluted earnings per share:(1)
Reported earnings (loss) per common share ... ...... ...... ... ..... . $(9.32) (5.03) $2.77
Goodwill amortization ........ .. ........ .. . .... ..... ...... .. . 0.01 0.01
International route amortization .. . .............. .. .... . .. . .... . 0.28 0.25
- - - -
Adjusted diluted earnings (loss) per hare ........................ . $(9.32) $(4.74) $3.03
(1) For the twelve months ended December 31, 2002 and 2001, no incremental hare related to
dilutive securitie were used to calculate diluted earnings per hare becau e of the anti-dilutive
impact cau ed by inclusion of these securities. See Note 2 for additional information regarding
earnings (loss) per share.
Impairment of Long-Lived Assets: The Company evaluate long-lived a sets for potential
impairment in compliance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Company records, in depreciation expense, impairment losses on long-lived a sets used in
operations when events and circumstances indicate the assets might be impaired and the undiscounted
cash flows estimated to be generated by those assets are less than their carrying amount . The current
fair market value of the assets is determined by recent transactions involving sales of similar aircraft
outside appraisals, asset utilization, expected remaining u eful lives, future market trend and projected
salvage values to determine the fair market value of these as et . Impairment losses are measured by
comparing the fair value of the asset to its carrying amount.
In December 2002, the Company revised its fleet plan, accelerating the retirement of nine Boeing
747-200 and 13 DCl0-30 aircraft. The Company recorded non-cash impairment charges of $352 million
to reflect reductions in the estimated market values of certain aircraft, engines and related inventory in
the fourth quarter of 2002. These charges consisted of $294 million related to the aircraft, $23 million
write-down of spare engines, and $35 million of related inventory.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
In the third and fourth quarters of 2001, the Company recorded non-cash impairment charges of
$161 million to reflect reductions in the estimated market values of certain aircraft and related
inventory due to reduced demand resulting from the events of September 11, 2001. The impairment
charges consisted of a $96 million write-down to the estimated market value of 25 Boeing 727 aircraft
and five Boeing 747 freighter aircraft. The remaining $65 million of impairment charges related to
seven non-operating aircraft that had been stored for future sale, two DC9 aircraft and three Boeing
727 aircraft retired during 2001, and four Boeing 747-200 aircraft retired or scheduled to be retired by
2004. The e impairment charges included $9 million to write-down related spare parts to their
estimated fair market value.
In December 2000, the Company accelerated the retirement of 21 DCl0-40 and six DCl0-30
aircraft in anticipation of the replacement of these aircraft with Airbus A330 and Boeing 757-300
aircraft. As a result, the Company recorded a non-cash fleet disposition charge of $125 million in
depreciation and amortization. The fleet disposition charge included a $29 million write-down of
related spare parts to their estimated fair market value.
Frequent Flyer Program: The estimated incremental cost of providing travel awards earned under
Northwests WorldPerks frequent flyer program is accrued and included in the accompanying
consolidated balance sheets as air traffic liability. The Company also sells mileage credits to
participating companies in its frequent flyer program. A portion of such revenue is deferred and
amortized as transportation is provided.
Operating Revenues: Passenger and cargo revenues are recognized when the transportation is
provided or the ticket expires unused. The air traffic liability represents the estimated value of sold but
unused tickets and is regularly evaluated by the Company. Other revenues include MLT Inc. ("MLT"),
transportation fees and charter revenues, and are recognized when the service or transportation is
provided.
Advertising: Advertising costs, included in selling and marketing expenses, are expensed as
incurred and were $93 million, $98 million and $127 million in 2002, 2001, and 2000, respectively.
Employee Stock Options: As of December 31, 2002, the Company has stock option plans for
officers and key employees of the Company. The Company accounted for those plans under the
recognition and mea urement principle of Accounting Principles Board (''APB") Opinion No. 25,
Accountin for Stock Issued to Employees, and related interpretatio s. No stock-based employee
compensation cost is reflected in the statement of operations, as all options granted under those plans
have an exercise price equal to the market value of the underlying common stock on the date of grant.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation-
T!w1sition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for
companies that voluntarily change to the fair value based method of accounting for stock-based
compensation. It al o amends the disclosure requirements of SFAS No. 123 to require prominent
disclo ure in both annual and quarterly financial statements regarding the method of accounting for
tock-based employee compensation and the effect of the method used on reported results. The
Company adopted the disclosure provisions of SFAS No. 148 for the year ended December 31, 2002.
See Note 7 to the Consolidated Financial Statements for additional disclosure of the Company's stock
option including a table which illustrates the effect on net income and earnings per share if the
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Effective January 1, 2003, the Company adopted the fair value method of recording tock-based
employee compensation contained in SFAS No. 123 and will account for thi change in accounting
principal using the "prospective method" as described by SFAS No. 148. All employee stock option
grants made on or after January 1, 2003 will be recorded as compensation expense over the vesting
period based on the fair value at the date the stock-based compensation is granted.
New Accounting Standards: In June 2002, the FASB issued SFAS No. 146, Accounting for Cost
Associated with Disposal or Exit A ctivities. SFAS No. 146 requires that a liability for costs a ociated with
exit or disposal activities be recognized when the liability is incurred, rather than when an entity
commits to an exit plan. The Company adopted SFAS No. 146 on January 1, 2003. Thi new tatement
will change the timing of liability and expense recognition related to exit or disposal activitie , but not
the ultimate amount of such expenses.
In November 2002, the FASB issued FASB Interpretation (' FIN ') No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FI
No. 45 requires certain guarantees to be recorded at fair value and to provide additional disclosure
about each guarantee, or each group of similar guarantees. The Company ha adopted the disclosure
requirements of FIN No. 45 for the period ending December 31, 2002 and will adopt the initial
recognition and measurement provisions for guarantees issued or modified after December 31, 2002.
See Note 11 to the Consolidated Financial Statements for the Company's disclosures concerning it
guarantor obligations.
In January 2003, the FASB issued FIN No. 46, Consolidation of Variable Interest Entitie . FIN
No. 46 requires that companies that control another entity through interests other than voting intere t
should consolidate the controlled entity. FIN No. 46 applies to variable interest entities created after
January 31, 2003, and to variable interest entitie in which an enterprise obtains an interest after
January 31, 2003. For all variable interest entities created before February 1, 2003, the provi ions are
effective July 1, 2003. The Company is evaluating the impact of the new interpretation.
Foreign Currency: Assets and liabilities denominated in foreign currency are remeasured at
current exchange rates with resulting gains and losses generally included in net income. The manditorily
redeemable preferred security (see Note 5) and other assets and liabilities associated with certain
properties located outside of the U.S. whose cash flows are primarily in the local functional currency
are translated at current exchange rate , with translation gains and losses recorded directly to
accumulated other comprehensive income (loss), a component of common stockholders' equity (deficit).
Income Taxes: The Company accounts for income taxes utilizing the liability method. Deferred
income taxes are primarily recorded to reflect the tax consequences of differences between the tax and
financial reporting bases of assets and liabilities.
Use of Estimates: The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in its consolidated financial statements and accompanying note . Actual
re ults could differ from those estimates.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2-Earnings (Loss) Per Share Data
The following table et forth the computation of ba ic and diluted earnings (los ) per common
hare for the years ended December 31:
Numerator:
Net income (loss) applicable to common stockholders for
basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . $
Effect of dilutive ecurities-Series C Preferred Stock ....
Net income (loss) applicable to common stockholders after
assumed conversions for diluted earnings (loss) per
share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Denominator:
Weighted-average shares outstanding for basic earnings
(loss) per share ............................. .
Effect of dilutive securities:
Series C Preferred Stock ...................... .
Shares held in non-qualified rabbi trusts ........... .
Employee stock options ....................... .
Adjusted weighted-average shares outstanding and
assumed conversions for diluted earnings (loss) per
share .................................... .
Shares related to dilutive securities excluded because
inclusion would be anti-dilutive .......... ...... . .
2002 2001 2000
(in millions, except share data)
(798) $
(798) $
85,655,786
85,655,786
6,926,103
( 424) $
(424) $
255
1
256
=====
84,280,222 82,629,233
6,941,938
2,183,978
500,317
84,280,222 92,255,466
7,921,443
For additional disclosures regarding the Series C Preferred Stock, shares held in rabbi trusts and
employee stock options see Notes 6 and 7.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings
Long-term debt as of December 31 consi ted of the following (with interest rate a of
December 31, 2002):
2002 2001
(in millions)
Pass-through certificates due through 2022, 6.2% weighted-average
rate(a) ................. . . ...... . . ......... . ..... . $1,651 $ 820
Unsecured notes due 2004 through 2039 8.7% weighted-average
rate(b) .............. .. .. ....... . . .. . . . . ... ...... . 1,591 1,291
Equipment pledge note due through 2019, 3.4% weighted-average
rate(c) ... . ........... . .. ... .. .. .. . ............ .. . . 1,103 654
Revolving Credit Facilitie due 2005, 4.3%( d) . .............. . 962 962
Secured notes due through 2009, 2.7% weighted-average rate . . . . . 307 339
Aircraft notes due through 2016, 6.0% weighted-average rate . . . . . 299 315
Sale-leaseback financing obligations due through 2020, 8.5%
imputed rate( e) ............. . .. ... . . .. . ........ .. . . 221 219
NWA Tru t No. 2 aircraft notes due through 2012, 9.8% weighted-
average rate(f) ................ .. . ... ....... .. . . ... . 220 230
NWA Trust No. 1 aircraft notes due through 2006, 8.6% weighted-
average rate(g) ...... . .. . . . . . .. . ............ .... .. . . 117 141
Other . . .................................. .. . . . .. . . 60 80
Total debt ......................................... . 6,531 5,051
Less current maturities ......... .... ....... . . . . . ..... . 281 223
- -
Long-term debt ........................... ..... ..... . $6,250 $4,828
(a) In 1999, the Company completed public offering of $795 million in pass-through certificates to
finance seven Airbus A320, 14 Airbus A319 and 14 AVRO RJ85 aircraft. In June 2000, the
Company completed a public offering of $522 million in pas -through certificate to finance 13 new
Airbus A319 aircraft delivered in 2001 and to refinance six Boeing 757-200 aircraft delivered in
1996. In June 2001, the Company completed a public offering of $581 million of pass-through
certificates to finance or refinance the acquisition of 14 aircraft consisting of nine new Airbus
A319 aircraft, three new Boeing 757-300 aircraft and two new Boeing 747-400 aircraft delivered
between March and December 2002. In July 2001, the Company completed a public offering of
$396 million in European pass-through certificate to finance nine new Airbus A319 aircraft and
five new Airbus A320 aircraft delivered between November 2001 and July 2002. In August 2002,
the Company completed a pre-funded public offering of $749 million of pass-through certificates to
finance or refinance the acquisition of 11 new Airbu A319 aircraft, ix new Boeing 757-300
aircraft and three new Airbus A330 aircraft scheduled to be delivered between October 2002 and
December 2003.
The pre-funded cash proceeds from the pass-through certificates were deposited with an escrow
agent and are not assets or direct obligations of, or guaranteed by, the Company and are therefore
not included in the Consolidated Financial Statements. As aircraft are delivered or refinanced, the
Company utilizes the cash proceeds to finance these aircraft as secured debt financing for
ownership or as non-recourse debt used for leveraged lease financing. If a leveraged lease is
obtained for any aircraft (under which the aircraft would be acquired from the manufacturer and
51
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ote 3-Long-Term Debt and Short-Term Borrowings (Continued)
1 a ct back by orthwe t) th ct bt a ociated with the aircraft become part of the lea e and will
not b a dir ct obligation of the Company or orthwe t. Lea e obligation that qualify a
op rating 1 a e under SF S o. 13 are di clo ed in ote 4 to the Con olidated Financial
tat m nt .
t Dec mber 31, 2002, 1.65 billion of the equipment note underlying the pa -through
certificat i u d for 61 aircraft are direct obligation of orthwe t. Intere t on the pa s-through
rtificate i payable emi-annually or quarterly. At December 31, 2002, $668 million of the
unu d proceed from pa -through certificate were held in e crow and are not recorded as an
a t or dir ct obligation of A Corp. or orthwe t.
