Northwest Airlines Form 10-K 2004

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[El ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
Commission file number 0-23642
TO
NORTHWEST AIRLINES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 41-1905580
(State or other jurisdiction of incorporation or organization) (I.RS. Employer Identification No.)
2700 Lone Oak Parkway, Eagan, Minnesota 55121
( Address of principal executive offices) (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
Quarterly Interest Bonds due 2039
Name of each exchange on which registered
The New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on which registered
Common stock, par value $.01 per share The Nasdaq National Market
Preferred Stock Purchase Rights The Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15( d) of the Securities Exchange Act of 1934 during the preceding 12 months ( or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ~ No
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.
Indicate by check mark whether the registrant is an accelerated filer ( as defined in Rule 12b-2 of the
Act). Yes[&] No
The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30,
2004 was $833 million.
As of January 31, 2005, there were 87,112,585 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 29, 2005.
PART I
Item 1. BUSINESS
Northwest Airlines Corporation ("NWA Corp." and, together with its subsidiaries, the "Company") is
the indirect parent corporation of Northwest Airlines, Inc. ("Northwest"). Northwest operates 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 assets that include:
domestic hubs at Detroit, Minneapolis/St. Paul and Memphis;
an extensive Pacific route system with a hub in Tokyo;
a transatlantic joint venture 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");
membership in SkyTeam, a global airline alliance with KLM, Continental, Delta, Air France,
Alitalia, Aeromexico, CSA Czech Airlines and Korean Air;
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 ("Airlink"); and
a cargo business that operates 12 dedicated freighter aircraft through hubs in Anchorage and
Tokyo.
Northwest's business strategies 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://ir.nwa.com as
soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities
and Exchange Commission ("SEC").
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, but employs various strategies specific to the geographic regions in
which it operates. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 16--
Geographic Regions" for a discussion of Northwest's operations by geographic region.
Operations and Route Network
Northwest and its Airlink partners operate substantial domestic and international route networks and
directly serve more than 232 destinations in 25 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 150 destinations from Detroit. For the six months ended June 30, 2004, they
enplaned 59% 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 167 destinations from Minneapolis/St. Paul. For
the six months ended June 30, 2004, they enplaned 63% of originating passengers from
Minneapolis/St. Paul, while the next largest competitor enplaned 10%.
Memphis. Memphis is the seventeenth largest origination/destination hub in the U.S. Northwest and
its Airlink carriers together serve 93 destinations from Memphis. For the six months ended June 30, 2004,
they enplaned 56% of originating passengers from Memphis, while the next largest competitor enplaned
17%.
Other Domestic System Operations. Domestic "non-hub" operations include service to 15 destinations
from Indianapolis, service to 14 destinations from Milwaukee and service from several west coast gateway
cities to Honolulu.
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, Seattle and Portland.
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 362 permanent weekly takeoffs and landings ("slots") as of December 31, 2004, the most for
any non-Japanese carrier. As a result of a 1952 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 eight U.S. gateways and twelve Asian destinations via
Tokyo. The Asian destinations via Tokyo are Bangkok, Beijing, Busan, Guam, Hong Kong, Manila,
Nagoya, Saipan, Seoul, Shanghai, Guangzhou and Singapore. Additionally, Northwest flies nonstop
between Detroit and Osaka and Nagoya, and uses its fifth freedom rights to fly beyond Osaka to Taipei
and beyond Nagoya to Manila.
On June 18, 2004, the United States and the People's Republic of China agreed to a series of
amendments to the 1980 U.S.-China Air Transport Agreement that provides for a significant expansion of
air services between the two countries. On July 23, 2004, the U.S. Department of Transportation ("DOT")
gave Northwest the authorization for seven additional combination (passenger and cargo) service
frequencies that became available to the Company on August 1, 2004. On October 31, 2004, the Company
began using these frequencies to provide new daily roundtrip service between Detroit and Guangzhou, via
Tokyo. As a result of these new frequencies being authorized, Northwest is currently the only U.S. carrier
operating combination service to Guangzhou.
Atlantic. Northwest and KLM operate an extensive transatlantic 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
Amsterdam and 16 cities in the U.S., Canada and Mexico, as well as between Amsterdam and India.
Codesharing between Northwest and KLM has been implemented on flights to 51 European, six Middle
Eastern, nine African, three Asian and 169 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
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terminate the joint venture. In May 2004, Air France completed an acquisition of KLM, the result of which
KLM and Air France became wholly-owned subsidiaries of a new holding company.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 16--Geographic
Regions" for a discussion of Northwest's operations by geographic region.
Alliances
In addition to its transatlantic joint venture with KLM, Northwest has strengthened its network
through other alliance partnerships. Long-term alliances are an 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.
Since 1998, Northwest and Continental have been in a domestic and international strategic
commercial alliance that connects the two carriers' networks and includes extensive code-sharing, frequent
flyer program reciprocity and other cooperative activities. The alliance agreement has a term through 2025.
In August 2002, the Company entered into 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. 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.
On September 13, 2004, Northwest, together with KLM and Continental Airlines, formally joined the
global SkyTeam Alliance. The addition of Northwest, KLM and Continental makes SkyTeam the world's
second largest and fastest growing airline alliance. The nine members of the SkyTeam alliance, Northwest,
KLM, Continental, Delta, Air France, Alitalia, Aeromexico, CSA Czech Airlines and Korean Air,
currently serve 341 million passengers annually with 14,320 daily departures to 658 global destinations in
more than 130 countries. Northwest customers are now able to accrue and redeem frequent flyer miles in
their WorldPerks accounts for travel on any of the airlines that belong to SkyTeam. This alliance affords
customers the options and flexibility of traveling on multiple airlines while being treated as a customer
traveling on one airline.
On September 24, 2004, the SkyTeam alliance members Air France, Delta, Alitalia and CSA Czech,
along with Northwest and KLM, filed a Joint Application for Antitrust Immunity ("ATI") for their
transatlantic operations. Northwest and KLM currently have ATI under which they operate their
transatlantic joint venture, while Air France, Delta, Alitalia and CSA Czech separately have ATI. The
application seeks to bridge the antitrust immunity between the two alliances, enabling these six SkyTeam
members to coordinate their international operations more closely, creating a more effective transatlantic
alliance that will allow the carriers to enhance cooperation in marketing, coordinate flight schedules, and
integrate sales, cargo and some pricing and revenue management initiatives.
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 the Atlantic, in addition to its extensive relationship with KLM, Northwest has reciprocal frequent
flyer programs with Air Alps Aviation, KLM cityhopper and KLM exel, Air Europa, Kenya Airways and
Malev Hungarian Airlines.
Northwest, together with the SkyTeam alliance and its other travel partners, currently provide a global
network to over 900 cities in more than 160 countries on six continents.
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Regional Partnerships
Northwest has exclusive airline services agreements with two regional carriers: Pinnacle Airlines and
Mesaba. Under the agreements, these regional carriers operate their flights under the Northwest "NW"
code and operate as Northwest Airlink. The purpose of these airline services agreements is to provide
service to small cities and more frequent service to larger cities, increasing connecting traffic at
Northwest's domestic hubs. The business terms of these agreements involve capacity purchase
arrangements. Under these arrangements, Northwest controls the scheduling, pricing, reservations,
ticketing and seat inventories for Pinnacle Airlines and Mesaba flights. Northwest is generally entitled to
all ticket, cargo and mail revenues associated with these flights. The regional carriers are paid based on
operations for certain expenses and receive reimbursement for other expenses.
Pinnacle Airlines. Pinnacle Airlines offers scheduled passenger service to over 99 cities. In 2004, 42
additional Bombardier Canadian Regional Jet ("CRJ") aircraft were leased to Northwest and
simultaneously subleased to Pinnacle Airlines, bringing the total number of CRJ aircraft in Pinnacle
Airlines' operations to 117 as of December 31, 2004. Northwest subleases all of the CRJ aircraft in
Pinnacle Airlines' fleet to Pinnacle Airlines pursuant to the airline services agreement between the two
companies. The airline services agreement has a term through 2017. Northwest has agreed to sublease an
additional 22 CRJs to Pinnacle Airlines to increase its fleet to 139 CRJs by December 31, 2005. This total
includes 10 additional CRJ aircraft that Northwest agreed to sublease to Pinnacle Airlines pursuant to an
amendment to the airline services agreement, which was entered into in December 2004.
Prior to 2003, Pinnacle Airlines Corp., the holding company of Pinnacle Airlines, was a wholly-owned
subsidiary of Northwest. As of September 30, 2003, Northwest had contributed 88.6% of the common
stock of Pinnacle Airlines Corp. 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, with the proceeds
retained by the plans. The Company continues to own 11.4% of the common stock of Pinnacle Airlines
Corp.
Mesaba. Mesaba offers scheduled passenger service to over 104 cities. The Company owns 27.5% of
the common stock of MAIR Holdings, Inc. ("MAIR"), the holding company of Mesaba. The Company
also has approximately 4.2 million warrants to acquire additional MAIR common stock, of which 22%
were at or above their exercise price as of December 31, 2004. The Company has an airline services
agreement with Mesaba to operate Saab 340 aircraft for Northwest through June 2007. Additionally, the
Company has an agreement with Mesaba to operate Avro RJ85 aircraft for Northwest through April 2007.
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 15-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 2004, cargo accounted for 7.4% 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 cargo space on its passenger aircraft. The Company
plans to add two additional Boeing 747-200 freighter aircraft in 2005 to the freighter fleet.
Northwest is able to participate in the high yield, small package "express" business by providing airlift
for cargo integrators using its extensive network across the Pacific. In 2001, the Company entered into a
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five-year agreement with DHL Worldwide Express ("DHL") to provide DHL with a specified amount of
cargo capacity on Northwest's flights 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 the two airlines
codeshare on certain routes between the U.S. and Japan.
On June 18, 2004, the United States and the People's Republic of China agreed to a series of
amendments to the 1980 U.S.-China Air Transport Agreement. The amendments provide for a significant
expansion of air services between the two countries. On September 3, 2004, the DOT awarded Northwest
six additional U .S.-China all-cargo frequencies, three of which became available to Northwest on
November 1, 2004, and another three that will become available on March 25, 2005. The Company is using
the three currently available frequencies, and intends to use the three frequencies that will become
available in 2005, to expand its cargo seivice to Shanghai, via its cargo hubs in Anchorage and Tokyo.
Additionally, on February 22, 2005, the DOT awarded Northwest three additional U.S.-China all-cargo
frequencies that will become available on March 25, 2006.
Other Travel Related Activities
MLT Inc. ML T Inc. ("ML T"), an indirect wholly-owned subsidiary of NW A 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 2004, ML T had $469 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 included 9.7% of
Northwest's total holdings. On September 29, 2004, Cendant Corporation ("Cendant"), Orbitz and the
airline owners of Orbitz entered into agreements that provided for the acquisition by Cendant of all shares
of Orbitz for $27.50 per share in cash. The transaction closed in November 2004. As a result of the sale,
Northwest sold all 4,949,201 of its remaining shares of class B common stock of Orbitz and the Company
recognized a gain of approximately $115 million in the fourth quarter of 2004.
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. It is structured as a three-tier elite incentive and reward program. 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.
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 remains
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, baggage liability and
access for persons with disabilities. Northwest is subject to regulations of the DOT and the Federal
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Aviation Administration ("FAA") 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 Department of Justice ("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.
International Service. 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 service. With respect to foreign air transportation, the
DOT must approve agreements between air carriers, including codesharing agreements, and may grant
antitrust immunity for those agreements in some situations.
Northwest's right 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 respective foreign countries.
Many aviation agreements permit an unlimited number of carriers to operate between the U.S. and a
specific foreign country, while others limit the number of carriers and flights on a given 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.
Aviation Security. The TSA regulates 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 has implemented, numerous security
procedures that have imposed and will continue to impose 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. In addition, the law authorizes the
TSA to impose an air carrier fee, capped through September 30, 2004 at the amount paid by the Company
for screening passengers and property in 2000. Thereafter, the TSA may apportion the air carrier fee
among the carriers operating in the U.S. on the basis of market share or any other appropriate measure,
but the total amount of air carrier fees collected by TSA for each fiscal year may not exceed, in the
aggregate, the amounts paid in 2000 by carriers for screening passengers and property.
On November 10, 2004, the TSA proposed to implement regulations addressing security of cargo on
passenger and all-cargo aircraft. Also in November 2004, the TSA implemented a test of a passenger pre-
screening program, named "Secure Flight," utilizing passenger data provided to the TSA by U.S. airlines.
On December 17, 2004, the President signed into law the Intelligence Reform and Terrorism Prevention
Act of 2004, which requires the TSA to take additional actions regarding passenger and air cargo security.
Distribution. On January 31, 2004, most DOT rules governing the conduct of computer reservations
systems ("CRSs") terminated; all remaining rules terminated on July 31, 2004. Among other things, these
rules-most of which had been in effect since 1984-restricted the ability of CRSs to charge discriminatory
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fees to different airlines for CRS services and to provide travel agency subscribers with schedule displays
that give preference to the flights of one airline over those of other airlines. Although these rules have
been terminated, the DOT continues to have the right to assert statutory jurisdiction over the conduct of
CRSs.
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". The number of takeoffs and landings slots at three of these airports-La
Guardia, Kennedy International and Reagan National-presently are 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 LaGuardia and Kennedy International on July 1, 2007.
During 2004, the FAA entered into voluntary agreements with the largest operators at O'Hare to restrict
operations there in order to relieve congestion. 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
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, frequency of aircraft operations and various other procedures for noise abatement. While
Northwest has sufficient operational and scheduling flexibility to accommodate current local noise
restrictions, its operations could be adversely affected if locally imposed regulations become more
restrictive or widespread.
Under the direction of the International Civil Aviation Organization ("ICAO"), world governments,
including the U.S., are considering 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 l~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, maintenance
programs for all aircraft operated by the Company. These programs provide for the ongoing maintenance
of the Company's aircraft, ranging from frequent routine inspections to major overhauls. The Company's
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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 Aiiworthiness 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
aiiworthy. The Company is currently, and expects to remain, in compliance with all applicable
requirements under all ADs and the FAA approved maintenance programs.
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.
Northwest, along with other airlines, has been identified as a potentially responsible party at various
environmental sites. Management believes that Northwest's share of liability for the cost of the
remediation of these sites, if any, will not have a material adverse effect on the Company's financial
statements.
Civil Reserve Air Fleet Program. Northwest renewed its participation in the Civil Reserve Air Fleet
Program ("CRAF"), pursuant to which Northwest has agreed to make available, during the period
beginning October 1, 2004 and ending September 30, 2005, 20 Boeing 747-200/400 passenger aircraft,
22 DCl0-30 passenger aircraft, eight Airbus A330-300 passenger aircraft, four Airbus A330-200 passenger
aircraft and 12 Boeing 747-200 freighter aircraft for use by the U.S. military under certain stages of
readiness related to national emergencies. The program is a standby arrangement that allows the U.S.
Department of Defense Air Mobility Command to call on some or all of these 66 contractually committed
Northwest aircraft and their crews to supplement military airlift capabilities.
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 domestic airlines as
well as foreign, regional and new entrant airlines, some of which have more financial resources and/or
lower cost structures than ours. In most of our markets we compete with at least one of these 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 protect market share
despite a potential loss of revenues.
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Industry revenues have declined substantially and we continue to experience significant operating losses.
Since 2001, the U.S. airline industry has suffered a substantial reduction in revenues, both on an
absolute basis and relative to historical trends. Our operating revenue in 2004 was 3.9%, or $452 million,
less than operating revenue in 2000 and we have incurred significant operating losses in each of the last
four years. For the twelve months ended December 31, 2004 and 2003, we reported pre-tax losses, absent
unusual items, of $696 million and $583 million, respectively. We do not anticipate that the revenue
environment will materially improve in 2005 and, as a result of various fare actions taken by our
competitors, may be worse. 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, economies in other regions of
the world and corporate profitability. While these and other factors may have temporal effects, permanent
structural differences in the industry revenue environment have also taken place that have contributed to
the decline. These differences are the result of a number of factors.
The rapid growth of low cost airlines has had a profound impact on industry revenues. Using the
advantage of low unit costs, driven in large part by lower labor costs, these carriers are able to operate
profitably while offering substantially lower fares. By targeting such fares at business passengers in
particular, these carriers are shifting demand among those travelers, historically our most profitable
customers, away from the larger, more established airlines. Low cost carriers now transport approximately
30% of all domestic U.S. passengers, compared to less than 10% a decade ago. They now compete for, and
thus influence industry pricing on, approximately 75% of all domestic U.S. passenger ticket sales.
Moreover, as a result of their better financial performance, low cost carriers possess the resources
necessary to continue to increase their market share and currently have large numbers of aircraft on order
to continue their expansion.
In a move similar to those employed by the low cost carriers, Delta, a large network carrier, recently
adopted a simplified fare pricing strategy that lowered unrestricted fares within the 48 contiguous United
States. This strategy includes a cap on the cost of one-way fares, eliminates certain flight restrictions, such
as the requirement to stay over a Saturday night, and decreases ticket change fees. We believe that fare
simplifications of this nature are revenue negative and that this initiative will adversely affect industry
revenues.
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 market share advantages. These factors could increase over time as Internet ticket
sales increase, driving the airline ticketing environment further toward commodity pricing.
The attacks of September 11, 2001 materially impacted air travel and concerns about further terrorist
attacks 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. Any future terrorist attack might also have a material effect on
industry revenues.
Global events that exacerbated the decline in airline industry revenue in 2003 had ongoing effects
throughout 2004. The aftermath of the war in Iraq continues to depress air travel, particularly on
international routes. The outbreak of Severe Acute Respiratory Syndrome ("SARS") sensitized passengers
to the potential for air travel to facilitate the spread of contagious diseases. Another outbreak of SARS or
other influenza-type illness, if it were to persist for an extended period, could again materially affect the
airline industry by reducing revenues and impacting travel behavior, especially on routes to and from
certain Asian destinations.
10
Airlines are among the most heavily taxed of all U.S. companies. According to the Air Transport
Association, taxes and fees can add up to approximately 25% of what a passenger pays for an average
roundtrip domestic airline ticket. These taxes and fees have grown significantly in the past decade. We
believe that nearly every dollar of tax or fee increase imposed on airline passengers translates into
approximately the equivalent amount of reduced airline revenue.
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 and US Airways, Inc. ("US Airways"), the second and
seventh largest domestic air carriers, respectively. 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. Among the significant cost advantages currently being sought by United and already
obtained by US Airways is the reduction or elimination of all of their defined benefit pension plans, which
would relieve those carriers of large cash funding obligations over the next several years. 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, including the Company, and salary and
benefit costs are our largest operating expense by a wide margin. Like other large network carriers, we are
heavily unionized, with approximately 90% of our employees represented by unions. For these groups,
wages, hours of work, working conditions, settlement of disputes and other matters are specified by
collective bargaining agreements. The major agreements currently in place 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, 12/31/06
International ("ALPA")
Agents and Clerks 8,400 International Association of 2/25/03
Machinists & Aerospace Workers
("IAM")
Equipment Service Employees 5,900 International Association of 2/25/03
and Stock Clerks Machinists & Aerospace Workers
("IAM")
Flight Attendants 9,200 Professional Flight Attendants 5/30/05
Association ("PF AA")
Mechanics and Related 5,600 Aircraft Mechanics Fraternal 5/11/05
Employees Association ("AMFA")
In addition to the groups described above, as of December 31, 2004, we had approximately 1,800
foreign national employees, working primarily in Asia. Collective bargaining agreements are also in place
for the majority of those workers.
Many older airlines, including Northwest, conducted contract negotiations with the unions over
several decades in a regulated environment in which there was little competition and costs were passed
11
through to customers. The most successful-and the only profitable-carriers in the industry today have
emerged since deregulation, principally by taking advantage of lower labor cost structures that have
allowed them to respond to market factors. This left the traditional airlines, including Northwest, with
significantly higher wage scales, much lower productivity, and defined benefit pension plans that are more
generous than those found at the low cost carriers. In addition, over time, airline unions have negotiated
restrictive scope clauses that can severely limit our ability to pursue market-driven adjustments.
Low cost carriers, with wage and benefit expenses substantially below those of the older airlines, have
used this cost advantage to offer significantly lower unrestricted fares. As a result, a considerable share of
the lucrative business passenger segment has shifted to their flights, leaving traditional carriers with a
diminishing base of the customers who were historically our main source of profits. There is no realistic
prospect that this new competitive balance in the industry, and the diminished revenue environment it has
created, will change anytime in the future. The low cost carriers have witnessed the previous failures of
new entrant airlines and thus recognize that their labor cost advantage must be sustained to remain
successful. Moreover, the supply/demand balance in the workforce is now strongly in their favor, with an
abundant supply of qualified employees available due to job losses at the older carriers. Any traditional
airline that is unsuccessful in obtaining substantial labor savings in the new industry revenue environment
is unlikely to return to profitability.
The labor cost disparity within the industry has narrowed over the past two years as traditional airlines
incurred losses at unsustainable levels, producing financial crises that left them no choice but to respond.
US Airways and United were able to achieve labor cost savings only through Chapter 11 bankruptcy
reorganizations. Both American and Delta also faced imminent Chapter 11 filings before their unions
acknowledged the severity of their financial situations and agreed to more competitive labor costs. Despite
such restructurings, each of those airlines faces ongoing challenges and may require further cost reductions
to emerge from, or avoid, bankruptcy reorganization. These developments place increasing pressure on us
to achieve similar results. Otherwise, our labor costs will be uncompetitive not only with the existing low
cost carriers, but the airline industry as a whole.
We have been in discussions with our labor groups over the past year, seeking to obtain competitive
wage scales, work rules and benefit plans. On October 14, 2004, we announced a tentative agreement with
our pilots, represented by the Northwest unit of the ALP A. The bridge agreement includes $300 million in
annual labor cost savings from the Company's pilots and its salaried workers, with pilots contributing $265
million in annual wage, benefit and other contract changes and salaried and management employees taking
$35 million in annual salary and benefit reductions. The agreement was subsequently approved by the
ALP A Master Executive Council and was ratified by the Company's pilots on November 5, 2004. The labor
cost reductions became effective December 1, 2004. Northwest currently is in contract discussions with
representatives of the other labor groups, which include the 1AM, the Transport Workers of America, the
AMF A, the PF AA, the Northwest Airlines Meteorology Association and the Aircraft Technical Support
Association. As noted above, the collective bargaining agreements with AMF A and PF AA become
amendable in May 2005 and the collective bargaining agreements with 1AM are currently amendable. The
Company is currently in mediation with AMF A, 1AM and PF AA.
Under the Railway Labor Act, an amendable labor contract continues in effect while the parties
negotiate a new contract. In addition to direct contract negotiations, the RLA also provides for mediation,
potential arbitration of unresolved issues and a 30-day "cooling off'' period after the end of which either
party can resort to self-help. The self-help remedies include, but are not limited to, a strike by the members
of the labor union and the imposition of proposed contract amendments and in the event of a strike, the
hiring of replacement workers by the Company. The Company cannot predict the outcome of negotiations
at this time.
12
Changes in government 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. 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 landing 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, 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 impact the global supply and demand for aircraft fuel may affect
our financial performance due to its high sensitivity to fuel prices. A one-cent change in the cost of each
gallon of fuel would impact operating expenses by approximately $1.6 million per month (based on our
2004 mainline and regional aircraft fuel consumption). 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 and can result in losses depending on price changes. In addition, the
Company's financial condition limits its ability to engage in hedging strategies.
