UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
~ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(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
(l.R.S. 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 [g] 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. D
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). Yes [g] No D
The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 30,
2004 was $928 million.
As of January 30, 2004, there were 86,106,532 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 23, 2004.
PART I
Item 1. BUSINESS
Northwe t Airlines Corporation ("NWA Corp." and, together with its subsidiaries, the "Company")
is the indirect parent corporation of Northwest Airlines, Inc. ("Northwest"). Northwest operate the
world's fourth largest airline, as measured by revenue passenger miles ("RPMs"), and is engaged in the
business of transporting passengers and cargo. Northwest began operations in 1926. Northwest's
business focuses on the development of a global airline network through its strategic asset that
include:
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;
a domestic and international alliance with Continental Airlines, Inc. ("Continental") and Delta
Air Lines, Inc. ("Delta");
exclusive marketing agreements with two domestic regional carriers, Pinnacle Airlines, Inc.
("Pinnacle Airlines") and Mesaba Aviation, Inc. (''Mesaba"), both of which operate as
Northwest Airlink; and
a cargo business that operates 12 dedicated freighter aircraft through hubs in Anchorage and
Tokyo.
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. Information contained on the
Company's website is not incorporated into this annual report on Form 10-K. 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 its 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.
See "Item 1. Business-Risk Factors Related to Northwest and the Airline Industry" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview"
for a discussion of trends and factors affecting the Company and the airline industry. The Company is
managed as one cohesive business unit. See "Item 8. Consolidated Financial Statements and
Supplementary Data Note 15-Segment Information".
Operations and Route Network
Northwest operates substantial domestic and international route networks and directly serves more
than 158 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
Airlink carriers together serve over 143 cities from Detroit. For the six months ended June 30, 2003
they enplaned 58% of originating passengers from Detroit, while the next largest competitor enplaned
13%.
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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 156 cities from Minneapolis/St. Paul. For the
six months ended June 30, 2003, they enplaned 65% of originating passengers from Minneapolis/St.
Paul, while the next largest competitor enplaned 7%.
Memphis. Memphis is the nineteenth largest origination/destination hub in the U.S. Northwest
and its Airlink carriers together serve 88 cities from Memphis. For the six months ended June 30, 2003,
they enplaned 60% of originating passengers from Memphis, while the next largest competitor
enplaned 16%.
International System
Northwest operates international flights to the Pacific and/or the Atlantic regions from its Detroit,
Minneapolis/St. Paul and Memphis hubs, as well as from gateway cities such as Boston, Honolulu, Los
Angeles, New York, San Francisco and Seattle. International flights to the Pacific from Portland are
scheduled to begin in June 2004.
Pacific. Northwest has served the Pacific market since 1947 and has one of the world's largest
Pacific route networks. Northwest's Pacific operations are concentrated at Narita International Airport
in Tokyo, where it has 358 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, Manila, Nagoya, 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 17 cities in the U.S., Canada and Mexico and Amsterdam, and between Amsterdam
and India. Codesharing between Northwest and KLM has been implemented on flights to 57 European,
six Middle Eastern, nine African, three Asian and approximately 173 U.S. cities. Codesharing is an
agreement whereby 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. After
September 2007, a three-year notice is required to terminate the joint venture.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 15-Segment
Information" for a discussion of Northwest's operations by geographic region.
Alliances
In addition to its trans-Atlantic alliance with KLM, Northwest has strengthened its network
through other alliance partnerships. Long-term alliances are the most effective way for Northwest to
enter markets that it would not be able to serve alone. Alliance relationships can include codesharing,
reciprocal frequent flyer programs, "through" luggage check-in, reciprocal airport lounge access, joint
marketing, sharing of airport facilities and joint procurement of certain goods and services. Northwest
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and it allianc partner currently provide a global n twork to over 750 citie in 120 countrie on ix
continent .
In ugu t _002, the Company announced that it had igned a cooperative marketing agreement
with ontinental and D !ta. Thi agr ement i d igned to connect the three carriers dome tic and
international n twork and provide for code haring, reciprocity of fr quent fly r programs, airport club
u and oth r coop rati act1v1t1e . orthwe t Continental and Delta received approval of the
agr m nt from th U.S. D partment of Ju tice ("DOJ") and the Department of Tran portation
("DOT' ) in th fir t quarter of 2003. The three airlines began implementing the agreement in
Jun 2003 b off ring ace to ach other' airport lounge and commencing codeshare ervice.
B ginning in July 2003 frequ nt fly r members of the three airlines were able to u e a single award to
book and r de m mil for itinerarie that include any combination of Northwe t, Continental and
Delta operated flight . In the fourth quarter of 2003, orthwest and Delta expanded their codesharing
to 650 daily dome tic flight operated by each carrier, the maximum permitted by the DOT a of that
time. In June 2004 th next pha may be implemented by adding code sharing on another 650 daily
dom tic flight . The combined network has increased orthwest's presence in the South, East and
Mountain We t region of the U.S., a well a in Latin America.
In S pt mb r 2003, KLM announced that it would enter into an agreement with Air France to
form a trategic bu in partner hip which would create Europe large t airline group and unite the
two carrier under the ame corporate holding company. In February 2004, the European Union
antitru t in e tigator gave their conditional approval of this merger. The KLM-Northwe t trans-
Atlantic joint enture will remain in place pur uant to their alliance agreement. It is anticipated that
KLM will join the SkyTeam global alliance ( of which Air France and Delta are the founding member )
in th pring of 2004. orthwe t al o expect to join the SkyTeam alliance in 2004.
orthwe t al o ha dome tic fr quent flyer and codesharing agreement with several other airlines
including Ala ka/Horizon Airlines, Hawaiian Airline , America We t Airline and American Eagle.
In the Pacific, orthwe t ha frequent flyer agreements with Malaysia Airlines, Japan Airlines, Jet
Airwa of India, Garuda Indone ia, Cebu Pacific Airlines and Pacific Island Aviation.
In addition to it exten ive relation hip with KLM in the Atlantic, Northwest has reciprocal
frequent flyer program with Air Alp Aviation, KLM cityhopper and KLM exel, Air Europa Kenya
Airv a and Male Hungarian Airline .
Reaional Pa,1ner hip
orthwe t ha exclu ive marketing agreement ith two regional carriers: Pinnacle Airline and
Me aba. Under the agreement these regional carrier operate their flight under the Northwest "NW"
cod and operate a orthwe t Airlink. The purpo e of the e marketing agreements i to provide
rvice to mall citie and more frequent ervice to larger cities, increasing connecting traffic at
orthwe t dome tic hub . Th agreement with Pinnacle Airlines and Me aba are capacity purchase
arrang ment . Und r the e arrangement , orthwe t control the cheduling pricing, re ervation ,
tick ting and eat in ntories for Pinnacle Airlines and Mesaba flight . Northwest i generally entitled
to all ticket, cargo and mail re enues a sociated with the e flights. The regional carriers are paid based
on operati n for certain xpen and r ceive reimbur ement for other expense .
Pinnacle Airline . Pinnacle Airline offer cheduled pa enger ervice to over 80 citie . In 2003,
_5 Bombardier Canadian R gional Jet (' CRJ ) aircraft were leased to Pinnacle Airline , bringing the
total numb r of CRJ aircraft in Pinnacle Airline operation to 76. All of the CRJ aircraft are lea ed
fr m orthw t. orthwe t ha agreed to lea e an additional 53 CRJ to increa e Pinnacle Airline
fl t to L9 RJ b December 31, 2005.
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As of September 30, 2003, Northwest had contributed 88.6% of the common stock of Pinnacle
Airlines Corp., the holding company of Pinnacle Airlines, to the Company's pension plans in lieu of
required cash contributions pursuant to an exemption granted by the U.S. Department of Labor
("DOL''). On November 24, 2003, the Pinnacle Airlines Corp. shares held by the plans were sold in an
initial public offering ("IPO"), with the proceeds being retained by the plans. The Company continues
to hold the remaining 11.4% interest in Pinnacle Airlines Corp. At the time of the offering, the
Company and Pinnacle Airlines agreed to extend the term of the airlines services agreement (''ASA")
through December 2017 .
. Mesaba. Mesaba offers scheduled passenger service to 112 cities. The Company owns 27.8% of
the common stock of MAIR Holdings, Inc. ("MAIR"), the holding company of Mesaba. The Company
also has approximately four million warrants to acquire additional MAIR common stock, of which 22%
were in-the-money as of December 31, 2003. Mesaba operates a fleet of 99 regional jet and turbo-prop
aircraft, which includes 35 AVRO RJ85 aircraft and 49 SAAB 340 aircraft leased or subleased from
Northwest.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 13-Related Party
Transactions" regarding the Company's transactions with Pinnacle Airlines and Mesaba.
Cargo
The Company is the largest cargo carrier among U.S. passenger airlines based on revenue and the
only one to operate a dedicated freighter fleet. In 2003, cargo accounted for 7.9% of the Company's
operating revenues, with approximately 77% of its cargo revenues resulting from cargo originating in or
destined for Asia. Through its cargo hubs in Anchorage and Tokyo, the Company serves most major air
freight markets between the U.S. and Asia with a fleet of 12 Boeing 747-200 freighter aircraft. In
addition to revenues earned from the dedicated freighter fleet, the Company also generates cargo
revenues in domestic and international markets through the use of excess cargo space on its passenger
aircraft.
Northwest is able to participate in the high yield, small package "express" business by providing
airlift for cargo integrators in its extensive network across the Pacific. In 2001, the Company entered
into a five-year capacity purchase agreement with DHL Worldwide Express ("DHL") for daily freighter
service from DHL's U.S. hub operations in Cincinnati to various points in Asia. In 2000, Northwest and
Japan Airlines entered into a cargo alliance under which Northwest and Japan Airlines codeshare on
certain routes between the U.S. and Japan.
Other Travel Related Activities
MLT Inc. MLT Inc. ("MLT"), an indirect wholly owned subsidiary of NWA Corp., is among the
largest vacation wholesale companies in the United States. MLT develops and markets Worry-Free
Vacations that include air transportation, hotel accommodations and car rentals. In addition to its
Worry-Free Vacations charter programs, MLT markets and supports Northwest's WorldVacations travel
packages 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 2003, MLT had $451 million in revenues.
Orbitz. Orbitz, Inc. ("Orbitz") allows travelers to purchase airline, hotel, car rental and other
travel related services online. The Orbitz website provides a comprehensive selection of online airfares,
including Internet-only fares and other travel information and customer features. On December 16,
2003, Orbitz and its airline owners (Northwest, Continental, Delta, United and American Airlines, Inc.
(''American")) sold approximately 12 million Orbitz shares through an initial public offering, which
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included 9.7% of orthwest' total holdings. The Company continues to hold approximately 12% of the
out tanding hare repre enting a 17% voting interest in Orbitz.
WORLDSPAN WORLDSPAN L.P. ("WorldSpan") operates and markets a global computer
reservation and pa enger processing system ("CRS"). A CRS is used by travel agents, corporate
account and Internet cu tamers to make airline, hotel, car and other travel reservations and to issue
airline tickets. On June 30, 2003, the Company together with the other owners (American and Delta)
sold WorldSpan to Travel Transaction Processing Corporation, an entity formed by Citigroup Venture
Capital Equity Partners L.P. and Teachers' Merchant Bank. In the sale, the Company sold its 33.7%
partnership interest in WorldSpan. Northwest has agreed to continue to purchase internal reservation
services from WorldSpan.
Frequent Flyer Program. Northwest operates a frequent flyer marketing program known as
"WorldPerks", under which mileage credits are earned by flying on Northwest or its alliance partners
and by using the services of participating credit card issuing banks, hotels, phone companies, car rental
firms and other partners. Northwest sells mileage credits to the other companies participating in the
program. WorldPerks is designed to retain and increase frequent traveler loyalty by 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 credits can be redeemed for free or upgraded travel on Northwest and other
participating airlines or for other travel industry awards. WorldPerks is structured as a three-tier elite
incentive and reward program.
Regulation
General. The Airline Deregulation Act of 1978, as amended, eliminated domestic economic
regulation of passenger and freight air transportation in many regards. Nevertheless, the industry
remain regulated in a number of areas. The DOT has jurisdiction over international route authorities
and various consumer protection matters, such as advertising, denied boarding compensation and
baggage liability. Northwest is subject to regulations of the DOT and the Federal Aviation
Administration ("F~') because it holds certificates of public convenience and necessity, air carrier
operating certificates and other authority granted by those agencies. The FAA regulates flight
operations, including air space control and aircraft standards, maintenance, ground facilities,
transportation of hazardous materials and other technical matters. The DOJ has jurisdiction over
airline competition matters, including mergers and acquisitions, under the federal antitrust laws. The
Transportation Security Administration ("TSA'') regulates airline and airport security. Other federal
agencies have jurisdiction over postal operations, use of radio facilities by aircraft and certain other
aspects of Northwest's operations.
Intemational Se,vice. Northwest operates its international routes under route certificates and
other authorities issued by the DOT. Many of Northwest's international route certificates are
permanent and do not require renewal by the DOT. Certain other international route certificates and
other authorities are temporary and subject to periodic renewal. Northwest requests renewals of these
certificates and other authorities when and as appropriate. The DOT typically renews temporary
authorities on routes when the authorized carrier is providing a reasonable level of ervice. With
re pect to foreign air transportation, the DOT must approve agreements between air carriers including
code haring agreements and may grant antitrust immunity for those agreements in ome situations.
orthwe t' rights to operate to foreign countries, including Japan, China and other countries in
Asia and Europe, are governed by aviation agreements between the U.S. and the re pective foreign
countries. Many aviation agreements permit an unlimited number of carriers to operate between the
U.S. and the relevant foreign country, while others limit the number of carriers and flight on a given
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international route. From time to time, the U.S. or its foreign country counterpart may seek to
renegotiate or cancel an aviation agreement. In the event an aviation agreement is amended or
canceled, such a change could adversely affect Northwest's ability to maintain or expand air service to
the relevant foreign country.
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.
Airport Security. The TSA regulate civil aviation security under the Aviation and Transportation
Security Act (''Aviation Security Act '). This law federalized 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. Since the
events of September 11, 2001, Congress has mandated, and the TSA ha implemented, numerous
security procedures that have imposed and will continue to impo e additional compliance
responsibilities and costs on airlines. Funding for airline and airport security under the law is provided
in part by a $2.50 per segment passenger security fee, subject to a limit of $10 per roundtrip. However,
the Company is responsible for costs in excess of this fee, which through September 2004 cannot
exceed the Company's 2000 passenger security screening expense level.
On April 16, 2003, the President signed into law the Emergency Wartime Supplemental
Appropriations Act ("Wartime Act"). The Wartime Act included, among other items, a $2.30 billion
cash reimbursement to U.S. airlines for security fees previously remitted to the TSA and $100 million
for reimbursement of the costs of aircraft cockpit door reinforcement incurred since the 2001 terrorist
attacks. The Company received $209 million for reimbursement of security fees in May 2003 which was
recorded as other income, and $11 million for direct costs of cockpit door reinforcement, which was
recorded as a reduction to the previously capitalized property account. Retention of these funds
requires compliance with provisions in the Wartime Act, including certain limitations on executive
compensation. The Wartime Act also suspended collection of security fees for the period from June 1,
2003 through September 30, 2003, after which these fees were reinstated.
Airport Access. Four of the nation's airports, Chicago O'Hare, New York (La Guardia 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 airports
("slots") have been limited during certain peak demand time periods. Currently, the FAA permits the
buying, selling, trading or leasing of these slots, subject to certain restrictions. Legislation passed in
March 2000 resulted in the elimination of slot 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 relations 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 seven domestic unions representing 11 separate employee groups. In addition,
Northwest has agreements with four unions representing its employees in countries throughout Asia.
These agreements are not subject to the RLA, although Northwest is subject to local labor laws.
Noise Abatement. The Airport Noise and Capacity Act of 1990 (''ANCA'') recognizes the right of
airport operators with special noise problems to implement local noise abatement procedures as long as
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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 other
procedure 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.
Under the direction of the International Civil Aviation Organization (''ICAO"), world
governments, including the U.S., have under consideration creation of a more stringent aircraft noise
certification standard than that contained in the ANCA. A new ICAO noise standard was adopted in
2001 that 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. FAA reauthorization legislation,
known as "Vision 100-Century of Aviation Reauthorization Act" and signed into law by the President
on December 12, 2003, requires the FAA, by April 1, 2005, to issue regulations implementing Chapter
4 noise standards consistent with ICAO recommendations. The FAA has issued a proposed rule that
would implement such standards.
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.
Under FAA regulations, the Company has established, and the FAA has approved, a maintenance
program for each type of aircraft operated by the Company. The program provides for the ongoing
maintenance of the Company's aircraft, ranging from frequent routine inspections to major overhauls.
The Company's aircraft require various levels of maintenance or "checks" and periodically undergo
complete overhauls. Maintenance programs are monitored closely by the FAA, with FAA
representatives routinely present at the Company's maintenance facilities. The FAA issues
Airworthiness Directives (''.ADs"), which mandate changes to an air carrier's maintenance program.
These ADs (which include requirements for structural modifications to certain aircraft) are issued to
ensure that the nation's transport aircraft fleet remains airworthy. The Company is currently, and
expects to remain, in compliance with all applicable requirements under all ADs and the FAA
approved maintenance program for each fleet type.
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 in the United States.
Environmental. The Company is subject to regulation under various environmental laws and
regulations, including the Clean Air Act, the Clean Water Act and Comprehensive Environmental
Response, Compensation and Liability Act of 1980. In addition, many state and local governments have
adopted environmental laws and regulations to which the Company's operations are subject.
Environmental laws and regulations are administered by numerous federal and state agencies.
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 aircraft engine emissions. The MOA includes a proposal for a voluntary engine retrofit program
to reduce such emissions. 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. To date these discussions have not resulted in an agreed upon program.
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Northwest, along with other airlines has been identified as a potentially re ponsible party at
various environmental ites. Management believes that Northwest's hare of liability for the cost of the
remediation of these sites, if any, will not have a material adverse effect on the Company' financial
statements.
Civil Reserve Air Fleet Program. Northwe t renewed it participation in the Civil Re erve Air Fleet
Program ("CRAP"), pur uant to which Northwest has agreed to make available during the period
beginning October 1, 2003 and ending September 30, 2004, 28 Boeing 747-200/400 pa enger aircraft,
21 DCl0-30 passenger aircraft, five Airbus A330-300 pas enger aircraft and 12 Boeing 747-200 freighter
aircraft for use by the U.S. military under certain stage of readines related to national emergencie .
The program is a standby arrangement that allows the U.S. Departm nt of Defen e Air Mobility
Command, headquartered at Scott Air Force Ba e in Illinoi , to call on ome or all of the e
66 contractually committed Northwe t aircraft and their crew to supplement military airlift capabilitie .
On February 8, 2003, the U.S. Secretary of Defen e authorized a 'Stage 1" mobilization of the
Civil Reserve Air Fleet, the lowe t activation level. A a re ult of that activation, Northwe t made
available four Boeing 747-200 pa senger aircraft for u e by the military. No Northwe t cargo aircraft
were u ed during the activation. The Stage 1 activation wa formally terminated on June 17, 2003.
Risk Factors Related to Northwest and the Airline Industry
The airline industry is intensely competitive.
The airline industry is intensely competitive. Our competitors include other major dome tic airline
as well as foreign, regional and new entrant airline , some of which have more financial re ources or
lower cost structures than ours. In most of our markets we compete with at least one of these carrier .
Our revenues are ensitive to numerous factors, and the action of other carriers in the area of
pricing, scheduling and promotions can have a substantial adverse impact on overall industry revenue .
Such factors may become even more significant in period when the indu try experiences large losses
as airlines under financial stress, or in bankruptcy, may in titute pricing structures intended to achieve
near-term survival rather than long-term viability.
Industry revenues have declined significantly and we continue to experience significant operating losses.
Since 2001, the U.S. airline industry overall has suffered a sub tantial reduction in revenues, both
on an absolute basis and relative to historical trend . Our annual operating revenue has declined in
each of the last three years and our 2003 operating revenue was over $1.7 billion le s than it was in
2000. As a result, we have incurred significant operating losse , and absent unu ual items, our pre-tax
losses over that period have totaled nearly $2.2 billion. We do not anticipate that the revenue
environment for us will materially improve in 2004. Due to the discretionary nature of bu ine s and
personal travel spending, U.S. airline revenues are heavily influenced by the strength of the U.S.
economy, other regional world economies and corporate profitability. The revenue decline has been
due in part to the U.S. economic cycle. However, permanent structural differences in the industry
revenue environment have also taken place. These differences are the result of a number of factors.
The rapid growth of low co t airline has had a profound impact on industry revenues. Using the
advantage of low unit costs, driven in large part by lower labor co ts, these carriers are able to operate
profitably while offering substantially lower fares. By targeting such fares at bu iness passengers in
particular, these carriers are shifting demand away from the larger, more e tablished airlines. These low
cost carriers now transport more than 25% of all domestic U.S. pa engers, compared to les than 10%
a decade ago. They now compete for, and thus influence indu try pricing on, approximately 75% of all
domestic U.S. passenger ticket sales, versu !es than 20% a decade ago. Moreover, a a re ult of their
better financial performance, low cost carrier have the re ource necessary to continue to increase
their market share. Industry revenue could be reduced ubstantially in the event one or more large
9
network carriers decides it is a better long-term strategy to adopt a broad pricing structure similar to
those employed by low cost carriers rather than give up additional market share.
Internet travel Web sites have driven significant distribution cost savings for airlines, but have also
allowed consumers to become more efficient at finding lower fare alternatives than in the past by
providing them with more powerful pricing information. The increased price consciousness of both
business and leisure travelers, as well as the growth in new distribution channels, has further motivated
airlines to price aggressively to gain fare and market share advantages. These factors will increase over
time as Internet ticket sales increase.
Airlines are among the most heavily taxed of all U.S. companies. Taxes and fees can add up to
approximately 25% of what a passenger pays for an average roundtrip domestic airline ticket, a
percentage even greater than that for alcohol and tobacco products. These taxes and fees have grown
significantly in the past decade. We believe that every dollar of tax or fee increase imposed on airline
passengers roughly translates into a dollar of reduced airline revenue.
The attacks of September 11, 2001 materially impacted air travel and, with concerns about further
terrorist attacks unlikely to abate any time soon, continue to have a negative effect on travel demand.
Additionally, security procedures introduced at airports since the attacks have increased the
inconvenience of flying, both in reality and in perception, and thus have further reduced demand.
Global events further exacerbated the decline in airline industry revenue in 2003. The war in Iraq
and its aftermath and the outbreak of Severe Acute Respiratory Syndrome ("SARS") have materially
affected airline bookings and continue to negatively impact air travel, particularly on international
routes. Another outbreak of SARS or other influenza-type illness, if it were to persist for an extended
period, could materially affect the airline industry by reducing revenues and impacting travel behavior,
especially on routes to and from certain Asian destinations.
Due to industry seasonality, operating results for any interim periods are not necessarily indicative of
those for the entire year.
The airline industry is seasonal in nature. Due to seasonal fluctuations, our operating results for
any interim period are not necessarily indicative of those for the entire year. Our second and third
quarter operating results have historically been more favorable due to increased leisure travel on
domestic and international routes during the summer months.
Airline bankruptcies could adversely affect the industry.
Since September 11, 2001 several air carriers have sought to reorganize under Chapter 11 of the
United States Bankruptcy Code, including United Airlines, Inc., the second largest domestic air carrier.
Successful completion of such reorganizations could present us with competitors having reduced levels
of indebtedness and significantly lower operating costs derived from labor, supply and financing
contracts that were renegotiated under the protections of the Bankruptcy Code. In addition, air carriers
involved in reorganizations historically have undertaken substantial fare discounting in order to
maintain cash flows and to enhance continued customer loyalty. Such fare discounting could further
lower yields for all carriers.
Attempts to reduce labor costs may not be successful.
Labor has always been a critical issue for major airlines. Most major airlines are heavily unionized,
and we are no exception, with more than 90% of our employees represented by unions. Many older
airlines, including us, conducted contract negotiations with the unions over several decades in a
regulated airline environment in which there was little competition and costs were passed through to
passengers. This has resulted in wage scales that are significantly higher, productivity that is much
lower, and defined benefit retirement plans that are much more generous than those found at low cost
10
carriers. In addition, over time, airline unions have negotiated restrictive scope clauses that can severely
limit an airline's ability to pursue market-driven adjustments.
The rapid growth of low cost carriers in recent years has made labor an even bigger issue for older
airlines. Less encumbered by legacy collective bargaining agreements and more able to establish costs
based on market factors, the low cost carriers have unit labor costs that are up to 50% below those for
older, pre-deregulation airlines. Given that labor is our largest cost by a wide margin, representing
roughly 40% of total operating expenses, a labor advantage of up to 50% translates to a significant
overall cost advantage. This is particularly powerful in a business where the product is largely viewed as
a commodity and pricing information has rapidly become tran parent to customers via the Internet.
Low cost carriers have used their cost advantage to offer significantly lower unrestricted fares than
older airlines, thus shifting a considerable share of lucrative business passengers to their flights. The
combination of lower costs and an increasing mix of business passengers allows low cost carriers to be
profitable and thrive at the same time that older, pre-deregulation airlines suffer financially. Moreover,
the current cost advantage of low cost carriers is not likely to be diminished by a large growth in their
costs. Having seen the failures of new entrant airlines from the past, they have been diligent in keeping
their labor costs contained. New entrant airlines have an abundant supply of qualified employees
available at significantly lower wages and benefits and with less stringent work rules than us.
The labor cost disparity versus low cost carriers forced US Airways, United Airlines and American
Airlines to restructure their labor costs through negotiations with their unions in the past year. The
successful lowering of labor costs at these airlines has placed even more pressure on us. Not only do
low cost carriers have labor cost advantages compared to us, most of our largest competitors now do as
well. We have been in discussions with our labor groups over the past year, eeking to obtain
competitive wage scales, work rules and benefit plans. The experiences of US Airways, United Airlines
and American Airlines demonstrate that, despite widespread recognition that a fundamental cost
problem exists and thousands of jobs are threatened, achieving negotiated labor cost reductions is
difficult and can come with high risk. US Airways and United Airlines were only able to achieve labor
cost savings through bankruptcy reorganizations. Accordingly, we cannot predict the outcome of our
labor negotiations at this time.
As of December 31, 2003, we had approximately 39,100 full-time equivalent employees, of whom
approximately 2,100 were foreign nationals working primarily in Asia. Collective bargaining agreements
provide standards for wages, hours of work, working conditions, settlement of disputes and other
matters. The major agreements with domestic employees became amendable or will become amendable
as follows:
Approximate
Number of
Full-time Equivalent Amendable
Employee Group Employees Covered Union Date
Pilots 5,100 Air Line Pilots Association, 9/13/03
International (''ALPA'')
Agents and Clerks 8,800 International Association of 2/25/03
Machinists & Aerospace Workers
("IAM")
Equipment Service Employees and 6,000 International Association of 2/25/03
Stock Clerks Machinists & Aerospace Workers
("IAM')
Flight Attendants 8,500 Professional Flight Attendants 5/30/05
Association ("PFAA'')
Mechanics and Related Employees 5,700 Aircraft Mechanics Fraternal 5/11/05
Association ('MFA'')
11
On July 23, 2003, we commenced negotiations with the ALPA on a new contract. We have also
entered into mediation with the IAM under the supervision of the National Mediation Board as we
seek agreement on a new contract.
Changes in govermnent regulations could increase our operating costs and limit our ability to conduct
our business.