(b In arch 1997, the Compan i ued 150 million of 8.375% note due 2004 and $100 million of
.70% not du 2007. In March 199 , the Company i ued 200 million of 7.625% notes due 2005
and _oo million of 7. 75% note due 200 . In April 1999, the Company i ued $200 million of
. ~2% note due 2004. In Augu t 1999, the Company completed the retail issuance of $143 million
of 9. "% enior un ecured quarterly interest bond maturing in 2039. These bond may be
redeemed by orthwe t beginning in 2004 without penalty. In May 2001, the Company issued
"'00 million of . 75% note due 2006. In March 2002 the Company issued $300 million of
9. r % note due 2007. Intere t on each of the e note is payable semi-annually unless otherwise
noted.
(c) Th equipment pledge note include new financing completed during 2002 of $492 million for the
acqui ition of ix Airbu A319 aircraft and refinancing of three Boeing 757-200 aircraft, two
Boeing 757-300 aircraft and the refinancing of three Boeing 747-400 aircraft (formerly held under
capital lea e ). Intere t on the note i payable emi-annually or quarterly.
(d) The Company' ecured credit facilitie con i ted of a 725 million revolving credit facility
( L million of which ha been utilized to establi h letters of credit), available until October 2005
and a 250 million 364-da revolving credit facility, available until October 2003, which is
renewable annually at th option of the lender ; however, to the extent any portion of the
ro million facility i not renewed for an additional 364-day period, the Company may borrow up
to the entire non-r newed portion of the facility and uch borrowings would then mature in
0 tob r 2005. Thi credit agreement i ecured by the Company Pacific route sy tern and certain
aircraft. On June 2 2002, Standard & Poor' downgraded the rating on the Company's ecured
credit facilitie to BB - from BB. With the change in credit rating, the interest rate on borrowings
und r the e ured credit facilitie increa d 0.5%. A of December 31, 2002 borrowing under
th 725 million re olving credit facility bear intere t at a variable rate equal to the six-month
London Interbank Offered Rate ("LIBOR ) plu 2.5% ( 4.25% at December 31, 2002) and
borrm ing under the 250 million 364-day revolving credit facility bear intere t at a variable rate
qua! to the four-month LIBOR plu 2.5% ( 4.33% at December 31, 2002). Commitment fees are
pa able b the Company on the unu ed portion of the revolving credit facilitie at a variable rate
qual to 0. "o/c p r annum at December 31, 2002, and are not con idered material.
Th redit agreement contain certain financial covenant , including limitations on ecured
ind btedne ( excluding ecured indebtedne for new aircraft and airport facilitie ) and certain
equity redemption and di idend a well a the requirement to maintain a certain level of
liquidity.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings (Continued)
(e) In March 1992, the Company completed agreements with the Minneapolis/St. Paul Metropolitan
Airports Commission ("MAC") for the sale and leaseback of variou corporate asset . The
sale-leaseback agreements, which are accounted for as debt, call for increa ing quarterly payment
over a 30-year term and include a provision that give the Company the option to repurchase the
assets. The agreements with the MAC are part of a group of financing arrangements with the State
of Minnesota and other government agencies.
In February 2002, the MAC refinanced the debt used to finance the MAC's original purchase of
Northwest assets. The savings generated by this refinancing will be pa ed on to Northwe t as
reduced lease payments to the MAC. The Company's imputed interest rate related to these bonds
is 8.458%.
(f) In December 1994, the Company completed a structured aircraft financing transaction in which 13
Airbus A320 aircraft were transferred from Northwest ( ubject to existing indebtedne s) to an
owner trust (NWA Trust No. 2). A limited partnership, of which Northwe t i the limited partner
and Norbus, Inc. (an affiliate of Airbus lndustrie A.I.E.) is the general partner, is the ole equity
participant in the owner trust. All proceeds from the transaction were u ed to repay equipment
pledge notes, which had previously been issued to finance the acquisition of the e aircraft by
Northwest. The aircraft were simultaneously leased back to Northwest.
Financing of $352 million was obtained through the issuance of $176 million of 9.25% Cla s A
Senior Aircraft Notes, $66 million of 10.23% Class B Mezzanine Aircraft Notes, $44 million of
11.30% Class C Mezzanine Aircraft Notes and $66 million of 13.875% Clas D Subordinated
Aircraft Notes. Substantially all of the Class D notes were repurchased by the Company in
December 1997. The notes are payable semi-annually from rental payments made by Northwest
under the lease of the aircraft and are secured by the aircraft subject to the lea e a well as the
lease itself.
(g) In March 1994, Northwest consummated a financing transaction in which six Boeing 747-200 and
four Boeing 757 aircraft were sold to an owner trust (NWA Trust No. 1) of which NWA Aircraft
Finance, Inc., an indirect subsidiary of the Company, is the sole equity participant. A portion of
the purchase price was financed through the issuance of $177 million of 8.26% Class A Senior
Aircraft Notes and $66 million of 9.36% Class B Subordinated Aircraft Notes. The aircraft were
simultaneously leased back to Northwest. The notes are payable semi-annually from rental
payments made by Northwest under the lease of the aircraft and are secured by the aircraft subject
to the lease a well a the lease itself.
Maturities of long-term debt for the five years subsequent to December 31, 2002 are a follows (in
millions):
2003 .................................. . ................. .
2004 .................................................... .
2005 ...............................
2006 .....................................
2007 .................................................... .
$ 281
623
1,430
563
673
At December 31, 2002, the Company was in compliance with the covenants of all of its debt and
lease agreements. Various assets, principally aircraft and route authorities, having an aggregate book
value of $5.89 billion at December 31, 2002, were pledged under various loan agreements.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings (Continued)
The weighted-average interest rates on short-term borrowings outstanding at December 31 were
3.04%, 3.59% and 6.57% for 2002, 2001 and 2000, respectively.
Cash payments of interest, net of capitalized interest, aggregated $421 million, $307 million and
$312 million in 2002, 2001 and 2000 respectively.
Manufacturer debt financing utilized in connection with the acquisition of aircraft was $25 million,
$21 million and $254 million in 2002, 2001 and 2000, respectively. These amounts are considered
non-cash transactions and are therefore excluded from proceeds from long-term debt and capital
expenditures in the Consolidated Statements of Cash Flows. These amounts are included in the
Consolidated Balance Sheets as long-term debt and flight equipment.
Note 4-Leases
The Company leases under noncancelable operating leases certain aircraft, space in airport
terminals, land and buildings at airports, ticket, sales and reservations offices, and other property and
equipment, which expire in various years through 2032. Certain aircraft and portions of facilities are
subleased under noncancelable operating leases expiring in various years through 2032.
Rental expense for all operating leases for the years ended December 31 consisted of the
following:
2002 2001 2000
(in millions)
Gross rental expense ............................ . $ 863 $ 811 $ 7 65
Sublease rental income ................ . .......... . (145) (129) (110)
Net rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 718 $ 682 $ 655
At December 31, 2002, Northwest leased 126 of the 439 aircraft it operates. Of these, 18 were
capital leases and 108 were operating leases. Base term lease expiration dates range from 2003 to 2009
for aircraft under capital leases, and from 2003 to 2025 for aircraft under operating leases. Northwest's
aircraft leases can generally be renewed for terms ranging from one to eight years at rates based on the
aircraft's fair market value at the end of the lease term. Of the 126 aircraft lease agreements, 116
provide Northwest with purchase options during the lease, at the end of the lease, or both, on terms
that approximate fair market value.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Leases (Continued)
At December 31, 2002, future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of more than one year were as follows:
2003
2004
2005
2006
2007
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less sublease rental income ................... .
Total minimum operating lease payments ......... .
Capital
Leases
$ 99
74
64
50
51
583
921
Less amounts representing interest . . . . . . . . . . . . . . . 470
Present value of future minimum capital lease
payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451
Less current obligations under capital leases . . . . . . . . 65
Long-term obligations under capital leases . . . . . . . . . $386
Operating lea es
Aircraft on-aircraft
(in millions)
$ 582 $ 160
151
139
130
120
575
565
577
577
4,703
7,579
369
$7,210
1,245
1,945
33
$1,912
The above table includes operating leases for 51 aircraft operated by and sublea ed to Pinnacle
Airlines, Inc. ("Pinnacle Airlines"), and 85 aircraft operated by and subleased to Mesaba Aviation, Inc.
("Mesaba"). Base term lease expiration dates for Northwest range from 2003 to 2021. These aircraft
leases can generally be renewed by Northwest for terms ranging from one to eight year at rate based
on the aircraft's fair market value at the end of the lease term.
Note 5-Mandatorily Redeemable Preferred Security of Subsidiary Which Holds Solely Non-Recourse
Obligation of Company
In October 1995, the Company completed a restructuring of its yen-denominated non-recourse
obligation secured by land and buildings the Company owns in Tokyo. A newly formed consolidated
subsidiary of the Company (the "Subsidiary") entered into a Japanese business arrangement designated
under Japanese law as a tokumei kumiai ("TK"). Pursuant to the TK arrangement, the holder of the
non-recourse obligation restructured such obligation and then assigned title to and ownership of such
obligation to the Subsidiary as operator under the TK arrangement in exchange for a preferred interest
in the profits and returns of capital from the business of the Subsidiary (the "Preferred Security"). The
restructured non-recourse obligation is the sole asset of the Subsidiary. As a result of this restructuring,
the original holder of such non-recourse obligation ceased to be a direct creditor of the Company and
the Company's obligation is reflected in the Company's Consolidated Balance Sheet as Mandatorily
Redeemable Preferred Security of Subsidiary Which Holds Solely Non-Recourse Obligation of
Company. Northwest Airlines Holdings Corporation has guaranteed the obligation of the Subsidiary to
distribute payments on the Preferred Security pursuant to the TK arrangement if and to the extent
payments are received by the Subsidiary.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5-Mandatorily Redeemable Preferred Security of Subsidiary Which Holds Solely Non-Recourse
Obligation of Company (Continued)
The re tructured obligation matures in three approximately equal annual installments due in 2005,
2006 and 2007. In addition to the e installments, cash payments of interest and principal are made
emi-annually throughout the term. The rate of interest varies from period to period and is capped at
6%. The obligation i non-recourse to the Company. The Company has the ability to transfer the land
and building in full satisfaction of all Company obligations related to the financing.
The carrying value i being accreted over 12 years from October 1995 to the ultimate maturity
alue of 69. 3 billion yen ( 587 million based on the December 31, 2002 exchange rate). Such accretion
i included as a component of interest of mandatorily redeemable preferred security holder.
Note 6-Preferred Redeemable and Common Stock
Series C Prefened Stock: A part of labor agreement reached in 1993, NWA Corp. issued to
tru t for the benefit of participating employees 9.1 million shares of a new class of Series C
cumulative, voting, convertible, redeemable preferred stock, par value of $.01 per share (the "Series C
Preferred Stock"), and 17.5 million shares of Common Stock and provided the union groups with three
position on the Board of Directors. NWA Corp. has authorized 25 million shares of Series C Preferred
Stock except as described below. The Series C Preferred Stock ranks senior to Common Stock with
re pect to liquidation and certain dividend rights. As long as the Common Stock is publicly traded, no
dividend accrue on the Serie C Preferred Stock. Each share of the Series C Preferred Stock is
convertible at any time into 1.364 shares of Common Stock. A of December 31 2002, 4.3 million
shares of Series C Preferred Stock have been converted into Common Stock and the remaining
4.8 million shares outstanding are convertible into 6.6 million shares of Common Stock. During 2002,
30,845 shares of Series C Preferred Stock were converted into 42,071 shares of Common Stock.
The holders of outstanding Series C Preferred Stock have a "put right" in 2003 to require NWA
Corp. to repurchase such shares for an amount (projected to be $226 million at the August 1, 2003 put
date) equal to the actual wage savings achieved under the 1993 labor agreement. NWA Corp. has the
option to repurchase such shares in cash, by the issuance of additional Common Stock, or by the use of
cash and stock. A decision to issue only additional Common Stock must be approved by a majority of
the three director elected by the holders of the Series C Preferred Stock. If NWA Corp. decides not to
repurchase the Series C Preferred Stock, quarterly dividends will accrue beginning August 1, 2003, at
12% per annum and the employee unions will receive three additional Board of Directors positions. If,
on August 1, 2003, NWA Corp. decides not to repurchase the Series C Preferred Stock, on each
succeeding quarter end date, NWA Corp. must use all '.vailable Cash", as defined, to effect partial
repurchases of the Serie C Preferred Stock. Any decision not to use all Available Cash to effect such
partial purchases must be approved by a majority of the directors elected by the holders of the Series C
Preferred Stock. The financial statement carrying value of the Series C Preferred Stock is being
accreted over 10 years commencing August 1993 to the ultimate put price, and was $226 million at
December 31, 2002.