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 $62 million higher in 2004 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, following multiple extensions, this coverage is
scheduled to expire on August 31, 2005. While the government may again extend the period that it
provides excess war risk coverage, there is no assurance that this will occur, or if it does, how long the
extension will last or at what cost the coverage will be provided. 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 and the maximum amount of coverage available would be reduced from that currently made
available by the government. Aviation insurers could further increase insuraa.ce premiums, and the
availability of coverage could be reduced, 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, 2004, we had long-term debt and
capital lease obligations, including current maturities, of $8.8 billion. Of this indebtedness, 48% bears
interest at floating rates. The current portion of long-term debt maturing in 2005 is $696 million.
Additionally, $963 million matures in 2006, $1.40 billion in 2007, $525 million in 2008, $1.08 billion in 2009
and $3. 75 billion thereafter. These amounts include $79 million and $567 million of aircraft related loan
obligations maturing in 2006 and 2007, respectively, that may be extended for an additional nine years from
13
their maturity dates at the Company's election. The indebtedness also includes the Company's $975 million
bank term loan, which includes covenants requiring the Company to maintain minimum liquidity and to
achieve specified ratios of earnings to fixed charges. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 3-Long-Term Debt and Short-Term Borrowings" for further information
related to outstanding debt obligations and maturities. As of December 31, 2004, the principal portion of
future minimum lease payments under capital leases was $53 million for 2005, $31 million for 2006, $39
million for 2007, $28 million for 2008, $21 million for 2009 and $189 million thereafter. These levels of
indebtedness do not include the obligation to redeem $263 million of convertible preferred stock. See
"Item 3. Legal Proceedings, Series C Preferred Stock Litigation" and "Item 8. Consolidated Financial
Statements and Supplementary Data, Note 6-Redeemable Preferred and Common Stock" for further
information related to the convertible preferred stock. We also have significant obligations related to
operating leases that do not appear on the consolidated balance sheets. See "Item 8. Consolidated
Financial Statements and Supplementary Data, Note 4-Leases" for further information related to future
minimum lease payments. Even in challenging times for the industry, the Company has been successful at
building and maintaining liquidity in recent years by selling non-strategic assets or obtaining new financing.
The amount of unencumbered assets available for such purposes is limited. The amount of our
indebtedness and the finite amount of unencumbered assets could limit our ability to obtain additional
financing or adversely affect our future financing costs. Our ability to service our indebtedness and
obligations could be adversely affected in many ways, including general economic conditions and other
factors beyond our control.
We also have noncontributory pension plans covering our pilots, other contract employees and
salaried employees. Funding obligations under these plans are governed by the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"). As of December 31, 2004, our pension plans were
underfunded by $3.82 billion, as calculated in accordance with SFAS No. 87, Employers' Accounting for
Pensions ("SF AS No. 87''). Unless future asset returns exceed plan assumptions, we will have to satisfy the
underfunded amounts of the plans through cash contributions over time. The timing and amount of
funding requirements also depend upon a number of other factors, including interest rates, asset returns,
potential changes in pension legislation, our decision to make voluntary prepayments, applications for and
receipt of waivers to reschedule contributions, and changes to pension plan benefits.
Our calendar year 2005 cash contributions to qualified pension plans will approximate $420 million.
This amount reflects the benefits of legislation enacted in April 2004, when the President signed into law
the Pension Funding Equity Act ("Pension Act"), which reduced our .required 2004 and 2005 plan year
contributions through two mechanisms: (1) certain companies were permitted to elect partial relief from
the deficit reduction contribution requirements that otherwise would have applied, an election we made;
and (2) the applicable discount rate used to determine funding was increased to reflect yields on indices of
high quality corporate bonds instead of 30-year U.S. Treasury rates. Absent further legislative relief,
authorization by the Internal Revenue Service ("IRS") to reschedule future conti;ibutions, contractual
relief under the Company's collective bargaining agreements, substantial changes in interest rates, or asset
returns significantly above the 9.5% annual rate currently assumed, we would expect our calendar year
2006 and 2007 cash contributions to be significantly higher than our 2005 cash contributions. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and
Capital Resources" for further discussion of our pension obligations.
We operate in a capital-intensive industry. Periodically, we are required 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 expenditures.
We are exposed to foreign cu"ency exchange rate fluctuations.
We conduct a significant portion of our operations in foreign locations. As a result, we have operating
revenues and, to a lesser extent, operating expenses, as well as assets and liabilities, denominated in foreign
14
currencies, principally the Japanese yen. Fluctuations in foreign currencies can significantly affect our
operating performance and the value of our assets and liabilities located outside 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.
We are exposed to changes in interest rates.
We had $8.8 billion of debt and capital lease obligations and $2.6 billion of cash, cash equivalents, and
short term investments as of December 31, 2004. Of this indebtedness, 48% bears interest at floating rates.
An increase in interest rates would have an overall negative impact on our earnings as increased interest
expense would only be partially offset by increased interest income.
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, 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.
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 include, 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.
15
Item 2. PROPERTIES
Flight Equipment
As shown in the following table, Northwest operated a fleet of 435 aircraft at December 31, 2004,
consisting of 367 narrow-body and 68 wide-body aircraft. Northwest's purchase commitments for aircraft as
of December 31, 2004 are also provided.
In Service
Temporarily Average Aircraft
Seating Capital Operating Not in Age on Firm
Aircraft Type Ca~aci9: Owned Lease Lease Service Total {Xears} Order
Passenger Aircraft
Airbus:
A319 ............ 124 58 12 70 3.1 11
A320 ............ 148 43 4 31 78 10.3 2
A330-200 ......... 243 7 7 0.3 5(5)
A330-300 ......... 298 8 8 1.1 12(5)
Boeing:
757-200 .......... 180-184 32 5 19 (5) 51 13.1
757-300 .......... 224 16 16 1.8
747-200 .......... 353-430 3 3 (1) 5 21.7
747-400 .... . ..... 403 4 12 16 11.1
McDonnell Douglas:
DC9 ............. 78-125 153 4 (5) 152 33.8
DClO ........... . 273 14 8 __0 20 25.8
338 9 89 (13) 423 30
Freighter Aircraft
Boeing 747F ...... 8 5 _ill 12 22.9
Total Northwest
Operated Aircraft . 346 9 94 (14) 435 18.3(1) 30(2)
Regional Aircraft
Avro RJ85 ....... 69 10 25 35 6.2
CRJ-200/440 ...... 44-50 117 (3) 114 1.9 Z2(3)
Saab 340 ......... 30-34 49 ~(4) 7.1
Total Airlink Operated Aircraft ... 10 191 _Q) 198 22
Total Aircraft . ...... 356 9 285 (17) 633 52
(1) Excluding DC9 aircraft, the average age of Northwest-operated aircraft is 9.9 years.
(2) Financing commitments available for use by the Company are in place for all of these aircraft.
(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 obligated to
take delivery of the aircraft.
(4) Excludes aircraft directly leased by Mesaba from third party lessors.
(5) On January 26, 2005, the Company announced that it had ordered six additional Airbus A330-300
aircraft and two additional Airbus A330-200 aircraft for delivery between 2006 and 2007. These
aircraft are included in the table presented above.
16
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,
maintenance programs and the lack of a commercially successful new 100-seat aircraft at this time. The
Company estimates that its DC9 aircraft on average could fly more than eight additional years beyond
2004 based upon the manufacturer's expected cycle life for such aircraft and the projected annual
utilization by Northwest.
In total, the Company took delivery of 10 Airbus aircraft and 42 Bombardier CRJ regional jet aircraft
during the twelve months ended December 31, 2004. The Company entered into operating leases with
respect to the 42 Bombardier CRJ aircraft and then subleased all of the aircraft to Pinnacle Airlines
pursuant to the Company's airlines services agreement with Pinnacle Airlines. In connection with the
acquisition of these 52 aircraft, the Company entered into long-term debt arrangements and operating
leases with various lenders and lessors. Under such arrangements, the aggregate amount of debt incurred
totaled $776 million and the minimum lease payments at the point of inception equaled $888 million.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 4-Leases" and
"Note IO-Commitments" for further information related to the Company's aircraft leases and
commitments.
Airport Facilities
Northwest leases the majority of its airport facilities. The associated lease terms cover periods up to 30
years and contain provisions for periodic adjustment of lease payments. At most airports that it serves,
Northwest has entered into agreements that provide for the non-exclusive use of runways, taxiways,
terminals and other facilities. Landing fees under these agreements normally are based on the number of
landings and weight of the aircraft.
In certain cases, the Company has constructed facilities on leased land that revert 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 several hangars 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 same facility. A new hotel in the terminal was completed in December 2002, and a two-bay Boeing 747
hangar was completed in October 2003.
In late 2003, an additional $190 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 this new expansion project, which is expected to be completed in 2006. 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 is undergoing a $2.9 billion construction program that
began in 1998. The major components completed include an additional 15 mainline jet gates, 30 commuter
gates, a 50% increase in vehicle parking and new automated people movers. Additionally, a new
north/south runway will be completed in 2005, with other minor projects completed in phases through
2010. Northwest currently has 66 mainline and 35 commuter gates at the airport. The airport is also
17
presently considering a three-phase $860 million plan to expand terminal facilities to meet air service
demand through the year 2020.
The Memphis-Shelby County Airport Authority has nearly completed a $360 million airport
renovation and expansion project. The airfield portion of the program provides nearly $300 million in
improvements, 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 new ticket counter
positions. Future enhancements being considered include $40 million in vehicle parking expansion and
roadwork modifications.
Other Property and Equipment
Northwest's primary offices are located at or near the Minneapolis/St. Paul International Airport. The
Company's corporate offices are located on a 160-acre site east of the airport. Owned facilities include
reservations centers in Baltimore, Tampa and Chisholm, 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. During 2004, the
Company closed its 26 remaining city ticket offices in North America.
In 2003, the Company closed its Detroit area city ticket offices and its reservations center located in
Livonia, Michigan. Call center activity performed at the Livonia facility was transferred to the Company's
reservations facilities in Baltimore, Chisholm, Minneapolis, Seattle and Tampa. In January 2005, the
Company sold the Livonia property.
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. U.S. Airways and Northwest
Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action No. 99-72474), BLT Contracting, Inc. v. U.S.
Airways, Northwest Airlines and the Airline Reporting Corporation (U.S. D.C. Eastern District of Michigan,
Civ. Action No. 99-72988), and Volk and Nitrogenous Industries Corp. v. US. Airways, Northwest Airlines,
Delta Air Lines, and the Airline Reporting Corporation (U.S. D. C. Eastern District of Michigan, Civ. Action
No. 99-72987). All have been assigned to the Judge in the Chase case. Northwest believes these cases are
without merit and intends to defend against them. In November 2000, the plaintiffs filed their class
certification motion and defendants filed their summary judgment motion. On May 16, 2002, the Court
entered an Order granting plaintiffs' motion for class certification and denying defendants' motion for
summary judgment. The Court has not yet set a trial date.
18
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. On December 20, 2004, the Eighth Circuit Court of Appeals affirmed the decision of
the District Court and on January 14, 2005, denied the plaintiffs' petition for a rehearing or a rehearing en
bane.
Hall v. United Air Lines, et al. (U.S. D.C. Eastern District of North Carolina, Civ. Action No. 7-00
CV-123-BR(l)). In October 1999, a purported class action was filed in State Court in North Carolina by
a North Carolina travel agent, on behalf of herself and similarly situated North Carolina travel agents,
challenging actions by most major airlines, including Northwest, to reduce travel agent base commissions
from 8 percent to 5 percent and alleging several state law theories of liability, including conspiracy. In
June 2000, the plaintiff filed a voluntary dismissal and then filed a new case in federal court. The new case
is a class action, now on behalf of a nation-wide class of travel agents, alleging an unlawful agreement
among airlines to reduce commissions in violation of the Sherman Act, and is based on the same factual
allegations. On November 13, 2001, the court granted the plaintiffs' motion to amend the complaint to
include allegations that other commission reductions in 1997 and 1998 were the result of unlawful
agreements among the airline defendants in violation of the Sherman Act. The complaint was subsequently
amended again to allege that commission reductions in March 2002 were also the result of an unlawful
agreement among the airline defendants. Northwest believes the case to be without merit and intends to
defend against the claim. On September 17, 2002, the Court entered an Order granting plaintiffs' motion
for class certification. On October 30, 2003, the Court granted the Defendants' motion for summary
judgment. On December 9, 2004, the Fourth Circuit Court of Appeals affirmed the decision of the District
Court and on January 4, 2005, denied the plaintiffs' petition for rehearing or rehearing en bane.
McCoy-Johnson v. Northwest Airlines (U.S. D.C. Western District of Tennessee, Civ. Action
No. 2-99-CV-2994GV). In November 1999, a purported class action was filed against Northwest by a
Northwest passenger in federal court alleging violations of Section 2 of the Sherman Act. The plaintiff
alleges that Northwest has monopolized or attempted to monopolize air transportation on certain routes
into and out of its three domestic hubs through a variety of exclusionary practices. The plaintiff purports to
sue on behalf of all similarly situated passengers who purchased tickets on Northwest for travel on certain
routes into or out of its three hubs since at least as early as April 1995. In March 2001, a second case,
Rodney v. Northwest Airlines (U.S. D.C. Western District of Tennessee, Civ. Action No. 01-2167GV), was
filed in the same court as a related case by the same counsel. The allegations in the Rodney case are
substantially the same as those in the McCoy-Johnson case. In July 2001, the lawyers representing the
plaintiffs in McCoy-Johnson and Rodney filed another companion lawsuit, Sax v. Northwest (U.S.D.C
Western District of Tennessee, Civ. Action No. 01-2582GV). The allegations in the Sax case are
substantially the same as those in the McCoy-Johnson and Rodney cases. Northwest believes these cases to
be without merit and intends to defend against the claims. On March 31, 2004, the Court denied the
plaintiffs' motion for class certification in the Rodney and Sax cases. The plaintiffs have appealed the denial
of class certification. The plaintiffs have not moved for class certification in the McCoy-Johnson case. The
plaintiffs' appeal of the Court's Order denying class certification is pending.
Spirit Airlines v. Northwest Airlines (U.S. D.C. Eastern District of Michigan, Civ. Action No. 00-71535).
In March 2000, Spirit Airlines filed a Sherman Act monopolization complaint against Northwest in the
U.S. District Court for the Eastern District of Michigan alleging that Northwest had monopolized, or
attempted to monopolize, air transportation service between Detroit and Philadelphia and between
19
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.
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 1AM 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. Although
discovery is not complete, plaintiffs have filed motions for summary judgment and the Company has filed
its response. The Court held a hearing on the motion on November 4, 2004, but has not yet ruled. 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
$263 million as of December 31, 2004). Quarterly dividends on the Series C Preferred Stock continue to
accrue at a 12% annual rate.
In re Northwest Airlines Privacy Litigation (U.S.D.C. District of Minnesota, Civ. File No. 04-126). In
2004, several purported class actions were filed, and subsequently consolidated, in federal court in
Minnesota alleging violations by Northwest of the Electronic Communications Privacy Act, the Fair Credit
Reporting Act and various state laws in connection with the release by Northwest of certain passenger
records to the National Aeronautics and Space Administration in late 2001. Similar purported class actions
were filed in federal court in North Dakota, Dyer v. Northwest Airlines Corp. (U.S.D.C. District of North
Dakota, Case No. Al-04-033), and in federal court in Tennessee, Copeland v. Northwest Airlines Corp.
(U.S.D.C. Western District of Tennessee, Civil File No. 04-CV-2156). On June 6, 2004, the District Court
in the Minnesota action granted Northwest's motion for summary judgment on all claims and that decision
is on appeal before the U.S. Court of Appeals for the Eighth Circuit. On September 8, 2004, the District
Court in the North Dakota action granted Northwest's motion for summary judgment on all claims and the
plaintiffs did not seek appellate review. The Tennessee action remains pending in the District Court.
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.
20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the fourth quarter of
2004.
MANAGEMENT
Executive Officers of the Registrant
Douglas M. Steenland, age 53, has served as President and Chief Executive Officer of NW A Corp.
and Northwest since October 2004 and was elected a director of both companies in September 2001. He
has served in a number of executive positions since joining Northwest in 1991, including President from
April 2001 to October 2004, Executive Vice President and Chief Corporate Officer from September 1999
to April 2001, Executive Vice President-Alliances, General Counsel and Secretary from January 1999 to
September 1999, Executive Vice President, General Counsel and Secretary from June 1998 to
January 1999, and Senior Vice President, General Counsel and Secretary from July 1994 to June 1998.
Prior to joining Northwest, Mr. Steenland was a senior partner at the Washington, D.C. law firm of
Verner, Liipfert, Bernhard, McPherson and Hand.
J. Timothy Griffin, age 53, has served as Executive Vice President-Marketing and Distribution of
Northwest since January 1999. From June 1993 to January 1999, he served as Senior Vice President-
Market Planning and Systems. Prior to joining Northwest in 1993, Mr. Griffin held senior positions with
Continental Airlines and American Airlines. Mr. Griffin also serves on the board of directors of Pinnacle
Airlines.
Philip C. Haan, age 49, has served as Executive Vice President-International, Alliances and
Information Technology of Northwest since October 2004. From January 1999 to October 2004, he served
as Executive Vice President-International, Sales and Information Services. Mr. Haan formerly held
positions of Senior Vice President-International Services, Vice President-Pricing and Area Marketing,
Vice President-Inventory Sales and Systems and Vice President-Revenue Management. Prior to joining
Northwest in 1991 he was with American Airlines for nine years.
Bernard L. Han, age 40, has served as 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 President and Chief Financial Officer from September 2001 to
October 2002, Senior Vice President-Marketing and Planning from May 1998 to September 2001 and Vice
President Financial Planning and Analysis from January 1996 to May 1998. Between 1988 and 1995,
Mr. Han held various finance and marketing positions at American Airlines and Northwest Airlines.
Andrew C. Roberts, age 44, has served as Executive Vice President-Operations since November 2004.
He has served in a number of executive positions since joining Northwest in 1997, including Senior Vice
President-Technical Operations from August 2001 to November 2004, Vice President-Materials
Management from April 1999 to August 2001, and Managing Director-Minneapolis/St. Paul Engine
Operations from September 1997 to April 1999. Prior to joining Northwest, Mr. Roberts held senior
positions with Pratt & Whitney and Aviall, Inc.
Barry P. Simon, age 62, joined Northwest in October 2004 as Executive Vice President and General
Counsel. Prior to joining Northwest, he served as Managing Director of the Seabury Group, an investment
bank and consulting firm, from September 2003 to October 2004. From 1982 to 2003, Mr. Simon held a
number of senior executive positions with Continental Airlines and its affiliated companies, including
Senior Vice President-International of Continental Airlines from 1991 to 2003. Prior to 1991, he also
served as Senior Vice President and General Counsel of Continental Airlines and Senior Vice President,
General Counsel and Secretary of Eastern Airlines. Mr. Simon also serves on the board of directors of
National Energy and Gas Transmission, Inc.
21
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is quoted on the Nasdaq National Market under the symbol NW AC.
The table below shows the high and low sales prices for the Company's common stock during 2004 and
2003:
Quarter
1st ........................................... .
2nd .......................................... .
3rd ........................................... .
4th ......................................... . . .
2004
High Low
14.33 8.30
11.42 8.60
11.20 7.50
11.83 7.09
As of January 31, 2005, there were 3,562 stockholders of record.
2003
High Low
8.67 5.05
11.80 6.30
11.37 7.70
15.21 9.56
Since 1989, NWA Corp. has not declared or paid any dividends on its common stock and does not
currently intend to do so. Under the provisions of the Company's bank term loan agreement, NW A Corp. 's
ability to pay dividends on or repurchase its common stock is restricted. Any future determination to pay
cash dividends will be at the discretion of th~ Board of Directors, subject to applicable limitations under
Delaware law, and will be dependent upon the Company's results of operations, financial condition,
contractual restrictions and other factors deemed relevant by the Board of Directors.
The following table summarizes information as of December 31, 2004, relating to equity compensation
plans of the Company pursuant to which options, restricted stock units or other rights to acquire shares
may be granted in the future.
EQUI'IY COMPENSATION PIAN INFORMATION
Plan Category
Equity Compensation
Plans Approved by
Security Holders(!) ..
Equity Compensation
Plans Not Approved by
Security Holders(2) ..
Total .................. .
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
2,602,693
6,849,868(3)
9,452,561
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
$10.39
$11.21(3)
$10.94(3)
(1) Comprised of the Company's 2001 Stock Incentive Plan.
Number of Shares Remaining
Available for Future Issuance
Under Equity Compensation Plans
(Excluding Securities Reflected in
Column (a))
(c)
5,527,363
5,131,503
10,658,866
(2) Comprised of the Company's 1999 Stock Incentive Plan and the 1998 Pilots Stock Option Plan.
(3) Excludes restricted stock and restricted stock units, which by their nature do not have an exercise
price.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 7-Stock Options"
for additional information regarding the Company's equity compensation plans.
22 .
ITEM 6. SELECTED FINANCIAL DATA
NORTHWEST AIRLINES CORPORATION
Statements of Operations
Operating revenues
Passenger . . .. . ... . . .. . . . . . . .. . .. . . . ... . .... ... . .
Regional carrier ...... .. . .... . .... .. .. . .. ... ... . .
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 ........ . .... . ................ .
Long-term pension and postretirement health care
benefits ... .. .. . . . ...... . ........ .. . .. .. . . .. . . . .
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) .. .. .. .. . . . ... .. .
Passenger revenue per scheduled ASM (RASM) . . ... .
Total available seat miles (ASM) (millions) .. .... .... . .
Passenger Service operating expense per total
ASM(3)(4)(5) .... . .. . ...... . ... . .. . ......... . . . .
Aircraft impairment, curtailment charge, severance
expense and other per total ASM( 5) .. . .. .. . . ...... .. .
Mainline fuel expense per ASM ..... . . .. . . .. ... ... .. .
Cargo ton miles (millions) .... . . . . . ... . . .. .......... .
Cargo revenue per ton mile . .... . .. .......... . . . .. . . .
Fuel gallons consumed (millions) .................... .
Average fuel cost per gallon, excluding taxes ........ .. .
Number of operating aircraft at year end .... . .. . ..... .
Full-time equivalent employees at year end ........... .
2004
$ 8,432
1,083
830
934
11,279
11,784
(505)
(4.5) %
$ (862)
$ (10.32)
$ (10.32)
$ 2,459
14,042
8,411
361
3,593
263
(3,087)
91,378
73,312
80.2%
55.4
11.50
9.23
91,531
10.62
0.31
2.14
2,338
35.48
1,766
118.17
435
39,342
Year Ended December 31
2003 2002 2001(1) 2000
(In millions, except per share data)
$ 7,632 $ 7,823 $ 8,207 $ 9,465
860 689 691 679
752 735 720 857
833 729 768 730
10,077 9,976 10,386 11,731
10,342 10,822 11,254 11,162
(265) (846) (868) 569
(2.6)% (8.5)% (8.4)% 4.9%
$ 248 $ (798) $ (423) $ 256
$ 2.75 $ (9.32) $ (5.03) $ 3.09
$ 2.62 $ (9.32) $ (5.03) $ 2.77
$ 2,757 $ 2,097 $ 2,512 $ 693
14,008 13,289 12,975 10,877
7,866 6,531 5,051 3,242
419 451 586 556
3,228 3,050 1,749 882
553 492 558
236 226 227 232
(2,011) (2,262) (431) 231
88,593 93,417 98,356 103,356
68,476 72,027 73,126 79,128
77.3% 77.1% 74.3% 76.6%
51.9 52.7 54.1 58.7
11.15 10.86 11.22 11.96
8.61 8.37 8.34 9.16
89,158 93,583 98,544 103,517
9.87 9.96 9.95 9.45
0.11 0.46 0.28 0.12
1.53 1.38 1.61 1.67
2,184 2,221 2,161 2,502
34.42 33.08 33.28 34.25
1,752 1,896 2,029 2,113
80.68 69.33 79.26 82.99
430 439 428 424
39,100 44,323 45,708 53,491
(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
Transportation Safety and System Stabilization Act, which was recorded as other non-operating income.