Airlines are subject to extensive regulatory requirements in the U.S. and internationally. In the last
several years, Congress has passed laws, and the FAA has issued a number of maintenance directives
and other operating regulations, that impose substantial costs on airlines. Additional laws, regulations,
taxes and airport 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 regulating
airlines' responses to their competitors' activities. The ability of U.S. carriers to operate international
routes 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 facilities may not be
available. We cannot give assurance that laws or regulations enacted in the future will not adversely
affect the industry.
We are vulnerable to increases in aircraft fuel costs.
Because fuel costs are a significant portion of our operating costs (14.5% for 2003), substantial
changes in fuel costs would materially affect our operating results. Fuel prices continue to be
susceptible to, among other factors, political unrest in various parts of the world, Organization of
Petroleum Exporting Countries ("OPEC") policy, the rapid growth of economies such as China, the
levels of inventory carried by industries, the amounts of reserves built by governments, disruptions to
production and refining facilities and weather. These and other factors that affect the global supply and
demand for aircraft fuel may affect our financial performance, which can be highly sensitive to fuel
prices. A one-cent change in the cost of a gallon of fuel (based on 2003 consumption) would impact
operating expenses by approximately $1.5 million per month. Changes in fuel prices may have a greater
impact on us than some of our competitors because of the composition of our fleet. From time to time,
we hedge some of our future fuel purchases to protect against potential spikes in price. However, these
hedging strategies may not always be effective.
Our insurance costs have increased substantially and further increases could harm our business.
Following September 11, 2001, aviation insurers significantly increased airline insurance premiums
and reduced the maximum amount of coverage available to airlines for certain types of claims. Our
total aviation and property insurance expenses were $66 million higher in 2003 than in 2000. As a
result of the Air Transportation Safety and System Stabilization Act (''Airline Stabilization Act"), the
U.S. Homeland Security Act and the U.S. Emergency Wartime Supplemental Appropriations Act, the
U.S. federal government assumes most war risk coverage. However, this coverage is scheduled to expire
on August 31, 2004. While the government may again extend the deadline for providing excess war risk
coverage, there is no assurance 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 substantially higher
than the premiums currently charged by the government. Aviation insurers could further increase
insurance premiums in the event of a new terrorist attack or other events adversely affecting the airline
industry. Significant increases in insurance premiums could negatively impact our financial condition
and results of operations.
Our indebtedness and other obligations, including pension funding liabilities, are substantial.
We have substantial levels of indebtedness. As of December 31, 2003, we had long-term debt and
capital lease obligations, including current maturities of $8.29 billion. Of this indebtedness, 44% bears
interest at floating rates. The amount of long-term debt that matures in 2004 i $668 million.
12
Additionally, $1.49 billion mature in 2005, $781 million in 2006, $732 million in 2007 and $515 million
in 2008. A of December 31, 2003, the principal portion of future minimum lea e payment under
capital leases was $64 million for 2004, $40 million for 2005, $29 million for 2006, $33 million for 2007
and $28 million for 2008. The e level of indebtedness do not include the obligation to redeem
$236 million of convertible preferred tock. We al o have ignificant obligation related to operating
leases that do not appear on the con olidated balanc h et . See Item 8. Con olidated Financial
Statements and Supplementary Data, ote 4-Lea e '. The amount of our ind btedn could limit
our ability to obtain additional financing or adver ly aff ct our future financing co t either of which
could negatively affect our ability to operate our bu ine or make future capital e 'penditure . Our
ability to ervice our indebtedne and obligation could be adv r ely aff cted by many factor
including general economic condition and oth r factor beyond our control.
We also have noncontributory pen ion plan covering our pilot other contract mployee and
salaried employees. Funding obligations under these plan are governed by the Employ Retirement
Income Security Act of 1974, as amended ("ERISA''). As of December 31, 2003, our pen ion plan
were underfunded by $3.75 billion, a calculat d in accordance with SPAS o. 87, Employers'
Accounting for Pensions. Absent a et returns exc ding plan a umption , we will hav to ati fy th
underfunded amounts of the plans through ca h contribution over time. The timing and amount of
funding requirement depend upon a number of factor , including intere t rate a et return potential
changes in pension legi lation, our decision to make voluntary prepayment , application for and receipt
of waivers to reschedule contributions and changes to pension plan benefit .
In 2003, we recorded expenses for our qualified pen ion plan of approximately 491 million
including $58 million related to a curtailment charge in the contract plan due to workfare r duction .
We anticipate 2004 expenses for these plans will not differ materially from the amount of such expen e
incurred in 2003, excluding the curtailment charge.
Our calendar year 2004 cash pension contribution are dependent on everal factor . On
December 23, 2003, we asked the Internal Revenue Service ("IRS") for permi sion to re chedule ome
of our plan year 2004 pension contributions, which includes amount due in both 2004 and 2005, for
the contract and salaried employees' pension plans. Separately, the U.S. Congre ha under
consideration certain legislative relief that could reduce 2004 contribution by increa ing the di count
rate used to determine funding, changing the current requirement for deficit reduction contribution ,
or both. Prior legislation increased the di count rate u ed by companies to determine funding
requirements for the past two years. On that ba is, expected contributions to our qualified pen ion
plans in 2004 approximates $350 million. However, approval of our application to re chedule
contributions and/or additional legi lative relief could reduce our pension funding requirement for
these plans to between $100 million and $350 million for the year. Should our reque t to re chedule
contribution not be approved by the IRS and Congress provide no legi lative relief, our qualified plan
funding obligations in calendar year 2004 would approximate $515 million. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Re ults of Operations-Pension Funding
Obligations", for further discussion of our pen ion obligations.
We operate in a capital-intensive industry. Periodically we are r quired to make significant capital
expenditures for new aircraft, related equipment and facilities. There can be no assurance that
sufficient financing will be available for all aircraft and other capital expenditure .
We are exposed to foreign currency exchange rate fluctuations.
We conduct a significant portion of our operation in foreign location . A a re ult, w have
operating revenues and, to a le ser extent, operating xpen es, a well a a et and liabilitie ,
denominated in foreign currencie , principally the Japane e y n. Fluctuation in foreign currencie can
significantly affect our operating p rformance and the valu of our a et and liabilitie located outsid
13
of the United States. From time to time, we use financial instruments to hedge our 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.
The Company believes that the material risks and uncertainties that could affect the outlook of an
airline operating in the global economy incluJe, among others, the future level of air travel demand,
the Company's future passenger traffic 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 United States and other regions of the world, the price and availability of jet
fuel, the aftermath of the war in Iraq, the possibility of additional terrorist attacks or the fear of such
attacks, concerns about SARS or other influenza or contagious illnesses, labor negotiations both at
other carriers and the Company, low cost 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 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 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. All subsequent written or oral forward-
looking statements attributable to the Company, or persons acting on behalf of the Company, are
expressly qualified in their entirety by the factors described above.
14
Item 2. PROPERTIES
Flight Equipment
As shown in the following table, Northwest operated a fleet of 430 aircraft at December 31, 2003
consisting of 368 narrow-body and 62 wide-body aircraft. Northwest's purchase commitments for
aircraft as of December 31, 2003 are also provided.
Aircraft Type
Passenger Aircraft
Airbus:
Seating
Capacity
A319 . . . . . . . . . . . . . . . . . . . . . . 124
A320 . . . . . . . . . . . . . . . . . . . . . . 148
A330-200 . . . . . . . . . . . . . . . . . . . 243
A330-300 . . . . . . . . . . . . . . . . . . . 298
Boeing:
757-200
757-300
747-200
747-400
McDonnell Douglas:
180-184
224
353-430
403
DC9 ...................... . 78-125
DClO...................... 273
Freighter Aircraft
Boeing 747F ................ .
Owned
58
43
5
23
16
12
4
152
14
327
5
Temporarily
Capital Operating Not in
Lease Lease Service
4
14
18
12
31
19
5
12
13
10
102
- - - -
(4)
(4)
(10)
(9)
_Q)
(29)
In Service
Average
Age
Total (Years)
70 2.1
74 9.1
5 0.3
52 12.2
16 0.8
7 21.9
16 10.1
156 33.0
22 24.8
418
12 21.9
Aircraft
on
Firm
Order
7
6
10
9
32
Total Northwest Operated Aircraft ..
Regional Aircraft
332 18
7
109 (29) 430 18.0(1) 32(2)
AVRO RJ85 ................ .
CRJ-200/440 ................ .
SAAB 340 ................. .
Total Airlink Operated Aircraft .... .
Total Aircraft ....... ...... .... .
69
44-50
30-34
10
10
342 18
25
76
49
150
259
(3) 32 5.2
76 1.7
49(4) 6.1
(3) 157
(32) 587(5)
(1) Excluding DC9 aircraft, the average age of Northwest-operated aircraft is 9.5 years.
(2) Financing commitments available for use by the Company are in place for all of these aircraft.
53(3)
53
85
(3) These aircraft will be leased or subleased to and operated by Pinnacle Airlines. The Company has
the option to finance these aircraft through long-term operating lease commitments from the
manufacturer; if the manufacturer chooses not to provide financing, the Company is not required
to take delivery of the aircraft.
( 4) Excludes aircraft directly leased by Mesaba from third party lessors.
( 5) Excludes aircraft leased to charter carriers.
The Company's 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 significant economic value given the Company's route network,
15
majntenance program and the lack of a comm rcially successful new 100-seat aircraft at this time. The
Company timate that it DC9 aircraft could fly on average more than nine additional years beyond
2003 ba ed upon the manufacturer' expected cycle life for such aircraft and the projected annual
utilization by orthwest.
See ' Item . Con olidated Financial Statements and Supplementary Data, Note 4-Leases" and
" ote 10-Commitments' for further information related to the Company s ajrcraft leases and
commitments.
Airport Facilities
orthwe t leases the majority of its airport facjlities. The lease term cover periods up to 30 years
and contain provisions for periodic adjustment of lease payments. At most airports that it serves
orthwest has entered into use agreements that provide for the non-exclusive use of runways, taxiways
and other facilities. Landing fees under these agreements normally are based on the number of
landings and weight of the aircraft.
In certain case , the Company has constructed a facility on leased land which reverts to the lessor
upon expiration of the lease. These facilities include cargo buildings in Boston, Los Angeles, New York
(JFK), Seattle 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.
The Company was responsible for managing and supervising the design and construction of the
$1.2 billion passenger terminal at Detroit Metropolitan Wayne County Airport that was completed in
February 2002. The new terminal offers 97 gates, 106 ticket-counter positions, 22 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 terminal also offers international-to-domestic connections
within the ame facility. A new hotel in the terminal was completed in December 2002, and a two-bay
747 hangar was completed in October 2003.
In late 2003, an additional $175 million expansion began on Detroit Metropolitan Wayne County
Airport's west concourse. The Company is responsible for managing and supervising the design and
construction of thi new expansion project. The project includes additional narrow-body and regional
gates on Concourses B and C, related apron expansion including hydrant fueling, loading bridges and
gate systems and additional moving walkways.
Minneapolis/St. Paul International Airport i undergoing a $2.7 billion construction program that
began in 1998. The major components completed include a 50% increase in vehicle parking as well as
an additional 15 mainline jet gates and 30 commuter gates. A new north/south runway, automated
people movers and improvement of existing runways are cheduled to be completed in phases through
2010.
The Memphis-Shelby County Airport Authority has undertaken a $400 million airport renovation
and expansion project. The airfield portion of the program provides nearly $300 million in airfield
impro ements, including a new 13,000-foot runway, which opened in late 2000. The majority of the
$60 million terminal renovation was completed in 2000, including the redesign of eight gates to
accommodate Northwest regional jet service, 15 additional regional jet gates, a new WorldClub and 11
nev ticket counter positions. This program also includes $40 million in future vehicle parking expansion
and roadwork modification .
Other Property and Equipment
orthwe t's primary offices are located at or near the Minneapolis/St. Paul International Airport.
The Company own a 160-acre site ea t of the airport where the Company's corporate office are
located. Additional owned building include re ervations center in Baltimore, Tampa and Chisholm,
16
Minnesota, and a data processing center in Eagan, Minnesota. 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's Narita International Airport.
The Company leases reservations centers in or near Minneapolis/St. Paul and Seattle. Maintenance
bases under operating leases are located in Minneapolis/St. Paul and Duluth, Minnesota. As of
December 31, 2003, the Company operated 26 city ticket offices in North America. One of these city
ticket offices was subsequently closed in January 2004 and the Company announced in February 2004
that i~ will be closing all of its remaining North America city ticket offices by March 2004.
In 2003, the Company closed its Detroit area reservations center and city ticket offices located in
Livonia, Michigan. The Company owns the building and land formerly used as the reservations center
and has entered into a purchase agreement to sell the property. The prospective buyer can terminate
the agreement before the end of the inspection period. Call center activity performed at the Detroit
facility was transferred to the Company's facilities in Baltimore, Chisholm, Minneapolis, Seattle and
Tampa.
Item 3. LEGAL PROCEEDINGS
Chase v. Northwest Airlines and Airline Reporting Corporation (U.S. D.C. Eastern District of
Michigan, Civ. Action No. 96-74711). Northwest is a defendant in an antitrust class 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 present.
The complaint alleges that Northwest's imposition of restrictions prohibiting the sale 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 same court against 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, N01thwest 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 plaintiffs' motion for class
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 Minnesota, Civ.
Action No. 97-1438). In June 1997, Midwestern Machinery Co. and several individuals filed an antitrust
class action against Northwest in the U.S. District Court for Minnesota. The complaint alleges that
Northwest's acquisition 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 plaintiff's appeal of the Court's Order granting
summary judgment is pending.
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
17
by a orth Carolina travel agent, on behalf of herself and similarly situated North Carolina travel
ag nts, challenging actions by most major airlines, including Northwest, to reduce travel agent base
commis ion from 8 percent to 5 percent and alleging several state law theories of liability, including
con piracy. 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 airline 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 plaintiffs' motion
to amend the complaint to include allegation 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. On October 30, 2003, the Court granted the
Defendants' motion for summary judgment. The plaintiffs' appeal of the Court's Order granting
summary judgment is pending.
McCoy-Johnson v. N011hwest Airlines (U.S. D.C. Western District of Tennessee, Civ. Action
o. 2-99-CV-2994GV). In November 1999, a purported class action was filed against Northwest by a
orthwest passenger in federal court alleging violations of Section 2 of the Sherman Act. The plaintiff
alleges that orthwest 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. Nmthwest 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 Rodneyfiled another companion
lawsuit Sax v. No11hwest (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.
orthwest 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. Nonhwest 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. On March 31 2003, the Court granted Northwest's motion for summary judgment.
Spirit's appeal of the Court's Order granting summary judgment is pending.
Force Majeure Arbitrations. Each of Northwest's collective bargaining agreements with its unions
contain "force majeure ' provisions, which provide that certain job protections, including layoff
protections, are nullified in the event of a "force majeure". A "force majeure" is generally defined as
the occurrence of certain events over which Northwest does not have control. Northwest has invoked
the force majeure' provisions of its collective bargaining agreements in laying off employees in
re ponse to three events: the terrorist attacks of September 11, 2001, the outbreak of war in Iraq in
March 2003 and the SARS epidemic in 2003. Each of the IAM, International Brotherhood of
Team ters Chauffeur , Warehousemen & Helpers of America ("IBT") (which was recently decertified
following a repre entation election in favor of the PFAA), ALPA and AMFA have filed one or more
grievance over the invocation of the force majeure provisions on some or all of these occa ions. These
di pute are ubject to arbitration and are in various stages of the grievance/arbitration process
18
provided for in the respective collective bargaining agreements. An arbitrator has denied both the IBT/
PFAA and AMFA grievances with respect to the Company's invocation of "force majeure" in
connection with the terrorist attacks of September 11, 2001. An adverse decision in any of the
remaining grievances could result in substantial damages against the Company. The Company is
vigorously defending these grievances. Although the ultimate outcome of these matters cannot be
predicted with certainty, management believes it properly applied the terms of the various collective
bargaining agreements and that the resolution of these matters will not have a material adverse effect
on the Company's consolidated financial statements taken as a whole.
Series C Preferred Stock Litigation. In June 2003, the IBT and certain related parties commenced
litigation against Northwest Airlines Corporation in New York state court, International Brotherhood of
Teamsters, Local 2000 et al. v. Northwest Airlines Corporation (New York Sup. Ct., Case No. 601742/03).
In August 2003, the IAM and a related party also commenced litigation against Northwest Airlines
Corporation in New York state court, International Association of Machinists and Aerospace Workers et
al. v. Northwest Airlines Corporation (New York Sup. Ct., Case No. 602476/03). Both lawsuits challenge
the Company's decision not to purchase its Series C Preferred Stock during 2003 and seek to compel
the Company to repurchase the Series C Preferred Stock that had been put to the Company. The
Company announced on August 1, 2003, that the Board of Directors had determined that the Company
could not legally repurchase the outstanding Series C Preferred Stock at that time because the Board
was unable to determine that the Company had adequate surplus to repurchase the outstanding
Series C Preferred Stock. The Company believes that the lawsuits are without merit. Discovery has
commenced. A court decision that adequate statutory surplus is available for a stock repurchase at this
time could result in the Company having to repurchase without deferral the outstanding Series C
Preferred Stock (approximately $236 million as of December 31, 2003).
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
above) will not have a material adverse effect on the Company's consolidated financial statements
taken as a whole.
19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
o matter were ubmitted to a vote of the Company' security holders during the fourth quarter
of 2003.
MANAGEMENT
Executive Officers of the Registrant
Richard H. Anderson, age 48 ha erved as Chief Executive Officer of NWA Corp. and Northwe t
ince April 2001 and wa elected a director of both companies in September 2001. He has erved in a
number of executive po ition ince JOmmg orthwest in 1990, including Executive Vice President and
Chief Operating Officer from December 1998 to April 2001, Executive Vice President-Technical
Operation and Airport Affairs from April 1998 to December 1998 and Senior Vice President-Technical
Operation and Airport Affairs from January 1997 to April 1998. From 1994 to 1996, he served as
Senior Vice President-Labor Relation , State Affairs and Law, and from 1990 to 1994 he served as Vice
Pre ident-Deputy General Counsel. Prior to joining Northwe t, Mr. Anderson was Staff Vice President
and Deputy General Counsel of Continental Airline . Mr. Anderson serves on the board of directors of
Medtronic, Inc.
Douglas M. Steenland, age 52, has served as Pre ident of NWA Corp. and Northwe t ince
April 2001 and wa elected a director of both companie in September 2001. He has served in a
number of executive positions since joining Northwe t in 1991, including Executive Vice President and
Chief Corporate Officer from September 1999 to April 2001, Executive Vice President-Alliance ,
General Coun el and Secretary from January 1999 to September 1999, Executive Vice President,
General Coun el 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
enior partner at the Washington, D.C. law firm of Verner, Liipfert, Bernhard, McPherson and Hand.
Bernard L. Han age 39, has erved a Executive Vice President and Chief Financial Officer of the
Company since October 2002. Prior to rejoining the Company, Mr. Han served at America West
Airlines, Inc. as Executive Vice Pre ident and Chief Financial Officer from September 2001 to
October 2002 Senior Vice Pre ident-Marketing and Planning from May 1998 to September 2001 and
Vice Pre ident Financial Planning & Analysis from January 1996 to May 1998. Between 1988 and 1995
Mr. Han held variou finance and marketing position at American Airlines and Northwest Airline .
J. Timothy Griffin, age 52, ha served a Executive Vice Pre ident-Marketing and Distribution of
orthwe t since January 1999. From June 1993 to January 1999, he erved a Senior Vice President-
Market Planning and Systems. Prior to joining Northwest in 1993, Mr. Griffin held senior po ition with
Continental Airline and American Airlines. Mr. Griffin al o erves on the board of directors of
Pinnacle Airlines Corp. and Orbitz, Inc.
Philip C. Haan, age 48 has erved as Executive Vice Pre ident-International, Sale and
Information Service of orthwe t ince January 1999. From December 1995 to January 1999, he
erv d a Senior Vice Pre ident-International Service . Mr. Haan formerly held position of Vice
Pre ident-Pricing and Area Marketing Vice President-In entory Sales and Sy tern and Vice Pre ident-
Revenue Management. Prior to joining orthwest in 1991 he was with American Airlines for nine
year.
20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the a daq National Market under the ymbol
NWAC. The table below how the high and low sale price for the Company' common tock during
2003 and 2002:
2003 2002
Quarter High Low High Low
1st .... ............ ...... .......... .... . . .67 5.05 20.92 13.56
2nd ... ............... ........ ....... .. .. . 11. 0 6.30 20.69 10.66
3rd ..................................... . 11.37 7.70 12.24 6.33
4th ..................................... . 15.21 9.56 8. 7 4.71
A of January 30, 2004, there were 3,648 tockholder of record.
Since 1989, NWA Corp. ha not declared or paid any dividend on it common tock and doe not
currently intend to do o. Under the provi ion of certain of the ompany bank er dit agreements,
NWA Corp.'s ability to pay dividend on or repurchase its common tock i re tricted. Any future
determination to pay cash dividends will be at the di cretion of the Board of Director , ubj ct to
applicable limitations under Delaware law, and will be dependent upon the Company' re ult of
operations, financial condition, contractual r triction and other factor deemed r levant by the Board
of Directors.
The following table summarize information a of December 31 2003, relating to equity
compensation plans of the Company pur uant to which options, re tricted tock unit 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 ........... . ....... .
umber of Securitie to be
Issued Upon Exercise of
Outstanding Options,
Warrant and Rights.
(a)
3,150,461
1,919,593(3)
5,070,054
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
$10.09
$18.37(3)
$13.23(3)
(1) Comprised of the Company's 2001 Stock Incentive Plan.
umber of Share Remaining
Available for Future Issuance
Under Equity Compensation
Plans (Excluding Securitie
Reflected in Column (a))
(c)
5,195,811
8,620,932
13,816,743
(2) Comprised of the Company's 1999 Stock Incentive Plan and the 1998 Pilot Stock Option Plan.
(3) Excludes re tricted stock and restricted stock units, which by their nature do not have an exerci
price.
See "Item 8. Consolidated Financial Statements and Supplementary Data Note 7-Stock Option
for additional information regarding the Company' equity compen ation plan .
21
ITEM 6. SELECTED FINANCIAL DATA
NORTHWEST AIRLINES CORPORATION
Statements of Operations
Operating revenues
Passenger ............... . ... . .... . ... . .
Cargo ................................ .
Other ............................... . .
Operating expenses ........................ .
Operating income (loss) ............... . ..... .
Operating margin ........... . .... . ........ . .
Net income (loss) ................... . ..... .
Earnings (loss) per common share:
Basic ............................... .
Diluted ...... . ..................... . .
Balance Sheets (In millions)
Cash cash equivalents and unrestricted short-term
investments ............................ .
Total assets .............................. .
Long-term debt, including current maturities . ...... .
Long-term obligations under capital leases, including
current obligations ....................... .
Mandatorily redeemable security ............... .
Preferred redeemable stock .................. .
Common stockholders' equity (deficit) ... . ....... .
Operating Statistics(2)
Scheduled service:
Available seat miles (ASM) (millions) .......... .
Revenue passenger miles (RPM) (millions) ...... .
Passenger load factor . . . . . . . . . . . . . . . . . . . . . .
Revenue passengers (millions) ...... . ........ .
Passenger revenue per RPM (yield)(3) ......... .
Passenger revenue per scheduled ASM (RASM)(3) ..
Total available seat miles (ASM) (millions) ........ .
Passenger Service operating expense per total
ASM(3)(4) ............................ .
Cargo ton miles (millions) ................... .
Cargo revenue per ton mile . . ....... . .... . ... .
Fuel gallons consumed ( million ) . . . . . . . . . . . . . . . .
Average fuel cost per gallon, excluding taxes ....... .
Number of operating aircraft at year end ......... .
Full-time equivalent employees at year end ........ .
2003
$ 7,936
752
822
9,510
9,775
(265)
(2.8) %
$ 248
$ 2.75
$ 2.74
$ 2,757
14,154
7,866
419
236
(2,011)
88,593
68,476
77.3%
51.9
11.14
8.61
89,158
9.87
2,184
34.42
1,752
80.68
430
39,100
Year Ended December 31
2002 2001(1) 2000
(In millions, except per share data)
$ 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
9.96
2,221
33.08
1,896
69.33
439
44,323
$ 8,417
720
768
9,905
10,773
(868)
(8.8) %
$ (423)
$ (5.03)
$ (5.03)
$ 2,512
12,975
5 051
586
492
227
(431)
98,356
73,126
74.3%
54.1
11.24
8.36
98,544
9.95
2,161
33.28
2,029
79.26
428
45,708
$ 9,653
857
730
11,240
10,671
569
5.1 %
$ 256
$ 3.09
$ 2. 77
$ 693
10,877
3,242
556
558
232
231
103,356
79,128
76.6%
58.7
12.04
9.21
103,517
9.45
2,502
34.25
2,113
82.99
424
53,491
1999
$ 8,692
732
709
10,133
9,419
714
7.0%
$ 300
$ 3.69
$ 3.26
$ 749
10,584
3,666
597
626
243
(52)
99,446
74,168
74.6%
56.1
11.58
8.64
99,572
8.73
2,336
31.31
2,039
53.55
410
51,823
(1) 2001 was affected by significantly 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 Air
Tran portation Safety and System Stabilization Act, which was recorded as other non-operating income.
(2) All statistics exclude Pinnacle Airlines, consistent with how the Company reports statistic to the DOT and is
comparable to statistics reported by other major network airlines.
(3) The e financial measures exclude non-passenger ervice revenues and expense . The Company believes that by
providing financial measures directly related to pas enger service operation investors are able to evaluate and
compare the Company' core operating results to those of the indu try.
22
(4) Pursuant to SEC Regulation S-K, Item lO(e), a reconciliation of passenger service operating expenses to total
operating expenses is provided below:
2003 2002 2001 2000 1999
(In millions)
Passenger service operating expenses(a) ........ $8,800 $ 9,324 $ 9,803 $ 9,784 $8,692
747 Freighter operations .............. . .. 497 486 474 466 377
MLT and Pinnacle, net of intercompany
eliminations ........................ 452 490 464 404 334
(Gain)/loss on assets and NBA transportation . . 26 35 32 17 16
- - - - - - - - - - - - -
Operating expenses ...................... $9,775 $10,335 $10,773 $10,671 $9,419
( a) Included in passenger service operating expenses are the following:
Aircraft impairments ..... . .......... .
Curtailment charges .......... . .. . ... .
Severance expenses . . . . . . . . . . . . . . . . . .
Other ................ . ..... ... .. .
Per Total ASM .............. . ..... .
23
2003
$ 21
58
20
$ 99
2002 2001 2000
(In millions)
$ 366 $ 161 $ 125
16
17 116
36
$ 435 $ 277 $ 125
1999
$ 22
_SE)
$ (5)
0.11 0.46 0.28 0.12 (0.01)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
NWA Corp. is a holding company whose principal indirect operating subsidiary is Northwest. The
Consolidated Financial Statements include the accounts of NWA Corp. and all consolidated
subsidiaries. Substantially all of the Company's results of operations are attributable to its principal
indirect operating subsidiary, Northwest, which accounted for approximately 98% of the Company's
2003 consolidated operating revenues and expenses. The Company's results of operations also include
other subsidiaries, of which MLT and Pinnacle Airlines have been the most significant. The following
discussion pertains primarily to Northwest and, where indicated, MLT and Pinnacle Airlines.
The Company reported net income of $236 million for the year ended December 31, 2003,
compared with a net loss of $798 million in 2002. Diluted earnings per share were $2.74 in 2003
compared with a loss per share of $9.32 in 2002. Operating loss was $265 million in 2003 compared
with an operating loss of $846 million in 2002. Passenger revenues for the year ended December 31,
2003 decreased by $89 million compared to 2002, continuing their three year trend of decline.