Common Stock: The Company wa required to adopt the provisions of EITF Issue No. 97-14,
A ccounting for De.fe,red Compensation Al'rangements Where Amounts Earned are Held in a Rabbi T,ust,
on September 30, 1998. A a result, the Company revised its consolidation of the assets and liabilities
of the non-qualified rabbi trusts. The 4,401 and 141,021 share of Common Stock as of December 31,
_002 and 2001 respectively that are held in the trusts are recorded similar to treasury stock and the
deferred compen ation liability i recorded in other long-term liabilities. The Company elected to
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6-Preferred Redeemable and Common Stock (Continued)
record the difference between the market value of the common hares and the historical co t of the
shares in the trusts at the date of adoption as a credit to common tockholders' equity ( deficit) net of
tax. After the adoption date, but prior to ettlement through either contribution to qualified tru ts or
diversification, increases or decreases in the deferred compensation liability will be recognized in
earnings to the extent the Common Stock market price exceeds the average historical cost of the hare
of $38.04 per share or falls below the September 30, 1998 price of $25.06 per hare, re pectively. For
the purpose of computing diluted earnings per share, the shares held by the rabbi tru ts are con idered
potentially dilutive securities. The Company has cla ified the diver ified as et held by the rabbi tru t
as trading and recorded them at fair market value.
Stockholder Rights Plan: Pursuant to the Stockholder Right Plan (the "Right Plan") each hare
of Common Stock has attached to it a right and, until the right expire or are redeemed, each new
share of Common Stock issued by NWA Corp., including the hare of Common Stock into which the
Series C Preferred Stock is convertible, will include one right. Upon the occurrence of certain events,
each right entitles the holder to purchase one one-hundredth of a hare of Serie D Junior
Participating Preferred Stock at an exercise price of $150, ubject to adju tment. The right become
exercisable only after any person or group ( other than the tru t holding Common Stock for the benefit
of employees) acquires beneficial ownership of 19% or more (25% or more in the ca e of certain
institutional investors) of NWA Corp.'s "outstanding" Common Stock (as defined in the Right Plan)
or commences a tender or exchange offer that would re ult in uch per on or group acquiring
beneficial ownership of 19% or more (25% or more in the case of certain institutional inve tor ) of
NWA Corp.'s outstanding Common Stock. If any person or group acquire beneficial owner hip of 19%
or more (25% or more in the case of certain institutional investors) of NWA Corp.' out tanding
Common Stock, the holder of the rights ( other than the acquiring person or group) will be entitled to
receive, upon exercise of the rights, Common Stock of NWA Corp. having a market value of two times
the exercise price of the right. In addition, if after the right become exercisable NWA Corp. is
involved in a merger or other business combination or ell more than 50% of its a et or earning
power, each right will entitle its holder ( other than the acquiring person or group) to receive common
stock of the acquiring company having a market value of two times the exercise price of the right . The
rights expire on November 16, 2005 and may be redeemed by NWA Corp. at a price of .01 per right
prior to the time they become exercisable.
Note 7-Stock Options
Stock Option Plan for Officers and Key Employees: A of December 31 2002, NWA Corp. had stock
option plans for officers and key employees of the Company. Option generally become exercisable in
equal annual installments over four or five years and expire 10 years from the date of the grant. The
Company accounted for those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. o stock-based
employee compensation cost is reflected in the consolidated tatement of operations, a all option
granted under those plans have an exercise price equal to the market value of the underlying common
stock on the date of grant.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued)
The following table illustrates the effect on net income (loss) and earnings (loss) per share if the
company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation:
Net income (loss), as reported ..................... .
Deduct: Total stock-based employee compensation expense
determined under a fair value based method for all
awards, net of tax ............................. .
Pro forma net income (loss) ...................... .
Earnings (loss) per share:
Basic-as reported ............................. .
Basic-pro forma .............................. .
Diluted-as reported ............................ .
Diluted-proforma ............................ .
Year Ended December 31
2002 2001 2000
(in millions, except per
share amounts)
$ (798) $ ( 423) $ 256
_Q) _QQ) ~)
$ (807) $ ( 433) $ 244
$(9.32) $(5.03) $3.09
$(9.43) $(5.14) $2.95
$(9.32) $(5.03) $2.77
$(9.43) $(5.14) $2.65
Following is a summary of stock option activity for the years ended December 31:
2002 2001 2000
Outstandjng at beginning of year ........ .
Granted ......... . ................ .
Forfeited ....... . ....... . ......... .
Exercised ......... . ............... .
Outstanding at end of year ............ .
Exercisable at end of year ..... ......... .
Reserved for issuance . ......... . ..... .
Available for future grants ............. .
At December 31, 2002:
Weighted-
Average
Exercise
Shares Price
8,757 $25.40
218 7.33
(639) 28.93
(413) 12.74
7,923 25.27
3,728 31.73
21,815
7,570
Weighted-
Average
Exercise
Shares Price
(shares in thousands)
6,235 $29.94
3,454 17.98
(850) 29.61
~ ) 14.76
8,757 25.40
3,259 30.60
21,815
7,150
Options Outstanding
Weighted-Average
Weighted-
Average
Exercise
Shares Price
5,067 $31.79
1,959 25.05
(620) 33.67
~ ) 15.05
6,235 29.94
2,425 30.28
16,806
5,613
Options Exercisable
Remaining Weighted-Average Weighted-Average
Range of Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
$4.740 to $25.125 .............. .
25.406 to 39.375 .............. .
40.188 to 64.406 .............. .
5,014
2,231
678
58
(shares in thousands)
7.8 years $18.75
5.6 33.46
4.9 46.63
1,425
1,654
649
$22.08
34.36
46.23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
Weighted average risk-free interest rate ................... .
Stock price volatility ................................. .
Expected lives in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2002 2001 2000
3.3% 4.5% 6.4%
40% 30% 30%
6 6 6
The weighted-average fair value of options granted during 2002, 2001 and 2000 is $3.23, $6.96 and
$10.77 per option, respectively.
Stock Option Plan for Pilots: In September 1998, in conjunction with the labor agreement reached
between Northwest and the Air Line Pilots Association, International, NWA Corp. established the 1998
Pilots Stock Option Plan ("Pilot Plan"). The Company has reserved for issuance 2.5 million shares of
Common Stock under the Pilot Plan.
Following is a summary of the Pilot Plan activity for the years ended December 31:
2002 2001 2000
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
(shares in thousands)
Outstanding at beginning of year ........... 2,486 $25.58 1,987 $27.08 1,497 $26.81
Granted .. .. . ........................ 500 19.62 500 27.88
Exercised . . . . . . . . . . . . , . . . . . . . . . . . . . . . . ___Q) 26.33 __QQ) 26.82
Outstanding at end of year ............... 2,486 25.58 2,486 25.58 1,987 27.08
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
2001 2000
Weighted average risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . 4.5% 6.4%
Stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30% 30%
Expected lives in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6
There were no options granted under the pilot plan in 2002. The weighted-average fair value of
options granted during 2001 and 2000 is $7.37 and $11.56 per option, respectively. All outstanding
options are exercisable at December 31, 2002 and the weighted-average remaining contractual life was
6.9 years.
Stock Incentive Plans: Shares of restricted stock were awarded at no cost to certain officers and
key employees in 2002, 2001 and 2000. These shares are subject to forfeiture and will be issued when
vested. Unearned compensation, representing the fair market value of the stock on the measurement
date, is amortized over the four-year vesting period. As of December 31, 2002, 1,181,229 shares were
outstanding and not vested.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7- tock Options (Continued)
A long-term incentive performance plan was established in 2000 under which 503,600 phantom
tock unit were awarded to certain k y officers. Phantom units were awarded to other management
mployee in 2002 and 2001 with 521,006 and 492,496 phantom stock units awarded, respectively. The
pcrformanc plan unit ve t over three to five performance periods upon satisfaction of certain
c tabli bed p rforrnanc tandard . The phantom unit vest over a four year period. Each unit
rcprc ent the right to r ceiv a cash payment equal to the market price of the Company's stock as
defin d in the plan. The average market price on the date of grant was between $5.70 and $18.45 for
-00-, and $24. 5 and $24.60 for the 2001 and 2000 grants, respectively.
Option Exchange Program: On January 14, 2003, the Company completed an option exchange
program. Offic-rs of the Company were able to exchange their current stock options at a ratio of two
old option for one newly i sued option. The new options have a strike price of $8.31, the average of
the high and low stock pric of the Company's common stock on the award date of January 15, 2003.
The compensation expense related to these new options will be amortized over a four-year vesting
p-riod u ing the fair valu m thod of recording stock-based employee compensation. Certain other
manabement empl yees of the Company were able to exchange their current stock options for phantom
unit at a ratio of thre old options for on phantom unit. The compensation expense related to these
phantom unit will be recognized over th four-year vesting period, adjusted for the current period
nding tock price on i tent with how phantom unit have been expen ed in the past. Compensation
e 'P n r lated to stock options is ued under this exchange program is anticipated to be approximately
$3 million for the year ending Decernb r 31, 2003. The Company has agreed to a similar option
exchang program for outstanding award under the stock option plan for pilots. Such an exchange
program i canting nt upon commencem nt of codesharing under the marketing agreement with
ontinental and Delta Air Lines, Inc.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8-Accumulated Other Comprehensive Income (Loss)
The following table sets forth information with respect to accumulated other comprehensive
income (loss) ("OCI"):
Foreign Deferred Gain Minimum Accumulated
Currency (Loss) on Pension OCI of Unrealized Other
Translation Hedging Liability Affiliated Gain on Comprehensive
Adjustment Activities Adjustment Companies Investments Income (Loss)
(in millions)
Balance_ at January 1, 2000. $(46) $31 $ $(3) $ 9 $ (9)
Before tax amount . . . . 11 3 (30) 13 9 6
Tax effect . . ......... ~) ___Q) 11 _Q) _Q) ____Q)
- - -
Net-of-tax amount ..... 7 2 (19) 8 6 4
Balance at December 31,
2000 ............... (39) 33 (19) 5 15 (5)
Before tax amount .... 14 (3) (452) (8) (23) (472)
Tax effect ........... __Q) 1 165 3 8 172
- - - -
Net-of-tax amount ..... 9 (2) (287) (5) (15) (300)
Balance at December 31,
2001 ............... (30) 31 (306) (305)
Before tax amount .... (11) (14) (1,618) (1,643)
Tax Effect ........... 4 5 592 601
Net-of-tax amount . .... (7) (9) (1,026) (1,042)
Balance at December 31,
2002 ............... $(37) $22 $(1,332) $- $- $(1,347)
- - -
Note 9-Income Taxes
Income tax expense (benefit) consisted of the following for the years ended December 31:
2002 2001 2000
- - - -
(in millions)
Current:
Federal $(218) $(127) $ 57
Foreign ...................... . .............. . 2 2 1
State ....................................... . 2 1 6
- -
(214) (124) 64
Deferred:
Federal (185) (94) 110
Foreign ..................................... . (2) (5) (1)
State ....................................... . (21) ~) 6
(208) (123) 115
- -
Total income tax expense (benefit) ................... . $(422) $(247) $179
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
Reconciliation of the statutory rate to the Company's income tax expense (benefit) for the years
ended December 31 are as follows:
Statutory rate applied to income (loss) before income taxes ..
Add ( deduct):
State income tax expense (benefit) net of federal benefit ..
Non-deductible meals and entertainment ...... ...... . .
Adju tment to valuation allowance and other income tax
accruals . ..... ......... ........ ............ .
Other ......... . ................... . . . . ... .. .
Total income tax expense (benefit) .......... .. ....... .