23
(2) All statistics exclude Northwest Airlink regional carriers, which is consistent with how the Company reports
statistics to the DOT, and is comparable to statistics reported by other major network airlines.
(3) This financial measure excludes non-passenger service expenses. The Company believes that providing financial
measures directly related to passenger service operations allows investors to evaluate and compare the
Company's core operating results to those of the industry.
(4) Passenger service operating expense excludes the following items unrelated to passenger service operations:
2004 2003 2002 2001 2000
--(In millions)
747 Freighter operations ................ . ...... . $ 608 $497 $486 $474 $466
MLT Inc.-net of intercompany eliminations .. . ... . 192 197 260 281 285
Regional carriers-net of intercompany eliminations .. . 1,210 567 487 480 492
Pinnacle Airlines, Inc.-net of intercompany
eliminations( a) .......... . ........... .. . . ... . 255 230 183 119
Other ............................ . .......... . 56 26 35 32 17
(a) Pinnacle Airlines' results were consolidated with the Company's financial statements prior to the initial
public offering of Pinnacle Airlines Corp. on November 24, 2003.
(5) Passenger service operating expense per ASM includes the following items:
2004 2003 2002 2001 2000
(In millions)--
Aircraft impairments ................... . $203 $ 21 $366 $161 $125
Curtailment charges ................... . 58 16
Severance expenses .................... . 20 17 116
Other ................................ . 77 36
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations"
and "Item 8. Consolidated Financial Statements and Supplementary Data" are integral to understanding
the selected financial data presented in the table above.
24
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
NW A Corp. is a holding company whose principal indirect operating subsidiary is Northwest. The
Consolidated Financial Statements include the accounts of NW A 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 2004 consolidated
operating revenues and expenses. The Company's results of operations also include other subsidiaries, of
which ML T is the most significant. The following discussion pertains primarily to Northwest and, where
indicated, MLT.
The Company reported a net loss applicable to common stockholders of $891 million for the year
ended December 31, 2004, compared with net income applicable to common stockholders of $236 million
in 2003. The basic and diluted ioss per common share was $10.32 in 2004 compared with diluted earnings
per common share of $2.62 in 2003. In 2004, the Company reported an operating loss of $505 million,
compared with an operating loss of $265 million in 2003. Net loss applicable to common stockholders was
approximately $14 million greater and basic and diluted loss per share were each $0.16 greater than
initially reported in the Company's earnings press release and Form 8-K, both dated January 19, 2005. In
performing its detailed review of the financial statements and notes at year end, management identified a
reporting error by an external service provider that reduced investment income recognized for the year by
that amount. This change did not impact operating income/(loss) in any period. Management has required
the outside party to provide sufficient evidence that the underlying reporting processes have been
corrected.
Full year 2004 results included $165 million of net unusual pre-tax charges, principally comprised of
$104 million attributable to write-downs associated with a revised Boeing 747-200 aircraft fleet plan, write-
downs of $99 million related to certain DC9-10 and DCl0-30 aircraft and $77 million due to an increase in
frequent flyer liability, partially offset by a $115 million gain from the sale of the Company's remaining
investment in Orbitz.
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 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 expiring tax credits.
As of December 31, 2002, the Company consolidated the revenues and expenses of Pinnacle Airlines
Corp., the holding company of Pinnacle Airlines, as a wholly-owned subsidiary of the Company. As of
September 30, 2003, Northwest had contributed 88.6% of the Common Stock of Pinnacle Airlines Corp. to
the Company's pension plans in lieu of cash contributions. As a result of the sale of the stock held by the
pension plans through a public offering, Pinnacle Airlines was no longer consolidated with the Company as
25
of November 24, 2003. The Company continues to own an 11.4% interest in Pinnacle Airlines Corp. as of
December 31, 2004, and accounts for this investment using the equity method. See "Item 8. Consolidated
Financial Statements and Supplementary Data, Note 15-Related Party Transactions" for further
information regarding the Company's relationship with Pinnacle.
Regional carrier revenues and related airline services agreement payments previously reported as a
net amount in passenger revenues are now reported separately in revenues and expenses for all periods
presented.
Northwest and the Current Status of the Airline Industry
The airline industry is intensely competitive. Our competitors include other major domestic airlines as
well as foreign, regional and new entrant airlines, some of which have more financial resources and/or
lower cost structures than ours. In most of our markets we compete with at least one of these 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 protect market share
despite a potential loss of revenues.
Northwest's earnings are significantly affected by changes in the price of aircraft fuel. In 2004, the
industry experienced record high fuel costs. The Company's mainline 2004 average price of aircraft fuel
increased 46.5% per gallon to 118.17 cents compared with the 2003 average price of 80.68 cents. A one-
cent change in the cost of each gallon of fuel would impact operating expenses by approximately $1.6
million per month (based on the Company's 2004 mainline and regional aircraft fuel consumption). From
time to time, the Company manages the price risk of fuel costs by utilizing futures contracts traded on
regulated futures exchanges, swap agreements and options. See "Item 7 A. Quantitative and Qualitative
Disclosures About Market Risk-Aircraft Fuel" for additional discussion of the Company's fuel hedging
strategies.
Since 2001, the U.S. airline indus.try has suffered a substantial reduction in revenues, both on an
absolute b~is and relative to historical trends. Our operating revenue in 2004 was 3.9%, or $452 million,
less than operating revenue in 2000 and we have incurred significant operating losses in each of the last
four years. For the twelve months ended December 31, 2004 and 2003, we reported pre-tax losses, absent
unusual items, of $696 million and $583 million, respectively. The Company does not anticipate that the
revenue environment will materially improve in 2005 and, as a result of various fare actions taken by our
competitors, may be worse. 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, economies in other regions of
the world and corporate profitability. While these and other factors may have temporal effects, permanent
structural differences in the industry revenue environment have also taken place that have contributed to
the decline. These differences are the result of a number of factors.
The rapid growth of low cost airlines has had a profound impact on industry revenues. Using the
advantage of low unit costs, driven in large part by lower labor costs, these carriers are able to operate
profitably while offering substantially lower fares. By targeting such fares at business passengers in
particular, these carriers are shifting demand among those travelers, historically our most profitable
customers, away from the larger, more established airlines. Low cost carriers now transport approximately
30% of all domestic U.S. passengers, compared to less than 10% a decade ago. They now compete for, and
thus influence industry pricing on, approximately 75% of all domestic U.S. passenger ticket sales.
Moreover, as a result of their better financial performance, low cost carriers possess the resources
necessary to continue to increase their market share and currently have large numbers of aircraft on order
to continue their expansion.
In a move similar to those employed by the low cost carriers, Delta, a large network carrier, recently
adopted a simplified fare pricing strategy that lowered unrestricted fares within the 48 contiguous United
26
States. This strategy includes a cap on the cost of one-way fares, eliminates certain flight restrictions, such
as the requirement to stay over a Saturday night, and decreases ticket change fees. We believe that fare
simplifications of this nature are revenue negative and that this initiative will adversely affect industry
revenues.
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 market share advantages. These factors could increase over time as Internet ticket
sales increase, driving the airline ticketing environment further toward commodity pricing.
The attacks of September 11, 2001 materially impacted air travel and concerns about further terrorist
attacks 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. Any future terrorist attack might also have a material effect on
industry revenues.
Global events that exacerbated the decline in airline industry revenue in 2003 had ongoing effects
throughout 2004. The aftermath of the war in Iraq continues to depress air travel, particularly on
international routes. The outbreak of SARS sensitized passengers to the potential for air travel to facilitate
the spread of contagious diseases. 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.
Airlines are among the most heavily taxed of all U.S. companies. According to the Air Transport
Association, taxes and fees can add up to approximately 25% of what a passenger pays for an average
roundtrip domestic airline ticket. 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 translates into approximately
the equivalent amount of reduced airline revenue.
Northwest has been among the most successful U.S. airlines in bringing down non-labor expenses over
the past several years. Through continuous cost reduction efforts beginning in early 2001, the Company has
taken aggressive steps to streamline operations and reduce expenses in response to the industry's new
revenue environment. Nonetheless, excluding one time gains, government assistance and other unusual
items, the Company has incurred over $2.9 billion in pre-tax losses over the past four years. Continued
losses at these levels are unsustainable and operating expenses must be further reduced to come into
balance with the new airline pricing environment. The Company's principal need at this time is to reduce
labor costs to industry norms. All of the industry's legacy carriers face this same challenge and either have
or will take similar measures. Some, such as United and US Airways, have been forced into bankruptcy
protection in order to achieve the necessary savings. Both American and Delta faced almost certain
bankruptcy filings before their labor groups recognized that significant cost reductions were inevitable if
those airlines were to remain viable.
In a first step toward achieving the necessary labor cost savings, the Company announced on
October 14, 2004, that it reached a tentative agreement with its pilots, represented by the Northwest unit of
the ALP A The agreement was subsequently approved by the ALP A Master Executive Council and was
ratified by the Company's pilots on November 5, 2004. The bridge agreement includes $300 million in
annual labor cost savings from the Company's pilots and its salaried workers, with pilots contributing $265
million in annual wage, benefit and other contract changes and salaried and management employees taking
$35 million in annual salary and benefit reductions. The labor cost reductions became effective
December 1, 2004.
Northwest currently is in contract discussions with representatives of all other labor groups, which
include the 1AM, the Transport Workers of America, the AMFA, the PFAA, Northwest Airlines
Meteorology Association, and Aircraft Technical Support Association. The collective bargaining
27
agreements with AMF A and PF AA become amendable in May 2005 and the collective bargaining
agreements with 1AM are currently amendable. The Company is presently in mediation with AMF A, 1AM
and PF AA. The Company cannot predict the outcome of these negotiations at this time.
Results of Operations-2004 Compared to 2003
Operating Revenues. Operating revenues increased 11.9% ($1.2 billion), the result of higher system
passenger, regional carrier, cargo and other revenue.
System passenger revenues increased 10.5% ($800 million). The increase in system passenger
revenues was primarily attributable to a 7.1 % increase in traffic and a 3.1 % increase in yields.
The following analysis by region is based on information reported to the DOT and excludes regional
carriers:
2004
Passenger revenues (in millions) .................. .
Increase (Decrease) from 2003:
Passenger revenues (in millions) .................. .
Percent .................................... . . .
Scheduled service ASMs (capacity) .......... . ..... .
Scheduled service RPMs (traffic) .................. .
Passenger load factor ............................ .
Yield .......................................... .
Passenger RASM ............................... .
As indicated in the above table:
$8,432
800
10.5%
3.1%
7.1%
2.9pts.
3.1%
7.2%
Domestic
$5,666
326
6.1%
3.0%
6.0%
2.lpts.
0.2%
3.0%
Domestic passenger revenues increased primarily due to improved traffic.
Pacific Atlantic
$1,777 $ 989
357 117
25.1% 13.5%
2.9% 4.1%
9.9% 6.3%
5.5pts. l.7pts.
13.8% 6.8%
21.6% 9.0%
Pacific passenger revenues increased significantly as a result of stronger traffic and substantially
improved yields.
Atlantic passenger revenues increased primarily due to improved traffic and yields.
Regional carrier revenues increased 25.9% ($223 million) to $1,083 million, due primarily to the
increased capacity from 38 additional Bombardier CRJ aircraft that have entered service since
December 31, 2003.
Cargo revenues increased 10.4% ($78 million) to $830 million due to a 7.1 % increase in cargo ton
miles and a 3.1 % increase in yield. Cargo revenues consist of freight and mail carried on passenger aircraft
and the Company's 12 Boeing 747-200F dedicated freighters. Freight revenue increased 15.4% ($107
million) while mail revenue decreased 50.9% ($29 million). In the last half of 2003, the Company decided
to stop carrying U.S. domestic mail. 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 ML T, other transportation fees, charter and
rental revenues, increased 12.1 % ($101 million). This increase was primarily due to the addition of 42 CRJ
aircraft leased to Pinnacle Airlines from Northwest, and the 2003 elimination of intercompany
transactions.
28
Operating Ex.penses. Operating expenses increased 13.9% ($1.4 billion) for 2004. The following table
and notes present operating expenses for the years ended December 31, 2004 and 2003 and describe
significant year-over-year variances (in millions):
Year ended Increase
December 311
(Decrease) Percent
2004 2003 from 2003 Change Note
Operating Expenses
Salaries, wages and benefits ....................... $ 3,796 $ 3,905 $ (109) (2.8)% A
Aircraft fuel and taxes ............................ 2,203 1,554 649 41.8 B
Selling and marketing ............................. 847 709 138 19.5 C
Depreciation and amortization ..................... 731 586 145 24.7 D
Other rentals and landing fees ...... . .............. 596 569 27 4.7 E
Aircraft maintenance materials and repairs .......... 463 474 (11) (2.3) F
Aircraft rentals ................................... 446 481 (35) (7.3) G
Regional carrier expenses ......................... 1,210 567 643 113.4 H
Other ........................... . ............... 1,492 1,497 __ill (0.3) I
Total operating expenses . ....................... $11,784 $10,342 $1,442 13.9%
A Salaries, wages and benefits decreased primarily due to $20 million of severance expenses and a $58
million pension curtailment charge both recorded in 2003, the consolidation of Pinnacle Airlines in
2003 (prior to the initial public offering of Pinnacle Airlines Corp. in November 2003) and the labor
cost reductions obtained by the pilot bridge agreement ratified November 5, 2004. These were
partially offset by annual wage rate increases in 2004.
B. Aircraft fuel and taxes were higher due to a 46.5 % increase in the average fuel cost per gallon to
$1.18, net of hedging transactions, partially offset by the consolidation of Pinnacle Airlines in 2003.
Fuel hedge transactions reduced fuel costs by $29 million in 2004 and $105 million in 2003.
C. Selling and marketing expenses were higher, primarily due to a 10.5% increase in passenger revenue
and a $77 million charge due to an increase in frequent flyer liability.
D. Depreciation and amortization expense increased in 2004, primarily due to $203 million of write-
downs on certain Boeing 747-200, Boeing DCl0-30 and DC9-10 aircraft, partially offset by a 2003
write-down of $21 million recorded on Boeing 727-200 aircraft.
E. Other rentals and landing fees were higher due primarily to increased capacity.
F. Aircraft maintenance materials and repairs expense was slightly lower year over year due to a
significant number of new aircraft in the fleet and reduced maintenance volume.
G. Aircraft rentals expense decreased primarily due to the consolidation of Pinnacle Airlines in 2003,
partially offset by the recognition of guaranteed residual values on leased aircraft.
H. The increase in regional carrier expenses was largely due to the 2003 consolidation of Pinnacle
Airlines operating expenses ($255 million), which were previously recorded on other line items, and
the 2003 elimination of intercompany transactions ($145 million). The remaining increase of
$243 million was primarily driven by the addition of 42 CRJ aircraft leased by Pinnacle Airlines from
Northwest and higher fuel costs.
I. Other expenses (which include MLT operating expenses, outside services, insurance, passenger food,
personnel expenses, communication expenses and supplies) decreased principally due to lower MLT
operating expenses and the consolidation of Pinnacle Airlines in 2003.
29
Other Income and Expense. Non-operating income decreased $839 million, primarily due to the
recognition in 2003 of several unusual items: a $299 million gain from the sale 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 $361 million gain related to the repurchase of
the Company's Mandatorily Redeemable Preferred Security accompanied by an impairment charge of
$213 million related to the property securing this obligation; a $39 million gain from the sale of the
Company's investment in Hotwire; and an $11 million gain from the sale of a portion of the Company's
investment in Orbitz, partially offset by a $115 million gain from the sale of the Company's remaining
investment in Orbitz in October 2004. The Company also generated a higher return on short-term
investments, which partially offset higher interest expense related to increased debt levels.
Tax Expense (Benefit). During 2003, the Company recognized a $30 million tax benefit related to
losses recorded in the first quarter that fully offset its remaining $30 million net deferred tax liability.
Given recent loss experience, current accounting rules do not allow the Company's balance sheet to reflect
a net deferred tax asset. Therefore, a valuation allowance is provided against tax benefits, principally for
net operating losses in excess of its deferred tax liability. It is more likely than not that future deferred tax
assets will require a valuation allowance to be recorded to fully reserve against the uncertainty that those
assets would be realized. See "Item 8. Consolidated Financial Statements and Supplementary Data,
Note 9-lncome Taxes" for additional discussion of the Company's tax accounts.
Results of Operations-2003 Compared to 2002
Opera#ng Revenues. Operating revenues increased 1.0% ($101 million), the result of higher regional
carrier, cargo and other revenue, partially offset by lower system passenger revenue.
System passenger revenues decreased 2.4% ($191 million). The decrease in system passenger
revenues was primarily attributable to a 4.9% decrease in traffic partially offset by a 2.7% increase in
yields.
The following analysis by region is based on information reported to the DOT and excludes regional
carriers:
System Domestic Pacific Atlantic
2003
Passenger revenues (in millions) ... ... .. . .... .. . $7,632 $5,339 $1,421 $ 872
Increase (Decrease) from 2002:
Passenger revenues (in millions) ................ (191) 13 (154) (50)
Percent ............................ . ....... (2.4)% 0.2% (9.8)% (5.4)%
Scheduled service ASMs (capacity) .............. (5.2)% (3.1)% (6.1)% (12.2)%
Scheduled service RPMs (traffic) ................ (4.9)% (1.3)% (9.0)% (11.0)%
Passenger load factor ......................... . 0.2 pts. 1.3 pts. (2.5) pts. 1.2 pts.
Yield ........................................ 2.7% 1.5% (0.8)% 6.3%
Passenger RASM ............................ . 2.9% 3.4% (3.9)% 7.8%
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, some of which was offset by higher yields.
30
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. 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 14.3% ($104 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.
Operating Expenses. Operating expenses decreased 4.4% ($480 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 ( in millions):
Year ended Increase
December 31
2
(Decrease) Percent
2003 2002 from2002 Change Note
Operating Expenses
Salaries, wages and benefits ..................... $ 3,905 $ 3,878 $ 27 0.7% A
Aircraft fuel and taxes ...... . ............. .. . . .. 1,554 1,439 115 8.0 B
Selling and marketing ...... .. ..... .. ... . ........ 709 803 (94) (11.7) C
Depreciation and amortization . .... . .... . . . . .... . 586 903 (317) (35.1) D
Other rentals and landing fees ....... . ... .. . ... .. 569 576 (7) (1.2) E
Aircraft rentals .. . ...... .. ............... . .. . .. . 481 460 21 4.6 F
Aircraft maintenance materials and repairs ...... . . 474 576 (102) (17.7) G
Regional carrier expenses ................. . .. ... 567 487 80 16.4 H
Other ............... . . . ........ . .......... . ... 1,497 1,700 ~ (11.9) I
Total operating expenses . .. . .. . ........... . ... $10,342 $10,822 $(480) (4.4)%
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 1AM 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.
31
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. The increase in regional carrier expenses was largely due to the addition of 25 CRJ aircraft leased by
Pinnacle Airlines from Northwest and higher fuel costs.
I. 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 increased by $857 million, primarily due to
several unusual items: a $299 million gain from the sale 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 $361 million gain related to a write-down of the Company's
Mandatorily Redeemable Preferred Security, accompanied by an impairment charge of $213 million
related to the property securing this obligation; a $39 million gain from the sale of the Company's
investment in Hotwire; and an $11 million gain from the sale of a portion of the Company's investment in
Orbitz. The Company also generated a higher return on short-term investments, which partially offset
higher interest expense related to increased debt levels.
Tax &pense (Benefit). During 2003, the Company recognized a $30 million tax benefit related to
losses recorded in the first quarter that fully offset its remaining $30 million net deferred tax liability.
Given recent loss experience, current accounting rules do not allow the Company's balance sheet to reflect
a net deferred tax asset. Therefore, a valuation allowance is provided against tax benefits, principally for
net operating losses in excess of its deferred tax liability. It is more likely than not that future deferred tax
assets will require a valuation allowance to be recorded to fully reserve against the uncertainty that those
assets would be realized. 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, 2004, the Company had cash, cash equivalents and short-term investments of
$2.61 billion. This amount includes $152 million of restricted short-term investments (which may include
amounts held as cash), resulting in total liquidity of $2.46 billion.
Cash Flows. Liquidity decreased by $298 million during the year ended December 31, 2004.
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2004
totaled $271 million, a $104 million decrease from the $375 million of cash provided by operating activities
for the year ended December 31, 2003. This decrease was driven by significant unusual items that
contributed to 2003 cash flows from operations, including a $218 million tax refund and a one-time $209
million reimbursement of security fees received from the U.S. Government, offset by a higher level of
forward bookings in 2004.
The Company operates, like its competitors, with negative working capital, which totaled $919 million
at December 31, 2004. This negative working capital position is primarily attributable to the Company's
$1.47 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
32
commission aircraft before entering revenue service, deposits on ordered aircraft, facility improvements
and ground equipment purchases.
Investing activities in 2004, other than aircraft and related purchases and short-term investments,
included proceeds of $136 million from the sale of the Company's remaining interest in Orbitz. Investing
activities in 2003, other than aircraft and related purchases and short-term investments, included 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. (proceeds of which were included in the Company's
2003 cash contributions to its pension plans), $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, included facilities and aircraft modification programs.
Financing Activities. Financing activities in 2004 consisted primarily of the issuance of $300 million
unsecured notes due in 2009, repayment of $138 million of 8.375% unsecured notes in March 2004,
repayment of $195 million 8.52% unsecured notes in April 2004, the restructure of the Company's
$975 million revolving bank credit facilities, the payment of debt and capital lease obligations, and the
financing of one Airbus A330-200 and one Airbus A330-300 aircraft with long-term debt.
On January 26, 2004, Northwest completed an offering of $300 million of unsecured notes due in
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
notes were used for working capital and general corporate purposes. The notes are guaranteed by NW A
Corp.
In March and April 2004, the Company repaid the remaining $333 million outstanding under two
issues of unsecured notes, as scheduled, with a combined original face amount of $350 million. On
March 15, 2004, $138 million of 8.375% senior unsecured notes were repaid, net of $12 million previously
exchanged for newly issued pass-through certificates in conjunction with an exchange offer in
December 2003. The 8.375% unsecured notes were originally issued in 1997. Additionally, the Company
repaid $195 million of 8.52% senior unsecured notes that matured on April 7, 2004, net of $5 million
previously exchanged for newly issued pass-through certificates in conjunction with the same
December 2003 exchange offer. The 8.52% unsecured notes were originally issued in 1998.
On November 23, 2004, the Company completed the restructuring of its $975 million revolving bank
credit facility, which was scheduled to mature in October 2005, by entering into an Amended and Restated
Credit and Guarantee Agreement (the "Agreement") with a consortium of lenders providing for a term
loan. The term loan had an initial principal amount of $975 million and is comprised of two tranches
bearing different interest rates and with different principal amortization periods. See "Item 8.
Consolidated Financial Statements and Supplementary Data, Note 3-Long-Term Debt and Short-Term
Borrowings" for additional discussion related to these credit facilities.
In addition to the aircraft discussed above, the Company also took delivery of six Airbus A330-200
and two Airbus A330-300 aircraft and 42 Bombardier CRJ200/440 regional jets during the twelve months
ended December 31, 2004. These Airbus A330-200 and A330-300 aircraft were financed largely through
non-cash transactions with the manufacturers, which are reflected as long-term debt on the Company's
consolidated balance sheets but are not classified as financing activities for cash flow purposes. The
Bombardier CRJ aircraft were acquired with long-term operating leases and subleased to Pinnacle
Airlines.