Full year 2003 results included $801 million of net unusual pre-tax gains. Operating expenses
included $99 million of unusual items related to employee severance, a pension curtailment charge and
aircraft write-downs. Net unusual non-operating gains totaling $900 million were comprised of a
$299 million gain from the initial public offering of 88.6% of the Company's investment in Pinnacle
Airlines Corp., $209 million received under the Emergency Wartime Supplemental Appropriations Act
as reimbursement for security fees previously paid to the TSA, a $199 million gain from the sale of the
Company's investment in WorldSpan, a $148 million net gain related to the acquisition of the
corporation which held the Company's Mandatorily Redeemable Preferred Security, a $39 million gain
from the sale of its investment in Hotwire.com ("Hotwire"), an $11 million gain from the sale of a
portion of its investment in Orbitz and a $5 million loss on the Company's debt exchange.
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 associated with the closure of several facilities, $32 million related to employee
benefit costs and additional 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 Airline Stabilization Act. In
addition, the 2002 effective tax rate reflected a $15 million provision for tax credits the Company
expected to expire unused.
Northwest and the Current Status of the Airline Industry
The airline industry is intensely competitive. Northwest's competitor include other major domestic
airlines as well as foreign, regional and new entrant airlines, some of which have more financial
resources or lower cost structures than Northwest. In most markets that Northwest serves, it competes
with at least one of th~se carriers. Our revenues are sensitive to numerous factors, and the actions of
other carriers in the areas of pricing, scheduling and promotions can have a substantial adverse 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, or in bankruptcy, may institute
pricing structures intended to achieve near term survival rather than long term viability.
Since 2001, the U.S. airline industry overall has suffered a sub tantial reduction in revenues, both
on an absolute basis and relative to historical trends. The Company's annual operating revenue has
declined in each of the last three years and its 2003 operating revenue was over $1.7 billion less than it
was in 2000. As a result, the Company has incurred significant operating losses, and absent unusual
items, its pre-tax losses over that period have totaled nearly $2.2 billion. The Company does not
24
anticipate that the revenue environment will materially improve in 2004. Due to the discretionary
nature of business and personal travel spending, U.S. airline revenues are heavily influenced by the
strength of the U.S. economy, other regional world economie and corporate profitability. The revenue
decline ha been due in part to the U.S. economic cycle. However, permanent tructural differences in
the industry revenue environment have also taken place. The e difference are the re ult of a number
of factors.
The rapid growth of low cost airlines has had a profound impact on indu try revenue . U ing the
advantage of low unit costs, driven in large part by lower labor co t , the e carrier are able to operate
profitably while offering substantially lower fares. By targeting such fare at bu ines pa enger in
particular, these carriers are shifting demand away from the larger, more e tabli hed airline . The e low
cost carriers now transport more than 25% of all domestic U.S. pa enger , compared to le than 10%
a decade ago. They now compete for, and thus influence indu try pricing on approximately 75% of all
domestic U.S. passenger ticket sales, versus less than 20% a decade ago. Moreover, as a result of their
better financial performance, low cost carrier have the resource nece ary to continue to increa e
their market share. Industry revenue could be reduced ubstantially in the event one or more large
network carriers decides it is a better long-term trategy to adopt a broad pricing tructure imilar to
those employed by low cost carriers rather than give up additional market hare.
Internet travel Web sites have driven ignificant di tribution co t aving for airline but have al o
allowed consumers to become more efficient at finding lower fare alternative than in the pa t by
providing them with more powerful pricing information. The increa ed price con ciou ne of both
business and leisure travelers, as well as the growth in new di tribution channel , has further motivated
airlines to price aggressively to gain fare and market share advantage . These factors will increase over
time as Internet ticket sales increase.
Airlines are among the most heavily taxed of all U.S. companies. Taxe and fee can add up to
approximately 25% of what a passenger pay for an average roundtrip domestic airline ticket, a
percentage even greater than that for alcohol and tobacco product . The e taxe and fee have grown
significantly in the past decade. The Company believes that every dollar of tax or fee increa e imposed
on airline passengers roughly translates into a dollar of reduced airline revenue.
The attacks of September 11, 2001 materially impacted air travel and with concerns about further
terrorist attacks unlikely to abate any time soon, continue to have a negative effect on travel demand.
Additionally, security procedures introduced at airports since the attack have increased the
inconvenience of flying, both in reality and in perception, and thu have further reduced demand.
Global events further exacerbated the decline in airline industry revenue in 2003. The war in Iraq
and its aftermath and the outbreak of Severe Acute Respiratory Syndrome ("SARS ') have materially
affected airline booking and continue to negatively impact air travel, particularly on international
routes. Another outbreak of SARS or other influenza-type illness, if it were to persist for an extended
period, could materially affect the airline industry by reducing revenues and impacting travel behavior,
especially on routes to and from certain Asian destinations.
In response to the industry environment, the Company has taken aggres ive tep to mitigate the
impact on its results of operations and financial condition resulting from these adver e trends. In the
past two years, these steps have included a significant decrease in scheduled capacity on an available
seat mile basis, a reduction in work force of over 16,900 full time equivalent position deferral of
certain aircraft orders, closure of maintenance facilities, flight crew base , reservation and ale
facilities and deferrals and cancellations of discretionary and other non-operationally critical spending.
In all, eight rounds of cost savings have been initiated ince the U.S. economy began w akening in
early 2001, resulting in co t reduction totaling $1.6 billion.
25
Despite these and other ignificant steps to reduce costs, additional measures will be necessary in
response to the fundamentally changed industry revenue environment. Wages, salaries and benefits
made up 40% of the Company's 2003 operating expenses and will be the critical component of future
cost reduction initiatives. The Company is in discussions with its labor unions in an effort to align
wages, benefits and work rules with the new revenue environment and to remain competitive with
airlines that have achieved permanent labor cost reductions through bankruptcy proceedings (United
Airlines, US Airways) or the threat of bankruptcy (American Airlines). The Company cannot predict
the outcome of these negotiations at this time.
Results of Operations-2003 Compared to 2002
Operating Revenues. Operating revenues increased 0.2% ($21 million). System passenger revenues
decreased 1.6% ($124 million), excluding Pinnacle Airlines. The decrease in system passenger revenues
was primarily attributable to a 4.9% decrease in traffic partially offset by a 3.5% increase in yields.
Pinnacle Airlines passenger revenues, net of intercompany eliminations, increased 13.3% ($36 million)
to $307 million due to increased capacity from 25 Bombardier CRJ aircraft added in 2003.
The following analysis by market is based on information reported to the DOT and excludes
Pinnacle Airlines:
System Domestic Pacific
2003
Passenger revenues (in millions) ................... . $7,629 $5,336 $1,421
Increase (Decrease) from 2002:
Passenger revenues (in millions) ................... . (124) 52 (136)
Percent ................................... . (1.6)% 1.0% (8.7)%
Scheduled service ASMs ( capacity) ................. . (5.2)% (3.1)% (6.1)%
Scheduled service RPMs (traffic) .................. . (4.9)% (1.3)% (9.0)%
Atlantic
$872
(40)
(4.4)%
(12.2)%
(11.0)%
Passenger load factor ........................... . 0.2 pts. 1.3 pts. (2.5) pts. 1.2 pts.
Yield ...................................... . 3.5% 2.3% 0.4% 7.4%
Passenger RASM ............................. . 3.7% 4.1% (2.8)% 8.9%
Domestic passenger revenues increased primarily due to slight improvements in yields, partially
offset by a small decline in traffic.
Pacific passenger revenues decreased substantially due to lower traffic. Despite a 6.1 % reduction
in capacity, largely intended to match lower demand as a result of the Iraq War and the SARS
epidemic, the Pacific load factor was down 2.5 percentage points.
Atlantic passenger revenues decreased due to a significant reduction in traffic caused by the Iraq
War, ome of which was offset by higher yields.
Cargo revenues increased 2.3% ($17 million) to $752 million due to a 4.1 % increase in yield,
partially offset by a 1.7% decline in cargo ton miles. Cargo revenues consist of freight and mail carried
on passenger aircraft and the Company s 12 Boeing 747-200F dedicated freighters. Freight revenue
increased 5.2% ($34 million) while mail revenue decreased 22.8% ($17 million). In the last half of
2003, the Company decided to stop carrying U.S. domestic mail as lower volumes and yields, partially
due to restrictions imposed by the U.S. Government following September 11, 2001, caused this business
to become unprofitable.
Other revenues, the principal components of which are MLT, other transportation fees and charter
revenues, increased 12.8% ($93 million). This increase was primarily due to increased revenues from
CRAF and other charter activities, frequent flyer partnership revenue, ticketing and handling fees,
KLM joint venture settlements, the NBA transportation program and support services revenue.
26
Operating Expenses. Operating expenses decreased 5.4% ($560 million). The following table
presents operating expenses for the year ended December 31, 2003 and describes significant variances
from the year ended December 31, 2002:
Increase
Year ended (Decrease) Percent
December 31, 2003 from 2002 Change Note
(in millions)
Operating Expenses
Salaries, wages and benefits ...................... . $3,905 $ 27 0.7% A
Aircraft fuel and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,554 115 8.0 B
Selling and marketing ........................... . 709 (94) (11.7) C
Depreciation and amortization .................... . 586 (317) (35.1) D
Other rentals and landing fees ............... . .... . 569 (7) (1.2) E
Aircraft rentals .... . . . ... . .................... . 481 21 4.6 F
Aircraft maintenance materials and repairs ........... . 474 (102) (17.7) G
Other ............ . ......................... . 1,497 (203) (1 J .9) H
Total operating expenses ....................... . $9,775 $(560) (5.4)%
A. Salaries, wages and benefits increased due to higher pension expenses, including a $58 million
pension curtailment charge, annual pay rate increases, $20 million of severance expenses, and
contractually required payments to employees represented by the International Association of
Machinists and Aerospace Workers and the Transportation Communications Union, partially offset
by savings from an 11.8% decrease in average full-time equivalent employees.
B. Aircraft fuel and taxes were higher due to a 16.4% increase in the average fuel cost per gallon to
80.68 cents, net of hedging transactions, partially offset by 7.6% fewer fuel gallons consumed as a
result of reduced capacity and the use of more fuel efficient aircraft. Fuel hedge transactions
reduced fuel costs by $105 million in 2003 and $55 million in 2002.
C. Selling and marketing expenses decreased $94 million, due primarily to the elimination of North
American base travel agency commissions, which began to take effect near the end of the second
quarter of 2002, lower passenger volumes and lower advertising expenses.
D. Depreciation and amortization decreased primarily due to $372 million of aircraft and related parts
write-downs recorded in 2002, offset slightly by similar charges of $21 million recorded in the
second quarter of 2003.
E. Other rentals and landing fees remained relatively unchanged. Generally higher rates system wide
were offset by lower volume.
F. Aircraft rentals increased due to additional leased aircraft, partially offset by lower variable
interest rates on existing leases.
G. Aircraft maintenance materials and repairs decreased by $102 million, due primarily to lower
material usage from reduced maintenance volume, which resulted from lower fleet utilization and a
significant number of new aircraft in the fleet.
H. Other expenses (which include MLT operating expenses, outside services, insurance, passenger
food, personnel expenses, communication expenses and supplies) decreased principally due to
lower Northwest passenger volumes, lower passenger liability insurance and lower MLT operating
expenses.
Other Income and Expense. Other non-operating income increa ed by $857 million, primarily due
to several unusual items: a $299 million gain from the sale of the Company's investment in Pinnacle
Airlines Corp.; $209 million received under the Emergency Wartime Supplemental Appropriations Act
27
a r imbur ment for curity f e pr viou ly paid to the TSA; a $199 million gain from the ale of the
Compan in e tm nt in WorldSpan; a $361 million gain related to a write-down of the Company's
Mandatoril R d mable Preferr d Security, accompanied by an impairment charge of $213 million
r lated to the prop rty curing thi obligation- a $39 million gain from the ale of the Company's
in tment in Hotwire and an $11 million gain from the ale of a portion of the Company's investment
in Orbitz. Th C mpan al o gen rat d a high r return on hort-term investments, which partia11y
off et high r interest expen e related to increased debt l vels.
Tax Expen e (Benefit). During 2003 the Company recognized a $30 million tax benefit related to
lo e recorded in the fir t quarter that fully offset its remaining $30 million net deferred tax liability.
Gi en rec nt lo experience, current accounting rule do not allow the Company's balance sheet to
reflect a net deferred tax asset. Therefor , a valuation allowance is provided against tax benefits,
principally for net operating losses in excess of its previously remaining deferred tax liability. See
"Item 8. Con olidated Financial Statement and Supplementary Data, Note 9-Income Taxe ", for
additional di cu ion of the Company' ta,"'< accounts.
Results of Operations- 2002 Compared to 2001
Operating Revenues. Operating revenues decrea ed 4.2% ($416 million). System passenger
revenue decrea ed 5.7% ( 466 million), excluding Pinnacle Airlines. The decrease in system passenger
rev nue was primarily attributable to a 1.5% decrease in traffic and a 4.3% decline in yields. System
pa enger load factor increa ed 2.8 points to 77.1 % for the year ended December 31, 2002. Pinnacle
Airline pas enger revenue , net of intercompany eliminations, increased 36.9% ($73 million) to
$271 million due to increa ed capacity from 21 Bombardier CRJ aircraft added in 2002 and higher
rates under a new airline services agreement with Northwest that was effective March 1, 2002.
The following analysi by market i based on information reported to the DOT and excludes
Pinnacle Airlines:
System Domestic Pacific Atlantic
2002
Pa enger re enues (in millions) ................... . $7,753 $5,284 $1,557
Increase (Decrease) from 2001:
Pa senger re enu (in millions) ................... . (466) (351) (120)
P rcent .... . ............................ . . . (5.7)% (6.2)% (7.2)%
Schedul d ser ic ASMs (capacity) ................. . (5.0)% (4.3)% (6.7)%
Scheduled ervic RPM (traffic) .................. . (1.5)% (2.3)% (0.4)%
Pa senger load factor ........................... . 2.8 pts. 1.5 pts. 5.3 pts.
Yield .................................... . . . (4.3)% (4.0)% (6.9)%
Pa enger RASM (0.7)% (2.1)% (0.6)%
Dome tic pa enger re enue decreased primarily due to a combination of lower yields and
traffic.
Pacific pa nger re enue decrea ed due to lower yields. Traffic wa virtually unchanged,
r ulting in a higher pa enger load factor on decrea ed capacity.
$912
5
0.7%
(5.2)%
(0.7)%
3.7 pts.
1.4%
6.1%
Atlantic pa enger re enue were effectively flat as slightly improved yields were mostly offset
b a mall reduction in traffic.
argo re enue increa ed 2.1 % ($15 million) to $735 million due to a 2.8% increase in cargo ton
mile partially off t b a 0.6% d dine in revenue per ton mile. Cargo revenue con i t of freight and
mail arried on pa enger aircraft and the Company 12 747-200F dedicated freighter . Freight revenue
increa ed 7.4% ( 46 million), including approximately 27 million in the fourth quarter resulting from
2
the west coast dockworkers' lockout. However, this was partially offset by a 29.6% ($31 million)
decrease in mail revenue, due largely to lower volumes resulting from U.S. Government restrictions
imposed following September 11, 2001 on the transportation of packages larger than 16 ounces on
passenger aircraft. Such restrictions were responsible, in part, for Northwest ultimately deciding in the
second half of 2003 to discontinue U.S. domestic mail carriage as lower volumes and yields caused this
business to become unprofitable.
Other revenues, the principal components of which are MLT, other transportation fees and charter
revenues, decreased 5.1 % ($39 million). This decline was primarily due to reduced revenues from MLT,
KLM joint venture settlements, ticketing and handling fees and support services, partially offset by an
increase in frequent flyer program partnership revenue.
Operating Expenses. Operating expenses decreased 4.1 % ($438 million). The following table
presents operating expenses for the year ended December 31, 2002 and describes significant variances
from the year ending December 31, 2001:
Increase
Year ended (Decrease) Percent
December 31, 2002 from 2001 Change Note
(in millions)
Operating Expenses
Salaries, wages and benefits ...................... . $ 3,878 $ (85) (2.1)% A
Aircraft fuel and taxes ...................... . ... . 1,439 (288) (16.7) B
Depreciation and amortization .................... . 903 213 30.9 C
Selling and marketing ............. . ..... . ...... . . 803 (201) (20.0) D
Aircraft maintenance materials and repairs ........... . 576 (93) (13.9) E
Other rentals and landing fees .................... . 576 43 8.1 F
Aircraft rentals ................. . ............. . 460 13 2.9 G
Other ...................................... . 1,700 ~) (2.3) H
Total operating expenses ....................... . $10,335 $(438) (4.1)%
A. Salaries, wages and benefits decreased primarily due to 10.6% fewer full-time equivalent employees
and $89 million for retroactive wages and benefits related to the 2001 AMFA collective bargaining
agreement. This decline was partially offset by higher average wage rates, pension, group
insurance, and other post employment benefit expenses. Pension expenses increased largely due to
a lower actuarial discount rate, a decline in pension asset returns and increased benefits from the
2001 AMFA contract.
B. Aircraft fuel and taxes were lower due to a 12.5% decrease in the average fuel cost per gallon to
69.33 cents, net of hedging transactions, and 6.6% fewer fuel gallons consumed as a result of
reduced capacity and the use of more fuel efficient aircraft. Fuel hedge transactions reduced fuel
costs by $55 million in 2002 and had an immaterial effect in 2001.
C. Depreciation and amortization increased primarily due to $372 million of aircraft and related parts
write-downs recorded in 2002, offset by similar charges of $161 million recorded in the third and
fourth quarters of 2001. The increase in depreciation and amortization was partially offset by the
elimination of $24 million per year from international route and goodwill amortization recorded
prior to 2002. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 1-
Summary of Significant Accounting Policies", for additional discussion of the fleet disposition
charges and international routes and goodwill no longer being amortized.
D. Selling and marketing decreased $109 million due primarily to the elimination of North American
base commissions in the second quarter of 2002 and $40 million due to lower revenues
system-wide.
29
E. Aircraft maintenance materials and repairs decreased due to lower repair volume in 2002, which
re ulted from retirements and removal from service of older aircraft, as well as a higher level of
scheduled work within the routine engine and airframe maintenance cycle in 2001.
F. Other rentals and landing fees increased primarily due to the new Detroit Midfield facility, as well
as higher rates across the system due to unfunded TSA mandates.
G. Aircraft rentals increased due to additional leased aircraft, partially offset by lower variable
interest rates on existing leases.
H. Other expenses (the principal components of which include MLT operating expenses, outside
services, insurance, passenger food, personnel expenses, communication expenses and supplies)
decreased principally due to lower personnel, supplies and claims expenses and reduced levels of
passenger food service, partially offset by significantly 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 borrowings 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
the Company's recent loss experience, current accounting rules do not allow its balance sheet to reflect
a net tax asset position. As a result, when losses after December 31, 2002 generated deferred tax assets
that fully offset the Company's then existing deferred tax liabilities, no tax benefit could be recognized
with respect to further losses. See "Item 8. Consolidated Financial Statements and Supplementary
Data, Note 9-Income Taxes", for additional discussion of the Company's tax accounts.
Liquidity and Capital Resources
As of December 31, 2003, the Company had ca h, cash equivalents and short-term investments of
$2.883 billion. This amount included $126 million of restricted short-term investments, resulting in total
unrestricted liquidity of $2.757 billion. As discussed later, the Company's secured credit facilities were
fully drawn as of December 31, 2002 and had approximately $1 million available as of December 31,
2003.
Cash Flows. Liquidity increased by $660 million as of December 31, 2003, due primarily to
$209 million security fee reimbursements received from the U.S. Government under the Emergency
Wartime Supplemental Appropriations Act, a $218 million income tax refund, cash proceeds of
$278 million from the sale of WorldSpan and the issuances of $150 million and $225 million of senior
convertible notes, partially offset by $158 million in cash contributions to the pension plans, capital
expenditures, net of financings, and other investing and financing activities.
Operating Activities. Cash provided by operating activities was $375 million in 2003 compared to
cash used by operating activities of $284 million in 2002. This increase of $659 million was largely due
to the $209 million of Emergency Wartime Supplemental Appropriations Act funds received in
May 2003, net income tax receipts $93 million higher in 2003 than 2002 and the payment in
30
January 2002 of $216 million of aviation taxes originally due between September 11, 2001 and
January 15, 2002.
The Company operates, like its competitors, with negative working capital, which totaled
$297 million at December 31, 2003. This negative working capital position is primarily attributable to
the Company's $1.27 billion air traffic liability, largely representing cash received from tickets that
customers have not yet used.
Investing Activities. Investing activities consist primarily of the purchase of short-term investments,
aircraft capital expenditures and other related costs. Other related costs include engine purchases, costs
to commission aircraft before entering revenue service, deposits on ordered aircraft, facility
improvements and ground equipment purchases.
Investing activities related to the acquisitions of aircraft consisted of the following for years ended
December 31:
Airbus A319
Airbus A320
Airbus A330 ..... . ................................ .
Boeing 747-400 ...................... . ... . ......... .
Boeing 757-200 . .. ........................ . ........ .
Boeing 757-300 ... . . . ... . .... . ... . ...... . .......... .
2003 2002 2001
14
2
5
9
30
24
2
2
3
7
38
13
4
5
22
Investing activities in 2003, other than aircraft purchases and short-term investments, include
proceeds of $278 million from the sale of the Company's interest in WorldSpan, $255 million from the
sale of 88.6% of the Company's interest in Pinnacle Airlines Corp., $40 million from the sale of the
Company's interest in Hotwire and $13 million from the sale of a portion of its investment in Orbitz.
Investing activities in 2002, other than aircraft purchases, include facilities and aircraft modification
programs. Investing activities in 2001, other than aircraft purchases, include $582 million in proceeds
from the sale of the Company's investment in Continental. See "Item 8. Consolidated Financial
Statements and Supplementary Data, Note 13-Related Party Transactions", for additional discussion of
the Company's investment in Continental.
Financing Activities. Financing activities in 2003 consist primarily of the issuance of $150 million
of 6.625% convertible senior notes due in 2023, the issuance of $225 million of 7.625% convertible
senior notes due in 2023, the payment of debt and capital lease obligations, and the financing of: (i) 11
Airbus A319, four Boeing 757-300 and three Airbus A330-300 aircraft with escrowed funds from an
offering of pass-through trust certificates completed in 2002; and (ii) two Boeing 757-300, one Airbus
A330-300, one Airbus A320 and one Airbus A319 aircraft with long-term debt.
In addition to the financed aircraft discussed above, the Company also took delivery of one Airbus
A330-300, one Airbus A320, one Airbus A319, three Boeing 757-300 aircraft and 25 Bombardier
CRJ200/440 regional jets during the twelve months ended December 31, 2003. The Airbus A300-300,
A320 and A319 aircraft and the three Boeing 757-300 aircraft were acquired through non-cash
transactions with manufacturers. The Bombardier CRJ aircraft were acquired and financed with
long-term operating leases and subleased to Pinnacle Airlines.
On December 9, 2003, Northwest completed an offer to exchange outstanding unsecured notes
("Old Notes") due in 2004, 2005 and 2006, with interest rates ranging from 7.625% to 8.875%, for new
10.5% class D pass-through trust certificates ("Class D Certificates") representing a fractional
undivided interest in the assets of a pass-through trust. The trust's assets consist of interests in
31
$551.8 million principal amount of notes primarily ecured by aircraft financed under five serie of
orthwe t pa -through certificate previou ly is ued. Holder tendered approximately $59 million of
Old otes for $64 million of Clas D Certificate .
The exchange wa accounted for as an extinguishment of debt under generally accepted accounting
principle with the Company recording an a sociated lo s because the cash flow of the new debt
in trument are greater than 110 percent of the original in truments' remaining cash flows. The los
recognized in the Consolidated Statements of Operation due to thi exchange offer approximated
$5 million.
During 2003, NWA Corp. completed two offerings of $375 million aggregate principle amount of
convertible enior note , both due in 2023. These notes were i sued to qualified in titutional buyer
pur uant to Rule 144A and to non-U.S. per on pur uant to Regulation S, under the Securitie Act of
1933. The first is uance of note in May wa for an aggregate principal amount of $150 million and
bear interest at 6.625% (the "6.625% otes"), which is payable in cash emi-annually through May 15,
2010. Thereafter, the principal amount of the notes will accrete semi-annually at a rate of 6.625% per
year to maturity. The econd issuance of notes in ovember wa for an aggregate principal amount of
$225 million and bears intere t at 7.625% (the "7.625% otes"), which i payable in cash emi-annually
through November 15, 2008. Thereafter, the principal amount of the note will accrete semi-annually at
a rate of 7.625% per year to maturity. Each note was issued at a price of $1,000 and i convertible into
NWA Corp. common stock. The 6.625% otes and the 7.625% otes were i ued with conversion rates
of 61.8047 and 43.6681 shares per $1,000 original principal amount of notes, respectively. The e
conversion rates equate to an initial conversion price of approximately $16.18 and $22.90 per share for
the 6.625% Note and the 7.625% Notes, respectively, subject to adju tment in certain circum tances.
Both issuance of notes are guaranteed by Northwest.
Holders of the note may convert their notes only if: (i) NWA Corp.' common stock trade above
a specified price threshold for a specified period; (ii) the trading price for the notes falls below certain
threshold ; (iii) the notes have been called for redemption; or (iv) specific corporate transactions occur.
NWA Corp. may elect to pay the repurchase price in cash or in shares of common stock, or a
combination of both, subject to certain conditions. Should holders elect to require NWA Corp. to
redeem the notes on any of the repurcha e dates, it is the Company's present intention to satisfy the
requirement in cash. NWA Corp. may redeem all or some of the notes for cash at any time on or after
May 15, 2010 for the 6.625% otes and on or after ovember 15, 2006 for the 7.625% otes, at a
redemption price in each case equal to the accreted principal amount plus accrued and unpaid interest,
if any, to the redemption date.
Holders of the 6.625% Notes may require NWA Corp. to repurchase the note on May 15 2010
2013 and 2018 at a price equal to the accreted principal amount plu accrued and unpaid interest if
any, on the repurchase date. Holders of the 7.625% otes may require NWA Corp. to repurchase the
note on November 15, 2008, 2013 and 2018 at a price equal to the acer ted principal amount plu
accrued and unpaid interest, if any, on the repurchase date. In conjunction with the i suance of the
7.625% ote , NWA Corp. entered into a call pread option tran action that was de igned to limit the
Company's exposure to potential dilution from conversion of the 7.625% Note in the event that the
market price per share of NWA Corp.'s common stock at the time of exerci e is greater than the trike
price of 22.90. Thi call spread option will be treated a an equity transaction under the Emerging
I ue Ta k Force (' EITF") I sue No. 00-19, Accounting for Derivative Financial In truments Indexed to,
and Potentially Settled in, a Company's Own Stock. NWA Corp. plans to use the net proceed from the
offerings for working capital and general corporate purpo e .
Financing activitie in 2002 con isted primarily of the is uance of 300 million of 9.875%
un ecured notes due in 2007, the pa ment of debt and capital lease obligation , and the financing of:
(i) 18 Airbus A319, one Boeing 747-400, two Airbu A320 and three Boeing 757-300 aircraft with
32
escrowed funds from offerings of pass-through trust certificates completed in 2001; (ii) two Boeing
757-300 aircraft with escrowed funds from an offering of pass-through trust certificates completed in
2002; (iii) three Boeing 757-200, two Boeing 757-300 and six Airbus A319 aircraft with long-term bank
debt; (iv) one Boeing 747-400 aircraft under a sale and leaseback; and the refinancing of three Boeing
747-400 aircraft purchased off capital lease.