2002 2001
(in millions)
$(427) $(235)
(19) (24)
7 10
15 6
2 ~)
$(422) $(247)
2000
$152
7
11
5
4
- -
$179
The net deferred tax liabilities listed below include a current net deferred tax asset of $105 million
and $122 million and a long-term net deferred tax liability of $135 million and $965 million as of
December 31, 2002 and 2001, respectively.
Significant components of the Company's net deferred tax liability as of December 31 were as
follows:
2002 2001
(in millions)
Deferred tax liabilities:
Accounting basis of assets in excess of tax basis ............ . $1,784 $1,781
Expenses other than accelerated depreciation and amortization .. 250 256
Other ....... ......... .......................... . 10 9
Total deferred tax liabilities ......................... . 2,044 2,046
Deferred tax assets:
Expenses not yet deducted for tax purposes ............... . 365 371
Pension and postretirement benefits .. .. .. ...... .. .. . ... . 995 405
Gains from the sale-leaseback of aircraft ............... .. . 124 154
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 93
Travel award programs ............. . ... .. ... .. . ..... . 38 48
Leases capitalized for financial reporting purposes .. .. . ..... . 29 41
et operating loss carryforward ........ ..... . .......... . 274 11
Foreign tax, general business and other credit carryforward .... . 33 34
Alternative minimum tax credit carryforward .............. . 76 46
Total deferred tax assets ....... ... ....... .... ...... . 2,029 1,203
Valuation allowance for deferred tax asset ... ..... ........ . (15)
Net deferred tax assets ............................ . 2,014 1,203
et deferred tax liability ......... .. ... .. ..... ... .. .... . $ 30 $ 843
The Company has certain federal tax deferred assets available for use in the regular tax system or
the alternative minimum tax ('MT") system. The deferred assets available for utilization in the
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
regular system include: AMT credits of $76 million, net operating loss carryforwards of $688 million,
general business credits of $8 million and foreign tax credits of $18 million. The deferred assets
available for utilization in the AMT system are: net operating loss carryforwards of $288 million and
foreign tax credits of $18 million. AMT credits available for use in the regular system have an
unlimited carryforward period and all other deferred tax assets in both systems are available for
carryforward to years beyond 2002, expiring in 2003 through 2022.
The Company also has the following deferred tax a set available at December 31, 2002 for use in
certain states: net operating losses with tax benefit value of approximately $33 million and state job
credits of $7 million available for carryforward to years beyond 2002, expiring in 2006 through 2022.
Under the provisions of SFAS No. 109, A ccounting for Income Taxes, the realization of the future
tax benefits of a deferred tax asset is dependent on future taxable income against which such tax
benefits can be applied. All available evidence must be considered in the determination of whether
sufficient future taxable income will exist. Such evidence includes, but is not limited to, the company's
financial performance, the market environment in which the company operates, the utilization of past
tax credits, and the length of relevant carryback and carryover periods. Sufficient negative evidence,
such as cumulative net losses during a three-year period that includes the current year and the prior
two years, may require that a valuation allowance be establi hed with respect to existing and future
deferred tax assets. The tax benefit recorded in 2002 includes a provision of $15 million for tax credits
that are expected to expire unused. As a result of the Company's cumulative losses over the past two
fiscal years and the full utilization of its loss carryback potential, it i more likely than not that any
future deferred tax assets would require a valuation allowance be recorded to fully reserve against the
uncertainty that those assets would be realized.
On March 9, 2002, the Job Creation and Worker Assistance Act of 2002 ("the Act") was enacted.
The Act provides, in part, an extension of the period for the carryback of net operating losses
("NOLs") arising in 2001 and 2002 from two years to five years. The Act also allows that Alternative
Minimum Tax NOLs generated in either 2001 or 2002 can fully offset Alternative Minimum Taxable
Income in the carryback period. These changes allowed the Company to claim a federal income tax
refund of $24 million and $218 million related to the carryback of its 2001 and 2002 NOLs. As of
December 31, 2002, the Company had a $30 million net deferred tax liability that could be utilized
against tax benefits generated by future pre-tax losses of approximately $80 million at the Company's
current statutory tax rate. Consequently, pre-tax losses above $80 million are not expected to be
reduced by the recognition of tax benefits associated with such losses.
Note IO-Commitments
The Company's firm orders for 62 new aircraft to be operated by Northwest consist of scheduled
deliveries for 14 Airbus A330-300 aircraft from 2003 through 2008, ten Airbus A330-200 aircraft from
2004 through 2008, eight Airbus A320 aircraft from 2003 through 2006, 21 Airbus A319 aircraft from
2003 through 2006, and nine Boeing 757-300 aircraft in 2003. Included in these firm orders are two
Airbus A320 and four Airbus A319 aircraft scheduled for delivery in 2004 and 2005, which were
converted from options to firm orders in the first quarter of 2002. As of December 31, 2002, the
Company also had firm orders for 78 Bombardier CRJ200/440 aircraft, which will be leased or
subleased to and operated by Northwest Airlink regional carriers. The Company has the option to
finance the CRJ200/440 aircraft through long-term operating lease commitments from the
manufacturer, and if the manufacturer doe not provide the financing, the Company is not required to
take delivery of the aircraft.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note IO-Commitments (Continued)
Committed expenditures for these aircraft and related equipment, including estimated amounts for
contractual price escalations and predelivery deposits, will be approximately $1.79 billion in 2003,
$1.23 billion in 2004, $1.19 billion in 2005, $576 million in 2006, $246 million in 2007 and $232 million
in 2008. Consistent with prior practice, the Company intends to finance its aircraft deliveries through a
combination of internally generated funds, debt and long-term lease financings. Financing commitments
available for use by the Company are in place for all of the aircraft on order.
Note 11-Contingencies
The Company is involved in a variety of legal actions relating to antitrust, contract, trade practice,
environmental and other legal matters pertaining to the Company's business. While the Company is
unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the
disposition of these matters will not have a material adverse effect on the Company's Consolidated
Financial Statements taken as a whole.
Guarantees and Indemnifications: The Company is the lessee under many aircraft financing
agreements and real estate leases. It is common in such transactions for the Company as the lessee to
agree to indemnify the lessor and other related third parties for the manufacture, design, ownership,
financing, use, operation and maintenance of the aircraft, and for tort liabilities that arise out of or
relate to the Company's use or occupancy of the leased asset. In some cases, this indemnity extends to
related liabilities arising from the negligence of the indemnified parties, but usually excludes any
liabilities caused by their gross negligence or willful misconduct. Additionally, in the case of real estate
leases, the Company typically indemnifies such parties for any environmental liability that arises out of
or relates to the Company's use of the leased premises. The Company expects that it would be covered
by insurance (subject to deductibles) for most tort liabilities and related indemnities described above
with respect to leased real estate and operated aircraft.
The Company is the guarantor of approximately $398 million of obligations related to tax-exempt
facilities bonds issued by airports and/or airport commissions in Minneapolis/St. Paul, Detroit,
Memphis, New York (JFK) and Duluth. These obligations are included in the future minimum lease
payments listed in Note 4 to the Consolidated Financial Statements and payable solely from the
Company's space rentals paid under long-term lease agreements with the respective governing bodies.
The lease terms end between 2011 and 2029.
The Company guarantees $89 million of residual value on fou operating leased aircraft. The
Company also guarantees the lease payments on eight aircraft leased by a non-consolidated affiliate. As
of December 31, 2002, the total amount of future lease payments on these eight aircraft was
$34 million.
Note 12-Pension and Other Postretirement Health Care Benefits
The Company has several noncontributory pension plans covering substantially all of its employees.
The benefits for these plans are based primarily on years of service and, in some cases, employee
compensation. It is the Company's policy to annually fund at least the minimum contribution as
required by the Employee Retirement Income Security Act of 1974. The Company did not make any
excess contributions in 2002 or 2001. In 2000, the Company made contributions of $36 million in excess
of its minimum requirement.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
The Company sponsors various contributory and noncontributory medical, dental and life
insurance benefit plans covering certain eligible retirees and their dependents. The expected future cost
of providing such postretirement benefits is accrued over the ervice life of active employees. Retired
employees are not offered Company-paid medical and dental benefits after age 64, with the exception
of certain employees who retired prior to 1987 and receive lifetime Company-paid medical and dental
benefits. Prior to age 65, the retiree share of the cost of medical and dental coverage is ba ed on a
combination of years of service and age at retirement. Medical and dental benefit plans are unfunded
and costs are paid as incurred. The pilot group i provided Company-paid life in urance coverage in
amounts which decrease based on age at retirement and age at time of death.
On May 11, 2001, the Company amended the pen ion plan of contract employee repre ented by
the Aircraft Mechanics Fraternal Association ( 'AMFA''). The plan amendment resulted in a benefit
level increase of 113% for mechanics and 84% for cleaner and custodian . The amended benefit
increases are retroactive to participant who terminated after October 2, 1996 and to certain
participants that retired after April 30, 1992, ubject to specific criteria. The plan liability wa
remea ured as of June 30, 2001 at a di count rate of 7.9% and re ulted in increa es to pen ion expen e
on a prorated basis for 2001 of $30 million and on an annual ba i of $59 million.
The following is a reconciliation of the beginning and ending balance of the benefit obligation and
the fair value of plan assets:
Pension Benefits Other Benefit
2002 2001 2002 2001
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year ................... . $ 6,674 $ 5,491 $ 647 531
Service cost .. ...... ................ . ............. . 218 188 26 19
Interest cost ...................................... . 503 451 51 40
Plan amendments ..... ... ............ ... ........... . 356 (128) 16
Actuarial loss and other ............................. . 596 497 95 73
Benefits paid ..................................... . (353) (309) (39) ~)
- - -
Benefit obligations at end of year ...................... . 7,638 6,674 652 647
- - -
Change in plan assets:
Fair value of plan assets at beginning of year .. ............ . 4,399 5,005 5 5
Actual return on plan assets ...... ..... ..... ...... .... . (548) (370)
Employer contributions .............................. . 192 73 39 32
Benefits paid ............ . . .. .................... . . (353) ~ ) (39) ~)
Fair value of plan assets at end of year .................. . 3,690 4,399 5 5
- - - - -
Funded Status-underfunded ......................... . (3,948) (2,275) (647) (642)
Unrecognized net actuarial loss .... .................... . 2,734 1,082 313 234
Unrecognized prior service cost ........................ . 804 905 (81) 48
- -
Net amount recognized .............................. . $ (410) $ (288) $(415) (360)
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
Amounts recognized in the Consolidated Balance Sheets as of December 31 were as follows:
Pension Benefits Other Benefits
2002 2001 2002 2001
(in millions)
Prepaid benefit costs ................................. . $ 13 $ 6 $ - $ -
Intangible asset ..................................... . 857 943
Accrued benefit liability ............................... . (3,380) (1,719) (415) (360)
Accumulated other comprehensive los .. ... ............. .. . 2,100 482
Net amount recognized ............................... . $ (410) $ (288) $(415) $(360)
The Company s pension plans with accumulated benefit obligations in excess of plan assets as of
December 31 were as follows:
Projected benefit obligation ............................ .
Accumulated benefit obligation .. ................. .. ..... .
Fair value of plan assets ............................... .
2002 2001
(in millions)
$7,624 $6,661
7,031 6,086
3,675 4,384
Weighted-a erage as umptions for pension and other benefits as of December 31 were as follows:
Discount rate .................................. .
Rate of future compensation increase ................. .
Expected long-term return on plan assets .............. .
2002 2001 2000
6.75% 7.50% 7.85%
3.60% 3.90% 3.90%
10.50% 10.50% 10.50%
At December 31, 2002, the Company changed its assumed expected long-term rate of return on
plan assets from 10.5% to 9.5%. This change will increase 2003 pension expenses, but does not impact
any di closures made as of December 31, 2002.
For measurement purposes, a 7.5% annual rate of increase in the per capita cost of covered health
care benefits was a urned for 2003. The rate was assumed to decrease 0.5% per year for five years to
5% in 2008 and remain at that level thereafter.
The components of net periodic cost of defined benefit plans included the following:
Pension Benefits Other Benefits
2002 2001 2000 2002 2001 2000
(in millions)
Service co t ......