In total, the Company took delivery of 10 Airbus aircraft and 42 Bombardier CRJ regional jet aircraft
during the twelve months ended December 31, 2004. The Company subleased all of the Bombardier CRJ
aircraft to Pinnacle Airlines pursuant to the Company's airline services agreement with Pinnacle Airlines.
33
In connection with the acquisition of these 52 aircraft, the Company entered into long-term debt
arrangements and operating leases with various lenders and lessors. Under such arrangements, the
aggregate amount of debt incurred totaled $776 million and the minimum lease payments at the point of
inception equaled $888 million.
Investing activities affecting cash flows and non-cash transactions and leasing activities related to the
initial acquisition of aircraft consisted of the following for the years ended December 31:
Non-cash
Investing Activities Transactions and
Affecting Cash Flows Leasing Activities
2004 2003 2002 2004 2003 2002
Airbus A319 ............................ . 13 24 1
Airbus A320 ............................ . 1 2 1
AirbusA330-300 ........................ . 1 4 2 1
Airbus A330-200 ........................ . 1 6
Boeing 747-400 ......................... . 2
Boeing 757-200 ....... . ................. . 3
Boeing 757-300 ......................... . 6 7 3
Bombardier CRJ - 440 ................... . 33 23 18
Bombardier CRJ - 200 ............ . ...... . 9 2 3
2 24 38 50 31 21
Financing activities in 2003 consisted 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 aircraft discussed above, the Company also took delivery of one Airbus A330-300,
one Airbus A320, one Airbus A319, and three Boeing 757-300 aircraft; and 25 Bombardier CRJ200/440
regional jets during the twelve months ended December 31, 2003. The Airbus A330-300, A320 and A319
aircraft and the three Boeing 757-300 aircraft were financed largely 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 $551.8 million principal
amount of notes primarily secured by aircraft financed under five series of Northwest pass-through
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, because the cash flows of the new debt instrument are greater than 110 percent of the original
instruments' remaining cash flows. The Company recorded a loss due to this exchange offer approximating
$5 million.
During 2003, NW A Corp. completed two offerings of $375 million aggregate principal amount of
convertible senior notes, both due in 2023. These notes were issued to qualified institutional buyers
pursuant to Rule 144A and to non-U.S. persons pursuant to Regulation Sunder the Securities Act of 1933.
34
The first issuance of notes was in May 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 was in November for an aggregate principal amount of $225 million and bears
interest at 7.625% (the "7.625% 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 NW A Corp. common stock.
The 6.625% Notes 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 issuances of notes are guaranteed
by Northwest.
Holders of the notes may convert their notes only if: (i) NW A Corp.'s common stock trades above a
specified price threshold for a specified period; (ii) the trading price for the notes falls below certain
thresholds; (iii) the notes have been called for redemption; or (iv) specific corporate transactions occur.
NW A 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 NW A Corp. to redeem the notes on
any of the repurchase dates, it is the Company's present intention to satisfy the requirement in cash. NW A
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 NW A 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,
NW A 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 NW A 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 Emerging Issues Task Force ("EITF")
Issue No. 00-19,Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock. NW A Corp. plans to use the net proceeds from the offerings for working capital
and general corporate purposes.
Financing activities in 2002 consisted primarily of the issuance of $300 million of 9.875% unsecured
notes due in 2007, the payment of debt and capital lease obligations, and the financing of: (i) 18 Airbus
A319, one Boeing 747-400, two Airbus A320 and three Boeing 757-300 aircraft with 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 addition to the financed aircraft discussed above, the Company also took delivery of 21 Bombardier
CRJ200/440 regional jets during the twelve months ended December 31, 2002. The Bombardier CRJ
aircraft were acquired and financed with long-term operating leases and subleased to Pinnacle Airlines.
35
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 of December 31, 2004, there were
no unused offering proceeds held in escrow.
Contractual Obligations. The following table summarizes the Company's commitments to make long-
term debt and minimum lease payments, aircraft purchases and certain other obligations for the years
ending December 31:
2005 2006 2007 2008 2009 Thereafter Total
- - - (in million-s)--
Long-term debt(l) ..................... . $ 696 $ 963 $1,400 $ 525 $1,078 $3,749 $ 8,411
Capital leases(2) ....................... . 53 31 39 28 21 189 361
Operating leases:(3)
Aircraft ............................. . 627 636 656 632 615 4,671 7,837
Non-aircraft ......................... . 161 158 147 135 129 1,186 1,916
Aircraft commitments( 4) ................ . 860 827 868 90 2,645
Other purchase obligations(5) ........... . 93 132 8 4 3 27 267
Total(6) ............................... . $2,490 $2,747 $3,118 $1,414 $1,846 $9,822 $21,437
(1) Amounts represent principal payments only. These amounts include $79 million and $567 million of
aircraft related loan obligations maturing in 2006 and 2007, respectively, that may be extended for an
additional nine years from their maturity dates at the Company's election. On November 23, 2004, the
Company completed the restructuring of its $975 million revolving bank credit facility, which was
scheduled to mature in October 2005, by entering into an Agreement with a consortium of lenders
that amended and restructured the revolving credit facility into a term loan. The term loan has an
initial principal amount of $975 million. The current portion of long-term debt maturing in 2005
related to the term loan is $148 million. Additionally, $76 million matures in 2006, $76 million in 2007,
$4 million in 2008, $291 million in 2009 and $380 million thereafter. See "Item 8. Consolidated
Financial Statements and Supplementary Data, Note 3-Long-Term Debt and Short-Term
Borrowings" and "Secured Credit Facilities" below, for additional information related to 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 financing commitments in place from the manufacturers
for all the firm order aircraft. 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, the Company will in the ordinary course spend
significant amounts of cash to operate its business. For example, the Company will pay wages as
36
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 orqers 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 the consolidated balance
sheets as accounts payable and accrued liabilities. The above table also excludes $263 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 Arrangements. The 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 involving an unconsolidated entity under which a company 1) has
made guarantees, 2) has retained 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 the structures of its contractual obligations potentially impacted by this
disclosure requirement and has concluded that no arrangements of the types described above in categories
1, 2 or 3 exist that the Company believes may have a material current or future effect on its financial
condition, liquidity or results of operations. With respect to category 4, 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 F ASB. See "Item 8. Consolidated Financial
Statements and Supplementary Data, Note I-Summary of Significant Accounting Policies" for additional
discussion of these variable interest arrangements.
Pension Funding Obligations. The Company has several noncontributory pension plans covering
substantially all of its employees. As of December 31, 2004, the Company's plans were substantially
underfunded as measured under the provisions of SFAS No. 87. Projected benefit obligations under the
plans totaled $9.25 billion, approximately $3.82 billion in excess of the fair value of plan assets. Unless
future asset returns exceed plan assumptions, we will have to satisfy the underfunded amounts of the plans
through cash contributions over time. The timing and amount of funding requirements also depend upon a
number of other factors, including interest rates, asset returns, potential changes in pension legislation, our
decision to make voluntary prepayments, applications for and receipt of waivers to reschedule
contributions, and changes to pension plan benefits.
On April 15, 2003, the IRS approved the application submitted by the Company 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. The Company satisfied the conditions for rescheduling
plan year 2003 contributions by granting the plans liens on certain assets of the Company (including
domestic foreign slots, international routes, aircraft and engines).
On April 10, 2004, the President signed into law the Pension Act, which reduced the Company's
required 2004 and 2005 plan year contributions through two mechanisms: (1) certain companies were
permitted to elect partial relief from the deficit reduction contribution requirements that otherwise would
37
have applied, an election the Company made; and (2) the applicable discount rate used to determine
funding was increased to reflect yields on indices of high quality corporate bonds instead of 30-year U.S.
Treasury rates.
Including the effect of the Pension Act, the Company's 2004 calendar year cash contributions to
qualified pension plans approximated $253 million. The Company anticipates that required contributions
related to its qualified pension plans in 2005 will be approximately $420 million. Absent further legislative
relief, authorization by the IRS to reschedule future contributions, contractual relief under the Company's
collective bargaining agreements, substantial changes in interest rates, or asset returns significantly above
the 9.5% annual rate currently assumed, we would expect our calendar year 2006 and 2007 cash
contributions to be significantly higher than our 2005 cash contributions.
Credit Ratings. On July 28, 2004, Standard & Poor's ("S&P") downgraded the corporate credit rating
of the Company from B+ to B. At December 31, 2004, the Company's S&P's corporate credit rating and
its senior unsecured credit rating were B and CCC+, 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 aircraft
deliveries, to renew outstanding letters of credit that back certain obligations and to obtain financial
instruments used in its fuel and currency hedging. Lower credit ratings could also increase the cost of these
transactions.
Secured Credit Facilities. On November 23, 2004, the Company completed the restructuring of its
$975 million revolving bank credit facility that was scheduled to mature in October 2005, by entering into
an Agreement with a consortium of lenders, which amended and restructured the revolving credit facility
into a term loan. The term loan has an initial principal amount of $975 million and is comprised of two
tranches bearing different interest rates and with different principal amortization periods. The first
tranche, in the principal amount of $575 million, bears interest at LIBOR plus 5% and is payable 25% at
the end of the first year, 12% at the end of each of the second and third years and 50% at the end of the
fifth year. The second tranche, in the principal amount of$400 million, bears interest at LIBOR plus 6%
and is payable 1 % at the end of each of the first five years and 95% at the end of the sixth year, on
November 23, 2010.
The term loan is secured by substantially the same collateral the Company pledged to secure the
original revolving bank credit facility. The Agreement contains a covenant requiring the Company to
maintain unrestricted cash, cash equivalents and short term investments in an amount not less than
$900 million at any time. In addition, the Agreement contains a covenant that requires the Company to
maintain a ratio of earnings to fixed charges of at least 0.50 to 1.0 for the nine months ending
December 31, 2004 and the twelve months ending March 31, 2005. For the three months ending June 30,
2005, six months ending September 30, 2005, nine months ending December 31, 2005 and the twelve
months ending March 31, 2006 and June 30, 2006 the numerator of the required ratio is 1.00. Quarterly
through June 30, 2007, the numerator of the required ratio gradually increases from 1.05 to 1.45 for each
of the rolling twelve month ending periods. Thereafter, the numerator of the required ratio is 1.50. For
purposes of calculating this ratio, earnings are defined as operating income adjusted to exclude the effects
of depreciation, amortization and aircraft rents and to include the effects of interest income and
governmental reimbursements for losses resulting from developments affecting the aviation industry.
Earnings also exclude certain non-recurring non-cash charges (subject to the inclusion of any cash
payments then or thereafter made with respect thereto) and are determined without giving effect to any
acceleration of rental expense. Fixed charges are defined as interest expense and aircraft rents (without
giving effect to any acceleration of rental expense). Although the Company believes that it will satisfy these
requirements through December 31, 2005, there can be no assurance that it will be able to do so through
the expiration of the facility. Compliance with the covenant depends on many fa~tors, some of which are
38
beyond the Company's control, including the overall industry revenue environment and the level of fuel
costs. 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 were used for working capital and general
corporate purposes. The notes are guaranteed by NW A 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.
Critical Accounting Estimates
The discussion and analysis of the Company's financial condition and results of operations are based
upon the Consolidated Financial Statements, which have been prepared in accordance with generally
accepted accounting principles. The preparation of the Consolidated Financial Statements requires the
Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues,
expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements.
Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting estimates are defined as those that are reflective of significant judgments and
uncertainties, and could potentially reflect materially different results under different assumptions and
conditions. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note I-Summary
of Significant Accounting Policies" for additional discussion of the application of these estimates and other
accounting policies. The Company's management discussed 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 Valuation and Impairments. The Company evaluates long-lived assets for potential
impairments in compliance with SFAS No. 144,Accountingfor the Impairment or Disposal of Long-Lived
Assets ("SFAS No. 144"). These impairment evaluations are primarily initiated by fleet plan changes and
therefore predominantly performed on fleet-related 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 or published
sales values of similar assets, 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, additional impairment charges may be required.
In June 2004, as part of a revised fleet plan, the Company determined that it does not currently intend
to return to service 10 Boeing 747-200 passenger aircraft that had been temporarily removed from
operations. As a result, the Company recorded, as additional depreciation expense, impairment charges of
$104 million associated with these aircraft and related inventory in the second quarter of 2004. In
December 2004, additional impairment charges of $99 million were recorded in conjunction with a new
aircraft order and the related early retirement of certain DCl0-30 aircraft, and the accelerated retirement
of the Company's DC9-10 fleet, as part of a revised fleet plan.
39
In June 2003, the Company recorded an aircraft impairment charge 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 previously 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 results 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 salvage values. If the current fair market
values and salvage values of the impaired aircraft were decreased by 10%, the aircraft impairment charge
would have increased by $17 million and the 2003 depreciation expense would have decreased by
$7 million. See "Item 8. Consolidated Financial 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 SPAS No. 87, 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 and 2004. 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 arithmetic average return 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, 2004. 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 and 2004, earning 28.2% and 15.0%, respectively. For the ten year period 1995 -
2004 in which the current asset allocation policy has been in place, the plan assets have generated
annualized returns of 11.8%. Depending on future rates of return, the Company's expected return on plan
assets could be adjusted downward. If such adjustments become necessary, future pension expense would
increase.
40
Plan assets for the Company's pension plans are managed by external investment management
organizations. These investment management firms 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 5.9% to be appropriate at
December 31, 2004, which is a reduction of 0.35% from the rate used at December 31, 2003.
For the year ended December 31, 2004, accounting for the changes related to the Company's pension
plans resulted in a net decrease to accumulated other comprehensive income of $222 million on a pre-tax
basis. The negative impact on accumulated other comprehensive income was principally due to an 11.3%
rise in benefit obligations driven by a 0.35% decrease in the discount rate to 5.9%, offset by a 12.9%
increase in the fair value of the plan assets. Holding all other factors constant, a change in the discount rate
used to measure plan liabilities by 0.5% would have changed accumulated other comprehensive income by
$564 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 compensation increases is an important assumption that affects the
amount of periodic pension expense recognized. The Company's 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, 2004, the weighted average rate
of future compensation increases assumed for the affected plans was 2.15% annually, which compares with
1.93% and 3.60% at December 31, 2003 and 2002, respectively.
For the year ended December 31, 2004, the Company recognized consolidated pre-tax pension
expense of $444 million, down from $491 million in 2003. Pension expense is expected to approximate
$500 million in 2005. Holding all other factors constant, an increase/decrease in the expected long-term
rate of return on plan assets by 0.5% would decrease/increase pension expense by approximately
$27 million in 2005. Holding all other factors constant, an increase/decrease in the discount rate used to
measure plan liabilities by 0.25% would decrease/increase pension expense by approximately $28 million in
2005.
SEC Inquiry. In October 2004, the Company received an informal request for information from the
SEC in connection with an inquiry related to accounting for pension and other post-retirement benefit
plans. The SEC has stated that the inquiry is not an indication that any violation of laws has occurred. The
Company believes its accounting practices in this area are appropriate and is cooperating with the inquiry,
which also involves several other companies.
Revenue Recognition. Passenger ticket revenues are recognized when the transportation is provided,
or when the ticket expires, or is expected to expire, unused. The air traffic liability account is increased at
the time of sale and represents 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 regularly performs evaluations of unused tickets. Unused tickets are recognized in passenger
revenue based on current estimates, along with adjustments resulting from revisions of previous estimates.
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
uses historical trends and averages in its estimates, significant changes in business conditions and/or
41
passenger behavior that affect these estimates could have a significant impact on the Consolidated
Financial Statements.
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 on
Northwest and other airline partners. 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 assumptions are made, based on past customer behavior, regarding the likelihood of
customers using the miles for first-class upgrades or other premiums instead of flight awards, the expected
use on other airline partners, as well as the likelihood of customers never redeeming the miles. Estimated
incremental costs of carrying a passenger flying on redeemed miles on Northwest are based on the system
average cost per passenger for food and beverage, fuel, insurance, security, miscellaneous claims and
WorldPerks distribution and administration expenses. Estimated incremental cost for carriage on airline
partners is based on contractual rates.
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. In
December 2004, Northwest revised its estimates associated with (i) the future mix of redemptions involving
reciprocal frequent flyer programs with other airlines; (ii) incremental costs per type of award redemption;
and (iii) the likelihood of customers never redeeming their award miles. For certain reciprocal frequent
flyer programs, Northwest does not record a liability for the gross payments it expects to make to other
airlines for WorldPerks members' redemption travel on those carriers until the Company meets certain
contractual thresholds that are required prior to making cash payments. For other reciprocal frequent flyer
arrangements with no such contractual thresholds, Northwest records a liability for the gross payments it
expects to make for WorldPerks members' redemption travel on the other airlines without regard to the
payments the Company expects to receive for their frequent flyer members' redemption travel on
Northwest. These changes in estimates resulted in a liability increase of $77 million, due primarily to the
higher cost of awards redeemed on reciprocal frequent flyer programs versus Northwest's incremental cost
for carriage, partially offset by a higher projection of unused award miles. While the average cost of an
award increased as a result of these revised estimates, the total number of awards expected to be redeemed
declined substantially. The number of estimated travel awards outstanding and expected to be redeemed at
December 31, 2004, 2003, and 2002 was approximately 3.8, 7.2 and 7.8 million, respectively. Northwest
recorded a liability for these estimated awards of $215 million, $119 million and $127 million at
December 31, 2004, 2003 and 2002, respectively.
The number of travel awards used for travel on Northwest during the years ended December 31, 2004,
2003 and 2002 was approximately 1,380,000, 1,408,000 and 1,459,000, representing an estimated 6.9%,
7.5%, and 7.8% 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.
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, partner airlines, and
other 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 marketing
services in excess of the fair value of the tickets expected to be redeemed.
Intangible Assets. The Company accounts for intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No.142 requires that companies test
42
goodwill and indefinite lived intangible assets for impairment on an annual basis 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 2004, 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, 2004. 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, 2004, 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 Options" for additional discussion of stock options. The Company
historically accounted for those plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (" APB No. 25") and related
interpretations. 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,Accountingfor Stock-Based Compensation-
Transition and Disclosure, an amendment of FASB Statement No. 123 ("SFAS No. 148"). SFAS No. 148
provides alternative methods of transition for companies that voluntarily change to the fair value based
method of accounting for stock-based compensation. It also amends the disclosure requirements of SFAS
No. 123,Accountingfor Stock-Based Compensation ("SFAS No. 123"), to require prominent disclosures in
both annual and quarterly financial statements 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 SF AS 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 compensation expense over the vestir).g period based on the fair
value at the date the stock-based compensation is granted. The disclosure provisions prescribed by SFAS
No. 148 are included in "Item 8. Consolidated Financial Statements and Supplementary Data, Note 7-
Stock Options".
In December 2004, the FASB issued SFAS No.123 (Revised 2004), Share-Based Payment ("SFAS
No. 123R"). In addition to requiring supplemental disclosures, SFAS No. 123R eliminates the option to
apply the intrinsic value measurement provisions of APB No. 25 to stock compensation awards issued to
employees. Furthermore, the Company is required to recognize compensation cost for the portion of
outstanding awards previously accounted for under the provisions of APB No. 25 for which the requisite
service had not been rendered as of the adoption date for this Statement. The Statement also requires
companies to estimate forfeitures of stock compensation awards as of the grant date of the award. Since
43
the Company's current policy is to recognize forfeitures as they occur, a cumulative effect of a change in
accounting principle will be recognized in income based on the estimate of remaining forfeitures for
awards outstanding as of the date SFAS No. 123R is adopted. Because the Company voluntarily adopted
the fair value method prescribed by SFAS No. 123 effective January 1, 2003, the unvested awards still
accounted for under the provisions of APB No. 25, and therefore subject to the provisions of SFAS
No. 123R, are minimal. Additionally, the overall impact of estimating the remaining forfeitures for awards
outstanding as of the adoption date is insignificant. Therefore, the impact of adopting SFAS No. 123R will
be immaterial. SFAS No. 123R is effective for the fiscal quarter beginning July 1, 2005, although early
adoption is permitted.
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 vesting period using 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 ALP A to obtain approval of the
Delta codeshare agreement from ALP A 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 !-Summary of Significant Accounting
Policies" and "Note 7-Stock Options" for additional discussion of these stock option exchange programs.
Recent Accounting Pronouncements
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") 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, at which time the U.S. Government will
also begin to pay a special subsidy equal to 28% of a retiree's covered prescription drug expenses between
$250 and $5,000 (adjusted annually for changes in Medicare per capita prescription drug costs) to
employers who sponsor equivalent plans. In accordance with FASB Staff Position 106-2,Accountingand
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003 ("FASB Staff Position 106-2"), effective for interim periods beginning after June 15, 2004, the
Company has estimated the effects of the Act in its measures of liabilities and expenses reflected in the
Consolidated Financial Statements and accompanying notes for the year ending December 31, 2004. See
"Item 8. Consolidated Financial Statements and Supplementary Data, Note 12-Pension and Other
Postretirement Health Care Benefits" for additional discussion of liabilities and expenses associated with
postretirement health care benefits.
44
In September 2004, the EITF issued EITF Issue 04-8, The Effect of Contingently Convertible Debt on
Diluted Earnings per Share ("EITF 04-8"). EITF 04-8 requires companies to include certain convertible
debt and equity instruments that were previously excluded from their calculation of diluted earnings per
share, and to restate the diluted earnings per share calculation for all periods during which time the
applicable convertible instruments were outstanding. The Company adopted the provisions of EITF 04-8
as of December 31, 2004. As further discussed in "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 2-Earnings (Loss) Per Share Data", the Company's diluted earnings per share
calculation has been restated to include shares issuable upon conversion of the Company's 6.625% and
7.625% senior convertible notes issued in 2003 for periods where the Company reported net income
applicable to common stockholders. The impact of adopting EITF 04-8 reduced diluted earnings per share
by $0.12 in 2003.
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 changes. Actual results may differ from the outcomes estimated in the
analyses due to factors beyond the Company's control. See "Item 8. Consolidated Financial Statements
and Supplementary Data, Note 13-Risk Management and Financial Instruments" for related accounting
policies 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 exchanges, swap agreements and options. A hypothetical 10% increase in the
December 31, 2004 cost per gallon of fuel, assuming projected 2005 mainline and regional aircraft fuel
usage, would result in an increase to aircraft fuel expense of approximately $243 million in 2005, compared
to an estimated $153 million for 2004 measured at December 31, 2003. As of December 31, 2004, the
Company had hedged approximately 25% and 6% of 2005 first quarter and full year mainline fuel
requirements, respectively. No fuel hedges were in place at December 31, 2003.
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, 2004 levels relative to each of the currencies in which the Company's
revenues and expenses are denominated would result in a decrease in operating income of approximately
$99 million for the year ending December 31, 2005, compared to an estimated decrease of $58 million for
2004 measured at December 31, 2003. This sensitivity analysis was prepared based upon projected foreign
currency-denominated revenues and expenses as of December 31, 2004 and 2003. The variance is due to
the Company's foreign currency-denominated revenues exceeding its foreign currency-denominated
expenses.
The Company also has foreign currency exposure as a result of changes to balance sheet items. The
result of a 10% strengthening in the value of the U.S. dollar would result in a decrease to other income of
an estimated $12 million in 2005, caused by the remeasurement of net foreign currency-denominated
assets as of December 31, 2004, compared with an estimated decrease of $1 million caused by the
remeasurement of net foreign currency denominated assets at December 31, 2003. This sensitivity analysis
was prepared based upon projected foreign currency-denominated assets and liabilities as of December 31,
2004 and 2003.