In August 2002, Northwest completed an offering of $749 million of pass-through trust certificates
to finance or refinance the acquisition of 11 new Airbus A319, six new Boeing 757-300 and three new
Airbus A330-300 aircraft that were delivered between October 2002 and December 2003. The
pre-funded portion of cash proceeds from the offerings of certificates were invested and held in escrow
with a depositary bank. Such funds were not assets or direct obligations of, or guaranteed by,
Northwest and are therefore not included in the Consolidated Financial Statements. As aircraft were
delivered or refinanced, Northwest utilized the cash proceeds to finance the acquisition of these aircraft
as secured debt financing for ownership. As of December 31, 2003, there were no unused offering
proceeds held in escrow.
Financing activities in 2001 consisted primarily of the Company's borrowing in March and
subsequent 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 as scheduled, the issuance of $300 million of 8.875% unsecured notes due 2006,
$120 million received under airport facility revenue bonds and payment of debt and capital lease
obligations. Financing activities also included the receipt of $678 million in financing for: (i) 13 Airbus
A319 aircraft, seven of which were financed with funds from pass-through trust certificates and six 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 funds from pass-through trust certificates and
one with long-term bank debt.
In June 2001, the Company completed an offering of $581 million of pass-through certificates at a
blended fixed coupon rate of 7.18%. Proceeds from sales of the certificates were used to finance 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 an offering of $396 million of European pass-through certificates due in 2013 at a
blended floating rate of three-month London Interbank Offered Rate ("LIBOR") plus 0.60% (1.77%
as of December 31, 2003) to finance the acquisition of nine new Airbus A319 aircraft and five new
Airbus A320 aircraft delivered between November 2001 and July 2002.
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:
2004 2005 2006 2007 2008 Thereafter Total
(in millions)
Long-term debt(l) ..................... $ 668 $1,488 $ 781 $ 732 $ 515
Capital leases(2) . . . . . . . . . . . . . . . . . . . . . . 64 40 29 33 28
Operating leases:(3)
Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . 608 595 602 605 567
Non-aircraft . . . . . . . . . . . . . . . . . . . . . . . . 163 157 145 135 122
Aircraft commitments(4) . . . . . . . . . . . . . . . . 1,600 746 567 206 190
Other purchase obligations(5) ............. ~ _E ~ ~ ~
Total(6) ............................. $3,132 $3,048 $2,145 $1,724 $1,435
$3,682 $ 7,866
225 419
4,521
1,292
33
$9,753
7,498
2,014
3,309
131
$21,237
(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 "Item 8. Consolidated
33
Financial Statements and Supplementary Data, Note 3-Long-Term Debt and Short-Term
Borrowings", for additional information related to interest rates on these amounts.
(2) Amounts represent principal payments only. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 4-Leases", for information related to interest on these amounts.
(3) Amounts represent minimum lease payments with initial or remaining terms of more than one year
and exclude related sublease rental income. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 4-Leases", for information related to these amounts.
( 4) Amounts represent contractual commitments for firm-order aircraft only and are net of previously
paid purchase deposits. The Company has firm financing commitments in place for all of the firm
order aircraft from manufacturers. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 10-Commitments", for a discussion of these purchase commitments.
(5) Amounts represent non-cancelable commitments to purchase goods and services, including such
items as software communications and information technology support. In addition to the
contractual cash obligations and commitments included in the table above, the Company will in the
ordinary course spend significant amounts of cash to operate its business. For example, the
Company will pay wages as required under its various collective bargaining agreements and will be
obligated to make contributions to the pension plans benefiting its employees (as discussed below);
the Company will purchase capacity from its regional airline affiliates (in return for which
Northwest generally retains all revenues from tickets sold in respect of that purchased capacity),
and the Company will pay, among other items, credit card processing fees, Computer Reservation
System fees and outside services related to engine and airframe maintenance. While these and
other expenditures may be covered by legally binding agreements, the actual payment amounts will
depend on volume and other factors that cannot be predicted with any degree of certainty, and
accordingly they are not included in the table.
(6) Purchase orders made in the ordinary course of business are excluded from the table. Any
amounts for which the Company is liable under purchase orders are reflected in our consolidated
balance sheet as accounts payable and accrued liabilities. The above table also excludes
$236 million in respect of the Series C Preferred Stock. See "Item 8. Consolidated Financial
Statements and Supplementary Data, Note 6-Redeemable Preferred and Common Stock", for
additional discussion of the Company's obligations related to the Series C Preferred Stock.
Off-Balance Sheet A!Tangements. The Securities and Exchange Commission ("SEC") requires
registrants to disclose "off-balance sheet arrangements". As defined by the SEC, an off-balance sheet
arrangement includes any contractual obligation, agreement or transaction arrangement involving an
unconsolidated entity under which a company 1) has made guarantees, 2) has a retained or a
contingent interest in transferred assets, 3) has an obligation under derivative instruments classified as
equity, or 4) has any obligation arising out of a material variable interest in an unconsolidated entity
that provides financing, liquidity, market risk or credit risk support to the company, or that engages in
leasing, hedging or research and development services with the Company.
The Company has examined its contractual obligation structures potentially impacted by this
disclosure requirement and has concluded that no arrangements of the types described in the first three
categories exist that the Company believes may have a material current or future effect on its financial
condition, liquidity or results of operations.
The Company has obligations arising out of variable interests in unconsolidated entities. The
Company has adopted the provisions of the Financial Accounting Standards Board Interpretation
No. 46 as of July 1, 2003 for certain variable interests based on the current guidance provided by the
FASB. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 1-Summary of
Significant Accounting Policies", for additional discussion of these variable interest arrangements.
34
Pension Funding Obligations. The Company also has noncontributory pension plans covering its
pilots, other contract employees and salaried employees. Funding obligations under these plans are
governed by ERISA. As of December 31, 2003, the Company's pension plans were underfunded by
$3.75 billion, as calculated in accordance with SFAS No. 87, Employers' Accounting for Pensions. Absent
asset returns exceeding plan assumptions, the Company will have to satisfy the underfunded amounts of
its plans through cash contributions over time. The timing and amount of funding requirements depend
upon a number of factors, including interest rates, asset returns, potential changes in pension
legislation, the Company's decision to make voluntary prepayments, applications for and receipt of
waivers to reschedule contributions and changes to pension plan benefits. Among other effects, those
factors may result in contributions for a particular plan year being made across multiple calendar years.
On November 5, 2002, the Company submitted an application to the IRS for authorization to
reschedule, over a five year period beginning in April 2004, the $454 million in 2003 plan year
contributions under the pension plans for contract and salaried employees. In 2003, the IRS approved
the application, subject to the Company's satisfaction of certain conditions imposed by the Pension
Benefit Guaranty Corporation ("PBGC"), which the Company satisfied by granting the plans liens on
certain assets of the Company ( certain domestic slots, international route , aircraft and engines). As a
result, the value of the Company's remaining unencumbered asset is not material.
In November 2002, the Company submitted an application to the DOL to permit it to contribute
common stock of Pinnacle Airlines Corp. to the pension plans in lieu of making certain required
contributions in cash. In 2003, the DOL granted the Company's application for a prohibited transaction
exemption. In 2003, pursuant to the exemption, the Company contributed approximately 6.3 million
shares, or 42.0%, of Pinnacle Airlines Corp. common stock to the contract and salaried plans to satisfy
approximately $163 million scheduled funding requirements for the 2002 plan year. The Company also
contributed $60 mfilion in cash to satisfy its remaining 2002 plan year scheduled funding requirements.
Purs "ant to an agreement with ALPA, the Company also made a voluntary contribution of $190 million
to the pilots' pension plan, consisting of approximately 7.0 million shares, or 46.6%, of Pinnacle
Airlines Corp. common stock. This voluntary contribution eliminated further ERISA required
contributions to the pilots' plan until 2005. On November 24, 2003 the Pinnacles Airlines Corp. shares
held by the plans were sold in an IPO. The offering generated $255 million in proceeds, requiring the
Company to contribute an additional $98 million to the plans to make up the difference between the
original valuations of the shares at the time of their contribution and the net IPO proceeds.
The Company's calendar year 2004 cash pension contributions are dependent on several factors.
On December 23, 2003, the Company asked the IRS for permission to reschedule some of its plan year
2004 pension contributions, which includes amounts due in both 2004 and 2005, for the contract and
salaried employees' pension plans. Separately, the U.S. Congress has under consideration certain
legislative relief that could reduce 2004 contributions by increasing the discount rate used to determine
funding, changing the current requirements for deficit reduction contributions, or both. Prior legislation
increased the discount rate used by companies to determine funding requirements for the past two
years. On that basis, expected contributions to the Company's qualified pension plans in 2004
approximates $350 million. However, approval of the Company's application to reschedule contributions
and/or additional legislative relief could reduce its pension funding requirements for these plans to
between $100 million and $350 million for the year. Should the Company's request to reschedule
contributions not be approved by the IRS and Congress provides no legislative relief, its qualified plan
funding obligations in calendar year 2004 would approximate $515 million.
Credit Ratings. At December 31, 2003, the Company's Standard & Poor's corporate credit rating
and its senior unsecured credit rating were B+ and B-, respectively; its Moody's Investor Services
senior implied rating and senior unsecured rating were B2 and Caal, 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, including the ability to utilize certain financing commitments related to future
35
aircraft deliveries, to renew outstanding letters of credit that back certain obligations and to obtain
financial instruments used in its fuel and currency hedging. It could also increase the cost of these
transactions. For information regarding the impact from the lowering of the credit rating on the
Company's secured credit facility on April 10, 2003, see the related discussion below as well as "Item 8.
Consolidated Financial Statements and Supplementary Data, Note 3-Long-Term Debt and Short-Term
Borrowings".
Secured Credit Facilities. The Company's secured credit facilities at December 31, 2003, 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 2004 and 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. Borrowings under the credit agreement are secured by the Company's Pacific route
system and certain aircraft. On March 28, 2003, Standard & Poor's downgraded the rating on the
Company's secured credit facilities to B+ from BB-. On April 10, 2003, Moody's downgraded the
rating on the Company's secured credit facilities to Bl from Ba3. With the change in credit rating and
the measurement of certain collateral tests required under the Company's credit facilities, the interest
rate applicable to borrowings under these secured credit facilities increased by 75 basis points.
Borrowings under both revolving credit facilities bear interest at a variable rate equal to the three-
month LIBOR plus 3.25% (4.37% at January 20, 2004). The credit agreement includes a covenant that
requires the Company, beginning with the three month period ending June 30, 2004, to maintain at
least a one-to-one ratio of earnings (adjusted to exclude the effects of interest, taxes, depreciation,
amortization and aircraft rents) to fixed charges ( comprising interest expense and aircraft rents). If the
Company fails to meet this fixed charges coverage ratio, borrowings under the c~ ci could
accelerated by the banks. While the Company currently believes that it will satis~ tl~ e ire n~
compliance with the covenant depends upon many factors that could impact futu ..,,_.........-..:;,uues an ...-t.
expenses, some of which are beyond the Company's control. See "Item 8. Consolidated Financial
Statements and Supplementary Data, Note 3-Long-Term Debt and Short-Term Borrowings", for
additional discussion of these credit facilities.
Unsecured Debt Issued in January 2004. In January 2004, Northwest completed an offering of
$300 million of unsecured notes due 2009. The notes have a coupon rate of 10%, payable
semi-annually in cash on February 1 and August 1 of each year, beginning on August 1, 2004, and are
not redeemable prior to maturity. Each note was issued at a price of $962 per $1,000 principal amount,
resulting in a yield to maturity of 11.0%. Proceeds from the sale of the notes will be used for working
capital and general corporate purposes. The notes are guaranteed by NWA Corp.
Shelf Registration Statement. As of December 31, 2003, the Company had an effective shelf
registration statement for the issuance of $3.0 billion of unsecured debt and pass-through certificates.
The $300 million unsecured debt issuance in January 2004 reduced this amount to $2.7 billion.
Receivables Financings. In January 2002, through NW A 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.
In June 2002, a second Receivables Purchase Agreement was executed by Northwest, NWA
Funding II, LLC ("NWFII"), a wholly-owned, non-consolidated subsidiary of the Company, and third
party purchasers ("Purchasers"). The agreement was a 364-day, $100 million maximum revolving
receivables purchase facility renewable annually for five years at the option of the Purchasers, that
allowed NWFII to sell variable undivided interests in accounts receivable acquired from Northwest to
36
the Purchasers. NWFII paid a yield to the Purchasers equal to the rate on Al/Fl commercial paper
plus a program fee. The Receivables Purcha e Agreement terminated in July 2003. The Purchasers then
collected $65 million on outstanding receivables. Due to sea anal fluctuations in accounts receivable
sold under the agreement, the Company estimate that termination of the program reduced its cash
balance at December 31, 2003 by approximately $50 million.
Critical Accounting Estimates
The discussion and analy is of the Company's financial condition and result of operations are
based upon the Consolidated Financial Statements, which have been prepared in accordance with
generally accepted accounting principle . The preparation of the Con olidated Financial Statement
requires the Company to make estimates and judgment that affect the reported amount of assets,
liabilities, revenues, expen e , and related disclosure of contingent a et and liabilities at the date of
the financial statements. Actual results may differ from these estimate under different as umptions or
conditions.
Critical accounting estimates are defined as tho e that are reflective of ignificant judgment and
uncertainties, and could potentially reflect materially different re ult under different assumptions and
conditions. See "Item 8. Con olidated Financial Statements and Supplementary Data, ote 1-
Summary of Significant Accounting Policies", for additional discussion of the application of the e
estimates and other accounting policies. The Company's management discu sed the development of the
estimates and disclosures related to each of these matters with the audit committee of the Company's
board of directors.
Asset Va.luation and Impairments. The Company evaluates long-lived assets for potential
impairments in compliance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Company records impairment losse on long-lived as et when events and circumstances
indicate the assets might be impaired and the undi counted cash flows estimated to be generated by
those assets are less than their carrying amounts. Impairment losses are measured by comparing the
fair value of the assets to their carrying amount . In determining the need to record impairment
charges, the Company is required to make certain estimates regarding uch things as the current fair
market value of the assets and future net cash flows to be generated by the a sets. The current fair
market value is determined by independent apprai al, and the future net cash flows are based on
assumptions such as asset utilization, expected remaining useful lives, future market trends and
projected salvage values. Impairment charges are recorded in depreciation and amortization expense on
the Company's Consolidated Statements of Operations. If there are subsequent changes in these
estimates, or if actual results differ from these estimates, such changes could impact the Consolidated
Financial Statements.
In June 2003, the Company recorded an aircraft impairment of $21 million as additional
depreciation expense, primarily for Boeing 727-200 aircraft used in charter operations. In
December 2003, the Company recorded an impairment charge of $213 million as other expense, which
related to foreign real property that then secured certain debt obligations of the Company.
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. The Company's 2003 operating re ults were also
impacted by an estimated $20 million of additional depreciation expense related to these aircraft,
reflecting the combined effect of the reduced average lives, a decrease in net book values and lower
alvage values. If the current fair market value 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 expense would have decrea ed by $7 million. See "Item 8. Con olidated Financial
37
Statements and Supplementary Data, Note 1-Summary of Significant Accounting Policies", for
additional discussion of impairment of long-lived assets.
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 basis that includes estimates relating
to expected return on plan assets, discount rate and employee compensation. Benefits associated with
these plans are based primarily on years of service and, in some cases, employee compensation. See
"Item 8. Consolidated Financial Statements and Supplementary Data, Note 12-Pension and Other
Postretirement Health Care Benefits' , for additional discussion of actuarial assumptions used in
determining pension liability and expense.
A significant element in determining the Company's pension expense is the expected return on
plan assets, which is based in part on historical results for similar allocations among asset classes. The
difference between the expected return and the actual return on plan assets is deferred and, under
certain circumstances, amortized over future years of service. Therefore, the net deferral of past asset
gains (losses) ultimately affects future pension expense.
At December 31, 2002, the Company changed its assumed expected long-term rate of return on
plan assets from 10.5% to 9.5%, which remained in place as of December 31, 2003. In developing the
expected long-term rate of return assumption, the Company examines projected returns by asset
category with its pension investment advisors. Projected returns are based primarily on broad, publicly
traded equity and fixed-income indices, with minor adjustments to account for the value of active
management the funds have provided historically. The Company's expected long-term rate of return on
plan assets is based on a target asset allocation of 45% U.S. equities, 25% international equities, 15%
long duration fixed income securities, 10% private market securities and 5% high yield fixed-income
securities. This target asset allocation yields an expected weighted average return slightly in excess of
9.5% on an annual basis. See "Item 8. Consolidated Financial Statements and Supplementary Data,
Note 12-Pension and Other Postretirement Health Care Benefits", for further information on the
Company's investment policy for its defined benefit plans and actual investment mix by asset category
as of December 31, 2003. The actual asset allocation is reviewed regularly and is periodically
rebalanced to the targeted allocation.
The plan assets earned a rate of return substantially less than 9.5% in each of 2000, 2001 and
2002, but exceeded that rate in 2003, earning 28.2%. For the nine ear period 1995 - 2003 in which the
current asset allocation policy has been in place, the plan assets have generated annualized returns of
11.7%. Depending on future rates of return, the Company's average long-term historical rate of return
may decline and could, in turn, cause the expected return on plan assets to be adjusted downward. If
such adjustments become necessary, future pension expense would increase.
Plan assets for the Company's pension plans are managed by external investment management
organizations. These advisors are prohibited by the investment policies of the plan from investing in
Company securities, other than as part of a market index fund that could have a diminutive proportion
of such securities.
The Company also determines the discount rate used to measure plan liabilities. The discount rate
reflects the current rate at which the pension liabilities could be effectively settled at the end of the
year. In estimating this rate, the Company looks to rates of return on fixed-income investments of
similar duration to the liabilities in the plans that hold high, investment grade ratings by recognized
ratings agencies. By applying this methodology, the Company determined a discount rate of 6.25% to
be appropriate at December 31, 2003, which is a reduction of 0.50% from the rate used at
December 31, 2002.
38
For the year ended December 31, 2003, accounting for the changes related to the Company'
pension plans resulted in a net increase to accumulated other comprehensive income of $19 million on
a pre-tax basis. The positive impact on accumulated other comprehen ive income wa principally due to
a 30.2% increase in the fair value of the plan assets, offset by a 12.0% rise in benefit obligations that
was principally driven by the decrease in the discount rate to 6.25%. Holding all other factor constant,
a change in the discount rate used to measure plan liabilities by 0.50% would have changed
accumulated other comprehensive income by $480 million on a pre-tax basis.
For pension plans sponsored by the Company in which benefits depend, in part, on the future level
of wages, the projected rate of future compen ation increases is an important assumption that affects
the amount of periodic pension expense recognized. The Company' expectations regarding future wage
increases are based on several factors including historical trends, contractual obligations under
collective bargaining agreements, and prevailing market forces. As of December 31, 2003, the weighted
average rate of future compensation increases assumed for the affected plan was 1.93% annually
which compares with 3.60% and 3.90% at December 31 2002 and 2001, respectively. The e changes are
reflective of significant downward wage pressures in the U.S. airline indu try resulting from the
continued expansion of low cost carriers, which derive a large part of their cost advantage from lower
labor rates, and significant wage savings achieved at everal of the Company' major competitors during
the past year.
For the year ended December 31, 2003, th Company recognized con olidated pre-tax pen ion
expense of $491 million, up from $309 million in 2002. The amount for 2003 included $58 million
related to a curtailment charge in the contract plan due to workforce reduction . Pen ion expense is
expected to approximate $446 million in 2004. Holding all other factor constant, an increase/decrease
in the expected long-term rate of return on plan asset by 0.5% would decrease/increase pension
expense by approximately $27 million in 2004. Holding all other factors constant, an increa e/decrea e
in the discount rate used to measure plan liabilitie by 0.25% would decrease/increa e pen ion expense
by approximately $30 million in 2004. Holding all other factors constant, reducing the rate of future
wage increases from 3.60% to 1.93% will decrea e 2004 pension expense by approximately $54 million.
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 performs monthly evaluation of this estimated liability and recognizes
any adjustments in passenger revenues for that period. These adjustments relate primarily to ticket
usage patterns, refunds, exchanges, inter-airline transactions, and other travel obligations 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 u es 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 Con olidated Financial Statement .
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 estimated incremental cost of flight awards expected to be redeemed.
Customers are expected to redeem their mileage, and a liability is recorded, when their accounts
accumulate the minimum number of miles needed to obtain one flight award. Additional a sumption
are made, based on past general customer behavior, regarding the likelihood of customers u ing the
miles for first-class upgrades or other premiums instead of flight award , as well as the likelihood of
customers never redeeming the miles. Estimated incremental costs are based on the system average
cost per passenger for food and beverage, fuel, insurance, ecurity, mi cellaneou claim and
WorldPerks distribution and administration expens s. If the average incremental co t of outstanding
39
awards were increased or decreased by 10%, the liability for the estimated incremental cost of flight
awards expected to be redeemed would change by $12 million.
The number of estimated travel awards outstanding at December 31, 2003, 2002 and 2001 was
approximately 7,180 000, 7,805,000 and 8,320,000, respectively. The estimated liability excludes accounts
that have never attained the minimum travel award level, awards that are expected to be redeemed for
upgrades, and the proportion not expected to be redeemed at all, but includes an estimate for partially
earned awards on accounts that previously earned an award. Northwest recorded a liability for these
estimated awards of $119 million, $127 million and $132 million at December 31, 2003, 2002 and 2001,
respectively. The number of travel awards used for travel on Northwest during the years ended
December 31, 2003, 2002 and 2001 was approximately 1,408,000, 1,459,000 and 1,398,000, respectively.
These awards represented an estimated 7.5%, 7.8% and 7.5% of Northwest's total RPMs for each such
year, respectively. Northwest believes displacement of revenue passengers is minimal based on the low
ratio of WorldPerks 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, which is primarily responsible for the decline in the number of
estimated awards outstanding and the recorded liability since 2001.
The Company defers a portion of the revenue from the sale of mileage credits to participating
partners such as credit card issuers, hotels, long-distance companies, car rental firms and other
non-airline partners. 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.
Intangible Assets. 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 basi rather than amortize such assets. The Company adopted SFAS No. 142
as of January 1, 2002, and as a result no longer amortizes its indefinite lived intangible assets and
goodwill. During the fourth quarter of 2002 the Company completed its impairment test of goodwill
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.
The Company's indefinite lived intangible asset derives 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 between Japan and 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 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, 2003.
Should any changes occur in policies, agreements, infrastructure or economic feasibility 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.
Stock Based Compensation. As of December 31, 2003, the Company has stock option plans for
officers and key employees of the Company. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 7-Stock Option ' , for additional discussion of stock options. The Company
historically accounted for those plans under the recognition and measurement principles of Accounting
Principles Board Opinion o. 25, Accounting for Stock Issued to Employees, and related interpretations.
40
Prior to January 1, 2003, no stock-based employee compensation expense related to options were
reflected in the Consolidated Statements of Operations, as all options granted in 2002 or before 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-
Transition and Disclosure, an amendment of FASB Statement No. 123. SFAS No. 148 provides alternative
methods of transition for companies that voluntarily change to the fair value ba ed method of
accounting for stock-based compensation. It also amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and quarterly financial statement about the method of
accounting for stock-based employee compensation and the effect of the method used on reported
results.
Effective January 1, 2003, the Company adopted the fair value method of recording stock-based
employee compensation prescribed by SFAS No. 123 and accounts for this change in accounting
principle using the "prospective method' as described by SFAS No. 148. All employee stock option
grants made on or after January 1, 2003 are recorded as compen ation expense 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 SFAS No. 148 for the year ended December 31 2002 and the
related disclosures are included in "Item 8. Consolidated Financial Statements and Supplementary
Data, Note 7-Stock Options".
On January 14, 2003, the Company completed an option exchange program, pursuant to which
officers of the Company were able to exchange their stock 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 u ing the fair
value method of recording stock-based employee compensation. Certain other management employees
of the Company were able to exchange their stock options for phantom units (instruments settled in
cash at the time of vesting) 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.
On June 27, 2003, the Company completed an option exchange program for its pilots holding stock
options or stock appreciation rights ("SARs") granted pursuant to the 1998 Pilots Stock Option Plan.
This exchange program was adopted as part of a Letter of Agreement with ALPA to obtain approval of
the Delta codeshare agreement from ALPA. Pilot participants were able to exchange all of their
outstanding stock options or SARs for a designated number of replacement options or replacement
SARs, respectively. Eligible participants were able to exchange their existing stock options and SARs at
a ratio of two shares subject to an old award for one share subject to a newly issued award of the same
type (although certain outstanding SARs were exchanged only for newly issued options). The exercise
price of the new awards is the average of the high and low sales prices of the Company s common
stock on the award date of July 31, 2003, or $9.185 per share. Compensation expense related to these
new options will be amortized over a four-year vesting period using the fair value method of recording
stock-based compensation. See "Item 8. Consolidated Financial Statements and Supplementary Data,
Note 1-Summary of Significant Accounting Policie " and "Note 7-Stock Options , for additional
discussion of these stock option exchange programs.
Recent Accounting Pronouncements
In December 2003, the FASB revised SFAS No. 132, Employers' Disclosures about Pensions and
Other Postretirement Benefits. This revision requires disclosures in addition to tho e in the original
statement about the assets, obligations, cash flow , and net periodic benefit co t of defined benefit
pension plans and other defined benefit postretirement plans. The Company has adopted the provisions
41
of the revised SFAS No. 132 as of December 31, 2003, and has included the required disclosures in the
footnotes to the Consolidated Financial Statements.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was passed by
Congress and signed into law on December 8, 2003. The Act establishes a voluntary prescription drug
benefit for eligible participants beginning January 1, 2006. The Act also provides for the government to
pay a special subsidy equal to 28% of a retiree's covered prescription drug expenses between $250 and
$5,000 (adjusted annually for the percentage increase in Medicare per capita prescription drug costs) to
employers who sponsor retiree prescription drug plans. In accordance with FASB Staff Position 106-1,
the Company has elected to defer including the effects of the Act in any measures of accumulated
postretirement benefit obligations and net periodic postretirement benefit costs reflected in the
Consolidated Financial Statements and accompanying notes. Specific authoritative guidance on
accounting for the federal subsidy is pending and that guidance, when issued, could require the
Company to change previously reported information. The Company estimates that the Act will not have
a significant impact on postretirement liabilities and benefit costs.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities". FIN 46 requires companies to determine whether a financing or other arrangement
constitutes a "variable interest entity". If a company concludes that such an arrangement is a variable
interest entity, the company must then evaluate whether it is the primary beneficiary. The primary
beneficiary of a variable interest entity is required to consolidate the entity for financial statement
purposes. Variable interest entities are those that: 1) have insufficient equity investment at risk to
finance their activities without additional subordinated support or 2) lack essential characteristics of a
controlling financial interest including, among others, the obligation to absorb expected losses, or the
right to receive expected residual returns, of the entity. The primary beneficiary is the enterprise that is
obligated to absorb the expected losses or has a right to receive the expected residual returns. FIN 46
was effective immediately for variable interest entities created, or in which the Company obtains an
interest, after January 31, 2003. For all variable interest entities created on or before January 31, 2003,
the FASB delayed the initial effective date of the provisions until the quarter ending December 31,
2003, but encouraged early adoption. The Company has adopted the provisions of FIN 46 as of July 1,
2003 for all variable interests based on then existing guidance provided by the FASB.