............ ... ............. $ 218 $ 188 $ 149 $26 $19 $14
Intere t cost ......... ............ ... ........... 503 451 397 51 40 32
Expected return on plan assets ..................... (538) (514) (468) (1)
Amortization of prior service cost ................... 80 75 55 5 3 1
Recognized_ net actuasial loss and other events .......... 46 31 1 12 6 2
- - - - - - - - -
et periodic benefit cost .......................... $ 309 $ 231 $ 134 $94 $68 $48
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
Assumed health care cost trend rates have a significant impact on the amounts reported under
other benefits, above, for the health care plans. A one-percentage-point change in assumed health care
cost trend rates would have the following effect :
Effect on total of service and intere t cost
components ........ . ............. . .. .. . .
Effect on accumulated postretirement benefit
obligations .......... . .. . ............... .
Note 13-Related Party Transactions
One-Percentage- One-Percentage-
Point Increase Point Decrease
$11
75
(in millions)
$(9)
(65)
Continental Airlines, Inc.: On November 20, 1998, the Company issued 2.6 million hare of
Common Stock and paid $399 million in ca h to acquire the beneficial ownership of approximately
8.7 million shares of Class A Common Stock of Continental. Northwest and Continental al o entered
into a 13-year global strategic commercial alliance that connect the two carriers network and include
extensive code-sharing (the joint designation of flights under the Northwe t "NW" code and the
Continental "CO" code), frequent flyer program reciprocity and other cooperative activities. In
connection with the Company's investment in Continental and Northwe ts alliance with Continental,
the Company entered into agreements with Continental which contained certain restriction on the
Company's ability to vote shares of Continental common tock, to acquire additional hares of
Continental common tock and to affect the composition and conduct of Continental Board of
Directors for a 10-year period. Due to the restrictions in the e agreements, the Company accounted for
its investment under the equity method and recognized its interest in Continental's earnings on a
one-quarter lag. The difference between the cost of the Company's investment and the proportionate
share of the underlying equity of Continental of $319 million was being amortized over 40 year .
On January 22, 2001, pursuant to an agreement reached in November 2000, (i) the Company sold
to Continental approximately 6.7 million shares of the Continental Class A Common Stock held by the
Company for $450 million in cash; (ii) subsequently, Continental effected a recapitalization as a result
of which the Company's remaining 2.0 million shares of Continental Class A Common Stock were
converted into 2.6 million shares of Continental Class B Common Stock; (iii) the Company and
Continental extended the term of their alliance agreement through 2025; and (iv) Continental issued to
the Company a special series of preferred stock that gives the Company the right to block certain
business combinations and similar change of control transactions involving Continental and a third-
party major air carrier during the term of the alliance agreement. The preferred stock is ubject to
redemption by Continental in certain events, including a change of control of the Company. The
Company also entered into a revised standstill agreement that contains certain restrictions on the
Company's ability to vote and acquire additional hares of Continental common stock. In
December 2000, the Company recorded a $26 million loss in other non-operating income ( expen e) as
a result of the sale of the 6.7 million Cla s A shares to Continental. At December 31, 2000, the
remaining 2.6 million Class B shares were being accounted for as marketable securities and $15 million
was recorded in unrealized gains in accumulated other comprehensive income (loss). In February 2001
the Company sold the remaining 2.6 million Class B shares for $132 million, as a result of which a
pre-tax gain of $27 million was recorded ($11 million after tax or $.13 per common hare).
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Related Party Transactions (Continued)
Mesaba Holdings, Inc.: The Company owns 27.8% of the common stock of Mesaba Holdings, Inc.,
the holding company of Mesaba, a Northwest Airlink carrier. The Company also has warrants to
acquire Me aba Holdings, Inc. common stock, none of which were in-the-money as of December 31,
2002. The Company accounts for its investment in Mesaba using the equity method.
Northwest and Mesaba signed a 10-year Airline Services Agreement ('.SA") effective July 1, 1997,
under which Northwest determines Mesaba's commuter aircraft scheduling and fleet composition. The
ASA is tructured as a capacity purchase agreement under which Northwest pays Mesaba to operate
th flights on Northwests behalf and Northwest is entitled to all revenues associated with those flights.
Und r thi agreement, Northwest paid Mesaba $454 million, $398 million and $442 million for the
year ended December 31, 2002, 2001 and 2000, respectively. These payments are recorded on a net
basis as a reduction to passenger revenues. The Company had a payable to Mesaba of $28 million and
$4 million as of December 31, 2002 and 2001, respectively. As of December 31, 2002, the Company
ha leased 49 Saab 340 aircraft, which are in turn subleased to Mesaba. In addition, as of
December 31, 2002 the Company has leased 11 owned and subleased 25 leased AVRO regional jet
aircraft to Mesaba under a Regional Jet Services Agreement consummated in October 1996.
Worldspan: The Company owns a 33.7% interest in WORLDSPAN, LP., an affiliate that provides
computer reservations services, which it accounts for using the equity method.
NWA Funding, LLC ("NWF"): In December 1999, a Receivables Purchase Agreement was
executed by Northwest, NWF, a wholly-owned, non-consolidated subsidiary of the Company, and a
certain third-party purchaser (the "Purchaser") pursuant to a securitization transaction. The amount of
los recognized related to receivables securitized at December 31, 2001, was not material. NWF
maintained a variable undivided interest in these receivables and was subject to losses on its share of
the receivables and, accordingly, maintained an allowance for doubtful accounts. The agreement was a
five-year $85 million revolving receivables purchase facility, renewable annually for five years at the
option of the Purchaser, allowing Northwest to sell additional receivables to NWF and NWF to sell
ariable undivided interests in these receivables to the Purchaser. The fair value of securitized
receivables was estimated from the anticipated future cash flows. The Company recorded the discount
on the ale of receivables and its interest in NWF's earnings in other non-operating income (expense).
The agreement provided for early termination upon the occurrence of certain events, including high
pa senger refunds as a percentage of sales and a downgrade in the Company's unsecured credit rating,
b th of which occurred following the events of September 11, 2001. As a result, on January 3, 2002, the
facility was paid in full and terminated.
NWA Funding II, LLC ("NWA Funding'~: During June 2002, a Receivables Purchase Agreement
wa executed by Northwest, NWA Funding, a wholly-owned, non-consolidated subsidiary of the
Company, and third party purchasers (the "Purchasers"). The agreement is a 364-day, up to
100 million revolving receivables purchase facility, renewable annually for five years at the option of
the Purchasers, that allows NWA Funding to sell variable undivided interests in account receivables
a quired from Northwest to the Purchasers. NWA Funding pays a yield to the Purchasers equal to the
rate on Al/Fl commercial paper plus a program fee.
During the second quarter of 2002 NWA Funding sold an initial undivided interest in such
recei able to the Purchasers for $65 million, subject to specified collateral requirements. The amount
of lo recognized related to receivables securitized at December 31, 2002 was not material. NWA
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Related Party Transactions (Continued)
Funding retains a variable undivided intere t in these receivables and is subject to losses on its share of
the receivable and, accordingly, maintains an allowance for doubtful accounts.
The agreement provides for early termination upon the occurrence of certain events including,
among others, a strike event causing a significant schedule reduction for even con ecutive day failure
to maintain a minimum liquidity requirement of $1.10 billion as of the last day of any fiscal quarter, or
the Company's failure to meet minimum credit ratings ( defined a any two of the following three
events: (i) S&P's "Long Term Local Issuer Credit ' rating below a B credit rating, (ii) Moody's "Senior
Implied" rating below a B2 credit rating, or (iii) Fitch' "Senior Un ecured Debt' rating below a B
credit rating).
The Company is the sole owner of NWA Funding, which i accounted for under the equity method
and not consolidated. NWA Funding purchase accounts receivable on a non-recour e basi from the
Company and sells an undivided interest in substantially all of tho e receivables to the Purchasers
pursuant to a securitization transaction. Under the terms of this arrangement, the Company surrenders
control over the receivables sold to NWA Funding having met all of the condition of SPAS o. 140
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SPAS
No. 140 requires a qualifying pecial purpose entity ("SPE' ) to be demonstrably di tinct from the
transferor and also requires its permitted activities to be significantly limited, specific, and not ea ily
changed as establi hed in it legal documents; in addition, the entity may hold only financial a et
transferred to it that are passive in nature. SPAS No. 140 directs that NWA Funding not be
consolidated into the Company's financial statement since it meet these qualifying special purpose
entity requirements.
Orbitz: The Company owns a 15.6% interest in Orbitz LLC, an affiliate that provide a travel
Web site for consumers providing airfares, rental cars, hotel rooms and other travel related ervice .
Orbitz is a corporate joint venture owned by five airlines as a separate and specific business for the
mutual benefit of those airlines. Additionally, the Company participates in the management of Orbitz
through its membership on the board of directors, holding two out of eleven total board seat . The
Company accounts for its investment in Orbitz under the equity method in accordance with Accounting
Principles Board Opinion 18, which directs that investments in common stock of corporate joint
ventures be accounted for under the equity method of accounting. During 2002, the Company
recognized $3 million of losses, which represents its share of Orbitz lo ses.
Note 14-Risk Management and Financial Instruments
The Company adopted SPAS No. 133, Accounting for Derivative Instruments and Hedging Activities
which requires the Company to recognize all derivatives on the balance sheet at fair value. The
Company uses derivatives as cash flow hedges to manage the price risk of fuel and its exposure to
foreign currency fluctuations. SPAS No. 133 requires that for cash flow hedges, which hedge the
exposure to variable cash flows of a forecasted transaction, the effective portion of the derivative's gain
or loss be initially reported as a component of other comprehensive income (loss) in the equity section
of the balance sheet and subsequently reclassified into earnings when the forecasted tran action affect
earnings. The ineffective portion of the derivative's gain or loss is reported in earnings immediately.
Risk Management: The Company principally uses derivative financial instrument to manage
specific risks and does not hold or issue them for trading purposes. The notional amounts of financial
instrument summarized below did not represent amounts exchanged between parties and, therefore,
are not a measure of the Company's exposure re ulting from its u e of derivatives.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14-Risk Management and Financial Instruments (Continued)
Foreign Currency: The Company is exposed to the effect of foreign exchange rate fluctuations on
the U.S. dollar value of foreign currency-denominated operating revenues and expense . The
Company large t expo ure come from the Japane e yen. In 2002, the Company's yen-denominated
net ca h inflow wa approximately 23 billion yen ($225 million).
The Company u es forward contracts, collar or put options to hedge a portion of its anticipated
yen-denominated ale . The changes in market value of such instruments have hi torically been highly
effective at offsetting exchange rate fluctuations in yen-denominated ales. At December 31 2002, the
Company recorded $4 million of unrealized gains in accumulated other comprehensive income (loss) as
a re ult of forward contracts to sell 21.25 billion yen ($187 million) at an average forward rate of 114
yen per dollar with various settlement date through December 2003. These forward contracts hedge
approximately 22% of the Company' anticipated 2003 yen-denominated sales. Hedging gains or losses
are recorded in revenue when transportation is provided. The Japanese yen financial instruments
utilized to hedge net yen-denominated cash flows resulted in gain of $31 million, $85 million and
23 million in 2002, 2001 and 2000, respectively.
Counterparties to these financial instruments expose the Company to credit loss in the event of
nonperformance, but the Company does not expect any of the counterparties to fail to meet their
obligation . The amount of such credit exposure is generally the unrealized gains, if any, in such
contract . To manage credit risks, the Company selects counterparties based on credit rating , limits
expo ure to a single counterparty and monitors the market position with each counterparty. It is the
Company policy to participate in foreign currency hedging transactions with a maximum span of
25 months.
Aircraft Fuel: The Company is exposed to the effect of 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
hip fuel and maintains fuel storage facilities to support its flight operations. To further manage the
price risk of fuel costs, the Company primarily utilizes futures contracts traded on regulated futures
exchanges, swap agreements and options. The changes in market value of such contracts have
hi torically been highly effective at offsetting fuel price fluctuations. It is the Company's policy to
participate in hedging transactions with a maximum span of 18 months.
A of December 31, 2002, the Company had $22 million of unrealized gains (net of $5 million of
hedging ineffectiveness recorded in fuel expense for the year ended December 31, 2002) in
accumulated other comprehensive income (loss) as a result of the fuel hedge contracts. Such gains, if
realized, will be recorded in fuel expense when the related fuel inventory is utilized. As of
December 31, 2002, the Company had hedged approximately 71 % and 60% of its first quarter 2003 and
full year 2003 fuel requirements respectively, in the form of futures contracts traded on regulated
futures exchanges, wap , and options to secure ongoing operating supplies.