45 .
In 2004, the Company's yen-denominated net cash inflow was approximately 54 billion yen
(approximately $487 million) and its yen-denominated assets exceeded its yen-denominated liabilities by
an average of 15 billion yen (approximately $143 million), compared with 19 billion yen (approximately
$164 million) and 4 billion yen (approximately $32 million), respectively, in 2003. In general, each time the
yen strengthens (weakens), the Company's operating income is favorably (unfavorably) impacted due to
net yen-denominated revenues exceeding expenses and a non-operating foreign currency gain (loss) is
recognized due to the remeasurement of net yen-denominated assets. The Company's operating income in
2004 was favorably impacted by approximately $88 million due to the average yen being stronger in 2004
compared to 2003 and favorably impacted in 2003 by approximately $26 million due to the average yen
being stronger in 2003 compared to 2002. Excluding the impact of hedging activities, the average yen to
U.S. dollar exchange rate for the years ending December 31, 2004, 2003 and 2002 was 108, 117 and 126,
respectively. Including the impact of hedge activities, the average yen to U.S. dollar exchange rate for the
years ending December 31, 2004, 2003 and 2002 was 110,117 and 104, respectively. The Japanese yen
financial instruments utilized to hedge net yen-denominated cash flows resulted in losses of $7.8 million
and a gain of $1 million in 2004 and 2003, respectively. As of December 31, 2004, the Company had
entered into forward contracts to hedge approximately 12% of its anticipated 2005 yen-denominated sales
at an average rate of 105 yen per U.S. dollar. This compares to 22% and 6% of its anticipated 2004 and
2005 yen-denominated sales, respectively, hedged as of December 31, 2003.
Interest Rates. 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 were to increase by 100
basis points for a full year, based on the Company's cash balance at December 31, 2004, the Company's
interest income from cash equivalents and short-term investments would increase by approximately $26
million compared to an estimated $29 million based on the Company's cash balance at December 31, 2003.
The Company's floating rate indebtedness was approximately 48% and 44% of its total long-term debt and
capital lease obligations at December 31, 2004 and 2003, respectively. If short-term interest rates were to
increase by 100 basis points across 2005 as measured at December 31, 2004, the Company's interest
expense would increase by approximately $42 million, compared to an estimated $36 million for 2004
measured at December 31, 2003. 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, 2004 and 2003.
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 $137 million
measured at December 31, 2004, compared to an estimated $132 million measured at December 31, 2003.
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 borrowin~ rates for similar types of
arrangements.
46
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Finn
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, 2004 and 2003, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting
Oversight Board (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, 2004 and 2003, and the
consolidated results of its operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Northwest Airlines Corporation's internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 25, 2005 expressed an unqualified opinion thereon.
Minneapolis, Minnesota
February 25, 2005
47
CURRENT ASSETS
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS
Cash and cash equivalents ................................................ .
Unrestricted short-term investments ....................................... .
Restricted short-term investments ......................................... .
Accounts receivable, less allowance (2004-$12; 2003-$19) .................. .
Flight equipment spare parts, less allowance (2004-$240; 2003-$202) ........ .
Maintenance and operating supplies .... . ............ . ..................... .
Prepaid expenses and other ............................................... .
Total current assets .................................................... .
PROPERTY AND EQUIPMENT
Flight equipment ........................... . ............................ .
Less accumulated depreciation ............................................ .
Other property and equipment .................................. . ......... .
Less accumulated depreciation ..................... , ...................... .
Total property and equipment .................... . ......... . ........... .
FLIGHT EQUIPMENT UNDER CAPITAL LEASES
Flight equipment ........................................................ .
Less accumulated amortization ........................................... .
Total flight equipment under capital leases ............................... .
OTHER ASSETS
Intangible pension asset. ................................................. .
International routes ..................................................... .
Investments in affiliated companies ........................................ .
Other .................................................................. .
Total other assets ..................................................... .
Total Assets .............................................................. .
December31
2004 2003
$ 707 $ 1,146
1,752 1,611
152 126
460 478
125 174
92 80
290 221
3,578 3,836
9,890 8,833
2,535 2,135
7,355 6,698
1,783 1,681
1,014 956
769 725
8,124 7,423
257 418
111 168
146 250
671 750
634 634
55 67
834 1,048
2,194 2,499
$14,042 $14,008
The accompanying notes are an integral part of these consolidated financial statements.
48
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUI1Y (DEFICIT)
CURRENT LIABILITIES
Air traffic liability ....................................................... .
Accrued compensation and benefits ....................................... .
Accounts payable ....................................................... .
Collections as agent ..................................................... .
Accrued aircraft rent .................................................... .
Other accrued liabilities .................................................. .
Current maturities of long-term debt ...................................... .
Current obligations under capital leases .................................... .
Total current liabilities ................................................. .
LONG-TERM DEBT ...................................................... .
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES ................... .
DEFERRED CREDITS AND OTHER LIABILITIES
Long-term pension and postretirement health care benefits ................... .
Other .................................................................. .
Total deferred credits and other liabilities ................................ .
PREFERRED REDEEMABLE STOCK .... ; ................................. .
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUI1Y (DEFICIT)
Common stock, $.01 par value; shares authorized-315,000,000; shares issued
(2004-111,124,304; 2003-110,868,937) ................................. .
Additional paid-in capital ................................................ .
Accumulated deficit ..................................................... .
Accumulated other comprehensive income (loss) ............................ .
Treasury stock (2004-24,018,221 shares; 2003-24,862,782 shares) ........... .
Total common stockholders' equity (deficit) .............................. .
Total Liabilities and Stockholders' Equity (Deficit) ............................ .
$
December31
2004 2003
1,468
895
566
135
267
417
696
53
4,497
7,715
308
3,593
753
4,346
263
1
1,471
(1,999)
(1,547)
(1,013)
(3,087)
$ 1,272
950
540
111
268
405
668
65
4,279
7,198
354
3,228
724
3,952
236
1
1,460
(1,083)
(1,340)
(1,049)
(2,011)
$14,042 $14,008
The accompanying notes are an integral part of these consolidated financial statements.
49
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Year Ended December 31
2004 2003 2002
OPERATING REVENUES
Passenger .................................................... . $ 8,432 $ 7,632 $ 7,823
Regional carrier revenues .................................... .. . 1,083 860 689
Cargo ........................................................ . 830 752 735
Other ........................................................ . 934 833 729
Total operating revenues ...................... .. ... .. ........ . 11,279 10,077 9,976
OPERATING EXPENSES
Salaries, wages and benefits .................................... . 3,796 3,905 3,878
Aircraft fuel and taxes ......................................... . 2,203 1,554 1,439
Selling and marketing ...................................... . ... . 847 709 803
Depreciation and amortization .................................. . 731 586 903
Other rentals and landing fees .................................. . 596 569 576
Aircraft maintenance materials and repairs ....................... . 463 474 576
Aircraft rentals ............................................... . 446 481 460
Regional carrier expenses ...................................... . 1,210 567 487
Other ..................... . .................................. . 1,492 1,497 1,700
Total operating expenses .......................... . .......... . 11,784 10,342 10,822
OPERATING INCOME (LOSS) .................................. . (505) (265) (846)
OTHER INCOME (EXPENSE)
U.S. Government appropriations ......................... .. ..... . 209 (27)
Interest expense .............................................. . (543) (475) (427)
Interest capitalized .................................. ... ....... . 8 10 25
Interest of mandatorily redeemable security holder ................ . (25) (25)
Investment income ............................................ . 51 43 46
Earnings of affiliated companies ................................ . 8 18 37
Other, net ................................................. . . . . 120 703 {3)
Total other income (expense) ................................. . (356) 483 {374)
INCOME (LOSS) BEFORE INCOME TAXES ..................... . (861) 218 (1,220)
Income tax expense (benefit) ................................... . 1 {30) {422)
NET INCOME (WSS) .......................................... . (862) 248 (798)
Preferred stock requirements ................................... . (29) (12)
NET INCOME (WSS) APPLICABLE TO COMMON
STOCKHOLDERS . ... : ....................................... . $ (891) $ 236 $ (798)
EARNINGS (LOSS) PER COMMON SHARE:
Basic ...................................................... . $ (10.32) $ 2.75 $ (9.32)
Diluted .................................................... . $ (10.32) $ 2.62 $ (9.32)
The accompanying notes are an integral part of these consolidated financial statements.
50
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES
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 .... . .
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 ACTIVITIES
Payment of long-term debt . . .. . ......... . .. . .. . ................ . ........ . .
Payment of capital lease obligations ......... . ........................... . . .
Payment of short-term borrowings ............. . ......... . . . ..... . ......... .
Proceeds from long-term debt ...... . . . ......... . .. . . .. .... . . . ... . ... ... . . .
Proceeds from sale and leaseback transactions . . ................... . .. . ...... .
Other, net .... . .... . .. . .................. .. .. . ..... . ........... .. .. ... . .
Net cash provided by (used in) financing activities ... .. ... . . . .... .. .. . . .
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .. .. . ... . ...... .
Cash and cash equivalents at beginning of period ........... . ....... .. .. . ..... . . .
Cash and cash equivalents at end of period . ....... . .. . . . .... .. ... . .. . ..... . . . . .
Available to be borrowed under credit facilities .... . .. . . . .... . .. . .. . .... . ...... .
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 and other
non-cash transactions . .. . . . . .. . ... . .. .. . .. .. . ... . ... .. ... . . . .. .. ... . ... .
Year Ended December 31
2004 2003 2002
$ (862) $ 248 $ (798)
731 586 903
1 (30) (422)
(3) 215 122
190 90 139
(8) (18) (37)
(95) (708) 41
77 20 83
46 (20) (38)
7 31 (14)
(60) 25 (68)
191 50 (54)
27 (103) (17)
19 (1) (164)
10 __QQ) 40
~ 375 (284)
(480) (1,123) (1,588)
(483) {1,715) (562)
351 325 391
160 615 15
__ (_6)_ill!)_JW
(458) (2,019) {1,780)
(1,664) (301) (201)
(70) (49) (58)
(4) (14) (2)
1,512 1,359 1,740
136
___@_ill)~
____gg) __m 1,421
(439) (723) (643)
1,146 1,869 2,512
$ 707 $ 1,146 $ 1,869
$ $ 1 -$--1
$ 2,459 $ 2.757 $ 2.097
$ sos $ 448 $ 421
$ 705 $ 290 $ (11)
The accompanying notes are an integral part of these consolidated financial statements.
51
NORTHWEST AIRLINES CORPORATION
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUI'IY (DEFICIT)
(In millions)
Accumulated
Additional Other
Common Stock Paid-Io Accumulated Comprehensive Treasury
Shares Amount Ca2ital Deficit Income {Loss} Stock Total
Balance January 1, 2002 . ............ . . . . --iw:3--$-1- $1,451 $ (518) $ (305) $ (1,060) $ (431)
Net income (loss) . ............ . . . . . . ... (798) (798)
Other comprehensive income (loss)
Foreign Currency (net of $4 million of tax) (7) (7)
Deferred gain/loss from hedging activities
(net of $5 million of tax) ..... . .... .. . (9) (9)
Minimum pension liability adjustments (net
of $592 million of tax) ... .. ... . .... . . (1,026) (1,026)
Total . .................... . . .. ..... . . (1,840)
Series C Preferred Stock converted to
Common Stock .............. .. .... 0.1 1
Common Stock held in rabbi trusts ... . . . . . (3) 5 2
Other . .......... . ........... . ........ 0.4 6 6
Balance December 31, 2002 . ......... .. . . 110.8 1,455 (1,316) (1,347) (1,055) (2,262)
Net income (loss) ...... . ............. .. 248 248
Other comprehensive income (loss)
Foreign Currency (net of $17 million of tax) 30 30
Deferred gain/loss from hedging activities
(net of $20 million of tax) ..... . ... . .. (35) (35)
Unrealized gain/loss on investments ...... (1) (1)
Minimum pension liability adjustments (net
of $7 million of tax) ...... . ..... .. . .. 13 13
Total . ........ . ....... .. ............ . 255
Preferred Series C dividends accrued .. . .... (12) (12)
Series C Preferred Stock converted to
Common Stock ...... . ........... . ... 2 2
Step-up in basis of Orbitz Investment .. .... 11 11
$225 million Convertible Debt call spread . . . (10) (10)
Other ...... .. .......... . ....... ... . . . 0.1 2 ___Q) 6 5
Balance December 31, 2003 ......... . .... 110.9 1,460 (1,083) (1,340) (1,049) ___gQ!l)
Net income (loss) ....... . ... .. ......... (862) (862)
Other comprehensive income (loss)
Foreign Currency .. . .......... . .... .. 3 3
Deferred gain/loss from hedging
activities. . . . . . . . . . . . . . . . . . .. . . .. . 8 8
Unrealized gain/loss on investments ..... 4 4
Minimum pension liability adjustments ... (222) ~
Total .... . .. . ............ . . . ......... (1,069)
Preferred Series C dividends accrued ....... (29) (29)
Series C Preferred Stock converted to
Common Stock ...... . ............ . .. 0.1 2 2
Stock options expensing ................. 0.1 7 7
Issuance of Treasury Stock .... . . . ..... ... (25) 36 11
Other ....... . ............ . ...... . ... . 2 2
Balance December 31, 2004 ..... .. .... . .. 111.1 $ 1 $1,471 $ (1,999) $(1,547) $(1,013) $(3,087)
The accompanying notes are an integral part of these consolidated financial statements.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I-Summary of Significant Accounting Policies
Business: Northwest's operations account for approximately 98% of the Company's consolidated
operating revenues and expenses. Northwest is a major air carrier engaged principally in the commercial
transportation of passengers and cargo, directly serving more than 232 cities in 25 countries in North
America, Asia and Europe. Northwest's global airline network includes domestic hubs at Detroit,
Minneapolis/St. Paul and Memphis, an extensive Pacific route system with a hub in Tokyo, a transatlantic
joint venture with KLM, which operates through a hub in Amsterdam, a domestic and international
alliance with Continental and Delta, membership in SkyTeam, a global airlines alliance with KLM,
Continental, Delta, Air France, Alitalia, Aeromex:ico, CSA Czech Airlines and Korean Air, exclusive
marketing agreements with two domestic 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 hubs in Anchorage and Tokyo.
Basis of Consolidation: NW A Corp. is a holding company whose principal indirect operating
subsidiary is Northwest. The consolidated financial statements include the accounts of NW A Corp. and all
consolidated subsidiaries. All significant intercompany transactions have been eliminated. Investments in
20% to 50% owned companies, as well as Pinnacle Airlines, 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 is provided at rates
that depreciate cost, less residual value, over the estimated useful lives of the related aircraft. Inventory
sales at amounts greater or less than their carried values are recorded in a reserve account and therefore
do not generate gain or loss recognition for income statement purposes.
Property, Equipment and Depreciation: Owned property and equipment are stated at cost. Property
and equipment acquired under capital leases are stated at the lower of the present value of minimum lease
payments or fair market value at the inception of the lease. Property and equipment are depreciated to
residual values using the straight-line method over the estimated useful lives of the assets, which generally
range from four to 25 years for flight equipment and three to 32 years for other property and equipment.
Leasehold improvements are generally amortized over the remaining period of the lease or the estimated
service life of the related asset, whichever is less. Property and equipment under capital leases are
amortized over the lease terms or the estimated useful lives of the assets.
The Company accounts for certain airport leases under the 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 $294 million at December 31, 2004 that relate to airport improvements at Minneapolis-St.
Paul, Memphis, Detroit, Knoxville and Seattle are recorded in other property and equipment, with the
corresponding obligations included in long-term obligations under capital leases and debt. During the
construction of the Detroit airport project, capital expenditures are reflected in other property and
equipment and long-term debt. This amount totaled $78 million as of December 31, 2004. Upon project
completion, the corresponding asset and obligation will be removed from the balance sheet and will be
accounted for as an operating lease.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
Airframe and Engine Maintenance: Routine maintenance, airframe and engine overhauls are charged
to expense as incurred, except engine overhaul costs covered by third-party maintenance agreements,
which are accrued on the basis of hours flown. Modifications that enhance the operating performance or
extend the useful lives of airframes or engines are capitalized and amortized over the remaining estimated
useful life of the asset.
International Routes and Goodwill: Certain of the Company's international routes result from the
U.S.-Japan bilateral aviation agreement, which establishes rights to carry traffic between Japan and the
U.S., and extensive "fifth freedom" rights from Japan to India, the South Pacific and other Asian
destinations. Fifth freedom rights allow Northwest to operate service from any gateway in Japan to points
beyond Japan and carry Japanese originating passengers. These rights have no termination date, and the
Company has the supporting infrastructure ( airport gates, slots and terminal facility leases) in place to
operate air service to Japan from its U.S. hub and gateway airports indefinitely. In accordance with SFAS
No. 142, Goodwill and Other Intangi,bleAssets, the Company does not amortize these intangible assets, but
instead regularly tests the balance for impairment. During the fourth quarter of 2004, 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.
Impainnent of Long-Lived Assets: The Company evaluates long-lived assets for potential
impairments in compliance with SF AS No. 144. These impairment evaluations are primarily initiated by
fleet plan changes .and therefore predominantly performed on fleet-related 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 or published sales values of similar assets, 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, additional impairment charges may be recognized.
In June 2004, as part of a revised fleet plan, the Company determined that it does not currently intend
to return to service 10 Boeing 747-200 passenger aircraft that had been temporarily removed from
operations. As a result, the Company recorded, as additional depreciation expense, impairment charges of
$104 million associated with these aircraft and related inventory in the second quarter of 2004. In
December 2004, additional impairment charges of $99 million were recorded in conjunction with a new
aircraft order and the related early retirement of certain DCl0-30 aircraft, and the accelerated retirement
of the Company's DC9-10 fleet, as part of a revised fleet plan.
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.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
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 these 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 inventory.
Frequent Flyer Program: 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 on
Northwest and other airline partners. 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 assumptions are made, based on past customer behavior, regarding the likelihood of
customers using the miles for first-class upgrades or other premiums instead of flight awards, the expected
use on other airline partners, as well as the likelihood of customers never redeeming the miles. Estimated
incremental costs of carrying a passenger flying on redeemed miles on Northwest are based on the system
average cost per passenger for food and beverage, fuel, insurance, security, miscellaneous claims and
WorldPerks distribution and administration expenses. Estimated incremental cost for carriage on airline
partners is based on contractual rates.
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. In
December 2004, Northwest revised its estimates associated with (i) the future mix of redemptions involving
reciprocal frequent flyer programs with other airlines; (ii) incremental costs per type of award redemption;
and (iii) the likelihood of customers never redeeming their award miles. For certain reciprocal frequent
flyer programs, Northwest does not record a liability for the gross payments it expects to make to other
airlines for WorldPerks members' redemption travel on those carriers until the Company meets certain
contractual thresholds that are required prior to making cash payments. For other reciprocal frequent flyer
arrangements with no such contractual thresholds, Northwest records a liability for the gross payments it
expects to make for WorldPerks members' redemption travel on the other airlines, without regard to the
payments the Company expects to receive for their frequent flyer members' redemption travel on
Northwest. These changes in estimates resulted in a liability increase of $77 million, due primarily to the
higher cost of awards redeemed on reciprocal frequent flyer programs versus Northwest's incremental cost
for carriage, partially offset by a higher projection of unused award miles. While the average cost of an
award increased as a result of these revised estimates, the total number of awards expected to be redeemed
declined substantially. The number of estimated travel awards outstanding and expected to be redeemed at
December 31, 2004, 2003, and 2002 was approximately 3.8, 7.2 and 7.8 million, respectively. Northwest
recorded a liability for these estimated awards of $215 million, $119 million and $127 million at
December 31, 2004, 2003 and 2002, respectively.
The number of travel awards used for travel on Northwest during the years ended December 31, 2004,
2003 and 2002 was approximately 1,380,000, 1,408,000 and 1,459,000, representing an estimated 6.9%,
7.5%, and 7.8% 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.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 1-Summary of Significant Accounting Policies (Continued)
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, partner airlines, and
other 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 marketing
services in excess of the fair value of the tickets expected to be redeemed.
Operating Revenues: Passenger and cargo revenues are recognized when the transportation is
provided, or when the ticket expires, or is expected to expire, unused. The main component of air traffic
liability represents the estimated value of sold but unused tickets. The Company regularly performs
evaluations of unused tickets. Unused tickets are recognized in passenger revenue based on current
estimates, along with adjustments resulting from revisions of previous estimates. 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 uses historical trends and
averages in its estimates, significant changes in business conditions and/or passenger behavior that affect
these estimates could have a significant impact on the Consolidated Financial Statements. Other revenues
include MLT, transportation fees and charter revenues, and are recognized when the service or
transportation is provided.
Advertising: Advertising costs, included in selling and marketing expenses, are expensed as incurred
and were $72 million, $82 million and $93 million in 2004, 2003, and 2002, respectively.
Employee Stock Options: As of December 31, 2004, the Company has stock option plans for officers
and key employees of the Company. See "Note 7-Stock Options" for additional discussion of stock
options. The Company historically accounted for those plans under the provisions of APB No. 25, and
related interpretations. In December 2002, the FASB issued SFAS No.148. SFAS No.148 provides
alternative methods of transition for companies that voluntarily change to the fair value based method of
accounting for stock-based compensation. It also amends the 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.
Effective January 1, 2003, the Company adopted the fair value method of recording stock-based employee
compensation prescribed by SPAS 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.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
The following table illustrates the effect on net income (loss) and earnings (loss) per common share as
if the fair value based 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 years.
Net income (loss) applicable to common shareholders, as
reported ....................................... .
Effect of dilutive securities:
Interest on contingently convertible debt ............. .
Adjusted net income for diluted earnings (loss) per share ..
Add: Stock-based employee compensation expense
included in reported net income (loss), net of tax
effect(l) ....................................... .
Deduct: Total stock-based employee compensation
expense determined under a fair value based method
for all awards, net of tax( 1) ....................... .
Pro forma net income (loss) applicable to common
shareholders .................................... .
Earnings (loss) per share:
Basic-as reported .............................. .
Basic-pro forma ............................... .
Diluted-as reported ............................ .
Diluted-pro forma ............................. .
Basic Earnings (Loss) Diluted Earnings (Loss)
Per Share for the Per Share for the
Twelve Months Ended Twelve Months Ended
December 31 December 31
2004 2003 2002 2004 2003 2002
(In millions except per share amounts) - -
$ (891) $ 236 $ (798) $ (891) $ 236 $ (798)
9
$ (891) $ 236 $ (798) $ (891) $ 245 $ (798)
32 19 3 32 19 3
_.....:.,.(3_2) ____@) _@ __ ill) ____@) _@
$ (891) $ 235 $ (807) $ (891) $ 244 $ (807)
$(10.32) $2.75 $(9.32)
$(10.32) $2.74 $(9.43)
$(10.32) $2.62 $(9.32)
$(10.32) $2.61 $(9.43)
(1) As described below in "Note 9-Income Taxes", the Company is not presently recording additional
tax benefits or provisions due to its net deferred tax asset position and recent history of losses;
therefore, the Company did not include any tax effect related to the 2004 and 2003 amounts shown.
Foreign Cu"ency: Assets and liabilities denominated in foreign currency are remeasured at current
exchange rates with resulting gains and losses generally included in net income.