The Company formerly consolidated a financing entity (as described in Note 5-Mandatorily
Redeemable Security) that issued a preferred security previously classified on the Company's
consolidated financial statements as Mandatorily Redeemable Preferred Security of Subsidiary Which
Holds Solely Non-Recourse Obligation of Company ("MRPS"). This subsidiary is a variable interest
entity under the provisions of FIN 46, but the Company is not the primary beneficiary. Accordingly, as
of July 1, 2003, the Company no longer consolidated the subsidiary but an amount equal to the MRPS
($553 million as of December 31, 2002), representing the Company's non-recourse obligation to the
subsidiary, was recorded as Mandatorily Redeemable Security in the liability section of the Company's
consolidated balance sheets. As a result of the Company purchasing the entity that holds the MRPS
during the December 2003 quarter, the MRPS is no longer a liability on the consolidated balance
sheets.
The Company has examined its other financing arrangements potentially impacted by the
provisions of FIN 46 and has concluded that no additional arrangements of a material nature require
consoUdation. In its report on Form 10-Q for the quarter ended June 30, 2003, the Company described
its preliminary conclusions regarding four aircraft leases that have historically been accounted for as
operating leases for book purposes but as a loan for tax purposes. Based on an examination of the
provisions of FIN 46 at that time, the Company reported that it would begin accounting for these
leases as capital leases for book purposes and record a cumulative effect charge associated with this
change in the quarter ending September 30, 2003. Subsequent interpretive guidance by the FASB
resulted in a determination by the Company that the lessor is not a variable interest entity under the
42
provisions of FIN 46. Therefore, the Company will not consolidate these aircraft leases and will
continue to account for them as operating leases.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150
("SPAS 150"), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SPAS 150 establishes standards for how a company clas ifie and measure certain financial
instruments and specifies that some financing arrangements with characteri tic of both liabilities and
equity must be classified as liabilities. Among the requirement of SPAS 150 is that all ' Mandatorily
Redeemable" securities be classified as liabilities. In the absence of applying FIN 46, this would have
resulted in the Company reclassifying the Mandatorily Redeemable Security described above to a
liability. Given the effects of FIN 46, however, the equivalent result already applied. The Company
adopted SPAS 150 on July 1, 2003 and anticipate that this standard will have no other material impact
on the Company's financial statements.
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 activities 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 changed the timing of liability
and expense recognition related to exit or dispo al activitie , but not the ultimate amount of such
expenses.
In November 2002, the FASB issued Interpretation No. 45 (' FIN 45"), Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45
requires certain guarantees to be recorded at fair value and to provide additional disclosures about
each guarantee, or each group of similar guarantees. The Company adopted the disclosure provisions
of FIN 45 as of December 31, 2002, and adopted the initial recognition and mea urement provisions
for all guarantees issued or modified after December 31, 2002. See "Item 8. Consolidated Financial
Statements and Supplementary Data, Note 11-Contingencies", for the Company's di closure
concerning its guarantor obligations.
Other Information
Labor Agreements. Approximately 90% of the Company's employees are members of collective
bargaining units. The Company has entered into mediation with the International Association of
Machinists and Aerospace Workers under the supervision of the National Mediation Board. The
Company has also commenced RLA negotiations with the Air Line Pilots Association and is in
discussion with the rest of its labor unions in an effort to align wages, benefits and work rules with the
industry's new revenue environment and to remain competitive with other airlines achieving permanent
cost reductions through bankruptcy proceedings or the threat of bankruptcy proceedings.
In June 2003, the Company's flight attendants authorized the PFAA to be their collective
bargaining representative. Results of the election were subsequently certified by the National Mediation
Board. The Company's collective bargaining agreement with the flight attendants now represented by
PFAA becomes amendable May 30, 2005.
The Company's collective bargaining agreement with the IAM, representing Agents, Clerks,
Equipment Service Employees and Stock Clerks, became amendable on February 25, 2003. Pursuant to
the RLA, these agreements remain in effect while the Company and the IAM pursue agreements on
new contracts. The Company and the IAM have entered into mediation under the supervision of the
National Mediation Board as the parties seek agreement on a new contract. Since the parties did not
reach tentative agreements by October 25, 2003, IAM represented employees received a one time lump
sum payment equal to 2% of W-2 earnings over the prior 14 months, which approximated $20 million.
On July 23, 2003, the Company and ALPA commenced negotiations on a new contract. These
negotiations are on going.
43
Facilities Consolidation. In January 2004, the Company clo ed one of its city ticket offices and
announced in February 2004 that it will be closing all of its remaining city ticket offices in North
America by March 2004. The 76 employees affected by the closures will be able to transfer to one of
the Company s five reservation centers. On September 25, 2003, the Company announced that it would
close its Detroit area reservations center and city ticket office located in Livonia, Michigan. Call center
activity performed at the Detroit facility was transferred to the Company's facilities in Baltimore,
Chi holm, Minneapolis, Seattle and Tampa. The 570 contract employees at the Detroit reservations
center were eligible to transfer to one of the Company's other operating reservations centers and
approximately 160 employees elected to do so. The Detroit reservations center and city ticket office
closed in December and 11 management positions were eliminated.
Alliances. Northwest has strengthened its network through alliance partnerships. Long-term
alliances are the most effective way for Northwest to enter markets that it would not be able to serve
alone. Alliance relationships can include codesharing, reciprocal frequent flyer programs, "through"
luggage check-in, reciprocal airport lounge access, joint marketing, sharing of airport facilities and joint
procurement of certain goods and services. Northwest and its alliance partners currently provide a
global network to over 750 cities in 120 countries on six continents.
In August 2002, the Company announced that it had signed a cooperative marketing agreement
with Continental and Delta. This agreement is designed to connect the three carriers' domestic and
international networks and provide for codesharing, reciprocity of frequent flyer programs, airport club
use and other cooperative activities. Northwest, Continental and Delta received approval of the
agreement from the DOJ and the DOT in the first quarter of 2003. The three airlines began
implementing the agreement in June 2003 by offering access to each other's airport lounges and by
offering codeshare service. Beginning in July 2003, frequent flyer members of the three airlines have
been able to book and redeem miles for itineraries that include any combination of Northwest,
Continental and Delta operated flights by using a single award. In the fourth quarter of 2003,
Northwest and Delta expanded their codesharing to 650 daily domestic flights operated by each carrier,
the maximum permitted by the DOT as of that time. In June 2004, the next phase may be implemented
by adding code haring on another 650 daily domestic flights. The combined network has increased
Northwest's presence in the South, East and Mountain West regions of the U.S., as well as in Latin
America.
In September 2003, KLM announced that it would enter into an agreement with Air France to
form a strategic business partnership, which would create Europe's largest airline group and unite the
two carriers under the same corporate holding company. In February 2004, the European Union
antitrust investigators gave their conditional approval of this merg~r. The KLM-Northwest trans-
Atlantic joint venture will remain in place pursuant to their alliance agreement. It is anticipated that
KLM will join the Sky Team global alliance ( of which Air France and Delta are the founding members)
in the spring of 2004. Northwest also expects to join the SkyTeam alliance in 2004.
Northwest also has domestic frequent flyer and codesharing agreements with several other airlines
including Alaska/Horizon Airlines, Hawaiian Airlines, America West Airlines and American Eagle.
In the Pacific, Northwest has frequent flyer agreements with Malaysia Airlines, Japan Airlines, 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 reciprocal
frequent flyer programs with Air Alps Aviation, KLM cityhopper and KLM exel, Air Europa, Kenya
Airways and Malev Hungarian Airlines.
44
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The risks inherent in the Company's market-sensitive instruments and positions are the potential
losses arising from adverse changes in the price of fuel, foreign currency exchange rates and interest
rates, as discussed below. The sensitivity analyses presented 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 change . Actual results may differ from the
outcomes e timated in the analysis due to factors beyond the Company's control. See "Item 8.
Consolidated Financial Statements and Supplementary Data, Note 14-Risk Management and
Financial Instruments", for related accounting policie and additional information.
Aircraft Fuel. The Company's earnings are affected by changes in the price and availability of
aircraft fuel. From time to time, the Company manages the price risk of fuel costs by utilizing futures
contracts traded on regulated futures exchange , swap agreement and options. A hypothetical 10%
increase in the December 31, 2003 cost per gallon of fuel, assuming projected 2004 fuel usage, would
result in an increase to aircraft fuel expense of approximately $131 million in 2004 compared to an
estimated $65 million (net of hedging) for 2003 measured at December 31, 2002. As of December 31,
2003, the Company had no fuel hedges in place compared to hedges on 71 % and 60% of the 2003 first
quarter and full year requirements, respectively, at December 31, 2002.
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 expenses. The
Company's largest exposure comes from the Japanese yen. From time to time, the Company uses
financial instruments to hedge its exposure to the Japanese yen. The result of a uniform 10%
strengthening in the value of the U.S. dollar from December 31, 2003 levels relative to each of the
currencies in which the Company's revenues and expense are denominated would result in a decrease
in operating income of approximately $58 million for the year ending December 31, 2004, compared to
an estimated decrease of $68 million for 2003 measured at December 31, 2002. This sensitivity analysis
was prepared based upon projected foreign currency-denominated revenues and expenses as of
December 31, 2003 and 2002. The variance is due to the Company's foreign currency-denominated
revenues exceeding its foreign currency-denominated expense .
The Company also has foreign currency exposure as a result of changes to balance sheet items.
The result of a 10% weakening in the value of the U.S. dollar would result in an decrease to other
income of an estimated $1 million in 2004, caused by the remeasurement of net foreign currency-
denominated assets as of December 31, 2003, compared with an estimated increase of $2 million
caused by the remeasurement of net foreign currency denominated liabilities at December 31, 2002.
This sensitivity analysis was prepared based upon projected foreign currency-denominated assets and
liabilities as of December 31, 2003 and 2002.
In 2003, the Company's yen-denominated net cash inflow was approximately 19 billion yen
(approximately $164 million) and its yen-denominated liabilities exceeded its yen-denominated assets by
an average of 4 billion yen (approximately $32 million) compared with 23 billion yen (approximately
$225 million) and 5 billion yen (approximately $38 million), respectively, in 2002. In general, each time
the yen strengthens (weaken ), the Company's operating income is favorably (unfavorably) impacted
due to net yen-denominated revenues exceeding expenses 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 2003 was favorably impacted by approximately $26 million due to the average yen
being stronger in 2003 compared to 2002 and unfavorably impacted in 2002 by approximately
$85 million due to the average yen being weaker in 2002 compared to 2001. The average yen to U.S.
dollar exchange rate for the years ending December 31, 2003, 2002 and 2001 was 117, 126 and 121,
respectively. Including the impact of hedge activities, the average yen to U.S. dollar exchange rate for
the years ending December 31, 2003, 2002 and 2001 was 117, 104 and 92, respectively. The Japanese
45
yen financial instruments utilized to hedge net yen-denominated cash flows resulted in gains of
$1 million and $31 million in 2003 and 2002, respectively. As of December 31, 2003, the Company had
entered into forward contracts to hedge approximately 22% and 6% of its anticipated 2004 and 2005
yen-denominated sales at an average rate of 114 and 106 yen per U.S. dollar, respectively. This
compares to 22% of 2003 sales hedged as of December 31, 2002.
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. If short-term interest rates increased by 100 basis
points for a year, based on the Company's cash balance at December 31, 2003, the Company's interest
income from cash equivalents and short-term investments would increase by approximately $29 million
compared to an estimated $21 million based on the Company's cash balance at December 31, 2002.
The Company's floating rate indebtedness was approximately 44% and 40% of its total long-term debt
and capital lease obligations at December 31, 2003 and 2002, respectively. If long-term floating interest
rates increased by 100 basis points during 2004 as measured at December 31, 2003, the Company's
interest expense would increase by approximately $36 million, compared to an estimated $28 million for
2003 measured at December 31, 2002. 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, 2003 and 2002.
Market risk for fixed-rate indebtedness is estimated as the potential decrease in fair value resulting
from a hypothetical 100 basis point increase in interest rates and amounts to approximately
$132 million during 2004 measured at December 31, 2003, compared to an estimated $113 million for
2003 measured at December 31, 2002. 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.
46
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, 2003 and 2002, 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, 2003. 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 assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates 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, 2003 and 2002, and
the consolidated results of its operations and its cash flows for each of the three years in the period
ended December 31, 2003, 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
changed its method of accounting for goodwill and other intangible assets and effective January 1,
2003, changed its method of accounting for stock-based compensation.
Minneapolis, Minnesota
January 23, 2004
47
ERNST & YOUNG LLP
URRENT ASSETS
NORTHWE T AIRLINES CORPORATION
ONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS
a h and ca h equi alent .......... ........ ..................... .
Unre tri ted short-term inve tments ................ ........ ........ .
Re tricted hort-term in e tment ................... ... ............ .
c ount re i able Jes allowance (2003- 19; 2002-$19) ............... .
Fliaht equipment spare part , le s allowanc (2003-$202 2002-$175) ....... .
Deferred in com taxe ' . .... .. .. ... ................ .... .......... .
Maint nan e and operating upplie .......................... . . .... .
Prepaid expen e and other ............. ......... ....... ......... .
Total current a et ..................................... . ..... .
PROPERTY AND EQUIPMENT
Flioht equipment ......................................... .... . .
Le a cumulated d pr iation ... ...... ........................... .
Other proper and equipment .................................... .
Les accumulated d preciation .................................... .
Total prop r and equipment ................ ................... .
FLIGHT EQUIPMENT UNDER CAPITAL LEASES
Flight equipment .......................... . ................... .
Le ac umulated amortization .... ................................ .
Total flioht equipment und r capital lea
OTHER ASSETS
Intangible p n ion a t ................... ... .. ................. .
International r ut , I ac umulated amortizati n (2003-$333; 2002-$333) ..
In e tm nt in affiliated companie ..................... . ... . ....... .
Other ..... ............. . .......... ......................... .
T< tal ther a set" ............................................ .
Total As et ... . .... ... .. . ........ ............................. .
December 31
2003 2002
$ 1,608 $ 2,097
1,149
126 100
478 663
174 230
146 105
80 79
221 236
3,982 3,510
8,833 8,031
2,135 2,046
6,698 5,985
1,681 1,946
956 900
725 1 046
7,423 7,031
418 464
168 175
250 289
750 857
634 634
67 255
1,048 713
2,499 2,459
$14,154 $13,289
Th a,, mpan 1m
not are an inte
0
ral part f th e con olidated financial tat m nt .
4
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 a agent ........ ....... .......... . ...... ......... . .. .
Accrued aircraft rent ...... ....... . . ....... ... ...... .... . ....... .
Other accrued liabilities ... ... .. ..... ........ .. . . ...... .... ...... .
Current maturities of long-term debt ...... .. ....... .... . . ..... ..... .
Current obligation under capital leases ... ..... ... . .. ... ... .. . ...... .
Total current liabilitie ........................................ .
LONG-TERM DEBT . ............................................ .
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES
DEFERRED CREDITS AND OTHER LIABILITIES
Long-term pension and po tretirement health care benefit ............... .
Deferred income taxes .. . ..... ..... ..... . .............. ... ...... .
Mandatorily Redeemable Security-Note 5 ........................... .
Other ....................................... . .. ...... .... .. .
Total deferred credits and other liabilities .. .... ... ... .... .... ..... . .
PREFERRED REDEEMABLE STOCK ..... . ................. . ....... .
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; har s authorized-315,000,000; share issued
(2003-110,868,937; 2002-110,799,943) .................. . ... ...... .
Additional paid-in capital ........................................ .
Accumulated deficit ..... ... ............ ... ..... ......... ....... .
Accumulated other comprehensive income (loss) ....................... .
Treasury stock (2003-24,862,782 hares; 2002-24,999,959 share ) .......... .
Total common stockholder ' equity ( deficit) ........ .. .... .. .... . .... .
Total Liabilities and Stockholders' Equity (Deficit) ...... .. ... ... .. ... .... .
December 31
2003 2002
$ 1,272 $ 1216
950 1,173
540 652
111 131
268 261
405 493
668 281
65 65
4,279 4 272
7,198 6,250
354 386
3,228 3,050
146 135
553
724 679
4,098 4,417
236 226
1 1
1,460 1,455
(1,083) (1,316)
(1,340) (1,347)
(1,049) (1,055)
(2,011) (2,262)
$14,154 $13,289
The accompanying note are an integral part of these consolidated financial statement .
49
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Year Ended December 31
OPERATING REVENUES
Passenger ............ . .......... ............. ......... .
Cargo ............................................... .
Other ............................................... .
Total operating revenues
OPERATING EXPENSES
Salaries, wages and benefits ............................... .
Aircraft fuel and taxes ................................... .
Selling and marketing .................................... .
Depreciation and amortization ............................. .
Other rentals and landing fees .............................. .
Aircraft rentals ......................................... .
Aircraft maintenance materials and repairs .................... .
Other ............................................... .
Total operating expenses ................................ .
OPERATING INCOME (LOSS) .............................. .
OTHER INCOME (EXPENSE)
U.S. Government appropriations ............................ .
Interest expense ........................................ .
Interest capitalized .......................... . ........ ... .
Interest of mandatorily redeemable 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 STOCKHOLDERS ..
EARNINGS (LOSS) PER COMMON SHARE:
Basic .............................................. .
Diluted ............................................. .
2003
$7,936
752
822
9,510
3,905
1,554
709
586
569
481
474
1,497
9,775
(265)
209
(475)
10
(25)
43
18
703
483
218
(30)
248
(12)
$ 236
$ 2.75
$ 2.74
2002
$ 8,025
735
729
9,489
3,878
1,439
803
903
576
460
576
1,700
10,335
(846)
(27)
(427)
25
(25)
46
37
(3)
(374)
(1,220)
(422)
(798)
$ (798)
$ (9.32)
$ (9.32)
The accompanying notes are an integral part of the e consolidated financial statement .
50
2001
$ 8,417
720
768
9,905
3,963
1,727
1,004
690
533
447
669
1,740
10,773
- -
(868)
461
(369)
29
(25)
66
(5)
41
198
(670)
(247)
(423)
(1)
$ (424)
$ (5.03)
$ (5.03)
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 . ....... . . .............. .......... .
Income tax expense (benefit) ................................... .
Net receipts (payments) of income taxes .... ..... . .. ...... .......... .
Pension and other postretirement benefit contributions less than expense ..... .
Sale proceeds of frequent flyer miles less than revenue . ........ . . . ...... .
Net loss (earnings) of affiliates ..... . . ...... .... ......... .. .. . ... .
Net loss (gain) on disposition of property, equipment and other .. .......... .
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 sales 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 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 .......................... .
Cash and cash equivalents and unrestricted short-term investments at end of period
Supplemental Cash Flow Information:
Interest paid ................................................ .
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing of aircraft and aircraft predelivery deposits . . . . . . . . . . . .
Year Ended December 31
2003 2002 2001
$ 248 $ (798) $ ( 423)
586 903 690
(30) (422) (247)
215 122 (24)
90 139 189
6 (5) (48)
(18) (37) 5
(708) 41 (19)
14 88 124
(20) (38) 102
31 (14) 8
25 (68) 79
50 (54) 16
(103) (17) 91
(1) (164) 220
(10) 40 __Q__!2)
- - -
375 (284) 646
(1,123) (1,588) (1,253)
(1,480) (334) (205)
325 391 135
615 15 602
(122) (36) (9)
(1,785) (1,552) (730)
(301) (201) (152)
(49) (58) (65)
(14) (2) (1,261)
1,359 1,740 2,102
1,245
136 84
(74) ~ ) ~ )
921 1,421 1,903
- - -
(489) (415) 1,819
2,097 2,512 693
- -
$ 1,608 $ 2,097 $2,512
- - -
$ 1 $ 1 $
2,757 2,097 2,512
448 421 307
290 (11) (21)
The accompanying notes are an integral part of these consolidated financial statements.
51
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, 2001 . . . . . . . . . . . . . . . . 110.1
Net loss ......................... .
Other comprehensive income
Foreign Currency (net of $5 million of tax) ..
Deferred gain/loss from hedging activities (net
of $1 million of tax) ............... .
Unrealized gain/loss on investments (net of
$11 miUion of tax) ................ .
Minimum pension liability adjustments (net of
$166 million of tax) ............... .
Total ........................... .
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 income
Foreign Currency (net of $4 million of tax) ..
Deferred gain/loss from hedging activities (net
of $5 million of tax) ... . . ......... . .
Minimum pension liability adjustments (net of
$592 million of tax) ............... .
Total ........................... .
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
Net income ....................... .
Other comprehensive income
Foreign Currency (net of $17 million of tax) ..
Deferred gain/loss from hedging activities (net
of $20 million of tax) .... .......... .
Unrealized gain/loss on investments ...... .
Minimum pension liability adjustments (net of
$7 million of tax) ................ .
Total ............. ....... ....... .
Series C Preferred Stock converted to Common
Stock .... . . ..... ....... . ... . .. .
Step-up in basis of Orbitz Investment ...... .
$225 million Convertible Debt call spread
Preferred Series C dividends accrued . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.1
Balance December 31, 2003 . . . . . . . . . . . . . . 110.9
$1
1
$1
$1,459
6
(16)
2
1,451
1
(3)
6
1,455
2
11
(10)
2
$1,460
$ (94)
(423)
(1)
(518)
(798)
(1,316)
248
(12)
(3)
$(1,083)
$ (5)
9
(2)
(20)
(287)
(305)
(7)
(9)
(1,026)
(1,347)
30
(35)
(1)
13
$(1,340)
$(1,130) $ 231
(423)
70
(1,060)
9
(2)
(20)
(287)
(723)
(1)
6
54
2
( 431)
(798)
(7)
(9)
(1,026)
(1,840)
5 2
6
(1,055) (2,262)
248
30
(35)
(1)
13
255
2
11
(10)
(12)
6 5
$(1,049) $(2,011)
The accompanying notes are an integral part of these consolidated financial statements.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Summary of Significant Accounting Policies
Business: Northwest's operations account for approximately 9 % of the Company's con olidated
operating revenues and expenses. Northwest is a major air carrier engaged principally in the
commercial transportation of passengers and cargo, directly serving more than 158 citie in 24 countries
in North America, Asia and Europe. Northwests global airline network includes domestic hub at
Detroit, Minneapolis/St. Paul and Memphis, an extensive Pacific route y tern with a hub in Tokyo, a
trans-Atlantic alliance with KLM, which operates through a hub in Amsterdam, a domestic and
international alliance with Continental and Delta, exclusive marketing agre ment with two dom tic
regional carriers: Pinnacle Airlines and Mesaba, both of which operate as Northwest Airlink; and a
cargo business that includes a dedicated fleet of 12 freighter aircraft that operate through hub in
Anchorage and Tokyo.
Basis of Consolidation: NWA Corp. is a holding company who e principal indirect operating
subsidiary is Northwest. The consolidated financial statements include the account of NWA Corp. and
all consolidated subsidiaries. All significant intercompany transactions have b en eliminated.
Investments in 20% to 50% owned companies, as well as Pinnacle Airlines and Orbitz, 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.
Flight Equipment Spare Parts: Flight equipment spare parts are carried at lower of average cost or
market and are expensed when consumed in operations. An allowance for depreciation i provided at
rates that depreciate cost, less residual value, over the e timated useful lives of the related aircraft.
Inventory sales at amounts greater or less than their carried values are recorded in a re erve 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 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, be recorded on the balance sheet.
Capitalized expenditures of $210 million at December 31, 2003, are recorded in other property and
equipment, with the corresponding obligations 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 basi of hours flown. Modification that enhance the op rating
performance or extend the useful lives of airframes or engines are capitalized and amortized over the
remaining estimated useful life of the asset.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-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 cany Japanese originating passengers. These rights have no termination date, and the
Company ha 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. Through the end of
2001, the international routes and goodwill were amortized on a straight-line basis over 40 years.
In June 2001, the 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
basi 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.
In 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.
The following table presents net income (loss) and earnings (loss) per share for comparable
periods in 2003, 2002 and 2001 adjusted for amortization of goodwill and indefinite lived intangible
assets. These amounts are not tax effected since these expenses were not deductible for tax purposes:
Twelve Months Ended
December 31,
2003 2002 2001
(In millions, except per
share amounts)
Reported net income (loss) applicable to common
shareholders ................................ . $236 $ (798) $ ( 424)
Goodwill amortization ........................... . 1
International route amortization .. ........... . .... . . 23
- -
Adjusted net income (loss) ....................... . $ 236 $ (798) $ ( 400)
Basic earnings per share:
Reported earnings (loss) per common share .. . ........ . $2.75 $(9.32) $(5.03)
Goodwill amortization ........................... . 0.01
International route amortization ................... . 0.28
- -
Adjusted basic earnings (loss) per share .............. . $2.75 $(9.32) $( 4.74)
Diluted earnings per share: (1)
Reported earnings (loss) per common share ........... . $2.74 $(9.32) $(5.03)
Goodwill amortization ....................... ... . . 0.01
International route amortization .. .. .. ......... .... . 0.28
- -
Adjusted diluted earnings (loss) per share ............ . $2.74 $(9.32) $( 4.74)
(1) For the twelve months ended December 31, 2002 and 2001, no incremental shares related to
dilutive ecuritie were used to calculate diluted earnings per share because of the anti-dilutive
impact caused by inclusion of such securities. See Note 2-Earnings (Loss) Per Share Data, for
additional information regarding earnings (loss) per share.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
Impairment of Long-Lived Assets: The Company evaluates long-lived assets for potential
impairments in compliance with SPAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Company records impairment losses on long-lived assets 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 measured by comparing the
fair value of the assets to their carrying amounts. In determining the need to record impairment
charges, the Company is required to make certain estimates regarding such things as the current fair
market value of the assets and future net cash flows to be generated by the assets. The current fair
market value is determined by independent appraisal, and the future net cash flows are based on
assumptions such as asset utilization, expected remaining useful lives, future market trends and
projected salvage values. Impairment charges are recorded in depreciation and amortization expense on
the Company's Consolidated Statements of Operations. If there are subsequent changes in these
estimates, or if actual results differ from these estimates, such changes could impact the Consolidated
Financial Statements.
In June 2003, the Company recorded an aircraft impairment of $21 million as additional
depreciation expense, primarily for Boeing 727-200 aircraft used in charter operations. In
December 2003, the Company recorded an impairment charge of $213 million as other expense, which
related to foreign real property that no longer secures certain debt obligations. See Note 5-
Mandatorily Redeemable Security, for additional information regarding impairment of foreign real
property.
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
to spare engines, and $35 million to related inventory.
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 and a weakened
economy. 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. These impairment charges included $9 million to write-down
related spare parts to their estimated fair market value.
Frequent Flyer Program: The estimated incremental cost of providing travel awards earned under
Northwest's WorldPerks frequent flyer program is accrued and included in the accompanying
consolidated balance sheets as a component of 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 main component of air traffic liability represents the
estimated value of sold but unused tickets and is regularly evaluated by the Company. Other revenues
include MLT, transportation fees and charter revenues, and are recognized when the service or
transportation is provided.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies (Continued)
Advertising: Advertising costs, included in selling and marketing expenses, are expensed as
incurred and were $82 million, $93 million and $98 million in 2003, 2002, and 2001, re pectively.
Employee Stock Options: As of December 31, 2003, the Company has stock option plans for
officers and key employees of the Company. See Note 7-Stock Options, for additional discussion of
tock option . The Company historically accounted for tho e plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Effective January 1, 2003, the Company adopted the fair value
method of recording stock-based employee compensation prescribed by SFAS No. 123 and accounted
for this change in accounting principle using the "prospective method" as described by SFAS No. 148.