Interest Rates: The Company used financial in truments to hedge its exposure to interest rate
market fluctuations prior to pricing pass-through certificates issued in 2000 and 2001. Additionally, the
Company used financial instruments to hedge its exposure to interest rate fluctuations on the interest
rate re ets on A320 aircraft financing during the fourth quarter of 2001. As of December 31 2002, the
Company had 4 million of unrealized losses in accumulated other comprehensive income (lo s) which
i amortized over the term of the related obligations.
priceline.com: During 1999, the Company entered into agreements with priceline.com, Inc. to
provide ticket inventory for ale through priceline.com's Internet site. A part of the agreements the
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14-Risk Management and Financial Instruments (Continued)
Company received warrants for 2,062,500 shares with various vesting requirements. During 1999, the
Company exercised 312,500 warrants to purchase 296,354 shares, which were recorded as available for
sale investments at December 31, 1999. During 2000, the Company sold its shares outstanding from
1999, additional shares converted from warrants exercised during 2000 and a portion of its remaining
warrants for a combined gain of $58 million ($36 million after tax or $0.40 per diluted share). During
2001, the remaining 625,000 warrants were sold for a nominal gain.
Fair Values of Financial Instruments: Cash equivalents are carried at cost and consisted primarily
of unrestricted money market funds as of December 31, 2002. These instruments approximate fair value
due to their short maturity.
The Company classifies investments with a remaining maturity of more than three months on their
acquisition date that are expected to be sold or called by the issuer within the next year, and those
temporarily restricted, as short-term investments. The carrying values of such investments approximate
fair value due to their short maturity. Restricted short-term investments consist primarily of money
market funds. During 2002 and 2001, there were no purchases or sales of short-term investments
classified as available-for-sale securities.
The financial statement carrying values and estimated fair values of the Company's financial
instruments, including current maturities, as of December 31 were:
2002 2001
Long-Term Debt ...................... .
Mandatorily Redeemable Preferred Security of
Subsidiary ........................ . .
Series C Preferred Stock ............... . .
Carrying
Value
$6,531
553
226
Fair
Value
Carrying Fair
Value Value
(in millions)
$5,496 $5,051
579 492
217 227
$4,692
513
202
The fair values of the Company's long-term debt were estimated using quoted market prices,
where available. For long-term debt not actively traded and the Preferred Security, fair values were
estimated using discounted cash flow analyses, based on the Company's current incremental borrowing
rates for similar types of securities. The fair value of the Series C Preferred Stock shares was estimated
using current market value of the Common Stock and the Black-Scholes option pricing model.
Note 15-Segment Information
The Company is managed as one cohesive business unit, of which revenues are derived primarily
from the commercial transportation of passengers and cargo. Operating revenues from flight segments
serving a foreign destination are classified into the Pacific or Atlantic regions, as appropriate. The
following table shows the operating revenues for each region for the years ended December 31:
Domes~ic ....... .............. ...... .. ..... .
Pacific, principally Japan . .... .. .... ............ .
Atlantic .... ............ ................... .
Total operating revenues ..................... .
2002 2001 2000
$6,410
2,043
1,036
$9,489
(in millions)
$6,726 $ 7,459
2,144 2,650
1,035 1,131
$9,905 $11,240
The Company's tangible assets consist primarily of flight equipment, which are utilized across
geographic markets and therefore have not been allocated.
71
NO1 E TO CON OLIDATED FINANCIAL STATEMENTS (Continued)
Note 16-Quartcrl Financial Data (Unaudited)
nauditccl quarter! r , ult f operation for th y ar ended December 31 are ummarized below:
2002:
~ 'rating r nu ...................... .. .
pcrating income (lo ) ..................... .
t le. :s . ................................ .
Ba ic loss per common share . ........... ....... .
Diluted lo per common hare ................. .
2001:
perHing re nue ........................ .
p 'rating lo .... .......................... .
t i ncomc (los, ) .......................... .
Basic eamin (lo ) per common hare ...... ..... .
Diluted earnings (los ) per common share . .. ....... .
1 t Quarter 2nd Quarter 3rd Quarter 4th Quarter
(in million , except per hare amounts)
$2,180
(196)
$ (171)
$ (2.01)
$ (2.01)
$2,611
(236)
$ (171)
$ (2.05)
$ (2.05)
$2,406
(46)
$ (93)
$ (1.08)
$ (1.08)
$2 715
(36)
$ (55)
$ (0.65)
$ (0.65)
$2,564
8
$ (46)
$ (0.55)
$ (0.55)
$2,594
(155)
$ 19
$ 0.22
$ 0.20
$2,339
(612)
$ ( 488)
$ (5.68)
$ (5.68)
$1,985
(441)
$ (216)
$ (2.55)
$ (2.55)
um of the quart rly arning per bar amount may not equal the annual amount reported
in e p r , har amount ar mputcd indep nd ntly for ach quart r and for the full year based on
r pccti iohtcd-a eragc common hare out tanding and other dilutive potential common hare .
Note 17- ub equent Event (Unaudited)
Pinnacle Airline : Pinna le irlin orp. wa incorporat d in Delaware on January 10, 2002 for
th , ol purpo f b co111i1 g a holding company of Pinnacle Airlin . In November 2002, the
0111p1n submitted an application to th Department of Labor to permit the Company to contribute
ommon , tock f Pinnacl Airlin , orp. to the ompany p n ion plan in lieu of making certain
r quir d c ntributi n in a h. In January 2003, th Department of Labor is ued a propo ed prohibited
tnn action c, cmpti n that would allow th mpany t contribute common stock of Pinnacle Airlines
rp. to ati fy a portion of th contribution requirement to orthw st s p n ion plan in 2003 and
_Q0-l-. h propo d prohibited tran action ex mption contemplate that the pen ion plan will have the
riaht at an tim to requir the mpan to repurcha the bar for ca h equal to the greater of the
original pur ha, c pri e or th then market value f uch hare . In anticipation of receiving thi
x mption, on Januar 14, 2003, the mpany tran ferred all of the out tandiog tock of Pinnacle
irlincs to Pinnacle irline orp. in x bange for all of the out tanding common tock of Pinnacle
irlin , orp. and one , hare f eri preferr d tock of Pinnacle Airline Corp. Pinnacle Airlines
)rp. th 'n is u d a di id nd to orthwe t con i ting of a 200 million ev n y ar note from Pinnacle
irlin 'S that bear_ inter ' tat .4 . 1 h ote i ubject to accelerated payment term if Pinnacle
irlin ' orp.' ca h balanc c 'Ceed rtain lcv 1 . The ompany th n contribut d 1.9 million hare
c. r 1 __ 9o1. , of th Pinnacl Airline mmon tock to i pen ion plan to ati fy certain ch duled
fundino r quir m nL.
a
' r \ 11c 1 irlin
mpan nt red int a new ASA with Pinnacl Airlin . The n w
abr cm nt, imilar t th agr ement previou ly held with Pinnacle Airlin
opcrat , flight n behalf f the ompany and i comp n ated at
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17-Subsequent Events (Unaudited) (Continued)
specified rates for each completed block hour and cycle, as well as for specified fixed costs based on
the size of its fleet. The Company also reimburses Pinnacle Airlines for specified expenses, such as fuel
and aviation insurance. The Company continues to control the scheduling, pricing, reservations,
ticketing, and seat inventories and is entitled to all revenues associated with the operation of Pinnacle
Airlines' aircraft under the new ASA.
Excluding the actual results of operations of Pinnacle Airlines, the Company's net income (loss)
would have been $(829) million, $( 437) million and $247 million for 2002, 2001, and 2000, respectively.
Worldspan. On March 3, 2003, an agreement was signed by Travel Transaction Processing
Corporation, an entity formed by Citigroup Venture Capital Equity Partners L.P. and Teachers'
Merchant Bank, to purchase Worldspan from Northwest, Delta Air Lines, Inc. and AMR Corporation,
the three airline owners. This transaction, which is scheduled to be completed in mid-2003, is subject to
financing, government approvals and various other closing conditions.
Note 18-Condensed Consolidating Financial Statements
The following tables present condensed consolidating financial information for: (i) Northwest, the
principal indirect subsidiary of NWA Corp., the holding company, (ii) on a combined basis, NWA Corp.
and all other subsidiaries of NWA Corp., and (iii) NWA Corp. on a consolidated basis. The principal
consolidating adjusting entries eliminate investments in subsidiaries and inter-company balances and
transactions.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18-Condensed Consolidating Financial Statements (Continued)
Condensed Consolidating Statements of Operations for the years ended December 31:
Other Consolidating NWA Corp.
Northwest Subsidiaries Adjustments Consolidated
2002:
Operating revenues ........................ .
Operating expenses ........................ .
Operating income (loss) ..................... .
Other income ( expen e) ..................... .
Loss before income taxes .................... .
Income tax expense (benefit) ................. .
et loss ................................ .
2001:
Operating revenues ...... . ........... ...... .
Operating expenses ........... . ............ .
Operating income (loss) .. ........ ........... .
Other income (expense) ..................... .
Loss before income taxes .................... .
Income tax expense (benefit) ................. .
Net loss ................................ .
2000:
Operating revenues ........................ .
Opera ting expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Opera ting income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . .................. .
$ 8,988
9,836
(848)
(418)
(1,266)
(458)
$ (808)
$ 9,445
10,346
(901)
150
(751)
(267)
$ ( 484)
$10,844
10,290
554
(215)
Income before income taxes . . . . . . . . . . . . . . . . . . . 339
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . 138
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201
74
(in millions)
$ 718
702
16
(2,333)
(2,317)
36
$(2,353)
$ 639
592
47
(1,284)
(1,237)
20
$(1,257)
$ 615
586
29
821
850
41
$ 809
$ (217)
(203)
(14)
2,377
2,363
$2,363
$ (179)
(165)
(14)
1,332
1,318
$1,318
$ (219)
(205)
(14)
(740)
(754)
$ 9,489
10,335
(846)
(374)
(1,220)
(422)
$ (798)
$ 9,905
10,773
(868)
198
(670)
(247)
$ (423)
$11,240
10,671
569
(134)
435
179
$ 256
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note IS-Condensed Consolidating Financial Statements (Continued)
Condensed Consolidating Statements of Cash Flows for the years ended December 31:
2002:
Net cash flows from operating activitie .... . .... . $ ( 442)
Net cash flows from investing activitie .. ... . . . . . . (1,546)
Net cash flows from financing activitie ..... .. . . . . 1,551
Increase (decrease) in cash and ca h equivalent .. . . (437)
Cash and cash equivalent at beginning of period .. . 2,471
Cash and cash equivalent at end of period ... .... . 2,034
2001:
Net ca h flows from operating activitie .... .... . . $ 477
Net cash flows from investing activities ...... .... . (1,291)
Net cash flows from financing activitie .. ...... .. . 2,627
Increase (decrease) in ca h and ca h equivalent ... . 1, 13
Cash and cash equivalents at beginning of period .. . 659
Cash and cash equivalent at end of period ... . . .. . 2,472
2000:
Net cash flows from operating activitie .... .. . .. . 7 3
Net cash flows from investing activitie .......... . (540)
Net cash flows from financing activities . . . .... . .. . ~ )
Increase (decrease) in cash and cash equivalents .. . . (76)
Cash and cash equivalents at beginning of period . . . 735
Cash and cash equivalents at end of period .. .... . . $ 659
- - -
75
Other
ub idiarie
$ 158
2
(138)
22
41
- -
63
$ 169
569
(732)
6
34
- -
40
110
(32)
~)
20
14
34
$-
( )
$-
( )
(7)
7
NW Corp.
Con olidated
(2 4)
(1 552)
1,421
(415)
2,512
2,097
$ 646
(730)
1 903
1 19
693
$ 2,512
$ 93
(579)
__Q22)
(56)
749
- - -
693
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 18-Condensed Consolidating Financial Statements (Continued)
Condensed Consolidating Balance Sheets as of December 31, 2002:
Other Consolidating NWA Corp.