Income Taxes: The Company accounts for income taxes utilizing the liability method. Deferred
income taxes are primarily recorded to reflect the tax consequences of differences between the tax and
financial reporting bases of assets and liabilities. However, based on cumulative net losses during the
current and prior two years, the Company is required to record a valuation allowance to the extent that its
deferred tax assets exceed its deferred tax liabilities. It is more likely than not that future deferred tax
assets will also require a valuation allowance to be recorded to fully reserve against the uncertainty that
those assets would be realized.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note I-Summary of Significant Accounting Policies (Continued)
Use of Estimates: The preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and assumptions that affect the
amounts reported in its consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
New Accounting Standards: In December 2004, the FASB issued SFAS No. 123R. In addition to
requiring supplemental disclosures, SFAS No. 123R eliminates the option to apply the intrinsic value
measurement provisions of APB No. 25 to stock compensation awards issued to employees. Furthermore,
the Company is required to recognize compensation cost for the portion of outstanding awards previously
accounted for under the provisions of APB No. 25 for which the requisite service had not been rendered as
of the adoption date for this Statement. The Statement also requires companies to estimate forfeitures of
stock compensation awards as of the grant date of the award. Since the Company's current policy is to
recognize forfeitures as they occur, a cumulative effect of a change in accounting principle will be
recognized in income based on the estimate of remaining forfeitures for awards outstanding as of the date
SFAS No. 123R is adopted. Because the Company voluntarily adopted the fair value method prescribed by
SFAS No. 123 effective January 1, 2003, the unvested awards still accounted for under the provisions of
APB No. 25, and therefore subject to the provisions of SFAS No. 123R, are minimal. Additionally, the
overall impact of estimating the remaining forfeitures for awards outstanding as of the adoption date is
insignificant. Therefore, the impact of adopting SFAS No. 123R will be immaterial. SF AS No. 123R is
effective for the fiscal quarter beginning July 1, 2005, although early adoption is permitted.
In September 2004, the EITF issued EITF 04-8. EITF 04-8 requires companies to include certain
convertible debt and equity instruments that were previously excluded from their calculation of diluted
earnings per share, and to restate the diluted earnings per share calculation for all periods during which
time the applicable convertible instruments were outstanding. The Company adopted the provisions of
EITF 04-8 as of December 31, 2004. As further discussed in "Note 2-Earnings (Loss) Per Share Data",
the Company's diluted earnings per share calculation has been restated to include shares issuable upon
conversion of the Company's 6.625% and 7.625% senior convertible notes issued.in 2003 for periods where
the Company reported net income applicable to common stockholders. The impact of adopting EITF 04-8
reduced diluted earnings per share by $0.12 in 2003.
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, at which time the U.S. Government will also
begin to pay a special subsidy equal to 28% of a retiree's covered prescription drug expenses between $250
and $5,000 (adjusted annually for changes in Medicare per capita prescription drug costs) to employers
who sponsor equivalent plans. In accordance with FASB Staff Position 106-2, effective for interim periods
beginning after June 15, 2004, the Company has estimated the effects of the Act in its measures of
liabilities and expenses reflected in "Note 12-Pension and Other Postretirement Health Care Benefits".
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 2-Earnings (Loss) Per Share Data
The following table sets forth the computation of basic and diluted earnings (loss) per common share
for the years ended December 31:
2004 2003 2002
(In millions, except share data)
Numerator:
Net income (loss) ........................... $ (862) $ 248 $ (798)
Preferred stock requirements ................. (29) {12)
Net income (loss) applicable to common
stockholders .............................. $ (891) $ 236 $ {798)
Effect of dilutive securities:
Interest on contingently convertible debt ..... 9
Adjusted net income for diluted earnings (loss)
per share ................................. $ (891) $ 245 $ (798)
Denominator:
Weighted-average shares outstanding for basic
earnings (loss) per share ................... 86,403,384 85,889,584 85,655,786
Effect of dilutive securities:
Contingently convertible debt .............. 7,281,552
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 ........................... 86,403,384 93,645,361 85,655,786
Basic earnings (loss) per common share:
Net income (loss) before preferred stock
requirements ........................... $ (9.98) $ 2.89 $ (9.32)
Preferred stock requirements ............... (0.34) {0.14)
Net income (loss) applicable to common
stockholders ............................ $ (10.32) $ 2.75 $ (9.32)
Diluted earnings (loss) per common share:
Net income (loss) before preferred stock
requirements ........................... $ (9.98) $ 2.65 $ (9.32)
Interest on contingently convertible debt. .... 0.09
Preferred stock requirements ............... (0.34) {0.12)
Net income (loss) applicable to common
stockholders ............................ $ (10.32) $ 2.62 $ (9.32)
For the twelve months ended December 31, 2004 and 2002, 19,768,222 and 6,926,103 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 related to
dilutive securities have an anti-dilutive impact on earnings per share 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)
Because of the stated intent of the parties to settle the Series C Preferred Stock with cash rather than
by the Company issuing additional common stock, 6,456,063 and 6,521,300 shares of Series C Preferred
Stock are excluded from the effect of dilutive securities for the years ended December 31, 2004 and 2003,
respectively. See "Note 6-Redeemable Preferred and Common Stock" for additional information
regarding this security.
The dilutive securities described above do not include 1,337,224 and 1,232,128 employee stock options
and restricted shares for the years ended December 31, 2004 and 2003, respectively, because the exercise
prices of these options were greater than the average market price of the common stock for the period or
the amount of assumed proceeds for the restricted shares did not result in incremental dilutive shares
under the treasury method. Total employee stock options and restricted shares outstanding of 9,449,561
and 11,589,438 as of December 31, 2004 and 2002, respectively, were not included in diluted securities
because the Company reported a net loss for the years ended December 31, 2004 and 2002.
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,
2004):
2004 2003
~illions)
Aircraft enhanced equipment trust certificates due through 2022, 6.4% weighted-
average rate{l) ................................... .... .. . .................. . $2,406 $2,590
Aircraft secured loans due through 2024, 4.7% weighted-average rate(2) ............ . 2,526 1,782
Bank Term Loan due 2005 through 2010, 8.2% weighted-average rate(3) ........ . ... . 975
Bank Revolving Credit Facilities(3) ..................................... . ....... . 962
Other secured notes due through 2020, 5.9% weighted-average rate ................ . 531 569
Other secured debt ........................................................ . .. . 102 51
Total secured debt. ........................................................... . 6,540 5,954
Unsecured notes due 2005 through 2039, 9.3% weighted-average rate(4) ............ . 1,494 1,533
Convertible unsecured notes due through 2023, 7.2% weighted-average rate .... '. .... . 375 375
Other unsecured debt .............................. .. ......................... . 2 4
Total unsecured debt ............................ . .. ... .. .. ................... . 1,871 1,912
Total debt ......... . ......................................................... . 8,411 7,866
Less current maturities ................................... . .................. . 696 668
Total Long-term debt .............................. . .......................... . $7,715 $7,198
(1) At December 31, 2004, the $2.41 billion of equipment notes underlying the pass-through trust
certificates issued for 101 aircraft are direct obligations of Northwest. Interest on the pass-through
trust certificates is payable semi-annually or quarterly.
(2) The Company took delivery of and financed three Airbus A330-300 and seven Airbus A330-200
aircraft during the twelve months ended December 31, 2004, resulting in an increase of $776 million
aircraft secured loans. At December 31, 2004, the $2.53 billion of equipment notes underlying the
secured loans issued for 74 aircraft are direct obligations of Northwest.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings (Continued)
(3) On November 23, 2004, the Company completed the restructuring of its $975 million revolving bank
credit facility, which was scheduled to mature in October 2005, by entering into an Amended and
Restated Credit and Guarantee Agreement with a consortium of lenders that amended and
restructured the revolving credit facility into a term loan. The term loan has an initial principal
amount of $975 million and is comprised of two tranches bearing different interest rates and with
different principal amortization periods. The first tranche, in the principal amount of $575 million,
bears interest at LIBOR plus 5% and is payable 25% at the end of the first year, 12% at the end of
each of the second and third years and 50% at the end of the fifth year. The second tranche, in the
principal amount of $400 million, bears interest at LIBOR plus 6% and is payable 1 % at the end of
each of the first five years and 95% at the end of the sixth year, on November 23, 2010.
The term loan is secured by substantially the same collateral the Company pledged to secure the
original revolving bank credit facility. The Agreement contains a covenant requiring the Company to
maintain unrestricted cash, cash equivalents and short term investments in an amount not less than
$900 million at any time. In addition, the Agreement contains a covenant that requires the Company
to maintain a ratio of earnings to fixed charges of at least 0.50 to 1.0 for the nine months ending
December 31, 2004 and the twelve months ending March 31, 2005. For the three months ending
June 30, 2005, six months ending September 30, 2005, nine months ending December 31, 2005 and the
twelve months ending March 31, 2006 and June 30, 2006 the numerator of the required ratio is 1.00.
Quarterly through June 30, 2007, the numerator of the required ratio gradually increases from 1.05 to
1.45 for each of the rolling twelve month ending periods. Thereafter, the numerator of the required
ratio is 1.50. For purposes of calculating this ratio, earnings are defined as operating income adjusted
to exclude the effects of depreciation, amortization and aircraft rents and to include the effects of
interest income and governmental reimbursements for losses resulting from developments affecting
the aviation industry. Earnings also exclude non-recurring non-cash charges (subject to the inclusion
of any cash payments then or thereafter made with respect thereto) and are determined without giving
effect to any acceleration of rental expense. Fixed charges are defined as interest expense and aircraft
rents (without giving effect to any acceleration of rental expense). Although the Company believes
that it will satisfy these requirements through December 31, 2005, there can be no assurance that it
will be able to do so through the expiration of the facility. Compliance with the covenant depends on
many factors, some of which are beyond the Company's control, including the overall industry revenue
environment and the level of fuel costs.
(4) 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 were used for working capital and general corporate purposes. The notes are
guaranteed by NWA Corp.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3-Long-Term Debt and Short-Term Borrowings (Continued)
Debt Maturity Table:
Maturities of long-term debt for the five years subsequent to December 31, 2004 are as follows (in
millions):
2005 2006 2007 2008 2009 Thereafter Total
(in millions)
Aircraft enhanced equipment trust certificates ... . $188 $186 $ 180 $184 $ 232 $1,436 $2,406
Aircraft secured loans ......................... . 117 308 701 101 103 1,196 2,526
Bank Term Loan ............................. . 148 76 76 4 291 380 975
Other secured notes .......................... . 38 39 43 35 157 219 531
Other secured debt ........................... . 16 84 1 1 102
-----
Total secured debt ............................ . 507 693 1,000 325 783 3,232 6,540
Unsecured notes ............................. . 188 270 400 200 294 142 1,494
Convertible unsecured notes ................... . 375 375
Other unsecured debt ......................... . 1 1 2
Total unsecured debt ......................... . 189 270 400 200 295 517 1,871
Total long-term debt. ......................... . 696 963 1,400 525 1,078 3,749 8,411
Total extendable long-term debt(l) ............. . - _@)
~-= -- 646
Total long-term debt assuming extensions elected . $696 $884 $ 833 $525 $1,078 $4,395 $8,411
=====.==:
(1) Aircraft secured loans in the above table include $79 million and $567 million of aircraft related loan
obligations maturing in 2006 and 2007, respectively, that may be extended for an additional nine years
from their maturity dates at the Company's election.
Other secured debt in 2006 in the above table includes $78 million of debt associated with the Detroit
airport project. As further discussed in "Note 1-Summary of Significant Accounting Policies", during the
construction of the Detroit airport project, capital expenditures are reflected in other property and
equipment and long-term debt. Upon project completion the corresponding asset and obligation will be
removed from the balance sheet and commitments associated with the airport project will be accounted for
as an operating lease. Additionally, holders of $225 million of the $375 million convertible unsecured notes
due after 2009 in the above table may require NW A Corp. to repurchase such notes in 2008 ( and holders
of all the notes also have other dates after 2009, but prior to maturity, on which NWA Corp. can be
required to repurchase such notes).
Under some of the debt instruments included above, agreements with the lenders require that the
Company meet certain financial covenants, such as unrestricted cash balances and fixed charges coverage
ratios. Assets having an aggregate book value of $8.1 billion at December 31, 2004, 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 agreements as of December 31, 2004. 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 factors affecting operating performance and the market values of assets.
The weighted-average interest rates on short-term borrowings outstanding at December 31 were
3.73%, 3.97% and 3.04% for 2004, 2003 and 2002, respectively.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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:
2004 2003 2002
(in millions)
Gross rental expense . . ....... .. ............. ... ...... .
Sublease rental income ............................... .
Net rental expense ................................... .
$ 928 $ 908 $ 863
(314) _DB) ____{ill)
$ 614 $ 736 $ 720
At December 31, 2004, Northwest leased 99 of the 435 aircraft it operates. Of these, nine were capital
leases and 90 were operating leases. Base term lease expiration dates range from 2007 to 2009 for aircraft
under capital leases, and from 2006 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 99 aircraft lease agreements, 93 provide Northwest with
purchase options during the lease, at the end of the lease, or both, on terms that approximated fair market
value at the inception of the lease.
At December 31, 2004, future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of more than one year were as follows:
2005 ............................................ .
2006 ............................................ .
2007 ............................................ .
2008 ............................................ .
2009 ............................................ .
Thereafter ...................................... .
Less sublease rental income ....................... .
Total minimum operating lease payments ........... .
Capital
Leases
$ 79
53
59
47
36
421
695
Less amounts representing interest. . . . . . . . . . . . . . . . . . 334
Present value of future minimum capital lease
payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 361
Less current obligations under capital leases. . . . . . . . . . 53
Long-term obligations under capital leases........... $308
Operating leases
Aircraft Non-aircraft
(in millions)
$ 627 $ 161
636 158
656 147
632 135
615 129
4,671 1,186
7,837 1,916
3,403 38
$4,434 $1,878
The above table includes operating leases for 117 aircraft operated by and subleased to Pinnacle
Airlines, and 74 aircraft operated by and subleased to Mesaba. Base term lease expiration dates for these
subleases range from 2007 to 2017. 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.
63 .
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS {Continued)
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 and assigned such obligation to the Subsidiary as operator in exchange for
a preferred interest in the profits and returns of capital from the business of the Subsidiary (the "Preferred
Security"). The restructured non-recourse obligation is the sole asset of the Subsidiary, and the Company
had the ability to transfer 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 a 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 by $213 million.
The gain on debt extinguishment 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, NW A Corp. issued to trusts
for the benefit of participating employees 9.1 million shares of a new class of Series C cumulative, voting,
convertible, redeemable preferred stock, par value of $.01 per share ( the "Series C Preferred Stock"), and
17 .5 million shares of Common Stock and provided the union groups with three positions on the Board of
Directors. NW A Corp. has authorized 25 million shares of Series C Preferred Stock. The Series C
Preferred Stock ranks senior to Common Stock with respect 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, 2004, 4.3 million shares of Series C Preferred Stock have been converted into
Common Stock and the remaining 4.7 million shares outstanding are convertible into 6.5 million shares of
Common Stock. During 2004, 47,827 shares of Series C Preferred Stock were converted into 65,237 shares
of Common Stock.
During the 60-day period ending on August 1, 2003 (the "Put Date"), holders of the Series C
Preferred Stock had the right to put their shares of the Series C Preferred Stock to NW A Corp. Under the
terms of the Series C Preferred Stock, NW A Corp. was required to elect, prior to the commencement of
such 60-day period, the form of payment it would use for repurchasing such shares of the Series C
Preferred Stock. On May 30, 2003, NW A Corp. elected to repurchase such 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 resulting from labor cost savings agreements entered into in 1993
( approximately $226 million as of August 1, 2003, the Put Date) plus 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
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 6-Redeemable Preferred and Common Stock (Continued)
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 Series C Preferred Stock, as a result of its inability to repurchase Series C
Preferred Stock, on a quarterly basis after the Put Date, NW A 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 redemptions, 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 must be approved by a majority of the directors
elected by the holders of the Series C Preferred Stock.
In June 2003, the IBT and certain related parties commenced litigation against NW A Corp. in New
York state court. In August 2003, the IAM and a related party also commenced litigation against
Northwest Airlines Corporation in New York state court. 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 believes that the lawsuits
are without merit.
The financial statement carrying value of the Series C Preferred Stock accreted over 10 years
commencing August 1993 to the ultimate put price, and was $263 million at December 31, 2004, including
approximately $41 million of unpaid dividends accrued since August 1, 2003.
Stockholder Rights Plan: Pursuant to the Stockholder Rights Plan ( the "Rights Plan"), each share of
Common Stock has attached to it a right and, until the rights expire or are redeemed, each new share of
Common Stock issued by NW A Corp., including the shares of Common Stock into which the Series C
Preferred Stock is convertible, will include one right. Upon the occurrence of certain events, each right
entitles the holder to purchase one one-hundredth of a 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 employees) acquires
beneficial ownership of 19% or more (25 % or more in the case of certain institutional investors) of NW A
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 NWA 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 NW A Corp.'s outstanding Common Stock, the holders of the rights ( other than
the acquiring person or group) will be entitled to receive, upon exercise of the rights, Common Stock of
NW A Corp. having a market value of two times the exercise price of the right. In addition, if after the
rights become exercisable NW A Corp. is involved 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 NW A Corp.
at a price of $.01 per right prior to the time they become exercisable.
Note 7-Stock Options
Stock Option Plan for Officers and Key Employees: As of December 31, 2004, the Company has stock
option plans for officers, key employees and pilots of the Company. Prior to December 31, 2002, the
Company historically accounted for options and other awards granted under those plans under the
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued)
recognition and measurement principles of APB No. 25, and related interpretations. Effective January 1,
2003, the Company adopted the fair value method of recording stock-based employee compensation
contained in SF AS 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. See "Note I-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 the Officers and Key Employees Plan activity for ~he years ended
December 31:
2004
Weighted-
Average
Exercise
Shares Price
2003
Weighted-
Average
Exercise
Shares Price
(shares in thousands)
2002
Weighted-
Average
Exercise
Shares Price
Outstanding at beginning of year . . . . . . . . . . . . . . . . 3,507 $12.06 7,923 $25.27 8,757 $25.40
Granted ..................... . . . ....... . ..... .
Forfeited .......................... . ......... .
Exercised ................ . .......... . .. . .. . . .
Outstanding at end of year .................... .
Exercisable at end of year ........... . ......... .
Reserved for issuance ......................... .
Available for future grants ............ . ........ .
At December 31, 2004:
Range of Exercise Prices
$5.71 to $24.59(1) .................... .
26.16 to 39.31 ........................ .
43.56 to 51.97 ........................ .
2,616
306
26
2,965 8.31 218 7.33
(343) 9.40 (7,357) 24.81 (639) 28.93
(216) 8.31 ~ 4.74 ~ 12.74
2,948 12.64 3,507 12.06 7,923 25.27
1,154 19.18 599 27.73 3,728 31.73
21,802 21,802 21,815
11,089 11,367 7,570
Options Outstanding Options Exercisable
Weighted-Average
Remaining Weighted-Average Weighted-Average
Exercise Price
Contractual Life Exercise Price Shares
7.8 years
3.2 years
4.1 years
(shares in thousands)
$ 9.72
34.50
50.49
829
300
26
$12.64
34.58
50.49
( 1) 2.0 million of the 2.6 million shares outstanding had an exercise price of $8.31, and approximately
422,000 of these shares were exercisable.
66
l
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
2004 2003 2002
Weighted average risk-free interest rate .......... . .... . ... . . NIA 3.2% 3.3%
Stock price volatility ... . ...... . ........................... . NIA 40% 40%
Expected lives in years . . . . . . . . . . . . . . . . . . .................. . NIA 6 6
The weighted-average fair value of options granted during 2003 and 2002 is $3.62 and $3.23 per
option, respectively.
Management Stock Option Exchange Program: 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 vesting period using 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 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.
Stock Option Plan for Pilots: In September 1998, in conjunction with the labor agreement reached
between Northwest and the Air Line Pilots Association, International, NW A Corp. established the 1998
Pilots Stock Option Plan ("Pilot Plan"). In October 2004, in conjunction with the agreement with ALPA
providing for labor cost restructuring, the Company granted 3.5 million additional stock options under the
pilot plan.
Following is a summary of the Pilot Plan activity for the years ended December 31:
2004 2003 2002
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
(shares in thousands)
Outstanding at beginning of year ... . ............. . 1,564 $15.85 2,486 $25.58 2,486 $25.58
Granted ........................... . ........... . 3,500 7.33 926 9.18
Cancelled ........................... . ......... . (1,848) 25.60
Exercised .. . ...................... . .......... . .
Outstanding at end of year ................... . .. . 5,064 9.96 1,564 15.85 2,486 25.58
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7-Stock Options (Continued) (Continued)
At December 31, 2004:
Exercise Prices
Options Outstanding
Weighted-Average
Remaining
Shares Contractual Life
Options Exercisable
Shares
(shares in thousands)
$7.325 .............................. .
9.185 ............................... .
19.62 ............................... .
24.688 .............................. .
27.875 .............................. .
3,500
926
134
123
381
9.8 years
8.6 years
6.7years
4.7years
4.4 years
233
134
123
381
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 ..................................... .
2004 2003 2002
3.5% 3.5% NIA
50% 40% NIA
6 6 NIA
The weighted-average fair value-of options granted during 2004 and 2003 is $3.78 and $4.04 per
option, respectively. There were no options granted under the Pilot plan in 2002.
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 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 ALP A Pilot participants were able to exchange 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 options is currently being amortized over
a four-year vesting period using the fair value method of recording stock-based compensation.
Stock Incentive Plans: Shares of restricted stock were awarded at no cost to certain officers and key
employees in 2004, 2003 and 2002. 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, 2004, 1,037,912 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 2004, 2003 and 2002, with a total of 2,076,350 units, 1,683,414 units and 560,606 units
awarded and outstanding at the end of each such year, respectively. The phantom units vest over either a
three or four year period based on continued employment of the participants 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.
68
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 Unrealized Gain Other
Translation Hedging Liability (Loss) on Comprehensive
Adjustment Activities Adjustment Investments Income {Loss}
(in millions)
Balance at January 1, 2002 .. ......... $(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 ............... ... . ... .. -1!1) 20 (7) (4)
- -
Net-of-tax amount ............ . ... 30 (35) 13 (1) 7
Balance at December 31, 2003 ........ (7) (13) (1,319) (1) (1,340)
Before tax amount ........ ... ..... 3 8 (222) 4 (207)
Tax Effect ........... . ... . ....... - - -
Net-of-tax amount ................ 3 8 (222) 4 (207)
Balance at December 31, 2004 . ........ $ (4) $ (5) $(1,541) $ 3 $(1,547)
Note 9-Income Taxes
Income tax expense (benefit) consisted of the following for the years ended December 31:
2004 2003 2002
(in millions)
Current:
Federal ................................ . ....... . ... . $ (3) $ 1 $(218)
Foreign ............... . ................ . ........... . 4 2 2
State .............................................. . 1 2
- -
1 4 (214)
Deferred:
Federal ................................ . ...... . .... . (29) (185)
Foreign ..................................... . ...... . (2) (2)
State .. ~ ..................... . ..... . ............... . _____ill ____ill)
_Qi) __@)
Total income tax expense (benefit) ....... . .............. . $ 1 $ (30) $(422)
69
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:
2004 2003 2002
(in millions)
Statutory rate applied to income (loss) before income taxes ................. . $(301) $ 76 $(427)
Add (deduct):
Mandatorily Redeemable Preferred Security ........................... . 8 (219)
State income tax expense (benefit) net of federal benefit ................. . (14) 4 (19)
Non-deductible meals and entertainment. ........................ .... .. . 6 7 7
Increase to Minimum Tax Credit Carryforward ......................... . (54)
Adjustment to valuation allowance and other income tax accruals ......... . 297 156 15
Other ........................................... .. ................. . 5 2
Total income tax expense (benefit) ................... ...... ............. . $ 1 $ (30) $(422)
Under the provisions of SFAS No. 109, Accounting for Income Taxes ("SFAS No. 109"), 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 carryforward 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. As a result, it is more likely than not that future deferred tax assets will require a
valuation allowance to be recorded to fully reserve against the uncertainty that those assets would be
realized.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
Significant components of the Company's deferred tax assets and liabilities as of December 31 were as
follows:
2004 2003
~ i l l i ~
Deferred tax liabilities:
Accounting basis of assets in excess of tax basis ............ . . .. ............... . $2,081 $1,910
Expenses other than accelerated depreciation and amortization ................. . 131 127
Other ................ . ................ . .......................... . ....... . 16 10
Total deferred tax liabilities ............ . ................................. . 2,228 2,047
Deferred tax assets:
Expenses not yet deducted for tax purposes . ....... . .......... . .. .. ........... . 309 389
Pension and postretirement benefits .... . .. . .... . ............................ . 1,194 1,101
Gains from the sale-leaseback of aircraft ............................ . ...... . . . 116 119
Rent expense .................... . ..... . .................................. . 101 98
Travel award programs .................................................... . 84 34
Net operating loss carryforward ............................................. . 784 307
Alternative minimum tax credit carryforward ................. . . . ............. . 134 130
Other .......................................................... . ......... . 44 42
Total deferred tax assets ...... . .......................................... . 2,766 2,220
Valuation allowance for deferred tax assets ................................... . (538) ____(@)
Net deferred tax assets . . ............ . ..................... . .............. . 2,228 2,047
Net deferred tax liability ........................... . ......... . ..... . ......... . $ $
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 tax assets available for utilization in the regular
system include: AMT credits of $134 million, net operating loss carryforwards of $2.08 billion, general
business credits of $7 million and foreign tax credits of $8 million. The deferred tax assets available for
utilization in the AMT system are: net operating loss carryforwards of $1.60 billion and foreign tax credits
of $5 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 2004,
expiring in 2005 through 2024.