All employee stock option grants made on or after January 1, 2003 are recorded as compensation
expense over the vesting period based on the fair value at the date the stock-based compensation is
granted. Prior to January 1, 2003, no stock-based employee compensation expense related to options
was reflected in the consolidated statement of operations, as all options granted in 2002 or before 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,-ansition 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 also amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and quarterly financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method used on reported results. The
following table illustrates the effect on net income (loss) and earnings (loss) per common share as if
the fair value ba ed method had been applied to all outstanding option awards rather than only those
granted since January 1, 2003. Awards under the Company's plans vest over periods ranging from three
to five year .
Twelve months ended
December 31
2003 2002 2001
(In millions except per
share amounts)
Net income (loss) applicable to common shareholders, as reported ........ . $ 236 $ (798) $ (424)
Add: Stock-based employee compensation expense included in reported net
income (lo ), net of tax effect(l) .............................. . 19 3 3
Deduct: Total stock-based employee compensation expense determined under
a fair alue based method for all awards, net of tax(l) ............... . (20) ~ ) ~ )
Pro forma net income (loss) applicable to common shareholder ......... . $ 235 $ (807) $ ( 433)
Earnings (loss) per share:
Ba ic-as reported ......................................... . $2.75 $(9.32) $(5.03)
Basic-pro forma .......................................... . $2.74 $(9.43) $(5.14)
Diluted-a reported ....................................... . $2.74 $(9.32) $(5.03)
Diluted-proforma ........................................ . $2.73 $(9.43) $(5.14)
(1) A de cribed below in Note 9-Income Taxe , the Company i not presently recording additional
tax benefit or provi ions due to it net deferred tax as et position and recent history of losse ;
therefore, the Company did not include any tax effect related to the 2003 amounts shown.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
New A ccounting Standards: In December 2003, the FASB revised SFAS No. 132, Employers'
Disclosures about Pensions and Other Postretirement Benefits. This revision requires disclosures in
addition to those in the original statement about the assets, obligations, cash flows, and net periodic
benefit costs of defined benefit pension plans and other defined benefit postretirement plans. The
Company has adopted the provisions of this revised statement as of December 31, 2003, and has
included the required disclosures in these footnotes.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was passed by
Congress and signed into law on December 8, 2003. The Act establishes a voluntary prescription drug
benefit beginning January 1, 2006. The Act also provides for the government to pay a special subsidy
equal to 28% of a retiree's covered prescription drug expense between $250 and $5,000 (adjusted
annually by the percentage increase in Medicare per capita prescription drug costs), to employers who
sponsor retiree prescription drug plans. In accordance with FASB Staff Position 106-1, the Company
has elected to defer including the effects of the Act in any measures of accumulated postretirement
benefit obligations (APBO) and net periodic postretirement benefit costs reflected in the current
financial statements and accompanying notes. Specific authoritative guidance on the accounting for the
federal subsidy is pending and that guidance, when issued, could require the Company to change
previously reported information. The Company estimates that the Act will not have a material impact
on postretirement liabilities and benefit costs.
In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46
requires companies to determine whether a financing or other arrangement constitutes a "variable
interest entity". If a company concludes that such an arrangement is a variable interest entity, the
company must then evaluate whether it is the primary beneficiary. The primary beneficiary of a variable
interest entity is required to consolidate the entity for financial statement purposes. Variable interest
entities are those that: (1) have insufficient equity investment at risk to finance their activities without
additional subordinated support, or (2) lack essential characteristics of a controlling financial interest
including, among others, the obligation to absorb expected losses, or the right to receive expected
residual returns, of the entity. The primary beneficiary is the enterprise that is obligated to absorb the
expected losses or has a right to receive the expected residual returns. FIN 46 was effective
immediately for variable interest entities created, or in which the Company obtains an interest, after
January 31, 2003. For all variable interest entities created on or before January 31, 2003, the FASB
recently delayed the effective date of the provisions until the quarter ending December 31, 2003, but
encouraged early adoption. The Company has adopted the provisions of FIN 46 as of July 1, 2003 for
all variable interests based on current guidance provided by the FASB.
The Company formerly consolidated a financing entity that issued a preferred security previously
classified on the Company's consolidated financial statements as Mandatorily Redeemable Preferred
Security ("MRPS"). See Note 5-Mandatorily Redeemable Security, for additional information
regarding this security. This subsidiary is a variable interest entity under the provisions of FIN 46, but
the Company is not the primary beneficiary. Accordingly, as of July 1, 2003, the Company no longer
consolidated the subsidiary but an amount equal to the MRPS ($553 million as of December 31, 2002),
representing the Company's non-recourse obligation to the subsidiary, was recorded as Mandatorily
Redeemable Security in the liability section of the Company's consolidated balance sheets. As a result
of the Company purchasing the entity that holds the MRPS during the December 2003 quarter, the
MRPS is no longer a liability on the consolidated balance sheets.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
The Company has examined its other financing arrangements potentially impacted by the
provision of FIN 46 and has concluded that no additional arrangements of a material nature require
consolidation. In its report on Form 10-Q for the quarter ended June 30, 2003, the Company described
its preliminary conclusions regarding four aircraft leases that have historically been accounted for as
operating leases for book purposes but as a loan for tax purposes. Based on an examination of the
provision of FIN 46 at that time, the Company reported that it would begin accounting for these
leases as capital leases for book purposes and record a cumulative effect charge associated with this
change in the quarter ending September 30, 2003. Subsequent interpretive guidance by the FASB has
resulted in a determination by the Company that the lessor is not a variable interest entity under the
provi ions of FIN 46. Therefore, the Company will not consolidate these aircraft leases and will
continue to account for them as operating leases.
In May 2003, the FASB issued SFAS 150, Accounting for Certain Financial Instruments with
Characte,istics of both Liabilities and Equity. SFAS 150 establishes standards for how a company
classifies and measures certain financial instruments and specifies that some financing arrangements
with characteristics of both liabilities and equity must be classified as liabilities. Among the
requirements of SFAS 150 is that all "Mandatorily Redeemable" securities be classified as liabilities. In
the absence of applying FIN 46, this would have resulted in the Company reclassifying the Mandatorily
Redeemable security described above to a liability. Given the effects of FIN 46, however, the equivalent
result already applied. The Company adopted SFAS 150 on July 1, 2003 and anticipates that this
standard will have no other material impact on the Company's financial statements.
In June 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated with Disposal or Exit
Activities. SFAS No. 146 requires that a liability for a cost associated 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. This new statement changed the timing of liability
and expense recognition related to exit or disposal activities, but not the ultimate amount of such
expenses.
In November 2002 the FASB issued FIN 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires certain
guarantees to be recorded at fair value and to provide additional disclosures about each guarantee, or
each group of similar guarantees. The Company adopted the disclosure provisions of FIN 45 as of
December 31 2002, and adopted the initial recognition and measurement provisions for all guarantees
issued or modified after December 31, 2002. See Note 11-Contingencies, for the Company's
disclosures concerning its guarantor obligations.
Forei0 n Cun-ency: Assets and liabilities denominated in foreign currency are remeasured at
current exchange rates with resulting gains and losses generally included in net income. The
Mandatorily Redeemable Security 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
tran lated at current exchange rates, with translation gains and losses recorded directly to accumulated
other comprehen ive income (loss), a component of common stockholders' equity (deficit). See
ote 5-Mandatorily Redeemable Security, for additional information regarding assets and liabilities
denominated in foreign currency.
Income Taxe : The Company accounts for income taxes utilizing the liability method. Deferred
income taxe are primarily recorded to reflect the tax consequences of differences between the tax and
financial reporting ba e of a sets and liabilities.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies (Continued)
Use of Estimates: The preparation of consolidated financial tatements in conformity with
generally accepted accounting principles requires management to make estimates and a umption that
affect the amounts reported in its consolidated financial tatement and accompanying notes. Actual
results could differ from those estimates.
Note 2-Earnings (Loss) Per Share Data
The following table sets forth the computation of basic and diluted earnings (loss) p r common
share for the years ended December 31:
2003 2002 2001
(In million , except share data)
Numerator:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 248 $
Preferred stock requirements . . . . . . . . . . . . . . . . . . . . . . (12)
Net income (loss) applicable to common stockholder . . . . $ 236 $
====
Denominator:
Weighted-average shares outstanding for basic earnings
(loss) per share ... ................... .. ...... 85,889,584
Effect of dilutive securities:
Shares held in non-qualified rabbi trusts ...... .. . ... 3,033
Employee stock options and unvested restricted shares .. 471,192
Adjusted weighted-average shares outstanding and
assumed conversions for diluted earnings (loss) per
share ...................................... 86,363,809
Basic Earnings (loss) per common share:
Net income (loss) before preferred stock requirements ... $ 2.89 $
Preferred stock requirements ... ................ ... (0.14)
Net income (loss) applicable to common shareholders .... $ 2.75 $
Diluted Earnings (loss) per common share:
Net income (loss) before preferred stock requirements ... $ 2.87 $
Preferred stock requirements ...... ........ ........ (0.13)
Net income (loss) applicable to common shareholders ... . $ 2.74 $
(798) $ (423)
(1)
(798) $ ( 424)
====
85 655,786 84,280,222
85,655,7 6 84,280 222
(9.32) $ (5.02)
(0.01)
(9.32) $ (5.03)
(9.32) $ (5.02)
(0.01)
(9.32) $ (5.03)
For the twelve months ended December 31, 2003, the Series C Preferred Stock was excluded from
the effect of dilutive securities as a result of the stated intent of the parties to ettle the Series C
Preferred Stock with cash rather than by the Company issuing additional common stock. See Note 6-
Redeemable Preferred and Common Stock, to these Condensed Con olidated Financial Statements for
additional discussion of the Company's Series C Preferred Stock.
For the twelve months ended December 31, 2002 and 2001, 6,926,103 and 7 921,443 incremental
shares related to dilutive securities, respectively, were not included in the diluted earnings per share
calculation because the Company reported a net loss for these periods. Incremental shares relat d to
dilutive securities have an anti-dilutive impact on earning per hare when a net loss is reported and
therefore are not included in the calculation.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2-Earnings (Loss) Per Share Data (Continued)
The dilutive securities described above do not include 1,232,128 employee stock options as of
December 31, 2003, because the exercise prices of these options are greater than the average market
price of the common stock for the respective periods. The dilutive securities described above do not
include any of the 11,589,438 and 12,152,812 employee stock options outstanding as of December 31,
2002 and 2001, respectively, because the Company reported a net loss for these periods.
Note 3-Long-Term Debt and Short-Term Borrowings
Long-term debt as of December 31 consisted of the following (with interest rates as of
December 31, 2003):
2003 2002
(in millions)
Aircraft enhanced equipment trust certificates due through 2022, 6.0% weighted-
average rate(a) ............... . ................................. . $2,590 $1,988
Aircraft secured loans due through 2023, 3.6% weighted-average rate(b) ......... . 1,782 1,368
Bank Revolving Credit Facilities due 2005, 4.4%(c) ..................... . .. . 962 962
Other secured notes due through 2020, 5.0% weighted-average rate . . ...... .... . 569 562
Other secured debt ......... .. ................... . ...... .. .... . . . .. . 51 56
Total secured debt ................................................ . 5,954 4,936
Unsecured notes due 2004 through 2039, 8.7% weighted-average rate ......... . . . 1,533 1,591
Convertible unsecured notes due through 2023, 7.2% weighted-average rate( d) .... . 375
Other unsecured debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4
- -
Total unsecured debt ........... .. ............... . .. . .............. . 1,912 1,595
Less current maturities ...................... . ........... . ........ . 668 281
- - - -
Total Long-term debt .............................................. . $7,198 $6,250
(a) At December 31, 2003, the $2.59 billion of equipment notes underlying the pass-through trust
certificates issued for 102 aircraft are direct obligations of Northwest. Interest on the pass-through
trust certificates is payable semi-annually or quarterly. This amount includes $64 million of newly
issued Class D certificates issued in an exchange offer for unsecured debt due in 2004, 2005 and
2006.
On December 9, 2003, Northwest completed an offer to exchange notes due in 2004, 2005 and
2006, with interest rates ranging from 7.625% to 8.875%, for new 10.5% Class D Certificates
representing a fractional undivided interest in the assets of a pass-through trust. The trust's assets
consist of interests in $551.8 million principal amount of notes primarily secured by aircraft
financed under five series of Northwest pass-through trust certificates previously issued. Holders
tendered approximately $59 million of old notes for $64 million of Class D Certificates.
The exchange was accounted for as an extinguishment of debt under generally accepted accounting
principles, with the Company recording an associated loss because the cash flows of the new debt
instrument are greater than 110 percent of the original instruments' remaining cash flows. The loss
recognized in the Consolidated Statement of Operations due to this exchange offer approximated
$5 million.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings (Continued)
(b) In addition to the aircraft financed using enhanced equipment tru t certificate as described in
(a) above, the Company also took delivery of two Airbus A330, two Airbus A320, two Airbus
A319, and five Boeing 757-300 aircraft during the twelve months ended December 31, 2003, u ing
the proceeds of approximately $506 million of secured aircraft financings.
( c) The Company's secured credit facilities at December 31, 2003, consisted of a $725 million
revolving credit facility ($12 million of which has been utilized to establi h letters of credit)
available until October 2005, and a $250 million 364-day revolving credit facility available until
October 2004 and 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 March 28, 2003, Standard & Poor's downgraded the rating on the
Company's secured credit facilities to B+ from BB-. On April 10, 2003, Moody s downgraded the
rating on the Company's secured credit facilities to Bl from Ba3. With the change in credit rating
and the measurement of certain collateral tests required under the Company's credit facilities the
interest rate applicable to borrowings under these secured credit facilities increased by 75 basi
points. Borrowings under both revolving credit facilities pay interest at a variable rate equal to the
three-month LIBOR plus 3.25% ( 4.37% at January 20, 2004). The credit agreement includes a
covenant that requires the Company, beginning with the three month period ending June 30, 2004,
to maintain at lea t a one-to-one ratio of earnings (adjusted to exclude the effects of interest,
taxes, depreciation, amortization and aircraft rents) to fixed charges ( comprising intere t expen e
and aircraft rents). If the Company fails to meet this fixed charges coverage ratio, borrowings
under the credit facility could be accelerated by the banks. While the Company currently believes
that it will satisfy this requirement, compliance with the covenant depends upon many factors that
could impact future revenues and expenses, some of which are beyond the Company's control.
(d) During 2003, NWA Corp. completed two offerings of $375 million aggregate principal amount of
convertible senior notes totaling $375 million, both due in 2023. The e notes were issued to
qualified institutional buyers pursuant to Rule 144A and to non-U.S. persons pursuant to
Regulation S, under the Securities Act of 1933. The first issuance of notes in May was for an
aggregate principal amount of $150 million and bears interest at 6.625% (the "6.625% Notes"),
which is payable in cash semi-annually through May 15, 2010. Thereafter, the principal amount of
the notes will accrete semi-annually at a rate of 6.625% per year to maturity. The second issuance
of notes in November was for an aggregate principal amount of $225 million and bears interest at
7.625% (the "7.625% million Notes"), which is payable in cash semi-annually through
November 15, 2008. Thereafter, the principal amount of the notes will accrete semi-annually at a
rate of 7.625% per year to maturity. Each note was issued at a price of $1,000 and is convertible
into NWA Corp. common stock. The 6.625% and the 7.625% Notes were issued with conversion
rates of 61.8047 and 43.6681 shares per $1,000 original principal amount of notes, respectively.
These conversion rates equate to an initial conversion price of approximately $16.18 and $22.90
per share for the 6.625% Notes and the 7.625% Notes, respectively, subject to adjustment in
certain circumstances. Both notes are guaranteed by Northwest.
Holders of the notes may convert their notes only if: (i) NWA Corp.'s common stock trades above
a specified price threshold for a specified period; (ii) the trading price for the note falls below
certain thresholds; (iii) the notes have been called for redemption; or (iv) specific corporate
transactions occur. NWA Corp. may elect to pay the repurchase price in cash or in hares of
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings (Continued)
common stock, or a combination of both, subject to certain conditions. Should holders elect to
require NWA Corp. to redeem the notes on any of the repurchase dates, it is the Company's
pre ent intention to satisfy the requirement in cash. NWA Corp. may redeem all or some of the
notes for cash at any time on or after May 15, 2010 for the 6.625% Notes and on or after
November 15, 2006 for the 7.625% Notes, at a redemption price in each case equal to the accreted
principal amount plus accrued and unpaid interest, if any, to the redemption date.
Holders of the 6.625% Notes may require NWA Corp. to repurchase the notes on May 15, 2010,
2013 and 2018 at a price equal to the accreted principal amount plus accrued and unpaid interest,
if any, on the repurchase date. Holders of the 7.625% Notes may require NWA Corp. to
repurchase the notes on November 15, 2008, 2013 and 2018 at a price equal to the accreted
principal amount plus accrued and unpaid interest, if any, on the repurchase date. In conjunction
with the issuance of the 7.625% Notes, NWA Corp. entered into a call spread option transaction
that was designed to limit the Company's exposure to potential dilution from conversion of the
7.625% Notes in the event that the market price per share of NWA Corp.'s common stock at the
time of exercise is greater than the strike price of $22.90. This call spread option will be treated as
an equity transaction under the EITF Issue No. 00-19, Accounting for Derivative Financial
Instnunents Indexed to, and Potentially Settled in, a Company's Own Stock. NWA Corp. plans to use
the net proceeds from the offerings for working capital and general corporate purposes.
Maturities of long-term debt for the five years subsequent to December 31, 2003 are as follows (in
millions):
2004 2005 2006 2007 2008 Thereafter Total
Aircraft enhanced equipment trust certificates . ..... .
Aircraft secured loans . . . . . . . . . . . . . . . . . . . . . . . .
Bank revolving credit facilities .... ... ........ .. .
Other secured notes ........................ .
Other secured debt ......................... .
Total secured debt ............ . . .. .. ........ .
Unsecured notes ........ . ... ............... .
Convertible unsecured notes ................... .
Other unsecured debt .. . .. ... ... . ........... .
$171 $
91
38
34
334
332
2
(in millions)
188 $187 $182 $187
95 284 107 92
962
38 39 43 35
16 1
1,299
188
1
510 332 315
270 400 200
1
Total unsecured debt . . . . . . . . . . . . . . . . . . . . . . . . . 334 189 271 400 200
- - - - - - - - - - -
Total Long-term debt ......................... $668 $1,488 $781 $732 $515
$1,675
1,113
376
3,164
143
375
518
$3,682
$2,590
1,782
962
569
51
5,954
1,533
375
4
1,912
$7,866
Under some of the debt and lease instruments included above, agreements with the lenders
require that the Company meet certain financial covenants, such as unrestricted cash balances, fixed
charges coverage ratios and credit ratings. Assets having an aggregate book value of $7.7 billion at
December 31, 2003, principally aircraft and route authorities, were pledged under various loan
agreements, which in some cases require periodic appraisals. The Company was in compliance with the
covenants and collateral requirements related to all of its debt and lease agreements as of
December 31, 2003. While the Company anticipates that it will continue to satisfy the lenders with
respect to such covenants and collateral requirements, these measures will depend upon the many
factor affecting operating performance and the market value of assets.
The weighted-average interest rates on short-term borrowings outstanding at December 31 were
3.97%, 3.04% and 3.59% for 2003 2002 and 2001, respectively.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings (Continued)
Cash payments of interest, net of capitalized interest, aggregated $448 million, $421 million and
$307 million in 2003, 2002 and 2001, respectively.
Manufacturer debt financing utilized in connection with the acquisition of aircraft was
$290 million, $25 million and $21 million in 2003, 2002 and 2001, 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:
Gross rental expense ............................ .
Sublease rental income . .. ... . ...... ... ... . ....... .
2003 2002 2001
(in millions)
$ 908 $ 863 $ 811
(172) (143) (127)
Net rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 736 $ 720 $ 684
At December 31, 2003, Northwest leased 116 of the 430 aircraft it operates. Of these, 16 were
capital leases and 100 were operating leases. Base term lease expiration dates range from 2004 to 2009
for aircraft under capital leases, and from 2004 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 116 aircraft lease agreements, 107
provide Northwest with purchase options during the lease, at the end of the lease, or both, on terms
that approximate fair market value.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 4-Leases (Continued)
At December 31, 2003, future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of more than one year were as follows:
2004
2005
2006
2007
2008
Thereafter
Less sublease rental income
Total minimum operating lease payments
Less amounts representing interest
Present value of future minimum capital lease
payments
Less current obligations under capital leases
Long-term obligations under capital leases
Capital
Leases
$ 93
66
52
53
44
470
- -
778
359
419
65
- -
$354
Operating leases
Aircraft Non-aircraft
(in millions)
$ 608 $ 163
595 157
602 145
605 135
567 122
4,521 1,292
7,498 2,014
2,492 43
- -
$5,006 $1,971
The above table includes operating leases for 76 aircraft operated by and subleased to Pinnacle
Airlines, and 74 aircraft operated by and subleased to Mesaba Aviation, Inc. ("Mesaba"). Base term
lease expiration dates for Northwest range from 2014 to 2022. These aircraft leases can generally be
renewed by Northwest 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.
Note 5-Mandatorily Redeemable Security
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 profit 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, and the Company had the
ability to tran fer the land and buildings in full satisfaction of the Company's obligation. 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 was reflected in the Company's Consolidated Balance
Sheets as Mandatorily Redeemable Security.
In December 2003 the Company acquired the holder of the Preferred Security, thereby eliminating
the obligation on the Company's Consolidated Balance Sheets. This acquisition resulted in a net
non-cash gain of $148 million, consisting of a gain related to the extinguishment of the non-recourse
obligation of $361 million and a corresponding impairment of the land that then secured the obligation
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5-Mandatorily Redeemable Security (Continued)
by $213 million. The gain on debt extingui hment and the land impairment charge include recognition
of currency translation adjustments previously recorded in other comprehensive income of $168 million
and $96 million, respectively.
Note 6-Redeemable Preferred and Common Stock
Series C Preferred Stock: As part of labor agreements reached in 1993, NWA Corp. i sued to
trusts for the benefit of participating employees 9.1 million hares of a new cla s of Serie C
cumulative, voting, convertible, redeemable preferred stock, par value of $.01 per hare (the "Series C
Preferred Stock"), and 17.5 million shares of Common Stock and provided the union groups with three
positions on the Board of Directors. NWA Corp. ha authorized 25 million hares of Serie C Preferred
Stock. The Series C Preferred Stock rank enior to Common Stock with re pect to liquidation and
certain dividend rights. Each share of the Series C Preferred Stock is convertible at any time into 1.364
shares of Common Stock. As of December 31, 2003, 4.3 million share of Serie C Preferred Stock
have been converted into Common Stock and the remaining 4.8 million hare out tanding are
convertible into 6.5 million shares of Common Stock. During 2003, 32,622 shares of Serie C Preferred
Stock were converted into 44,496 shares of Common Stock.
During the 60-day period ending on August 1, 2003 (the "Put Date") holder of the Serie C
Preferred Stock had the right to put their shares of the Series C Preferred Stock to NWA Corp. Under
the terms of the Series C Preferred Stock, NWA Corp. wa required to elect prior to the
commencement of such 60-day period, the form of payment it would u e for repurcha ing such shares
of the Series C Preferred Stock. On May 30, 2003 NW A Corp. elected to repurchase uch shares of
the Series C Preferred Stock for cash equal to the Put Price. The "Put Price" of the Series C Preferred
Stock is equal to a pro rata portion of the actual savings re ulting from labor cost saving agreements
entered into in 1993 (approximately $226 million as of August 1, 2003, the Put Date) plu any accrued
and unpaid dividends on the Series C Preferred Stock.
On August 1, 2003, the Company announced that its Board of Directors had determined that the
Company could not legally repurchase the outstanding Series C Preferred Stock at that time because
the Board of Directors was unable to determine that the company had adequate legally available
surplus to repurchase the outstanding Series C Preferred Stock. As a result, quarterly dividends began
accruing August 1, 2003, at 12% per annum and the employee unions are entitled to three additional
Board of Directors positions.
Under the terms of the Serie C Preferred Stock, as a result of its inability to repurchase Series C
Preferred Stock, on a quarterly basis after the Put Date, NWA Corp. must use all cash held by it ( or
available under revolving credit agreements) in excess of all the Company's cash requirements within
one year of such determination date (''Available Cash") to make partial pro rata redemption , provided
such redemptions are not prohibited under applicable credit agreements or by applicable law. Any
decision not to use all Available Cash to effect such partial purchases mu t 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 Serie C Preferred Stock accreted over 10 years
commencing August 1993 to the ultimate put price, and was $236 million at December 31, 2003,
including $12 million of accrued but unpaid dividends.
Common Stock: The Company wa required to adopt the provision of EITF I sue No. 97-14
Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust,
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6-Redeemable Preferred and Common Stock (Continued)
on September 30, 1998. As a result the Company revised its consolidation of the assets and liabilities
of the non-qualified rabbi trusts. The 1,086 and 4,401 shares of Common Stock as of December 31,
2003 and 2002, respectively, that are held in the trusts are recorded similar to treasury stock and the
deferred compen ation liability is recorded in other long-term liabilities. The Company elected to
record the difference between the market value of the common shares and the historical cost of the
hares in the trusts at the date of adoption as a credit to common stockholders' equity ( deficit), net of
tax. After the adoption date, but prior to settlement through either contribution to qualified trusts or
diver ification increases or decrea es 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 shares
of 38.04 per share or falls below the September 30, 1998 price of $25.06 per share, respectively. For
the purpose of computing diluted earnings per share, the shares held by the rabbi trusts are considered
potentially dilutive securities. The Company has classified the diversified assets held by the rabbi trusts
a trading and recorded them at fair market value.
Stockholder Rights Plan: Pur uant to the Stockholder Rights Plan (the "Rights Plan"), each share
of Common Stock ha attached to it a right and, until the rights expire or are redeemed, each new
share of Common Stock issued by NWA Corp., including the shares of Common Stock into which the
Serie C Preferred Stock i convertible, will include one right. Upon the occurrence of certain events,
each right entitles the holder to purchase one one-hundredth of a share of Series D Junior
Participating Preferred Stock at an exercise price of $150, subject to adjustment. The rights become
exercisable only after any person or group ( other than the trusts holding Common Stock for the benefit
of employee ) acquire beneficial ownership of 19% or more (25% or more in the case of certain
in titutional investors) of NWA Corp. s "outstanding" Common Stock (as defined in the Rights Plan)
or commences a tender or exchange offer that would result in such person or group acquiring
beneficial ownership of 19% or more (25% or more in the case of certain institutional investors) of
WA Corp.'s outstanding Common Stock. If any person or group acquires beneficial ownership of 19%
or more (25% or more in the case of certain institutional investors) of NWA Corp.'s outstanding
Common Stock the holders of the rights ( other than the acquiring person or group) will be entitled to
recei e, 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 rights become exercisable NWA Corp. is
in olved in a merger or other business combination or sells more than 50% of its assets 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 rights. 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 exerci able.
Note 7-Stock Options
Stock Option Plan for Officers and Key Employees: As of December 31, 2003, the Company has
tock option plan for officers, key employees and pilots of the Company. Prior to December 31, 2002,
the Company hi torically accounted for option and other awards granted under those plans under the
recognition and mea ur ment principles of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Effective January 1, 2003, the Company adopted
th fair value method of recording stock-based employee compensation contained in SFAS No. 123 and
accounted for this change in accounting principle using the "prospective method" as described by SFAS
o. 14 . All employee tock option grant made on or after January 1, 2003 were recorded as
c mpen ation e pen e o er the vesting period based on the fair value at the date the stock-based
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued)
compensation is granted. See Note 1-Summary of Significant Accounting Policies, for additional
disclosure of the Company's stock options, including a table that illustrates the effect on net income
and earnings per share. Prior to January 1, 2003, no stock-based employee compensation expense
related to options was reflected in the consolidated statement of operations, as all options granted in
2002 or .prior had an exercise price equal to the market value of the underlying common stock on the
date of grant.