Assets
Current Assets
Cash, cash equivalents and restricted short-term
inve tments .......................... .
Accounts receivable, net ................... .
Other current assets ...................... .
Total current assets . ...... .............. .
Property and Equipment .................... .
Flight Equipment Under Capital Leases ......... .
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets .......................... .
Liabilities and Stockholders' Equity
Current Liabilities
Air traffic liability ....................... .
Accounts payable and other liabilities ......... .
Current maturities of long-term debt and capital
lease obligations .................. . .... .
Total current liabilities .................. .
Long-Term Debt and Capital Lease Obligations ... .
Pension and Postretirement Benefits ........... .
Deferred Income Taxes ..................... .
Other Liabilities .......................... .
Mandatorily Redeemable Preferred Security ...... .
Preferred Redeemable Stock ..... .. .......... .
Common Stockholders' Equity ................ .
Total Liabilities and Stockholders' Equity .. . . .
76
Northwest Subsidiaries Adjustments Consolidated
$ 2,104
428
515
3,047
6,751
289
2,288
$12,375
$ 1,154
2,686
318
4,158
6,401
3,050
657
553
(2,444)
$12,375
(in millions)
$ 93
235
203
531
280
(4,257)
$(3,446)
$ 80
74
28
182
235
135
62
226
(4,286)
$(3,446)
$
~ )
(68)
4,428
$4,360
$ (18)
(50)
(68)
(40)
4,468
$4,360
$ 2,197
663
650
3,510
7,031
289
2,459
$13,289
$ 1,216
2,710
346
4,272
6,636
3,050
135
679
553
226
(2,262)
$13,289
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note IS-Condensed Consolidating Financial Statements (Continued)
Condensed Consolidating Balance Sheets as of December 31, 2001:
Other Consolidating NWA Corp.
Assets
Current Assets
Cash, cash equivalents and restricted short-term
investments .......................... .
Accounts receivable, net ................... .
Other current assets ...................... .
Total current assets ..................... .
Property and Equipment .................... .
Flight Equipment Under Capital Leases ......... .
Other Assets ............................. .
Total Assets .......................... .
Liabilities and Stockholders' Equity
Current Liabilities
Air traffic liability ....................... .
Accounts payable and other liabilities ......... .
Current maturities of long-term debt and capital
lease obligations ........ . .............. .
Total current liabilities .................. .
Long-Term Debt and Capital Lease Obligations ... .
Pension and Postretirement Benefits ........... .
Deferred Income Taxes ..................... .
Other Liabilities .......................... .
Mandatorily Redeemable Preferred Security ...... .
Preferred Redeemable Stock ................. .
Common Stockholders' Equity ................ .
Total Liabilities and Stockholders' Equity .... .
77
Northwest Subsidiaries Adjustments Consolidated
$ 2,538 $ 74
386 146
519 180
3,443 400
5,724 342
543
2,370 2,169
$12,080 $2,911
$ 1,212 $ 69
2,420 62
388 28
4,020 159
4,963 258
1,749
965
566 84
492
227
290 1,218
$12,080 $2,911
(in millions)
$
(33)
(33)
(1,983)
$(2,016)
$ (6)
(27)
(33)
(44)
(1,939)
$(2,016)
$ 2,612
532
666
3,810
6,066
543
2,556
$12,975
$ 1,275
2,455
416
4,146
5,221
1,749
965
606
492
227
(431)
$12,975
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
one.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by thi Item is incorporated by reference and will be set forth under the
heading "Election of Director -Information Concerning Director-Nominees" to be included in the
Company' Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the
Commi ion pur uant to Regulation 14A within 120 days after the end of the last fiscal year. The
information regarding executive officer is included in Part I of this report under the caption
"Executive Officers of the Registrant".
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference and will be set forth under the
headings "Board of Directors-Compensation of Directors", "Board of Directors-Campen ation
Committee Interlock and In ider Participation" and "Executive Compensation" to be included in the
Company' Proxy Statement for the 2003 Annual Meeting of Stockholders to be filed with the
Commission pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference and will be set forth under the
heading ' Beneficial Owner hip of Securities" to be included in the Company's Proxy Statement for the
2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item i incorporated by reference and will be set forth under the
heading "Board of Directors-Compensation Committee Interlocks and In ider Participation" and
"Board of Directors-Related Party Transactions" to be included in the Company's Proxy Statement for
the 2003 Annual Meeting of Stockholders to be filed with the Commission pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
Item 14. CONTROLS AND PROCEDURES
On March 10, 2003, an evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer and Executive Vice President and
Chief Financial Officer, of the effectiveness of the design and operation of the Company's di closure
controls and procedures. Ba ed on that evaluation, the Company's management, including the Chief
Executive Officer and Executive Vice President and Chief Financial Officer, concluded that the
Company disclo ure controls and procedures were effective in ensuring that material information
relating to the Company with respect to the period covered by this report was made known to them.
There have been no ignificant change in the Company's internal control or in other factor that
could ignificantly affect internal controls sub equent to March 10, 2003.
78
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following is an index of the financial statement , chedule and exhibits included in thi
Report.
(a) 1. Financial Statements:
Page
Consolidated Balance Sheets-December 31, 2002 and December 31 2001 . . . . . . . . . . . . . 40
Consolidated Statements of Operations- For the year ended December 31, 2002, 2001 and
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Consolidated Statements of Cash Flows-For the year ended D cember 31, 2002, 2001
and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Consolidated Statements of Common Stockholder ' Equity (Deficit)-For the year ended
December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Notes to Consolidated Financial Statements 45
2. Financial Statement Schedule:
Schedule II-Valuation of Qualifying Account and Re erve -For the year ended
December 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Schedules not included have been omitted because they are not applicable or becau e the required
information is included in the consolidated financial tatements or note thereto.
3. Exhibits
The following is an index of the exhibits included in this Report or incorporated herein by
reference.
3.1 Restated Certificate of Incorporation of Northwest Airlines Corporation (filed a Exhibit 4.1
to the Registration Statement on Form S-3, File No. 333-69655 and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of Northwest Airlines Corporation (filed as Exhibit 4.1 to
NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31 1999 and
incorporated herein by reference).
3.3 Restated Certificate of Incorporation of Northwest Airlines, Inc. (filed a Exhibit 3.3 to
Northwest's Registration Statement on Form S-3, File No. 33-74772 and incorporated herein
by reference).
3.4 Bylaws of Northwest Airlines, Inc. (filed as Exhibit 4.2 to NWA Corp.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference).
4.1 Certificate of Designation of Series C Preferred Stock of Northwest Airlines Corporation
(included in Exhibit 3.1).
4.2 Certificate of Designation of Series D Junior Participating Preferred Stock of WA Corp.
(included in Exhibit 3.1).
4.3 Rights Agreement dated as of November 20 1998 between orthwe t Airlines Corporation
and Norwest Bank Minne ota, N.A., a Rights Agent (filed as Exhibit 1 to NWA Corp.'
Form 8-A filed November 20, 1998 and incorporated herein by reference).
79
4.4 The regi trant hereby agrees to furni h to the Commis ion upon request, copies of certain
instruments defining the right of holders of long-term debt of the kind described in
Item 601 (b) (4) of Regulation S-K.
10.1 Standstill Agreement, among Continental Airlines, Inc., Northwest Airlines Corporation,
Northwe t Airlines Holdings Corporation and Northwest Airlines, Inc., dated as of
ovember 15, 2000 (filed as Exhibit 99.8 to Continental Airlines, Inc.'s Current Report on
Form 8-K dated November 15, 2000 and incorporated herein by reference).
10.2 Standstill Agreement between Northwest Airlines Corporation and David Bonderman,
Bonderman Family Limited Partnership, Lectair Partners, Eli Broad, Donald Strum, 1992 Air
GP and 1992 Air, Inc. ( collectively the "Holders"), dated as of November 20, 1998 (filed as
Exhibit 10.8 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31,
1998 and incorporated herein by reference).
10.3 Registration Rights Agreement among Northwest Airlines Corporation, the Holders and 1992
Air Inc., as the representative of the Holders, dated November 20, 1998 (filed as Exhibit 10.9
to NWA Corp. s Annual Report on Form 10-K for the year ended December 31, 1998 and
incorporated herein by reference).
10.4 Amended and Restated Standstill Agreement between Koninklijke Luchtvaart Maatschappij
N.V and Northwest Airlines Corporation dated May 1, 1998 (filed as Exhibit 10.2 of NWA
Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 and incorporated
herein by reference).
10.5 First Amended and Restated Common Stock Registration Rights Agreement among NWA
Corp., the holders of the Series C Preferred Stock and the Original Investors named therein
(filed as Exhibit 10.9 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by reference).
10.6 Acknowledgement of Northwest Airlines Corporation regarding assumption of obligations as
uccessor under the First Amended and Restated Common Stock Registration Rights
Agreement, dated November 20, 1998 (filed as Exhibit 10.28 to NWA Corp.'s Annual Report
on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference).
10.7 Airport Uses and Lease Agreement between The Charter County of Wayne, Michigan and
Northwest dated as of June 21, 2002.
10.8 Airline Operating Agreement and Terminal Building Lease Minneapolis-St. Paul International
Airport dated as of January 1, 1999 between the Metropolitan Airports Commission and
Northwest (filed as Exhibit 10.24 to NWA Corp.'s Annual Report on Form 10-K for the year
ended December 31, 1999 and incorporated herein by reference).
10.9 Master Financing Agreement dated as of March 29, 1992 among Northwest Airlines
Corporation, Northwest and the State of Minnesota (filed as Exhibit 10.9 to the registration
statement on Form S-1, File No. 33-74210, and incorporated herein by reference).
10.10 Credit and Guarantee Agreement among Northwest Airlines Corporation, Northwest Airlines
Holdings Corporation, NWA Inc., Northwest Airlines, Inc. and various lending institutions
named therein dated as of October 24, 2000 (filed as Exhibit 10.21 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by
reference).
10.11 Second Amendment dated as of October 23, 2001 to Credit and Guarantee Agreement among
Northwest Airlines Corporation, Northwest Airlines Holdings Corporation, NWA Inc.,
Northwest Airlines Inc. and various lending institutions named therein dated as of
October 24, 2000 (filed as Exhibit 10.13 to NWA Corp.'s Annual Report on Form 10-K for the
year ended December 31, 2001 and incorporated herein by reference).
80
10.12 A319-100 Purchase Agreement dated as of September 19, 1997 between AVSA, S.A.R.L. and
Northwest Airlines, Inc. (filed as Exhibit 10.1 to NWA Corp.'s Form 10-Q for the quarter
ended September 30, 1997 and incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.13 A330 Purchase Agreement between AVSA, S.A.R.L. and Northwest Airlines, Inc. dated as of
December 21, 2000 (filed as Exhibit 10.1 to NWA Corp.'s Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.14 Amendment No. 1 to A330 Purchase Agreement between AVSA, S.A.R.L. and Northwest
Airlines, Inc. dated as of November 26, 2001 (NWA Corp. has filed a request with the SEC
for confidential treatment as to certain portions of this document).
10.15 Amendment No. 2 to A330 Purchase Agreement dated as of December 20, 2002 between
AVSA, S.A.R.L. and Northwest Airlines, Inc. (NWA Corp. has filed a request with the SEC
for confidential treatment as to certain portions of this document).
10.16 Bombardier CRJ440 Purchase Agreement between Bombardier Inc. and Northwest
Airlines, Inc. dated as of July 6, 2001 (filed as Exhibit 10.1 to NWA Corp.'s Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by
reference; the Commission has granted confidential treatment for certain portions of this
document).
10.17 Third Amendment dated as of September 9, 2002 to Credit and Guarantee Agreement among
Northwest Airlines Corporation, Northwest Airlines Holdings Corporation, NWA Inc.,
Northwest Airlines, Inc. and various lending institutions named therein dated as of
October 24, 2000 (filed as Exhibit 10.1 to NWA Corp.'s Form 10-Q for the quarter ended
September 30, 2002 and incorporated herein by reference).
10.18 Corrected Schedule I and Schedule II to Aircraft Mortgage and Security Agreement included
in Exhibit 10.13 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2001 (filed in substitution) (filed as Exhibit 10.2 to NWA Corp.'s Form 10-Q for
the quarter ended September 30, 2002 and incorporated herein by reference).