The Company also has the following deferred tax assets available at December 31, 2004 for use in
certain states: net operating losses with tax benefit value of approximately $57 million and state job credits
of $7 million available for carryforward to years beyond 2004, expiring in 2008 through 2024.
The Company's valuation allowance increased by $365 million during 2004. In addition to the
valuation allowance recorded through continuing operations, a portion of this valuation allowance was
recorded to Other Comprehensive Income, primarily as a result of an increase in minimum pension
liabilities.
The Company's effective tax rate is impacted by income tax reserves and changes thereto that it
considers appropriate. Significant judgment is required to evaluate and adjust the reserves in light of
changing facts and circumstances, such as the progress of a tax audit. Further, a number of years may lapse
before a particular matter for which the Company has established a reserve is audited and finally resolved.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 9-Income Taxes (Continued)
While it is difficult to predict the final outcome or the timing of resolution of any particular tax matter, the
Company believes that its reserves reflect the probable outcome of known tax contingencies.
Note IO-Commitments
The Company's firm orders for 30 new aircraft to be operated by Northwest consist of scheduled
deliveries for 12 Airbus A330-300 aircraft and five Airbus A330-200 aircraft from 2005 through 2007, two
Airbus A320 aircraft in 2008 and 11 Airbus A319 aircraft from 2005 through 2006. As of December 31,
2004, the Company also had firm orders for 22 Bombardier CRJ200/440 aircraft in 2005, which will be
leased or subleased to and operated by Pinnacle Airlines. The Company has the option to finance the
CRJ200/440 aircraft through long-term operating lease commitments from the manufacturer, and if the
manufacturer does not provide the financing, the Company is not obligated to take delivery of the aircraft.
Committed expenditures for these aircraft and related equipment, including estimated amounts for
contractual price escalations and predelivery deposits, will be approximately $860 million in 2005, $827
million in 2006, $868 million in 2007 and $90 million in 2008. Consistent with prior practice, the Company
intends to finance its aircraft deliveries through a combination of internally generated funds, debt and
long-term lease financings. Firm financing commitments 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 antitrust, contract, trade practice,
environmental and other legal matters pertaining to the Company's business. While the Company is unable
to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition
of these matters will not have a material adverse effect on the Company's Consolidated Financial
Statements taken as a whole.
Guarantees and Indemnifications: Northwest is the lessee under many aircraft financing agreements
and real estate leases. It is common in such transactions for the Company as the lessee to agree to .
indemnify the lessor and other related third parties for the manufacture, design, ownership, financing, use,
operation and maintenance of the aircraft, and for tort liabilities that arise from or relate to the Company's
use or occupancy of the leased asset. In some cases, this indemnity extends to related liabilities arising
from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross
negligence or willful misconduct. The Company expects that it would be covered by insurance (subject to
deductibles) for most tort liabilities and most related indemnities described above with respect to operated
aircraft.
The Company is the guarantor of approximately $362 million of obligations related to facilities bonds
issued by airports and/or airport commissions in Minneapolis/St. Paul, Detroit, Memphis, New York
(Kennedy International) 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 2009 and
2029.
The Company guarantees $30 million of residual value on two remaining operating leased aircraft.
For the year ended December 31, 2004, the Company recognized $27 million in rent expense related to the
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11-Contingencies (Continued)
residual value guarantees on four operating leases, two of which were subsequently purchased during the
year, as the guaranteed obligations exceeded the fair market value of the leased aircraft.
I
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 BRISA. The Company made an excess contribution of $190 million in 2003, but did not make excess
contributions in 2004 or 2002.
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 that decrease
based on age at retirement and age at time of death.
The following is a reconciliation of the beginning and ending balances of the benefit obligations and
the fair value of plan assets:
Pension Benefits Other Benefits
2004 2003 2004 2003
(in million~
Change in benefit obligations:
Benefit obligations at beginning of year .............. . .... . $ 8,554 $ 7,638 $ 820 $ 652
Service cost. ........................................... . 239 248 30 26
Interest cost ........................................... . 534 531 51 46
Plan amendments ......................... . ............ . 33 (17) (15)
Actuarial loss and other .................. . ......... ~ .... . 284 458 91 150
Benefits paid ...... . .................................. . . (366) ~ ) ~ ) _Q2)
Benefit obligations at end of year ......................... . 9,245 8,554 926 820
Change in pla.n assets:
Fair value of plan assets at beginning of year ............... . 4,806 3,690 5 5
Actual return on plan assets ... . ..... . ........ . ......... . . 679 1,025 1
Employer contributions ............. . ................... . 306 445 48 39
Benefits paid ................................ . ......... . (366) {354) ~ ) _Q2)
Fair value of plan assets at end of year ............ . ....... . 5,425 4,806 5 5
Funded Status-underfunded ............................ . (3,820) (3,748) (921) (815)
Unrecognized net actuarial loss (income) ... . ............. . 2,591 2,584 510 445
Unrecognized prior service cost .......................... . 627 703 ~ __@
Net amount recognized ................................. . $ (602) $ (461) $(508) $(458)
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
Amounts recognized in the Consolidated Balance Sheets as of December 31 were as follows:
Pension Benefits Other Benefits
2004 2003 2004 2003
(in millionsr--
Prepaid benefit costs ........................ . ............. . . . $ 6 $ 6 $ - $ -
Intangible asset ............................................ . 671 750
Accrued benefit liability ..................................... . (3,586) (3,296) (508) (458)
Accumulated other comprehensive loss (income) ............... . 2,307 2,079
Net amount recognized ..................................... . $ (602) $ (461) $(508) $(458)
The accumulated benefit obligations for all defined benefit pension plans was $8.99 billion and $8.08
billion at December 31, 2004 and 2003, respectively. The Company's pension plans with accumulated
benefit obligations in excess of plan assets as of December 31 were as follows:
2004 2003
---unmmi~
Projected benefit obligations ................................. . $9,226 $8,536
Accumulated benefit obligations .............................. . 8,971 8,006
Fair value of plan assets ...................................... . 5,401 4,785
Weighted-average assumptions used to determine benefit obligations for pension and other benefits
at December 31:
Discount rate ......................... ..... .
Rate of future compensation increase ........ .
Pension Benefits
2004 2003
5.90% 6.25%
2.15% 1.93%
Other Benefits
2004 2003
- - - -
5.90% 6.25%
NIA NIA
The amount of minimum liability recorded in other comprehensive loss for the year ended
December 31:
(Increase) decrease in other comprehensive
loss due to change in minimum pension
liability ................................ .
74
Pension Benefits Other Benefits
2004 2003 2004 2003
- - ---UO millions)
$(222) $ 13 NIA NIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
The components of net periodic cost of defined benefit plans and other benefit plans included the
following:
Pension Benefits Other Benefits
2004 2003 2002 2004 2003 2002
(in millions-
) -
Service cost .... . ................ . .......... . .... . . . . $ 239 $ 248 $ 218 $30 $26 $26
Interest cost ............... .. .. . ... . . . . . ........... . 534 531 503 51 46 51
Expected return on plan assets ...... . .. . . . ... . .... .... (503) (476) (538)
Amortization of prior service cost ... . .... . .. . ... . . . . .. 75 77 80 (8) (8) 5
Recognized net actuarial loss and other events .......... 99 111 46 25 19 12
Net periodic benefit cost ....... . ....... . . .. ... . ... . .. $ 444 $ 491 $ 309 $98 $83 $94
Weighted-average assumptions used to determine net periodic pension and other benefit costs for the
years ended December 31:
Discount rate ...... . .... . ... . .......... . .... .
Expected long-term return on plan assets . . . . .. .
Rate of future compensation increase ..... . ... .
Pension Benefits
2004 2003
6.25% 6.75%
9.50% 9.50%
1.93% 3.60%
Other Benefits
2004 2003
6.25% 6.75%
7.00% 7.00%
NIA NIA
On March 31, 2003, in conjunction with the curtailment charge discussed below, the liabilities of the
Company's Pension Plan for Contract Employees ("Contract Plan") were remeasured using 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 charges 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.
The Company has adopted and implemented an investment policy for the defined benefit pension
plans that incorporates a strategic asset allocation mix designed to best meet the Company's long-term
pension obligations. This asset allocation policy mix is reviewed every 2-3 years and, on a regular basis,
actual allocations are rebalanced toward the prevailing targets. The following table summarizes actual
allocations as of December 31, 2004 and 2003:
Asset Category
Domestic Stocks ............ . .... ... ... . . . . . ....... .
International Stocks ........... . .. . . . . . .... . . . . . .... .
Private Markets ........... . ... . .. . ..... . . .. ........ .
Long-Duration Bonds ......... . . . .......... . ....... .
High Yield Bonds .................... . ...... .. ..... .
Total .............. . .... . . . ... . .... . .. .. .... . ..... .
75
~
45.0%
25.0%
10.0%
15.0%
5.0%
100%
Plan Assets
2004 2003
46.2% 44.9%
27.3% 25.9%
6.7%
14.7%
9.2%
14.7%
5.1% 5.3%
-- --
100.0% 100.0%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
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 of
long-term economic benefit; (3) maximize the opportunity for value-added returns 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 market index
funds as a core strategy, 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 strategies, while establishing investment guidelines and monitoring procedures for each investment
manager to ensure the characteristics of the portfolio are consistent with the original investment mandate;
and ( 4) maintain an allocation to nontraditional investments, where market inefficiencies are greatest, and
use these investments primarily to enhance the overall returns.
The Company reviews its rate of return on plan asset assumptions annually. These assumptions are
largely based on the asset category rate-of-return assumptions developed annually with the Company's
pension investment advisors. The advisors' asset category return assumptions are based in part on a review
of historical asset returns, but also emphasize current market conditions to develop estimates of future risk
and return. Current market conditions include the yield-to-maturity and credit spreads on a broad bond
market benchmark in the case of fixed income asset classes, and current prices as well as earnings and
dividend growth rates in the case of equity asset classes. The assumptions are also adjusted to account for
the value of active management the funds have provided historically. The Company's expected long-term
rate of return is based on target asset allocations of 45% domestic equities with an expected rate of return
of 9.6%; 25% international equities with an expected rate of return of 9.9%; 10% private markets with an
expected rate of return of 15.0%; 15% long-duration bonds with an expected rate of return of 5.7%; and
5% high yield bonds with an expected rate of return of 7.0%. These assumptions result in a weighted
arithmetic average rate of return of 9.5% on an annual basis.
For measurement purposes, an 9.0% annual rate of increase in the per capita cost of covered health
care benefits was assumed for 2005. The rate was assumed to decrease 1.0% per year for four years to
5.0% in 2009 and remain at that level thereafter. Assumed health care cost trend rates have a significant
impact on the amounts reported under other benefits, above, for the health care plans. A one percentage-
point change in assumed health care cost trend rates would have the following effects:
Effect on total of service and interest cost
components ...... ....................... .. . : .
Effect on accumulated postretirement benefit
obligations ................ . . . ............... .
One Percent;lge- One Percentage-
Point Increase Point Decrease
$ 10.2
101.7
(in ~iUions)
$ (8.8)
(88.1)
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, at which time the U.S. Government will also
begin to pay a special subsidy equal to 28% of a retiree's covered prescription drug expenses between $250
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care. Benefits (Continued)
and $5,000 (adjusted annually for changes in Medicare per capita prescription drug costs) to employers
who sponsor retiree health care plans that provide a benefit that is at least actuarially equivalent to the
prescription drug benefit under Medicare, known as "Medicare Part D". The Company believes that
benefits provided to certain participants will be at least actuarially equivalent to Medicare Part D and,
accordingly, the Company will be entitled to a subsidy.
F ASB Staff Position 106-2 was issued in May 2004 in response to the Act and is effective for interim
periods beginning after June 15, 2004. FASB Staff Position 106-2 requires (a) the effects of the federal
subsidy be considered an actuarial gain and recognized in the same manner as other actuarial gains and
losses and (b) certain disclosures for employers that sponsor postretirement health care plans that provide
prescription drug benefits.
The Company determined that the effects of the Act were not a significant event requiring an interim
remeasurement under SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS No. 106"). Consequently, as permitted by FASB Staff Position 106-2, net periodic
postretirement benefit cost for 2004 does not reflect the effects of the Act. The Accumulated
Postretirement Benefit Obligation (" APBO") for the postretirement benefit plan was remeasured at
December 31, 2004, to reflect the effects of the Act, which resulted in a reduction in the APBO of $6.8
million. The effects of the reduction in APBO will begin to be reflected in 2005 expense; however, the
impact on expense in any given year is not expected to be significant.
The estimated future benefit payments expected to be made by the pension and other postretirement
benefit plans are shown below:
Estimated Future Benefit Payments:
2005 ................................... .
2006 ................................... .
2007 ................................... .
2008 ................................... .
2009 ................................... .
Years 2010-2014 .......................... .
Employer
Provided Other
Pension Benefits Postretirement Benefits
382
401
438
478
506
3,132
(in millions)
45
48
52
55
60
360
On April 10, 2004, the President signed into law the Pension Act, which reduced the Company's
required 2004 and 2005 plan year contributions through two mechanisms: (1) certain companies were
permitted to elect partial relief from the deficit reduction contribution requirements that otherwise would
have applied, an election the Company made; and (2) the applicable discount rate used to determine
funding was increased to reflect yields on indices of high quality corporate bonds instead of 30-year U.S.
Treasury rates.
Including the effect of the Pension Act, the Company's 2004 calendar year required cash contributions
to qualified pension plans were $253 million. The Company expects to make contributions approximating
$420 million to its qualified pension plans in 2005. Absent further legislative relief, authorization by the
IRS to reschedule future contributions, contractual relief under the Company's collective bargaining
agreements, substantial changes in interest rates, or asset returns significantly above the 9.5% annual rate
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 12-Pension and Other Postretirement Health Care Benefits (Continued)
currently assumed, we would expect our calendar year 2006 and 2007 cash contributions to be significantly
higher than our 2005 cash contributions.
Note 13-Risk Management and Financial Instruments
The Company adopted SF AS No. 133, Accounting for Derivative Instruments ,and Hedging Activities
("SFAS No. 133"), which requires the Company to recognize all derivatives on the balance sheet at fair
value. The Company uses derivatives as cash flow hedges to manage the price risk of fuel and its exposure
to foreign currency fluctuations. SF AS 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.
Any ineffective portion of the derivative's gain or loss is reported in earnings 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 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. In 2004, the Company's yen-denominated net cash inflow
was approximately 54 billion yen ($487 million).
The Company uses forward contracts, collars or put options to hedge a portion of its anticipated yen-
denominated sales. 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, 2004, the Company
recorded $8 million of unrealized losses in accumulated other comprehensive income (loss) as a result of
forward contracts to sell 15 billion yen ($147 million) at an average forward rate of 105 yen per dollar with
various settlement dates through December 2005. These forward contracts hedge approximately 12% of
the Company's 2005 yen-denominated sales. Hedging gains or losses are recorded in revenue when
transportation is provided. The Japanese yen financial instruments utilized to hedge yen-denominated cash
flows resulted in a realized loss of $8 million in 2004 and realized gains of $1 million and $31 million in
2003 and 2002, 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 any
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 of 25 months.
Aircraft Fuel: The Company is exposed to the effect of changes in the price and availability of aircraft
fuel. In order to provide a measure of control over price and supply, the Company trades and 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
78 .
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13-Risk Management and Financial Instruments (Continued)
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, 2004, the Company had a nominal amount of unrealized gains in accumulated
other comprehensive income (loss) as a result of 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 was
immaterial for the years ended December 31, 2004 and 2003. As of December 31, 2004, the Company had
hedged approximately 25% and 6% of its first quarter 2005 and full year 2005 mainline fuel requirements,
respectively, in the form of futures contracts traded on a regulated futures exchange.
Fair Values of Financia.l 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 Short-term Investments
Cash Equivalents Unrestricted Restricted
2004 2003 2004 2003 2004 2003
Cash . . . .................... .
Available for sale securities ... .
Total ....................... .
$ 62
645
$707
(in million-s)--
$ 54 $ $
1,092 1,752 1,611
$1,146 $1,752 $1,611
$-
152
$152
$-
126
$126
Cash equivalents are carried at cost and consisted primarily of unrestricted money market funds as of
December 31, 2004. 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:
2004 2003
Carrying Fair Carrying
Value Value Value
~illions)
Long-Term Debt .......................... . $8,411 $7,317 $7,866
Series C Preferred Stock ................... . 263 263 236
Fair
Value
$7,035
236
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, 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 is based on the Company's stated intent to redeem the
shares in cash.
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 14-lnvestment Securities
The amortized cost, gross unrealized gains and losses, and fair value of short-term investment
securities held available-for-sale as of December 31 were as follows:
2004 2003
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized
Available-for-sale Securities (1) (2) Cost Gains Losses Value Cost Gains Losses
(in millions)
Mutual Funds ............... .. $ 425 $2 $- $ 427 $ 417 $ 1 $-
U.S. Treasury securities ......... 69 1 70 181
Corporate securities .. ...... .. : . 147 1 (1) 147 104
Mortgage-backed securities ...... 208 1 (1) 208 122 (1)
Asset-backed securities .......... 894 2 (2) 894 782 (2)
Other securities and investments .. 6 6 6
Total available-for-sale securities . . $1,749 $7 $ (4) $1,752 $1,612 $ 2 $ (3)
Fair
Value
$ 418
181
105
121
780
6
$1,611
(1) Available-for-sale securities are carried at fair value, with unrealized net gains or losses reported within other comprehensive
income in stockholders' equity.
(2) $462 million previously recorded as cash and cash equivalents in the Company's December 31, 2003 consolidated balance sheet
has been reclassified to unrestricted short-term investments to conform to the December 31, 2004 presentation.
As of December 31, 2004, the fair value of available-for-sale securities includes investments totaling
$50 million, with unrealized losses of $0.9 million, which have been in an unrealized loss position for
greater than 12 months. The investments consist of 39 securities that are primarily high credit quality fixed
income securities. All related principal and interest payments are expected to be collected, due to the
Company's ability to hold these investments until either the value recovers or they reach maturity. All
other available-for-sale securities, with unrealized losses of $2.7 million, which have been in an unrealized
loss position for less than 12 months, have an aggregate fair value of $353 million. These securities
primarily represent fixed income investments with temporary impairments resulting from increases in
interest rates since the purchase of the investments. The Company has the ability to hold these investments
until such time as the values recover or they reach maturity.
The following table provides information as to the amount of gross gains and losses realized through
the sale of available-for-sale investment securities for the years ending December 31:
Realized gains ....................... .... . .
Realized losses ........................... .
Net realized gains (losses) ............ . . ... .
2004 2003 2002
--(in millions)
$ 6 $ 1 $-
_{!Q) _J_!)
$ (4) $- $-
The contractual maturities of debt securities available-for-sale at December 31, 2004 are shown below.
Expected maturities may differ from contractual maturities because borrowers may have the right to recall
or prepay obligations with or without call or prepayment penalties.
Within one year ..................... .
Between one and five years ........... .
Between five and ten years .......... .. .
After ten years ...................... .
Total short-term investments .......... .
80
Amortized Cost Fair Value
(in millions)
$ 480 $ 482
373
83
814
$1,752
373
82
814
$1,749
NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Note IS-Related Party Transactions
MAIR Holdings, Inc.: The Company owns 5.7 million shares, or 27.5% of the outstanding common
stock of MAIR Holdings, Inc., the holding company of Mesaba, a Northwest Airlink carrier. The Company
also has approximately 4.2 million warrants to acquire MAIR Holdings, Inc. common stock, of which
approximately 923,000, or 22% were at or above the exercise price as of December 31, 2004. On a fully
diluted basis, if all the warrants were converted, the Company's ownership percentage in MAIR
Holdings, Inc. would increase to approximately 40%. 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's turboprop and Avro regional jet aircraft scheduling and fleet composition. These
agreements are structured as capacity purchase arrangements whereby Northwest pays Mesaba to operate
the flights on Northwest's behalf and Northwest is entitled to all revenues associated with those flights.
Under these agreements, Northwest paid $421 million, $439 million and $454 million for the years ended
December 31, 2004, 2003 and 2002, respectively. These payments are recorded on a gross basis as an
operating expense. The Company had a payable to Mesaba of $24 million and $23 million as of
December 31, 2004 and 2003, respectively. As of December 31, 2004, the Company has leased 49 Saab 340
aircraft, which are in turn subleased to Mesaba. In addition, as of December 31, 2004, the Company has
leased 10 owned and subleased 25 Avro regional jet aircraft to Mesaba.
Pinnacle: Prior to 2003, Pinnacle Airlines Corp., the holding company of Pinnacle Airlines, was a
wholly-owned subsidiary of Northwest. As of September, 30, 2003, Northwest had contributed 88.6% of the
Common Stock of Pinnacle Airlines Corp. to the Company's pension plans in lieu of cash contributions
totaling $353 million pursuant to an exemption granted by the DOL. The Company completed a public
offering of the Pinnacle Airlines Corp. stock held by the plans on November 24, 2003, for net proceeds of
$255 million, with the proceeds being retained by the Plans. An additional cash contribution of
approximately $98 million was therefore required to satisfy the difference between the original valuation of
the shares at the time of their contribution and the realized value at the time of the public offering. The
Company continues to own 11.4% of the common stock of Pinnacle Airlines Corp.
Northwest and Pinnacle Airlines have entered into an airline service agreement, under which
Northwest 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 this agreement, Northwest paid $493 million, $357 million and $151 million for the years
ended December 31, 2004, 2003 and 2002, respectively. The Company had payables of $23 million and $18
million to Pinnacle Airlines as of December 31, 2004 and 2003, respectively, ~d there was no payable as of
December 31, 2002. As of December 31, 2004, the Company has leased 117 CRJ aircraft, which are in turn
subleased to Pinnacle Airlines.