Following is a summary of stock option activity for the years ended December 31:
2003
Weighted-
Average
Exercise
Shares Price
Outstanding at beginning of year . . . . . . . . . . . . . . . 7,923 $25.27
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,965 8.31
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,357) 24.81
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24) 4.74
Outstanding at end of year . . . . . . . . . . . . . . . . . . . 3,507 12.06
Exercisable at end of year . . . . . . . . . . . . . . . . . . . . 599 27.73
Reserved for issuance . . . . . . . . . . . . . . . . . . . . . . . 21,802
Available for future grants. . . . . . . . . . . . . . . . . . . . 8,632
At December 31, 2003:
2002
Weighted-
Average
Exercise
Shares Price
(shares in thousands)
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
2001
Shares
6,235
3,454
(850)
~ )
8,757
3,259
21,815
7,150
Weighted-
Average
Exercise
Price
$29.94
17.98
29.61
14.76
25.40
30.60
Options Outstanding Options Exercisable
Range of Exercise Prices
$5.705 to $24.5938 .......... .
26.16 to 39.3125 . . ........ .. .
43.5625 to 51.9688 .......... .
Shares
3,171
310
26
Weighted-Average
Remaining Weighted-Average Weighted-Average
Contractual Life Exercise Price Shares Exercise Price
(shares in thousands)
8.8 years $ 9 .55
4.2 years 34.51
5.1 years 50.49
288
285
26
$18.67
34.85
50.49
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:
2003 2002 2001
Weighted average risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2% 3.3% 4.5%
Stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40% 40% 30%
Expected lives in years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 6
The weighted-average fair value of options granted during 2003, 2002 and 2001 is $3.62, $3.23 and
$6.96 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.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued)
Following is a summary of the Pilot Plan activity for the years ended December 31:
2003 2002 2001
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 2,486 $25.58 1,987 $27.08
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 926 9.18 500 19.62
Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,848) 25.60
Exercised ............................... . . __ Q) 26.33
Outstanding at end of year. . . . . . . . . . . . . . . . . . . . . 1,564 15.85 2,486 25.58 2,486 25.58
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003 2002 2001
3.5% NIA
40% NIA
6 NIA
4.5%
30%
6
926,080 options were granted in 2003 under an exchange offer that terminated on July 30, 2003.
Under this program, 1.8 million options were cancelled in the exchange. The weighted-average fair
value of the options granted was $4.04 per option. The new awards vest in 25% installments over a
four year period and the weighted-average remaining contractual life as of December 31, 2003 is
9.6 years.
There were no options granted under the Pilot plan in 2002. The weighted-average fair value of
options granted during 2001 was $7.37 per option. The weighted-average remaining contractual life as
of December 31, 2003 was 8.1 years.
Stock Incentive Plans: Shares of restricted stock were awarded at no cost to certain officers and
key employees in 2003, 2002 and 2001. 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 applicable vesting period. As of December 31, 2003, 1,627,602 shares were
outstanding and not vested.
A long-term incentive performance plan was established in 2000 under which phantom stock units
were awarded. These. phantom stock units were awarded to certain key officers and other management
employees in 2003, 2002 and 2001, with a total of 1,683,414 units, 560,606 units and 491,096 units
awarded and outstanding in each such year, respectively. The phantom units vest over a four year
period based on continued employment of the employee during such periods and upon satisfaction of
certain established performance standards. Each unit represents the right to receive a cash payment
equal to the market value of the Company's stock as defined in the plan. The fair value of the units is
equal to the closing market price on the date of grant, which was between $6.93 and $10.13 for 2003,
$5.70 and $18.45 for 2002 and $24.55 for 2001.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued)
Management Stock Option Exchange Program: On January 14, 2003, the Company completed an
option exchange program, pur uant to which officer of the Company were able to exchange their stock
options at a ratio of two old option for one newly i ued 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 expen e related to these new options will be amortized over a
four-year vesting period using the fair value method of recording stock-based employee compensation.
Certain other management employee of the Company were able to exchange their stock options for
phantom unit at a ratio of three old options for one phantom unit. The compensation expen e 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. Compensation
expense related to stock options issued under this exchange program i anticipated to be approximately
$2.7 million for the year ending December 31, 2004.
Pilot Stock Option Exchange Program: On June 27, 2003, the Company completed an option
exchange program for its pilots holding stock options or SARs granted pursuant to the 1998 Pilot
Stock Option Plan. This exchange program was adopted as part of a letter of agreement with ALPA to
obtain approval of the Delta codeshare agreement from ALPA. Pilot participants were able to exchange
their outstanding stock options or SARs for a de ignated number of replacement options or
replacement SARs, respectively. Eligible participant were able to exchange their exi ting tock options
and SARs at a ratio of two shares subject to an old award for one share subject to a newly issued
award of the ame type (although certain out tanding SARs were exchanged only for newly issued
options). The exercise price of the new award i the average of the high and low sale prices of the
Company's common stock on the award date of July 31, 2003, or $9.185 per share. Compen ation
expense related to these new options will be amortized over a four-year vesting period using the fair
value method of recording stock-ba ed compensation and is anticipated to be approximately $1 million
annually for award issued under this program.
69
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 Janua,y 1, 2001 . ...... $(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)
Before tax amount .......... 47 (55) 20 (1) 11
Tax Effect ................. (17) 20 __
(7) (4)
- -
Net-of-tax amount .. ... ...... 30 (35) 13 (1) 7
Balance at December 31, 2003 . . . . . $ (7) $(13) $(1,319) $- $ (1) $(1,340)
Note 9-Income Taxes
Income tax expense (benefit) consisted of the following for the years ended December 31:
2003 2002 2001
- - - -
(in millions)
Current:
Federal ..... .......... .................................... . $ 1 $(218) $(127)
Foreign .... ..... .......................................... . 2 2 2
State .............. . ..................................... . 1 2 1
- - - -
4 (214) (124)
Deferred:
Federal .... .... ............... ..... ....................... . (29) (185) (94)
Foreign ........ .. ...................... . .................. . (2) (2) (5)
State .. ............. . ..... . .................... . ......... . (3) ~) ~)
(34) (208) (123)
Total income tax expense (benefit) ................................. . $(30) $( 422) $(247)
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
Reconciliations of the statutory rate to the Company's income tax expense (benefit) for the years
ended December 31 are as follows:
2003 2002 2001
(in millions)
Statutory rate applied to income (loss) before income taxes . . . ... .. .. $ 76 $ (427) $ (235)
Add ( deduct):
Mandatorily Redeemable Preferred Security ... . . . . . ........ . ... (219)
State income tax expense (benefit) net of federal benefit . .... . . .. .. 4 (19) (24)
Non-deductible meals and entertainment .. . ....... ... ..... ... . 7 7 10
Increase to Minimum Tax Credit Carryforward .. .. ............. . (54)
Adjustment to valuation allowance and other income tax accruals .... 156 15 6
Other .. . ..................... . ..... ... ...... .. ... ... . 2 (4)
Total income tax expense (benefit) ............ . ............. . . $ (30) $ (422) $ (247)
Under the provisions of SFAS No. 109, Accounting 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 established with respect to existing and future
deferred tax assets. The net tax benefit recorded in 2003 includes a valuation allowance of $156 million
based on these limitations. It is more likely than not that any future deferred tax assets will require a
valuation allowance to be recorded to fully reserve against the uncertainty that those assets would be
realized.
The net deferred tax liabilities listed below include a current net deferred tax asset of $146 million
and $105 million and a long-term net deferred tax liability of $146 million and $135 million as of
December 31, 2003 and 2002, respectively.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
Significant components of the Company's net deferred tax liability as of December 31 were as
follows:
2003 2002
(in millions)
Deferred tax liabilities:
Accounting basis of assets in excess of tax basis ......................... . $1,910 $1,784
Expenses other than accelerated depreciation and amortization .............. . 127 250
Other ........................................................ . 10 10
Total deferred tax liabilities ...................................... . 2,047 2,044
Deferred tax assets:
Expenses not yet deducted for tax purposes ............................ . 389 365
Pension and postretirement benefits .................................. . 1,101 995
Gains from the sale-leaseback of aircraft .............................. . 119 124
Rent expense .................................................. . 98 95
Travel award programs ........................................... . 34 38
Leases capitalized for financial reporting purposes ....................... . 3 29
Net operating loss carryforward ..................................... . 307 274
Foreign tax, general business and other credit carryforward ................. . 39 33
Alternative minimum tax credit carryforward ........................... . 130 76
Total deferred tax assets ......................................... . 2,220 2,029
Valuation allowance for deferred tax assets ............................. . (173) ~ )
Net deferred tax assets .......................................... . 2,047 2,014
Net deferred tax liability ............................................ . $ $ 30
The Company has certain federal deferred tax assets available for use in the regular tax system or
the alternative minimum tax (''AMT") system. The deferred assets available for utilization in the
regular system include: AMT credits of $130 million, net operating loss carryforwards of $779 million,
general business credits of $8 million and foreign tax credits of $24 million. The deferred assets
available for utilization in the AMT system are: net operating loss carryforwards of $413 million and
foreign tax credits of $24 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 2003, expiring in 2004 through 2023.
The Company also has the following deferred tax assets available at December 31, 2003 for use in
certain states: net operating losses with tax benefit value of approximately $34 million and state job
credits of $7 million available for carryforward to years beyond 2003, expiring in 2007 through 2023.
Note IO-Commitments
The Company's firm orders for 32 new aircraft to be operated by Northwest consist of scheduled
deliveries for nine Airbus A330-300 aircraft and 10 Airbus A330-200 aircraft from 2004 through 2008,
six Airbus A320 aircraft in 2006 and seven Airbus A319 aircraft from 2005 through 2006. As of
December 31, 2003, the Company also had firm orders for 53 Bombardier CRJ200/440 aircraft which
will be leased or subleased to and operated by Pinnacle Airline . The Company has the option to
finance the CRJ200/440 aircraft through long-term operating lease commitments from the
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note IO-Commitments (Continued)
manufacturer, and if the manufacturer does not provide the financing, the Company is not required to
take delivery of the aircraft.
Committed expenditures for these aircraft and related equipment, including estimated amounts for
contractual price escalations and predelivery depo its, will be approximately $1.60 billion in 2004
$746 million in 2005, $567 million in 2006, $206 million in 2007 and $190 million in 2008. Consi tent
with prior practice, the Company intends to finance it aircraft deliveries through a combination of
internally generated funds, debt and long-term lease financings. Firm financing commitment at market
rates for the long term, are available for use by the Company for all of the aircraft on order.
Note 11-Contingencies
The Company is involved in a variety of legal actions relating to antitru t, contract trade practice
environmental and other legal matters pertaining to the Company's busines . While the Company is
unable to predict the ultimate outcome of these legal action , 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 a the le see 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 from or
relate to the Company's use or occupancy of the leased as et. In ome 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 from
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 $379 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-Leases, and are 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 $107 million of residual value on four operating leased aircraft. As of
and for the year ended December 31, 2003, the Company recognized $11 million in rent expense
related to the residual value guarantees on the e operating leases, as the guaranteed obligation exceeds
the current fair market value of the leased aircraft.
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. Th Company mad an exc ss
contribution of $190 million in 2003, and did not make any exces contributions in 2002 or 2001.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 was passed by
Congress and signed into law on December 8, 2003. The Act establishes a voluntary prescription drug
benefit for eligible participants beginning January 1, 2006. The Act also provides for the government to
pay a special subsidy equal to 28% of a retiree's covered prescription drug expenses between $250 and
$5,000 ( adjusted annually for the percentage increase in Medicare per capita prescription drug costs) to
employers who sponsor retiree prescription drug plans. In accordance with FASB Staff Position 106-1,
the Company has elected to defer including the effects of the Act in any measures of accumulated
postretirement benefit obligations and net periodic postretirement benefit costs reflected in the
Consolidated Financial Statements and accompanying notes. Specific authoritative guidance on
accounting for the federal subsidy is pending and that guidance, when issued, could require the
Company to change previously reported information. The Company estimates that the Act will not have
a significant impact on postretirement liabilities and benefit costs.
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 service lives 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 based 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 is provided Company-paid life insurance coverage in
amounts which decrease based on age at retirement and age at time of death.
On May 11, 2001, the Company amended the pension plan of contract employees represented by
the AMFA. The plan amendment resulted in a benefit level increase of 113% for mechanics and 84%
for cleaners and custodians. The amended benefit increases are retroactive to participants who
terminated after October 2, 1996 and to certain participants who retired after April 30, 1992, subject to
specific criteria. The plan liability was remeasured as of June 30, 2001 at a discount rate of 7.9% and
resulted in increases to pension expense on a prorated basis for 2001 of $30 million and on an annual
basis of $59 million.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
The following is a reconciliation of the beginning and ending balances of the benefit obligation and
the fair value of plan assets:
Pension Benefits Other Benefits
2003 2002 2003 2002
(in millions)
Change in benefit obligation:
Benefit obligation at beginning of year .................... . $7,638 $6,674 $ 652 $ 647
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 218 26 26
Interest cost ..................... . ................. . 531 503 46 51
Plan amendments ...................... ...... ....... . 33 (15) (128)
Actuarial loss and other ............................... . 458 596 150 95
Benefits paid ...................................... . (354) (353) (39) ____Q2)
Benefit obligations at end of year ........................ . 8,554 7,638 820 652
Change in plan assets:
Fair value of plan assets at beginning of year ............... . 3,690 4,399 5 5
Actual return on plan assets ........................... . 1,025 (548)
Employer contributions ............................... . 445 192 39 39
Benefits paid ........................... . .......... . (354) (353) (39) ____Q2)
Fair value of plan assets at end of year ......... .. ......... . 4,806 3,690 5 5
- - - -
Funded Status-underfunded ........................... . (3,748) (3,948) (815) (647)
Unrecognized net actuarial loss ......................... . 2,584 2,734 445 313
Unrecognized prior service cost ......................... . 703 804 (88) -~]:)
- - - -
Net amount recognized ................... .. .......... . $ (461) $ ( 410) $(458) $( 415)
Amounts recognized in the Consolidated Balance Sheets as of December 31 were as follows:
Pension Benefits Other Benefits
2003 2002 2003
(in millions)
Prepaid benefit costs ................................... . $ 5 $ 13 $ -
Intangible asset ...................................... . 751 857
Accrued benefit liability ................................ . (3,296) (3,380) (458)
Accumulated other comprehensive loss ..................... . 2,079 2,100
Net amount recognized .................. ............... . $ (461) $ (410) $(458)
The accumulated benefit obligation for all defined benefit pension plans was $8.08 billion and
$7.04 billion at December 31, 2003 and 2002, respectively.
75
2002
$ -
(415)
$(415)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
The Company' 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 ............................................ .
2003 2002
(in millions)
$8,536 $7,624
8,066 7,031
4,785 3,675
Weighted-average assumptions used to determine benefit obligations for pension and other benefits
at December 31:
Pension
Benefits Other Benefits
2003 2002 2003 2002
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.25% 6.75% 6.25% 6.75%
Rate of future compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.93% 3.60% NIA NIA
The Company has adopted and implemented an investment policy for the defined benefit pension
plans that incorporates a strategic, long-term asset allocation mix designed to best meet the Company's
long-term pension requirements. This asset allocation policy mix is reviewed every 2-3 years and, on a
regular basis, actual allocations are rebalanced to the prevailing targets. The following table summarizes
actual allocations as of December 31, 2003 and 2002:
Plan Assets
Asset Category Target 2003 2002
Domestic Stocks ............................................. . 45.0% 44.9% 41.3%
International Stocks .......................................... . 25.0% 25.9% 24.1%
Private Markets ............................................. . 10.0% 9.2% 13.7%
Long-Duration Bonds ......................................... . 15.0% 14.7% 15.6%
High Yield Bonds ........................................... . 5.0% 5.3% 5.3%
- - - -
Total ..................................................... . 100% 100.0% 100.0%
The investment policy also emphasizes the following key objectives: (1) maintain a diversified
portfolio among asset classes and investment styles, (2) maintain an acceptable level of risk in pursuit
f long-term econ mic benefit (3) maximize the opportunity for value-added return from active
management, ( 4) capture return opportunities from inefficiencies in nontraditional capital markets, and
(5) maintain adequate controls over administrative costs.
To meet these objectives, the Company's investment policy reflects the following major themes:
(1) diversify holdings to achieve broad coverage of both stock and bond markets; (2) utilize index funds
as a core trategy, where appropriate, to ensure broad diversification, minimal fees, and reduced risk of
relative underperformance of the portfolio; (3) use active investment managers with disciplined, clearly
defined trategie , while establishing investment guidelines and monitoring procedures for each
in e tment manager to ensure the characteristics of the portfolio are consistent with the original
in estment mandate; and ( 4) maintain an allocation to nontraditional investments, where market
inefficiencie are greatest, and use these investments primarily to enhance the overall return .
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
The Company reviews its rate of return on plan asset as umptions annually. The e a umption are
largely based on the asset category rate-of-return assumption developed annually with the ompany'
pension investment advisors. The advisor ' as et category return a sumption are ba ed in part on a
review of historical asset returns, but in recent years have also emphasized current market conditions to
develop estimates of future risk and return. Current market conditions include the yield-t -maturity and
credit spreads on a broad bond market benchmark in the case of fixed income as et cla e , and
current prices as well as earnings and dividend growth rates in the ca e of equity as et cla es. The
assumptions are also adjusted to account for the value of active managem nt the fund have provided
historically. The Company's expected long-term rate of return is based on target a et allocation of
45% domestic equities with an expected rate of return of 9.6%; 25% international quiti with an
expected rate of return of 10.0%; 10% private markets with an expect d rate of return of J 5.0%; 15 %
long-duration bonds with an expected rate of return of 5.7%; and 5% high yield bond with an
expected rate of return of 7.5%. These assumptions result in a weight d average long t rm rat of
return slightly in excess of 9.5% on an annual basis.
The components of net periodic cost of defined benefit plans included the following:
Service cost ............... . .... . ..................... .
Interest cost ...... . ................................... .
Expected return on plan assets ............................ .
Amortization of prior service cost .......................... .
Recognized net actuarial loss and other events ..... .. .. ........ .
Net periodic benefit cost ........ . ... .. ....... . .. ......... .
Pension Benefits Other Benefits
2003 2002 2001 2003 2002 200 l
(in millions)
$248 $218 $1 $26 $26 $19
531 503 451 46 51 40
( 476) (538) (514)
77 80 75 (8) 5 3
111 46 31 19 12 6
- - - - - -
$491 $309 $231 $83 $94 $68
Weighted-average assumptions used to determine net periodic pension and other benefit costs for
the years ended December 31:
Pension Benefits Other Benefits
2003 2002 2003 2002
Discount rate .................................... .. . . . 6.75% 7.50% 6.75% 7.50%
Expected long-term return on plan a et 9.50% 0.50% 7.00% 7.75%
Rate of future compensation increase ...................... . 3.60% 3.90% NIA NIA
On March 31, 2003, the liabilities of the Contract plan were remeasured u ing a 6.50% discount
rate. Net cost for the Contract plan during the final nine months of 2003 was also based on a 6.50%
discount rate.
The Company recorded $58 million and $16 million in pension curtailment charge due to
reductions in anticipated future service, as a result of layoffs of approximately 9.6% (10.2% of Contract
plan employees) and 11.9% (6.9% of Pilot plan employees) during the years ended December 31, 2003
and 2002, respectively.
For measurement purposes, a 7.0% annual rate of increase in the per capita co t of cover d health
care benefits was assumed for 2004. The rate was assumed to decrease 0.5% per year for four years to
5.0% in 2008 and remain at that level thereafter. Assumed health care cost trend rate have a
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
ignificant 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 effects:
One Percentage- One Percentage-
Point Increase Point Decrease
(in millions)
Effect on total of service and interest cost components ............ . $ 10.5 $ (8.9)
Effect on accumulated postretirement benefit obligations .......... . 103.6 (88.9)
The estimated future benefit payments expected to be made by the pension and other
postretirement benefit plans follows:
Estimated Future Benefit Payments:
2004 ................................................. .
2005 ................... . ............................. .
2006 ........................
2007 ... ...... .... ....... ...... .............. ... .. .. .. .
2008 ........................
Years 2009-2013 ......................................... .
Pension Benefits Other Benefits
(in millions)
$ 349
379
404
443
487
3,091
$ 37
40
43
47
50
320
The Company's calendar year 2004 cash pension contributions are dependent on several factors.
On December 23, 2003, the Company asked the IRS for permission to reschedule some of its plan year
2004 pen ion contributions, which includes amounts due in both 2004 and 2005, for the contract and
salaried employees pension plans. Separately, the U.S. Congress has under consideration certain
legislative relief that could reduce 2004 contributions by increasing the discount rate used to determine
funding, changing the current requirements for deficit reduction contributions, or both. Prior legislation
increa ed the discount rate used by companies to determine funding requirements for the past two
year . On that basis, expected contributions to the Company's qualified pension plans in 2004
approximate $350 million. However, approval of the Company's application to reschedule contributions
and/or additional legislative relief could reduce its pension funding requirements for these plans to
between $100 million and $350 million for the year. Should the Company's request to reschedule
contributions not be approved by the IRS and Congress provides no legislative relief, its qualified plan
funding obligations in calendar year 2004 would approximate $515 million. The Company also expects
to contribute approximately $37 million to its other postretirement benefit plans in 2004.
Note 13-Related Party Transactions
Continental Airlines, Inc.: On November 20, 1998, the Company issued 2.6 million shares of
Common Stock and paid $399 million in cash to acquire the beneficial ownership of approximately
.7 million shares of Class A Common Stock of Continental. Northwest and Continental also entered
into a 13-year global strategic commercial alliance that connects the two carriers' networks and includes
extensive code-sharing (the joint designation of flights under the Northwest "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 Northwest's alliance with Continental,
the Company entered into agreements with Continental which contained certain restrictions on the
Company ability to vote share of Continental common stock, to acquire additional shares of
Continental common stock and to affect the composition and conduct of Continental's Board of
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Related Party Transactions (Continued)
Directors for a 10-year period. Due to the restrictions in these 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 wa being amortized over 40 year .
On January 22, 2001, pursuant to an agreement reached in November 2000, (i) the Company old
to Continental approximately 6.7 million share of the Continental Cla s A C9mmon Stock held by the
Company for $450 million in cash; (ii) ub equently, Continental effected a rtcapitalization as a result
of which the Company's remaining 2.0 million hares of Continental CJa s A Common Stock were
converted into 2.6 million shares of Continental Clas B Common Stock; (iii) the Company and
Continental extended the term of their alliance agreement through 2025; and (iv) Continental i ued to
the Company a special series of preferred stock that gives the Company the right to block certai
business combinations and similar change of control transactions involving Continental and a third-
party major air carrier during the term of the aJJiance agreement. The preferred tock is ubject to
redemption by Continental in certain event , including a change of control of the Company. The
Company also entered into a revised standstiJJ agreement that contains certain restrictions on the
Company's ability to vote and acquire additional shares 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 A shares to Continental. At December 31, 2000, the
remaining 2.6 million Class B share were being accounted for a marketable ecuritie and $15 million
was recorded in unrealized gains in accumulated other comprehen ive income (lo s). In February 2001,
the Company sold the remaining 2.6 million Class B shares for $132 million, as a re ult of which a
pre-tax gain of $27 million was recorded ($11 million after tax or $.13 per common share).
MAIR Holdings, Inc.: The Company owns 27.8% of the common stock of MAIR Holdings, Inc.,
the holding company of Mesaba, a Northwest Airlink carrier. The Company also ha warrant to
acquire MAIR Holdings, Inc. common stock, of which approximately 923,000 or 22% of the warrants
held by the Company, were in-the-money as of December 31, 2003. The Company accounts for its
investment in Mesaba using the equity method.
Northwest and Mesaba have entered into two airline service agreements, under which Northwest
determines Mesaba' turboprop and AVRO regional jet aircraft scheduling and fleet compo ition.
These agreements are structured as capacity purchase agreements under which Northwest pays Mesaba
to operate the flights on Northwest's behalf and Northwe t i entitled to all revenue associated with
those flights. Under these agreements, Northwest paid $493 million, $454 million and $398 million for
the years ended December 31, 2003, 2002 and 2001, respectively. The e payments are recorded on a
net basis as a reduction to passenger revenues. The Company had a payable to Me aba of $23 million
and $28 million as of December 31, 2003 and 2002, re pectively. As of December 31, 2003, the
Company has leased 49 Saab 340 aircraft, which are in turn ublea ed to Mesaba. In addition, as of
December 31, 2003, the Company has leased 10 owned and subleased 25 AVRO regional jet aircraft to
Mesaba.
Pinnacle: As of September 30, 2003, Northwest had contributed 88.6% of the Common Stock of
Pinnacle Airline Corp., the holding company of Pinnacle Airlines, to the Company's pen ion plan in
lieu of cash contributions totaling $353 million pur uant to an exemption granted by the Department of
Labor. The Company completed an IPO of the Pinnacle Airline Corp. tock held by the plan on
November 24, 2003, for net proceed of $255 million, with the proceed being retained by the Plan .
An additional ca h contribution of approximately $98 million was therefore required to ati fy the
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Related Party Transactions (Continued)
difference between the original valuation of the shares at the time of their contribution and the
realized value at the time of the IPO. The Company continues to hold an 11.4% interest in Pinnacle
Airline Corp. Prior to the IPO, Pinnacle Airlines was fully consolidated and contributed approximately
$52 million to 2003 operating income.
Northwest and Pinnacle Airlines have entered into an airline service agreement, under which
Northwe t determines Pinnacle Airlines' commuter aircraft scheduling and fleet composition. The
agreement is structured as a capacity purchase agreement whereby Northwest pays Pinnacle Airlines to
operate the flights on Northwest's behalf and Northwest is entitled to all revenues associated with those
flights. Under thi agreement, Northwest paid a net $375 million, $188 million and $200 million for the
years ended December 31 2003, 2002 and 2001, respectively. These payments are recorded on a net
basi as a reduction to passenger revenues. The Company had a payable of $18 million to Pinnacle
Airlines as of December 31 2003, and there was no payable as of December 31, 2002. As of
December 31, 2003, the Company has leased 76 CRJ aircraft, which are in turn subleased to Pinnacle
Airlines.
orthwest has approximately $143 million in receivables from Pinnacle Airlines, consisting of a
$133 million note receivable, of which $13 million was classified as short-term, and a $10 million
hort-term receivable from a revolving line of credit as of December 31, 2003.
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 certain
Purchasers pursuant to a securitization transaction. The amount of loss 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 variable undivided interests in these
r ceivables to the Purchaser. The fair value of securitized receivables was estimated from the
anticipated future cash flows. The Company recorded the discount on the sale of receivables and its
intere t in NWF' earnings in other non-operating income (expense). The agreement provided for early
termination upon the occurrence of certain events, including high passenger refunds as a percentage of
sales and a downgrade in the Company's unsecured credit rating, both 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 ("NWF II"): In June 2002, a second Receivables Purchase Agreement was
executed by orthwe t, NWA Funding II, LLC ("NWF II"), a wholly-owned, non-consolidated
ubsidiary of the Company, and third party purchasers ("Purchasers"). The agreement was a 364-day,
100 million maximum revolving receivables purchase facility, renewable annually for five years at the
option of the Purchasers, that allowed NWF II to sell variable undivided interests in accounts
receivable acquired from Northwest to the Purchasers. NWF II paid a yield to the Purchasers equal to
the rate on Al/Fl commercial paper plus a program fee. The Receivables Purchase Agreement
terminated in July 2003. The Purchasers then collected $65 million on outstanding receivables. Due to
ea onal fluctuations in accounts receivable sold under the agreement the Company estimates that
termination of the program reduced its cash balance at December 31 2003 by approximately
$50 million.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Related Party Transactions (Continued)
WorldSpan: On June 30, 2003, the Company together with the other owners (American and
Delta) sold WorldSpan to Travel Transaction Processing Corporation, an entity formed by Citigroup
Venture Capital Equity Partners L.P and Teachers' Merchant Bank. In the sale, the Company old it
33.7% partnership interest in WorldSpan. The Company received cash proceed of $278 million at the
time of sale, plus $125 million of credit for future ervices from WorldSpan to be applied over the
next nine years. As a result of this transaction, the Company recorded a gain of $199 million in other
income. The Company will recognize the service credits a a reduction to the co t of purchased ervice
expense in the periods the credits are utilized.