10.19 Consulting Agreement dated as of December 20, 2002 between Northwest Airlines, Inc. and
Aviation Consultants LLC.
*10.20 Management Compensation Agreement with Richard H. Anderson dated as of June 28, 2001
(filed as Exhibit 10.17 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2001 and incorporated herein by reference).
*10.21 Management Compen ation Agreement with Dougla M. Steenland dated a of June 28, 2001
(filed as Exhibit 10.18 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2001 and incorporated herein by reference).
*10.22 Management Compensation Agreement with J. Timothy Griffin dated as of January 14, 2002.
(filed as Exhibit 10.20 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2001 and incorporated herein by reference).
* 10.23 Management Compensation Agreement with Bernard L. Han dated as of September 26, 2002.
*10.24 Management Compensation Agreement with Philip C. Haan dated as of January 14, 2002.
(filed as Exhibit 10.21 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2001 and incorporated herein by reference).
*10.25 Key Employee Annual Cash Incentive Program (filed as Exhibit 10.42 to the registration
statement on Form S-1, File No. 33-74210, and incorporated herein by reference).
81
* 10.26 Northw t Airline Exce Pen ion Plan for Salari d Employee (2001 Re tatement) (filed as
hibit 10.23 to NWA Corp.' Annual Report on Form 10-K for the year ended December 31,
2001 and incorporated herein by reference).
* 10.27 orthw t Airline Suppl m ntal Executive Retirement Plan (2001 Restatement) (filed as
xhibit 10.24 to NWA Corp.' Annual Report on Form 10-K for the year ended December 31,
2001 and incorporated h rein by reference).
*10.2 1990 Stock Option Plan for Key Employee of the Company (filed as Exhibit 10.44 to the
regi tration tatem nt on Form S-1, File No. 33-74210, and incorporated herein by reference).
* 10.29 orthwe t Airline Corporation 1999 Stock Incentive Plan, as amended. (filed as Exhibit 10.26
to WA Corp.' Annual Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference).
*10.30 2001 Northwe t Airlines Corporation Stock Incentive Plan, as amended (filed as Exhibit 10.43
to NWA Corp.' Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
*10.31 Form of Non-Qualified Stock Option Agreement for executive officers under the 2001
orthwe t Airline Corporation Stock Incentive Plan (filed as Exhibit 10.28 to NWA Corp.'s
Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein
by reference).
*10. 2 Form of Phantom Stock Unit Award Agreement for executive officers under the 2001
orthw t Airline Corporation Stock Incentive Plan (filed as Exhibit 10.39 to NWA Corp.'s
Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein
by refer nee).
* 10.33 Form of Deferred Stock Award Agreement for executive officers under the 1999 Northwest
Airline Corporation Stock Incentive Plan (filed a Exhibit 10.40 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by
r fer nc ).
* 10.34 orthwe t Airline Corporation E-Commerce Incentive Compensation Program, including
form of Award Agre ment.
* 10.35 2003 Long-Term Ca h Incentive Plan, including form of Award Agreement
* 10.36 The Chairman' Long-Term Retention and Incentive Program (filed as Exhibit 10.62 to NWA
Corp. Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated
h r in by ref rence ).
12.1 Computation of Ratio of Earning to Fixed Charges.
12.2 Computation of Ratio of Earning to Fixed Charges and Preferred Stock Requirements.
21.1 Li t of Sub idiarie .
23.1 on ent of Ern t & Young LLP
24.1 Pow r of Attorney (included in ignature page).
9.1 Certification Pur uant to 1 U.S.C. Section 1350, a Adopted Pursuant to Section 906 of the
Sarbane -Oxley Act of 2002.
99.2 C rtification Pur uant to 18 U.S.C. Section 1350, a Adopted Pursuant to Section 906 of the
Sarban -Oxley Act of 2002.
* atory plan in which the director and executive officer of Northwest participate.
(b) Report on Form -K:
on
2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the S cunt1 E 'Chanoe ct of l : 4, th
Registrant has duly caused this report to be signed on it b half by th und r ign d, th r unt dul
authorized this 17th day of March 2003.
ORTHWE T lRLI ORP TI
Jam
Vice Pre id nt- Finance and lzief Ac 11nti11
Officer (prin ipal accounting offi er)
KNOW ALL MEN BY THESE PRESENTS, that ach indi idual wh ignatur app
hereby constitutes and appoints Richard H. And r on, B rnard L. Han and Jam
each of them individually, his or her true and lawful ag nt, proxy and attorne -in-fa t, , ith full p wer
of substitution and resubstitution, for uch individual and in uch indi idual's narn , pl c and t ad, in
any and all capacities, to act on, sign and fil with th Securiti and Ex hange mmi ion any and II
amendments to this report together with all chedule and xhibit th r t and to tak an and all
actions which may be necessary or appropriate in conn ction ther with, and each u h indi idual
hereby approves ratifie and confirms all that such agent , proxie and att rn -in-fa t an of th m r
any of his or their substitute or substitutes may lawfully do or cau to b don b
Pursuant to the requirement of the Securiti Exchang ct of 1934, thi r p rt ha b n ign d
below on the 17th day of March 2003 by th following p r on on b half f th r gi trant and in the
capacities indicated.
/s/ RICHARD H. ANDERSON
Richard H. Anderson
Chief Executive Officer and Director (principal
executive officer)
Isl BERNARD L. HAN
Bernard L. Han
Executive Vice President & Chief Financial
Officer (principal financial officer)
/sf JAMES G. MATHEWS
James G. Mathews
Vice President-Finance and Chief Accounting
Officer (principal accounting officer)
/s/ GARY L. WILSO
Gary L. Wilson
Chairman of the Board
83
I I ROBERT L. FRIED /
Robert L. Fri drnan
Director
Dori Kearn Goodwin
Dir ctor
/s/ D EN IS F. HIGHTOWER
Dennis F. Hightow r
Director
/s/ G EORGE J. KOURPI
George J. Kourpia
Director
Isl RAY W. BE NING, JR.
Ray W. Benning, Jr.
Director
Isl RICHARD C. BLUM
Richard C. Blum
Director
Isl ALFRED A. CHECCHI
Alfred A. Checchi
Director
Isl JOHN ENGLER
John Engler
Director
84
Isl FREDERIC V. MALEK
Frederic V. Malek
Director
Isl V. A. RAVINDRAN
V. A. Ravindran
Director
Isl MICHAEL G. RISTOW
Michael G. Ristow
Director
Isl DOUGLAS M. STEENLAND
Douglas M. Steenland
President and Director
Leo M. van Wijk
Director
CERTIFICATIONS
I, Richard H. Anderson, certify that:
1. I have reviewed this annual report on Form 10-K of Northwest Airlines Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations
a~d cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee of registrant's board of directors ( or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
/s/ RICHARD H. ANDERSON
Richard H. Anderson
Chief Executive Officer
85
I, Bernard L. Han, certify that:
1. I have reviewed this annual report on Form 10-K of Northwest Airlines Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge the financial statements, and other financial information included in this
annual report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and lSd-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation,
to the registrant's auditors and the audit committee of registrant's board of directors ( or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrants ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not
there were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
/s/ B ERNARD L. HAN
Bernard L. Han
Chief Financial Officer
86
Northwest Airlines Corporation
SCHEDULE II-VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Col. A Col. B
Balance at
Beginning
Description of Period
Year Ended December 31, 2002
Allowances deducted from asset accounts:
Allowance for doubtful accounts ....... $ 20
Accumulated allowance for depreciation
of flight equipment spare part 121
Year Ended December 31, 2001
Allowances deducted from asset account :
Allowance for doubtful accounts ....... 16
Accumulated allowance for depreciation
of flight equipment spare parts ...... 131
Year Ended December 31, 2000
Allowances deducted from asset account :
Allowance for doubtful accounts ....... 16
Accumulated allowance for depreciation
of flight equipment spare parts ... . .. 131
(1) Uncollectible accounts written off, net of recoveries
(2) Interaccount transfers
(3) Dispositions and write-offs
S-1
Col. C Col. D
Additions
Charged to
Charged to Other
Costs and Accounts Deductions
Expen es -De cribe -Describe
9 $- $10(1)
67 22(2) 35(3)
12 8(1)
32 2(2) 44(3)
(1)
37 6(2) 43(3)
Col. E
Balance at
End
of Period
19
175
20
121
16
131
Exhibit 12.1
Northwest Airlines Corporation
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Year ended December 31,
2002 2001 2000 1999
Earnings:
Income (los ) before income taxes ..................... $(1,220) $(670) $435 $487
Less: Income (loss) from less than 50% owned investees ..... 37 (5) 92 86
Add:
Rent expense representative of interest(l) .............. 247 237 229 199
Interest expense net of capitalized interest ..... .. ....... 385 326 316 348
Interest of preferred security holder .................. 25 25 27 27
Amortization of debt discount and expense ............. 17 14 11 15
Amortization of interest capitalized .................. 5 4 4 4
- - - -
Adjusted earnings ............................. $ (578) $ (59) $930 $994
Fixed charges:
Rent e pense representative of interest(l) ............... $ 247 $ 237 $229 $199
Interest expense net of capitalized interest ............... 385 326 316 348
Interest of preferred security holder ................... . 25 25 27 27
Amortization of debt discount and expense ............... 17 14 11 15
Capitalized interest ................................ 25 29 23 16
- - - - - -
Fixed charges . ............................ . ... $ 699 $ 631 $606 $605
Ratio of earnings to fixed charges ..................... -(2)---=(2) 1.53 1.64
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
1998
$( 430)
9
193
294
22
18
4
- -
$ 92
$ 193
294
22
18
17
- -
$ 544
-(2)
(2) Earnings were inadequate to cover fixed charges by $1.28 billion, $690 million and $452 million for
the years ended December 31, 2002, 2001 and 1998, respectively.
Exhibit 12.2
Northwest Airlines Corporation
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(Dollars in millions)
Earnings:
Income (loss) before income taxes ...... . .. .. ....... .. .
Less: Income (loss) from less than 50% owned inve tee .... .
Add:
Rent expense representative of interest(l) .... ...... ... .
Interest expense net of capitalized interest ............ .
Interest of preferred security holder ...... .. ..... .... .
Amortization of debt discount and expen e ............ .
Amortization of interest capitalized . .... . ... ...... . . .
Year ended December 31,
2002 2001
$(1,220) $(670)
37 (5)
247
385
25
17
5
237
326
25
14
4
2000 1999
435 $4 7
92 86
229
316
27
11
4
199
348
27
15
4
1998
(430)
9
193
294
22
1
4
Adjusted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (57 ) ~ ) 930 $994 9~
Fixed charges and preferred stock requirements:
Rent expense representative of intere t(l) .............. .
Interest expense net of capitalized interest ...... . ....... .
Preferred stock requirements ........................ .
Interest of preferred ecurity holder ................... .
Amortization of debt discount and expense . . .. .... .. ... . .
Capitalized interest ............................... .
Fixed charges and preferred stock requirements ...... .
Ratio of earnings to fixed charges and preferred stock
requirements .................................. .
$ 247
385
1
25
17
25
$ 700
$ 237
326
1
25
14
29
$ 632
229
316
1
27
11
23
607
199
34
1
27
15
16
$606
-(2)-=(2) 1.53 1.64
===
(1) Calculated as one-third of rentals, which is con idered representativ of the intere t factor.
193
294
2
22
18
17
$ 546
(2) Earnings were inadequate to cover fixed charge by $1.28 billion $691 million and $454 million for
the years ended December 31, 2002, 2001 and 1998, respectively.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 99.1
In conn ction with the Annual Report of Northwest Airlines Corporation (the "Company") on
Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange
Commi sion on the dat hereof (the 'Report"), I, Richard H. Anderson, Chief Executive Officer of the
Company certify pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley
Act of 2002 that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Isl RI HARD H. ANDER o
Richard H. Anderson
Chief Executive Officer
March 10, 2003
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 99.2
In connection with the Annual Report of Northwest Airlines Corporation (the "Company") on
Form 10-K for the period ending December 31, 2002 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), I, Richard H. Anderson, Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Isl B ERNARD L. HAN
Bernard L. Han
Chief Financial Officer
March 10, 2003