Orbitz: On December 16, 2003, Orbitz and its airline owner (Northwe t, Continental, Delta,
United and American) sold approximately 12 million Orbitz shares through an initial public offering,
which included 9.7% of Northwest's total holdings. Northwe t sold 543,000 hare , with a book value of
$1.9 million, for approximately $13.3 million and recorded a gain of approximately $11.4 million. The
Company continues to hold approximately 12% of the out tanding hare , representing a 17% voting
interest in Orbitz.
Hotwire: On November 5, 2003, the Company sold its 6.7% intere t in Hotwire to InterActive
Corp. and received cash proceeds of $40 million. Hotwire operates an online opaque travel ite and
was founded by Texas Pacific Group and six airlines, including the Company.
At December 31, 2003, the Company's inve tment in three affiliates, with a book value of
$56 million based on the equity method, had an aggregate market value of $194 million.
Note 14-Risk Management and Financial Instruments
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which requires the Company to recognize all derivative on the balance heet at fair value. The
Company uses derivatives as cash flow hedge to manage the price risk of fuel and it expo ure to
foreign currency fluctuations. SFAS 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 transaction affects
earnings. The ineffective portion of the derivative's gain or loss is reported in earning immediately.
Risk Management: The Company principally uses derivative financial instruments to manage
specific risks and does not hold or issue them for trading purposes. The notional amounts of financial
instruments summarized below did not represent amounts exchanged between parties and, therefore,
are not a measure of the Company's exposure resulting from its use of derivatives.
Foreign Currency: The Company is exposed to the effect of foreign exchange rate fluctuation on
the U.S. dollar value of foreign currency-denominated operating revenues and expenses. The
Company's largest exposure comes from the Japanese yen. In 2003, the Company's yen-denominated
net cash inflow was approximately 19 billion yen ($164 million).
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14-Risk Management and Financial Instruments (Continued)
The Company uses forward contracts, collars or put options to hedge a portion of its anticipated
yen-denominated ale . The changes in market value of such instruments have historically been highly
effective at offsetting exchange rate fluctuations in yen-denominated sales. At December 31, 2003, the
Company recorded $10 million of unrealized losses in accumulated other comprehensive income (loss)
as a result of forward contracts to sell 22 billion yen ($193 million) at an average forward rate of
114 yen per dollar with various settlement dates through December 2004, and forward contracts to sell
five billion yen ($44 million) at an average forward rate of 106 yen per dollar with various settlement
date through September 2005. The e forward contracts hedge approximately 22% and 6% of the
Company's anticipated 2004 and 2005 yen-denominated sales, respectively. 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 gains of $1 million, $31 million and $85 million in
2003 2002 and 2001, 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
obligations. The amount of such credit exposure is generally the unrealized gains, if any, in such
contracts. To manage credit risks, the Company selects counterparties based on credit ratings, limits
exposure to a single counterparty and monitors the market position with each counterparty. It is the
Company's practice to participate in foreign currency hedging transactions with a maximum span f
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
ships 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
historically 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.
As of December 31, 2003, the Company had a nominal amount of unrealized gains 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. Fuel hedge contract
effectiveness is evaluated on a monthly basis and any ineffective portion is recorded in fuel expense
immediately. Ineffectiveness of $5 million was recorded in fuel expense for the year ended
December 31, 2002 and wa immaterial for the years ended December 31, 2003 and 2001. The
Company has not entered into any futures contracts traded on regulated futures exchanges, swaps, or
option as of December 31, 2003 in order to hedge its first quarter 2004 or full year 2004 fuel
requirements.
Interest Rates: The Company used financial instruments 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 reset on A320 aircraft financing during the fourth quarter of 2001. As of December 31, 2003, the
Company had $3 million of unrealized losses in accumulated other comprehensive income (loss), which
i amortized over the term of the related obligations.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14-Risk Management and Financial Instruments (Continued)
Fair Values of Financial Instruments: The financial statement carrying values equal the fair values
of the Company's cash, cash equivalents and short-term investments. As of December 31, these
amounts were:
Cash and
Cash
Equivalents
Short-term Investments
Unrestricted Restricted
2003 2002 2003 2002 2003 2002
Cash ..................................... . ........ . 54
(in millions)
47
Available for sale securities . .............................. 1,554 2,050 1,149
- -
- - - -
Total ........... . .................. ... . ... ..... ... . . 1,608 2,097 1,149
126 100
126 100
Cash equivalents are carried at cost and consisted primarily of unrestricted money market funds as
of December 31, 2003. 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 and those temporarily restricted, as short-term investments.
The financial statement carrying values and estimated fair values of the Company's financial
instruments, including current maturities, as of December 31 were:
2003 2002
Carrying Fair Carrying
Value Value Value
(in millions)
Long-Term Debt ....................... ...... ... . .. . $7,866 $7,035 $6,531
Mandatorily Redeemable Preferred Security .. ... . .... .. ... . 553
Series C Preferred Stock ............................. . 236 234 226
Fair
Value
$5,496
579
217
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 underlying 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:
Domestic ................................................ .
Pacific, principally Japan .. . .................................. .
Atlantic ..... . ..... .... ................ . ......... ... .... . .
Total operating revenues ................................... .
83
2003 2002 2001
$6,469
1,921
1,120
$9,510
(in millions)
$6,410
2,043
1,036
$9,489
$6,726
2,144
1,035
$9,905
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note IS-Segment Information (Continued)
The ompan s tangible a ets con i t primarily of flight quipment, which are utilized across
geographic mark t and th refore have not been allocated.
Note 16-Quarterly Financial Data (Unaudited)
Unaudited quarterly r suits of operation for the year ended December 31 are summarized below:
2003:
Operating re enue ........................ .
Operating in ome (lo ) ..................... .
t inc me (lo ) .......................... .
Basic earnings (loss) per common share ........... .
Diluted earnings (loss) per common share . ......... .
2002:
Operating re enue ........................ .
Operating inc m (lo ) ..................... .
et income (lo ) .......................... .
Basic earnings (loss) per common share ........... .
Diluted earni,ws (loss) per common share . ......... .
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(in millions, except per share amounts)
$2 250
(326)
$ (396)
($ 4.62)
($ 4.62)
$2,180
(196)
$ (171)
($2.01)
($ 2.01)
$2,297
(73)
$ 227
$ 2.64
$ 2.45
$2,406
(46)
$ (93)
($ 1.08)
($ 1.08)
$2,556
146
$ 47
$ 0.49
$ 0.49
$2,564
8
$ (46)
($ 0.55)
($ 0.55)
$2,407
(12)
$ 370
$ 4.23
$ 4.18
$2,339
(612)
$ ( 488)
($ 5.68)
($ 5.68)
Th sum of th quarterly earnings per share amounts may not equal the annual amount reported
inc per bar amounts ar computed independently for each quarter and for the full year based on
r pecti e weighted-average common hares outstanding and other dilutive potential common shares.
Note 17-Subsequent Events (Unaudited)
Debt Issuance: On January 26, 2004, Northwest completed an offering of $300 million of
un cured note due 2009. The note ha e a coupon rate of 10%, payable semi-annually in cash on
F bruary 1 and Augu t l of each year, beginning on Augu t 1, 2004, and are not redeemable prior to
maturity. Each not was i ued at a pric of $962 per $1,000 principal amount resulting in a yield to
maturity of 11.0 . Proce d from th note ar to be u ed for working capital and general corporate
purp e . The note ar guarant ed by NWA Corp.
4
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
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 disclosure controls and
procedures as of December 31, 2003. Based on that evaluation, the Company's management, including
the Chief Executive Officer and Executive Vice President and Chief Financial Officer, concluded that
the Company's disclosure 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 significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to December 31, 2003.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference and will be set forth under the
headings "General Information-Section 16(a) Beneficial Ownership Reporting Compliance",
"Information about our Board of Directors", and "Election of Directors-Information Concerning
Director-Nominees" to be included in the Company's Proxy Statement for the 2004 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after the end of the last fiscal year. The information regarding executive officers 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 "Information about our Board of Directors-Compensation of Directors," "Information about
our Board of Directors-Compensation Committee Interlocks and Insider Participation" and
"Executive Compensation" to be included in the Company's Proxy Statement for the 2004 Annual
Meeting of Stockholders to be filed with the Securities and Exchange 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 Ownership of Securities" to be included in the Company's Proxy Statement for the
2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange 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 is incorporated by reference and will be set forth under the
headings "Information about our Board of Directors-Compensation Committee Interlocks and Insider
Participation" and "Information about our Board of Directors-Related Party Transactions" to be
included in the Company's Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after the
end of the last fiscal year.
85
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference and will be set forth under the
heading "Relationship with Independent Public Accountants" to be included in the Company's Proxy
Statement for the 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the last fiscal year.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following is an index of the financial statements, schedules and exhibits included in this
Report.
(a) 1. Financial Statements
Page
Consolidated Balance Sheets-December 31, 2003 and December 31, 2002 . . . . . . . . . . . . 48
Consolidated Statements of Operations-For the years ended December 31, 2003, 2002
and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Consolidated Statements of Cash Flows-For the years ended December 31, 2003, 2002
and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Consolidated Statements of Common Stockholders' Equity (Deficit)-For the years ended
December 31, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2. Financial Statement Schedule:
Schedule II-Valuation of Qualifying Accounts and Reserves-For the years ended
December 31, 2003, 2002 and 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
Schedules not included have been omitted because they are not applicable or because the
required information is included in the consolidated financial statements or notes 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 as 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.
3.3 Restated Certificate of Incorporation of Northwest Airlines, Inc. (filed as 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 Northwest
Airlines Corporation (included in Exhibit 3.1).
4.3 Rights Agreement dated as of ovember 20, 1998 between Northwest Airlines Corporation
and Norwest Bank Minne ota, N.A., a Rights Agent.
86
4.4 The registrant hereby agrees to furnish to the Commission, upon r que t, copie of certain
instruments defining the rights of holders of long-term debt of the kind d crib d in It m
60l(b)(4) of Regulation S-K.
10.1 Standstill Agreement dated as of Novemb r 15, 2000 among Continental Airlin Inc.
Northwest Airlines Corporation, Northwe t Airline Holding Corporation and Northwe t
Airlines, Inc. (filed a Exhibit 99.8 to Continental Airline Inc. Current Report on Form 8-K
dated November 15, 2000 and incorporated herein by ref r nee).
10.2 Amended and Restated Standstill Agreement dated May 1, 1998 b tw n Koninklijke
Luchtvaart Maatschappij N.V and Northwest Airline Corporation.
10.3 First Amended and Restated Common Stock Registration Right Agreement dated a of
September 9, 1994 among Northwest Airlines Corporation, th holders of th Serie C
Preferred Stock and the Original Investor named ther in (filed a Exhibit 10.9 to NWA
Corp.'s Annual Report on Form 10-K for the year ended December 31 2000 and incorporat d
herein by reference).
10.4 Acknowledgement dated November 20, 1998 of Nortbwe t Airlin Corporation regarding
assumption of obligation a succes or under the Fir t Amended and R stated Common Stock
Registration Rights Agreement.
10.5 Airport Use and Lease Agreement dated a of June 21, 2003 between The Charter County of
Wayne, Michigan and Northwest Airline , Inc. (fil d as Exhibit 10.7 to NWA Corp. s Annual
Report on Form 10-K for the year ended Decemb r 31, 2002 and incorporat d herein by
reference).
10.6 Airline Operating Agreement and Terminal Building Lease Minneapolis-St. Paul International
Airport dated as of January 1, 1999 between the Metropolitan Airport Commi sion and
Northwest Airlines, Inc. (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).
10.7 Master Financing Agreement dated as of March 29 1992 among Northwest Airlines
Corporation, Northwest Airlines, Inc. and the State of Minne ota (filed as Exhibit 10.9 to th
registration statement on Form S-1, File No. 33-74210, and incorporated herein by reference).
10.8 Credit and Guarantee Agreement dated as of October 24, 2000 among Northwe t Airlines
Corporation, Northwest Airlines Holdings Corporation, NWA Inc., Northwe t Airlines, Inc.
and various lending institution named therein (filed as Exhibit 10.21 to NWA Corp.' Annual
Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by
reference).
10.9 Second Amendment dated as of October 23 2001 to Credit and Guarantee Agreement among
Northwest Airlines Corporation, Northwe t Airline H !ding rp rati n, NW Inc.,
Northwest Airlines, Inc. and various lending institutions named therein dated a 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).
10.10 Third Amendment dated as of September 9, 2002 to Credit and Guarantee Agreement among
Northwest Airline Corporation Northwest Airlines Holding Corporation, NWA Inc.,
Northwest Airlines, Inc. and various lending institutions named ther in 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 ref rence ).
10.11 Fourth Amendment dated as of February 14, 2003 to Credit and Guarant e Agreement among
Northwest Airlines Corporation, Northwest Airlines Holding Corporation NWA Inc.,
Northwest Airlines, Inc. and variou lending in titution named therein dated as of
October 24, 2000 (filed as Exhibit 10.1 to NWA Corp.'s Form 10-Q for the quart r nded
June 30, 2003 and incorporated herein by refer nc ).
87
10.12 Fifth Amendment dated as of May 1 2003 to Credit and Guarantee Agreement among
Northwest Airlines Corporation, Northwest Airlines Holdings Corporation NWA Inc.,
orthwest Airlines, Inc. and various lending institution named therein dated as of
October 24, 2000 (filed as Exhibit 10.2 to NWA Corp.'s Form 10-Q for the quarter ended
June 30, 2003 and incorporated herein by reference).
10.13 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).
10.14 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).
10.15 A330 Purchase Agreement dated as of December 21, 2000 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 March 31, 2001 and incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.16 Amendment No. 1 to A330 Purchase Agreement dated as of November 26, 2001 between
AVSA, S.A.R.L. and Northwest Airlines, Inc. (filed as Exhibit 10.14 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by
reference; the Commission has granted confidential treatment as to certain portions of this
document).
10.17 Amendment No. 2 to A330 Purchase Agreement dated as of December 20, 2002 between
AVSA, S.A.R.L. and Northwest Airlines, Inc. (filed as Exhibit 10.15 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by
reference; the Commission has granted confidential treatment as to certain portions of this
document).
10.18 Amendment No. 3 to A330 Purchase Agreement dated as of April 30, 2003 between AVSA,
S.A.R.L. and Northwest Airlines Inc. (NWA Corp. has filed a request with the Commission
for confidential treatment as to certain portions of this document).
10.19 Amendment No. 4 to A330 Purchase Agreement dated as of December 18, 2003 between
AVSA, S.A.R.L. and Northwest Airlines, Inc. (NWA Corp. has filed a request with the
Commission for confidential treatment as to certain portions of this document).
10.20 Bombardier CRJ440 Purchase Agreement dated as of July 6, 2001 between Bombardier Inc.
and Northwest Airlines, Inc. (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).
10.21 Preliminary Confirmation and Master Agreement dated October 29, 2003 and January 15,
1997, respectively, between Citibank, N.A. and Northwest Airlines Corporation (filed as
Exhibit 10.1 to NWA Corp.'s Form 10-Q for the quarter ended September 30, 2003 and
incorporated herein by reference).
10.22 Consulting Agreement dated as of December 20, 2002 between Northwest Airlines, Inc. and
Aviation Consultants LLC (filed as Exhibit 10.19 to NWA Corp.'s Annual Report on Form
10-K for the year ended December 31, 2002 and incorporated herein by reference).
10.23 Agreement dated May 6, 2003 by and between the United States of America (acting through
the Transportation Security Administration) and orthwest Airlines, Inc. pursuant to the
Emergency Wartime Supplemental Appropriations Act of 2003.
88
*10.24 Management Compensation Agreement dated as of June 28, 2001 between Northwest Airlines,
Inc. and Richard H. Anderson (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).
*10.25 Management Compensation Agreement dated as of June 28, 2001 between Northwest Airlines,
Inc. and Douglas M. Steenland (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).
*10.26 Management Compensation Agreement dated as of January 14, 2002 between Northwest
Airlines, Inc. and J. Timothy Griffin (filed as Exhibit 10.20 to NWA Corp.' Annual Report on
Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
*10.27 Management Compensation Agreement dated as of January 14, 2002 between Northwest
Airlines, Inc. and Philip C. Haan (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).
*10.28 Management Compensation Agreement dated as of September 27, 2002 between Northwest
Airlines, Inc. and Bernard L. Han (filed as Exhibit 10.23 to NWA Corp.'s Annual Report on
Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).
*10.29 Northwest Airlines, Inc. 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).
*10.30 Northwest Airlines, Inc. Excess Pension Plan for Salaried Employees (2001 Restatement) (filed
as Exhibit 10.23 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2001 and incorporated herein by reference).
*10.31 Northwest Airlines, Inc. Supplemental Executive Retirement Plan (2001 Restatement) (filed as
Exhibit 10.24 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31,
2001 and incorporated herein by reference).
*10.32 Northwest Airlines Corporation 1999 Stock Incentive Plan, as amended (filed as Exhibit 10.26
to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference).
*10.33 2001 Northwest Airlines Corporation Stock Incentive Plan, as amended (filed as Exhibit 10.43
to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
* 10.34 Northwest Airlines Corporation 1998 Pilots Stock Option Plan.
*10.35 Amendment to Northwest Airlines Corporation 1998 Pilots Stock Option Plan.
*10.36 Form of Non-Qualified Stock Option Agreement for executive officers under the 2001
Northwest Airlines 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).
* 10.37 Form of Phantom Stock Unit Award Agreement for executive officers under the 2001
Northwest Airlines 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 reference).
*10.38 Form of Deferred Stock Award Agreement for executive officers under the 1999 Northwest
Airlines Corporation Stock Incentive Plan (filed as Exhibit 10.40 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by
reference).
*10.39 Northwest Airlines Corporation E-Commerce Incentive Compensation Program, including
form of Award Agreement (filed as Exhibit 10.34 to NWA Corp.' Annual Report on Form
10-K for the year ended December 31, 2002 and incorporated herein by reference).
89
*10.40 The Chairman's Long-Term Retention and Incentive Program (filed as Exhibit 10.62 to NWA
Corp.'s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated
herein by reference).
*10.41 orthwest Airlines, Inc. 2003 Long-Term Cash Incentive Plan, including form of Award
*
Agreement.
12.1 Computation of Ratio of Earnings to Fixed Charges.
12.2 Computation of Ratio of Earnings to Fixed Charges and Preferred Stock Requirements.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
24.1 Powers of Attorney (included in signature page).
31.1 Rule 13a-14( a)/15d-14( a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 Section 1350 Certification of Chief Financial Officer.
Compensatory plans in which the directors and executive officers of Northwest participate.
(b) Reports on Form 8-K:
(i) Report dated October 16, 2003, reporting Item 5. "Other Events and Regulation FD
Disclosure" and Item 9. "Regulation FD Disclosure.' No financial statements were filed with
the report, which included a press release announcing our financial results for the third
quarter of 2003 and a letter to investors and analysts on forward looking guidance.
(ii) Report dated October 29, 2003, reporting Item 5. "Other Events and Regulation FD
Disclosure." No financial statements were filed with the report, which included a press release
announcing the intention to issue convertible senior notes due 2023, issued October 29, 2003,
announcing the pricing of 7.625% convertible senior notes due 2023, issued October 30, 2003,
and announcing the launch of an offer to exchange 10.5% secured pass-through certificates for
certain unsecured notes, issued October 30, 2003.
(c) Exhibits:
(i) See Item 15(a)(3).
. (d) Financial Statement Schedules:
(ii) See Item 15(a)(2).
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15( d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized this 4th day of March 2004.
NORTHWEST AIRLINES CORPORATION
By: /s/ JAMES G. MATHEWS
James G. Mathews
Vice President-Finance and Chief Accounting Officer
(principal accounting officer)
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears
below hereby constitutes and appoints Richard H. Anderson, Bernard L. Han and James G. Mathews
and each of them individually, his or her true and lawful agent, proxy and attorney-in-fact, with full
power of substitution and resubstitution, for such individual and in such individual's name, place and
stead, in any and all capacities, to act on, sign and file with the Securities and Exchang Commission
any and all amendments to this report together with all schedules and exhibits thereto and to take any
and all actions which may be necessary or appropriate in connection therewith, and each such
individual hereby approves, ratifies and confirms all that such agents, proxies and attorneys-in-fact, any
of them or any of his or their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
91
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below on the 4th day of March 2004 by the following persons on behalf of the registrant and in the
capacities indicated.
I I RICHARD H. ANDERSO
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)
Isl JAMES G. MATHEWS
James G. Mathews
Vice President-Finance and Chief Accounting
Officer (principal accounting officer)
Isl GARY L. WILSON
Gary L. Wilson
Chairman of the Board Director
Isl RAY W. BENNI G, 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
92
Isl ROBERT L. FRIEDMAN
Robert L. Friedman
Director
Isl DORIS KEARNS GOODWIN
Doris Kearns Goodwin
Director
Isl DENNIS F. HIGHTOWER
Dennis F. Hightower
Director
Isl GEORGE J. KOURPIAS
George J. Kourpias
Director
Isl FREDERIC V. MALEK
Frederic V Malek
Director
Isl V. A. RA VINDRAN
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
NORTHWEST AIRLINES CORPORATION
SCHEDULE II-VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Col. A Col. B Col. C Col. B
Additions
Charged to
Balance at Charged to Other
Beginning Costs and Accounts Deductions
Description of Period Expenses -Describe -Describe
Year Ended December 31, 2003
Allowances deducted from asset accounts:
Allowance for doubtful accounts ............. $ 19 $11 $- $11(1)
Accumulated allowance for depreciation of flight
equipment spare parts ................... 175 25 5(2) 3(3)
Year Ended December 31, 2002
Allowances deducted from asset accounts:
Allowance for doubtful accounts ............. 20 9 10(1)
Accumulated allowance for depreciation of flight
equipment spare parts ................... 121 67 22(2) 35(3)
Year Ended December 31, 2001
Allowances deducted from asset accounts:
Allowance for doubtful accounts ............. 16 12 8(1)
Accumulated allowance for depreciation of flight
equipment spare parts ................... 131 32 2(2) 44(3)
(1) Uncollectible accounts written off, net of recoveries
(2) Interaccount transfers
(3) Dispositions and write-offs
S-1
Col. B
Balance
at End
of Period
$ 19
202
19
175
20
121
Northwest Airlines Corporation
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Year ended December 31,
2003 2002 2001
Earnings:
Income (loss) before income taxes $ 218 $ (1 ,220) $ (670)
Le s: Income (loss) from less than 50% owned
investees 18 37 (5)
Add:
Rent ex pen e representative of interest (1) 253 247 237
Interest expense net of capitalized interest 441 385 326
Intere t of preferred security holder 25 25 25
Am01iization of debt discount and expense 24 17 14
Amortization of interest capitalized 10 5 4
Adjusted earnings $ 953 $ (578) $ (59)
Fixed charges:
Rent expense representative of interest ( 1) $ 253 $ 247 $ 237
Interest expense net of capitalized interest 441 385 326
Interest of preferred security holder 25 25 25
Amortization of debt discount and expense 24 17 14
Capitalized interest 10 25 29
Fixed charges 753 $ 699 $ 631
Ratio of earnings to fixed charges 1.27 (2) (2)
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
(2) Earning were inadequate to cover fi ed charge by 1.2 billion and $690 million for the
years ended December 31 , 2002 and 2001, respectively.
$
$
$
$
Exhibit 12.1
2000 1999
435 $ 487
92 86
229 199
316 348
27 27
11 15
4 4
930 $ 994
229 $ 199
316 348
27 27
11 15
23 16
606 $ 605
1.53 1.64
Northwest Airlines Corporation
COMPUTATION OF RA TIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(Dollars in millions)
Year ended December 31,
2003 2002 2001
Earnings:
Income (loss) before income taxes $ 218 $ (1 ,220) $ (670) $
Less: Income (loss) from less than 50% owned
investees 18 37 (5)
Add:
Rent expense representative of interest (1) 253 247 237
Interest expense net of capitalized interest 441 385 326
Interest of preferred security holder 25 25 25
Amortization of debt discount and expense 24 17 14
Amortization of interest capitalized 10 5 4
Adjusted earnings $ 953 $ (578) $ (59) $
Fixed charges and preferred stock requirements:
Rent expense representative of interest (1) $ 253 $ 247 $ 237 $
Interest expense net of capitalized interest 441 385 326
Preferred stock requirements 12
Interest of preferred security holder 25 25 25
Amortization of debt discount and expense 24 17 14
Capitalized interest 10 25 29
Fixed charges and preferred
stock requirements $ 765 $ 700 $ 632 $
Ratio of earnings to fixed charges
and preferred stock requirements 1.25 (2) (2)
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
(2) Earnings were inadequate to cover fixed charges by $1 .28 billion and $691 million for the
years ended December 31 , 2002 and 2001 , respectively.
Exhibit 12.2
2000 1999
435 $ 487
92 86
229 199
316 348
27 27
11 15
4 4
930 $ 994
229 $ 199
316 348
1
27 27
11 15
23 16
607 $ 606
1.53 1.64
RULE 13a-14(a)/1 5d-14(a) CERTIFICATIONS EXHIBIT 31.1
I, Richard H. Anderson, certify that:
1. I have reviewed this annual repori 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-15(e) and 15d-15(e)) for the registrant and
have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
c) disclosed in this annual report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporiing, to the registrant's auditors and the au it committee ofregistrant's board of
directors (or persons performing the equivalent func ions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record,
process summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 4, 2004
Isl RICHARD H. ANDERSON
Richard H. Anderson
Chief Executi e Officer
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS EXHIBIT 31 .2
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 circumstance under which uch
statements were made, not misleading with respect to the period covered by thi annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly pre ent in all material respects the financial condition, re ults 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-15(e) and 15d-15(e)) for the registrant and
have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, 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 report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and pre ented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this annual report based on such evaluation; and
c) disclosed in this annual report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors and the audit committee ofregistrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 4, 2004
I I BERNARD L. HAN
Bernard L. Han
Chief Financial Officer
SECTIO 1350 CERTIFICATIONS EXHIBIT 32.1
In connection with the Annual Report of Northwest Airlines Corporation (the "Company") on Form 10-K for the
period ending December 31, 2003 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,
a adopted pur uant 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.
/s/ RICHARD H. ANDERSON
Richard H. Anderson
Chief Executive Officer
March 4, 2004
SECTION 1350 CERTIFICATIONS EXHIBIT 32.2
In connection with the Annual Report of Northwest Airlines Corporation (the "Company") on Form 10-K for the
period ending December 31 , 2003 as filed with the Securities and Exchange Commission on the date hereof (the
"Report''), I, Bernard L. Han, Chief Financial Officer of the Company, certify, pur uant to 18 U.S.C. S 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 infonnation contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ BERNARD L. HAN
Bernard L. Han
Chief Financial Officer
March 4, 2004