Northwest had approximately $125 million in receivables from Pinnacle Airlines, consisting of a $120
million note receivable, of which $12 million was classified as short-term, and a $5 million short-term
receivable from a revolving line of credit as of December 31, 2004. See "Note 18-Subsequent Events" for
additional disclosure regarding the subsequent sale of the Pinnacle Airlines note to Pinnacle Airlines Corp.
NWA Funding II, UC ("NWF II"): In June 2002, a Receivables Purchase Agreement was executed
by Northwest, NW A Funding II, LLC ("NWF II"), 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
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note IS-Related Party Transactions (Continued)
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, at which time the
Purchasers collected $65 million on outstanding receivables. Due to seasonal 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.
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. For its 33.7% partnership interest in
WorldSpan, the Company received cash proceeds of $278 million at the time of sale, plus $125 million of
credits for future services 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 recognizes the
service credits as a reduction to the cost of purchased services expense in the periods the credits are
utilized.
Orbin: On December 16, 2003, Orbitz and its airline owners (Northwest, 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. On September 29, 2004, Cendant Corporation, Orbitz and the
airline owners of Orbitz entered into agreements that provided for the acquisition by Cendant of all shares
of Orbitz for $27.50 per share in cash. The sale passed regulatory and other approvals and the transaction
closed in November 2004. As a result of the sale, Northwest sold all 4,949,201 of its remaining shares of
class B common stock of Orbitz and the Company recognized a gain of approximately $115 million in the
fourth quarter of 2004.
Hotwire: On November 5, 2003, the Company sold its 6.7% interest in Hotwire to InterActive Corp.
and received cash proceeds of $40 million. Hotwire operates an online opaque travel site and was founded
by Texas Pacific Group and six airlines, including the Company.
At December 31, 2004, the Company's investment in two affiliates, with a book value of $44 million
based on the equity method, had an aggregate market value of $87 niillion~
Note 16-Geographic Regions
The Corp.pany 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 ....... .
2004
$ 7,714
2,390
1,175
$11,279
2003
(in millions)
$ 6,805
2,079
1,193
$10,077
$6,870
2,061
1,045
$9,976
The Company's tangible assets consist primarily of flight equipment, which are utilized across geographic
markets and therefore have not been allocated.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17-Quarterly Financial Data (Unaudited)
Unaudited quarterly results of operations for the years ended December 31 are summarized below:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(in millions, except per share amounts)
2004:
Operating revenues ................................ $2,603 $2,871 $3,052 $2,753
Operating income (loss) ............................ (108) (52) 79 (424)
Net income (loss) applicable to common stockholders . $ (230) $ (182) $ (46) $ (433)
Basic earnings (loss) per common share . ............... $ (2.67) $ (2.11) $ (0.54) $ (5.00)
Diluted earnings (loss) per common share .............. $ (2.67) $ (2.11) $ (0.54) $ (5.00)
2003:
Operating revenues .......................... . ..... $2,375 $2,423 $2,691 $2,588
Operating income (loss) ............................ (326) (73) 146 (12)
Net income (loss) applicable to common stockholders . $ (396) $ 227 $ 42 $ 363
Basic earnings (loss) per common share . ............... $ (4.62) $ 2.64 $ 0.49 $ 4.23
Diluted earnings (loss) per common share .............. $ (4.62) $ 2.35 $ 0.47 $ 3.60
Unaudited quarterly net income (loss) applicable to common stockholders in the table above includes
the following unusual items:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
(in millions)
2004:
Aircraft impairments ............................ $- $(104) $- $ (99)
Gain on sale of assets ............................ 115
Frequent flyer liability adjustment ................. _fJJ)
Impact on net income (loss) from unusual items ..... $- $(104) $- $ (61)
2003:
Aircraft impairments ............................ $- $ (21) $- $ -
Gain on sale of assets ............................ 199 349
Emergency wartime appropriations ................ 209
Curtailment charge .............................. (58)
Severance expenses .............................. (20)
Net gain related to acquisition of
Redeemable Securities Holder .................... 148
Loss on Extinguishment of Debt .......... .. ...... - _2)
Impact on net income (loss) from unusual items ..... $(78) $ 387 $- $492
In September 2004, the EITF issued EITF 04-8. EITF 04-8 requires companies to include certain
convertible debt and equity instruments that were previously excluded from their calculation of diluted
earnings per share, and to restate the diluted earnings per share calculation for all periods during which
time the applicable convertible instruments were outstanding. The Company adopted the provisions of
EITF 04-8 as of December 31, 2004. As further discussed in "Note 2-Earnings (Loss) Per Share Data",
the Company's diluted earnings per share calculation has been restated to include shares issuable upon
conversion of the Company's 6.625% and 7.625% senior convertible notes issued in 2003 for periods where
the Company reported net income applicable to common stockholders.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 17-Quarterly Financial Data (Unaudited) (Continued)
The sum of the quarterly earnings per share amounts may not equal the annual amount reported since
per share amounts are computed independently for each quarter and for the full year are based on
respective weighted-average common shares outstanding and other dilutive potential common shares.
Note IS-Subsequent Events (Unaudited)
As of December 31, 2004, Northwest had approximately $125 million in receivables resulting from
debt owed by Pinnacle Airlines, a wholly owned subsidiary of Pinnacle Airlines Corp., consisting of a $120
million note receivable, of which $12 million was classified as short-term, and a $5 million short-term
receivable from a revolving line of credit. On February 1, 2005, the Company agreed to sell the Pinnacle
Airlines note to Pinnacle Airlines Corp. The outstanding balance on the note at the time of the sale was
$120 million, and the purchase price was $102 million, inclusive of accrued interest. As a result of the sale
of this note, the Company will recognize a loss of approximately $18 million in the quarter ending
March 31, 2005. Additionally, Pinnacle Airlines agreed to pay down the $5 million that was outstanding
under a $25 million revolving credit facility that it maintains with Northwest. The Company continues to
hold an 11.4% interest in Pinnacle Airlines Corp.
84
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
To the Stockholders and Board of Directors
Northwest Airlines Corporation
We have audited management's assessment, included in the accompanying Management's Report on
Internal Control Over Financial Reporting, that Northwest Airlines Corporation maintained effective internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ( the
COSO criteria). The Company's management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the
Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating
. management's assessment, testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that Northwest Airlines Corporation maintained effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based
on the COSO criteria. Also, in our opinion, Northwest Airlines Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Northwest Airlines Corporation as of December 31,
2004 and 2003, and the related consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2004. Our report dated February 25, 2005
expressed an unqualified opinion thereon.
Minneapolis, Minnesota
February 25, 2005
85
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures-As of December 31, 2004, management
performed an evaluation under the supervision and with the participation of the ,Company's President and
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. Based on this evaluation,
the Company's President and Chief Executive Officer and Executive Vice President and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are effective in alerting them in
a timely manner to material information required to be disclosed in the Company's periodic reports filed
with the SEC.
Management's Report on Internal Control Over Financial Reporting-The Company's management
is responsible for establishing and maintaining adequate internal control over the Company's financial
reporting. The Company's internal control system is designed to provide reasonable assurance regarding
the reliability of the Company's financial reporting and the preparation of the Company's financial
statements in accordance with generally accepted accounting principles. Management performed an
evaluation under the supervision and with the participation of the President and Chief Executive Officer
and Executive Vice President and Chief Financial Officer of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework. Based on this evaluation and those criteria, the Company's management
concluded that the Company's internal control over financial reporting as of December 31, 2004 was
effective. The Company's independent auditors have issued an attestation report on management's
assessment of the Company's internal control over financial reporting. This report appears on page 85.
Changes in Internal Control-There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect those controls subsequent to the date of their
most recent evaluation.
Item 9B. OTHER INFORMATION
On October 12, 2004, NW A Corp., Northwest, and the Northwest unit of ALPA entered into a bridge
agreement that provided for labor cost savings. As part of the arrangements provided for under the bridge
agreement, the Compensation Committee of the Board of Directors of NW A Corp. adopted the 2004
Pilots' Bridge Stock Option Plan (the "2004 Pilot Plan") as a subplan under the Northwest Airlines
Corporation 1999 Stock Incentive Plan. Under the terms of the 2004 Pilot Plan, Mr. Ristow, who is a
Northwest pilot and a director of NW A Corp. and Northwest, received an option with respect to 634 shares
of NW A Corp. common stock.
86
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about the Company's directors is incorporated by reference from the discussion under
the headings "General Information-Section 16(a) Beneficial Ownership Reporting Compliance",
"Information about our Board of Directors", and "Item I-Election of Directors-Information
Concerning Director-Nominees" in the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders. Information about the Company's 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 from the discussion 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" in the Company's Proxy Statement for the 2005 Annual Meeting of Stockholders.
Item 12. SECURI'IY OWNERSIDP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about the security ownership of certain beneficial owners and management is
incorporated by reference from the discussion under the heading "Beneficial Ownership of Securities" in
the Company's Proxy Statement for the 2005 Annual Meeting of Stockholders. The information about
securities authorized for issuance under equity compensation plans is included in Part II of this report
under the caption "Equity Compensation Plan Information".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the discussion 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" in the
Company's Proxy Statement for the 2005 Annual Meeting of Stockholders.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information about the fees for 2004 and 2003 for professional services rendered by our independent
auditors is incorporated by reference from the discussion under the heading "Audit and Non-Audit Fees"
in Item 2 of the Company's Proxy Statement for the 2005 Annual Meeting of Stockholders. Information
about the Audit Committee's policy on pre-approval of audit and permissible non-audit services of the
independent auditors is incorporated by reference from the section captioned "Audit Committee Pre-
Approval Policy" in Item 2 of the Company's Proxy Statement for the 2005 Annual Meeting of
Stockholders.
87
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
15 (a)(l) Financial Statements. The following is an index of the financial statements, related notes,
independent auditor's report and supplementary data that are included in this Report
~
Consolidated Balance Sheets-December 31, 2004 and December 31, 2003. ... .. . .. ... .. .. . .. 48-49
Consolidated Statements of Operations-For the years ended December 31, 2004, 2003 and
2002..... . .............. . ............ .. ....... ...... . ...... .. . .... . . ... . .... ... . .. . 50
Consolidated Statements of Cash Flows-For the years ended December 31, 2004, 2003 and
2002........................ . ......... . ...... . . . ..... . . ... .. .. . . . . .... . ......... ... 51
Consolidated Statements of Common Stockholders' Equity (Deficit )-For the years ended
December 31, 2004, 2003 and 2002. .. .... .. . . . ........... .. .. .. . .... . . . ........ . ..... . 52
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
15(a)(2) Financial Statement Schedules. The following is a list of the financial schedules that are
included in this Report. Schedules not included have been omitted because they are not required or
because the information is included in the consolidated financial statements or notes thereto.
Schedule II-Valuation of Qualifying Accounts and Reseives-For the years ended
December 31, 2004, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
15(a)(3) Exhibits. The following is an index of the exhibits to this Report.
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 (filed as Exhibit 3.2 to NW A
Corp.'s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated
herein by reference).
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.
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 November 20, 1998 between Northwest Airlines Corporation and
Norwest Bank Minnesota, N.A., as Rights Agent (filed as Exhibit 4.3 to NW A Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by
reference).
4.4 The registrant hereby agrees to furnish to the Commission, upon request, copies of certain
instruments defining the rights of holders of long-term debt of the kind described in
Item 601 (b) (4) of Regulation S-K.
88
10.1 Standstill Agreement dated as of November 15, 2000 among Continental Airlines, Inc.,
Northwest Airlines Corporation, Northwest Airlines Holdings Corporation and Northwest
Airlines, Inc. (filed as Exhibit 99.8 to Continental Airlines, Inc.'s Current Report on Form 8-K
dated November 15, 2000 and incorporated herein by reference).
10.2 Amended and Restated Standstill Agreement dated May 1, 1998 between Koninklijke Luchtvaart
Maatschappij N.V. and Northwest Airlines Corporation (filed as Exhibit 10.2 to NWA Corp.'s
Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by
reference).
10.3 First Amended and Restated Common Stock Registration Rights Agreement dated as of
September 9, 1994 among Northwest Airlines Corporation, the holders of the Series C Preferred
Stock and the Original Investors named therein (filed as Exhibit 10.9 to NW A Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by
reference).
10.4 Acknowledgement dated November 20, 1998 of Northwest Airlines Corporation regarding
assumption of obligations as successor under the First Amended and Restated Common Stock
Registration Rights Agreement (filed as Exhibit 4.4 to NW A Corp.'s Annual Report on
Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
10.5 Airport Use and Lease Agreement dated as of June 21, 2003 between The Charter County of
Wayne, Michigan and Northwest Airlines, Inc. (filed as Exhibit 10.7 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2002 and incorporated 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 Airports Commission and
Northwest Airlines, Inc. (filed as Exhibit 10.24 to NW A 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 Minnesota (filed as Exhibit 10.9 to the
registration statement on Form S-1, File No. 33-74210, and incorporated herein by reference).
10.8 Amended and Restated Credit and Guarantee Agreement dated as of November 23, 2004 among
Northwest Airlines Corporation, Northwest Airlines Holdings Corporation, NW A Inc.,
Northwest Airlines, Inc. and various lenders and agents.
10.9 Route Security Agreement dated as of October 23, 2001 between Northwest Airlines, Inc. and
The Chase Manhattan Bank, as Collateral Agent.
10.10 Route Security Agreement dated as of November 23, 2004 between Northwest Airlines, Inc. and
JPMorgan Chase Bank, N.A., as Collateral Agent.
10.11 Aircraft Mortgage and Security Agreement dated as of October 23, 2001 between Northwest
Airlines, Inc. and The Chase Manhattan Bank, as Collateral Agent.
10.12 A330 Purchase Agreement dated as of December 21, 2000 between A VSA, 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).
10.13 Amendment No. 1 to A330 Purchase Agreement dated as of November 26, 2001 between A VSA,
S.A.R.L. and Northwest Airlines, Inc. (filed as Exhibit 10.14 to NW A 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).
89
10.14 Amendment No. 2 to A330 Purchase Agreement dated as of December 20, 2002 between A VSA,
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).
10.15 Amendment No. 3 to A330 Purchase Agreement dated as of April 30, 2003 between A VSA,
S.A.R.L. and Northwest Airlines, Inc. (filed as Exhibit 10.1 to NWA Corp.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference; the
Commission has granted confidential treatment for cert~in portions of this document).
10.16 Amendment No. 4 to A330 Purchase Agreement dated as of December 18, 2003 between A VSA,
S.A.R.L. and Northwest Airlines, Inc. (filed as Exhibit 10.2 to NWA Corp.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference; the
Commission has granted confidential treatment for certain portions of this document).
10.17 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).
10.18 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).
10.19 A330 Financing Letter Agreement No. 1 dated as of December 21, 2000 between Northwest
Airlines, Inc. and A VSA S.A.R.L. (NW A Corp. has filed a request with the Commission for
confidential treatment as to certain portions of this document).
10.20 Amendment No. 1 to the A330 Financing Letter Agreement No. 1 dated as of December 20,
2002 between Northwest Airlines, Inc. and A VSA S.AR.L. (NW A Corp. has filed a request with
the Commission for confidential treatment as to certain portions of this document).
10.21 Amendment No. 2 to the A330 Financing Letter Agreement No. 1 dated May 26, 2004, between
Northwest Airlines, Inc. and A VSA S.A.R.L. (NW A Corp. has filed a request with the
Commission for confidential treatment as to certain portions of this document).
10.22 New A330 Financing Letter Agreement No. 1 dated as of January 21, 2005 between Northwest
Airlines, Inc. and A VSA S.A.R.L. (NW A Corp. has filed a request with the Commission for
confidential treatment as to certain portions of this document).
10.23 Form of Credit Agreement to be entered into pursuant to Exhibits 10.19 and 10.22 (NW A Corp.
has filed a request with the Commission for confidential treatment as to certain portions of this
document).
10.24 Form of Mortgage to be entered into pursuant to Exhibits 10.19 and 10.22 (NW A Corp. has filed
a request with the Commission for confidential treatment as to certain portions of this
document).
10.25 Agreement dated May 6, 2003 by and between the United States of America ( acting through the
Transportation Security Administration) and Northwest Airlines, Inc. pursuant to the Emergency
Wartime Supplemental Appropriations Act of 2003 (filed as Exhibit 4.3 to NW A Corp.'s Annual
Report on Form 10-Kfor the year ended December 31, 2003 and incorporated herein by
reference).
90
*10.26 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-Kfor 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 J. Timothy Griffin (filed as Exhibit 10.20 to NWA Corp.'s Annual Report on
Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
*10.28 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).
*10.29 Management Compensation Agreement dated as of September 27, 2002 between Northwest
Airlines, Inc. and Bernard L. Han (filed as Exhibit 10.23 to NW A Corp.'s Annual Report on
Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).
*10.30 Management Compensation Agreement dated as of April 17, 2002 between Northwest
Airlines, Inc. and Andrew C. Roberts
*10.31 Management Compensation Agreement dated as of December 3, 2004 between Northwest
Airlines, Inc. and Barry P. Simon
* 10.32 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).
* 10.33 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).
*10.34 Northwest Airlines, Inc. Supplemental Executive Retirement Plan (2001 Restatement) (filed as
Exhibit 10.24 to NW A Corp.'s Annual Report on Form 10-K for the year ended December 31,
2001 and incorporated herein by reference).
* 10.35 Ancillary Agreement to the Northwest Airlines, Inc. Supplemental Executive Retirement Plan
dated as of November 7, 2002 between Northwest Airlines, Inc. and Andrew C. Roberts.
* 10.36 Ancillary Agreement to the Northwest Airlines, Inc. Supplemental Executive Retirement Plan
dated as of December 7, 2004 between Northwest Airlines, Inc. and Barry P. Simon.
*10.37 Northwest Airlines Corporation 1999 Stock Incentive Plan, as amended (filed as Exhibit 10.26 to
NW A Corp.'s Annual Report on Form 10-K for the year ended December 31, 2001 and
incorporated herein by reference).
* 10.38 Northwest Airlines Corporation 2004 Pilots' Bridge Stock Option Plan dated as of October 12,
2004, and Letter Agreement dated as of October 12, 2004 amending the 2004 Pilot's Bridge
Stock Option Plan.
*10.39 2001 Northwest Airlines Corporation Stock Incentive Plan, as amended (filed as Exhibit 10.43 to
NW A Corp.'s Annual Report on Form 10-K for the year ended December 31, 2000 and
incorporated herein by reference).
* 10.40 Northwest Airlines Corporation 1998 Pilots Stock Option Plan (filed as Exhibit 10.34 to NW A
Corp.'s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated
herein by reference).
*10.41 Amendment to Northwest Airlines Corporation 1998 Pilots Stock Option Plan (filed as
Exhibit 10.35 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).
91
*10.42 Form of Non-Qualified Stock Option Agreement (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).
*10.43 Form of Deferred Stock Award Agreement (filed as Exhibit 10.1 to NWA Corp.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by
reference).
*10.44 Form of Restricted Stock Award Agreement (filed as Exhibit 10.2 to NWA Corp.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by
reference).
*10.45 Form of Phantom Stock Unit Award Agreement for executive officers under the 2001 Northwest
Airlines Corporation Stock Incentive Plan (filed as Exhibit 10.3 to NWA Corp.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by
reference).
* 10.46 Northwest Airlines Corporation E-Commerce Incentive Compensation Program ( as amended
and restated), including form of Award Agreement (filed as Exhibit 10.4 to NW A Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated
herein by reference).
*10.47 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).
* 10.48 Northwest Airlines, Inc. 2003 Long-Term Cash Incentive Plan, including form of Award
Agreement (filed as Exhibit 10.41 to NWA Corp.'s Annual Report on Form 10-l( for the year
ended December 31, 2003 and incorporated heiein'hy reference).
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 Ba-14( a )/15d-l 4( 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.
92
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.
Dated: March 2, 2005
NORTHWEST AIRLINES CORPORATION
By Isl JAMES G. MA THEWS
James G. Mathews
Vice Presiden-Finance and Chief Accounting Officer
(principal accounting officer)
Each of the undersigned directors and officers of Northwest Airlines Corporation whose signature
appears below hereby constitutes and appoints Douglas M. Steenland, Bernard L. Han and James G.
Mathews, and each of them individually, his or her true and lawful attorneys 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 Exchange 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.
93
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below on the 2nd day of March, 2005 by the following persons on behalf of the registrant and in the
capacities indicated.
Isl DOUGLAS M. STEENLAND
Douglas M. Steenland
President and Chief Executive
Officer (principal executive officer)
and Director
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
Isl RICHARD H. ANDERSON
Richard H. Anderson
Director
Isl RAY W. BENNING, JR.
Ray W. Benning, Jr.
Director
Alfred A. Checchi
Director
John Engler
Director
94
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
V. A. Ravindran
Director
Isl MICHAEL G. RISTOW
Michael G. Ristow
Director
Leo M. van Wijk
Director
Northwest Airlines Corporation
SCHEDULE II-VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Col.A Col.B
Balance at
Beginning
Descri(!tion of Period
Year Ended December 31, 2004
Allowances deducted from asset accounts:
Allowance for doubtful accounts ....... $ 19
Accumulated allowance for depreciation
of flight equipment spare parts ....... 202
Year Ended December 31, 2003
Allowances deducted from asset accounts:
Allowance for doubtful accounts ....... 19
Accumulated allowance for depreciation
of flight equipment spare parts ....... 175
Year Ended December 31, 2002
Allowances deducted from asset accounts:
Allowance for doubtful accounts ....... 20
Accumulated allowance for depreciation
of flight equipment spare parts ....... 121
(1) Uncollectible accounts written off, net of recoveries
(2) Interaccount transfers
(3) Dispositions and write-offs
S-1
Col.C Col.D
Additions
Charged to
Charged to Other
Costs and Accounts Deductions
Exeenses -Describe -Describe
$ 6 $- $13(1)
16 28(2) 6(3)
11 11(1)
25 5(2) 3(3)
9 10(1)
67 22(2) 35(3)
Col.E
Balance at
End
of Period
$ 12
240
19
202
19
175
Northwest Airlines Corporation
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Exhibit 12.1
Year ended December 31
1
Earnings:
Income (loss) before income taxes .................... .
Less: Income (loss) from less than 50% owned investees .
Add:
Rent expense representative of interest(l) ........... .
Interest expense net of capitalized interest .......... .
Interest of preferred security holder ................ .
Amortization of debt discount and expense ...... . ... .
Amortization of interest capitalized ................ .
Adjusted earnings . ............................. .
Fixed charges:
Rent expense representative of interest(l) ............. .
Interest expense net of capitalized interest ............. .
Interest of preferred security holder .................. .
Amortization of debt discount and expense ............ .
Capitalized interest ................................. .
Fixed charges . ................................. .
Ratio of earnings to fixed charges .................... .
2004
$(861)
8
248
505
30
8
$ (78)
$ 248
505
30
8
$ 791
-(2)
2003
$ 218
18
253
441
25
24
10
$ 953
$ 253
441
25
24
10
$ 753
1.27
--
~ 2001 2000
$(1,220) $(670) $ 435
37 (5) 92
247 237 229
385 326 316
25 25 27
17 14 11
5 4 4
$ (578) $ (59) $ 930
$ 247 $ 237 $ 229
385 326 316
25 25 27
17 14 11
25 29 23
$ 699 $ 631 $ 606
-(2) -(2) 1.53
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
(2) Earnings were inadequate to cover fixed charges by $869 million, $1.28 billion and $690 million for the
years ended December31, 2004, 2002 and 2001, respectively.
Exhibit 12.2
Northwest Airlines Corporation
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(Dollars in millions)
Year ended December 31,
2004 2003 2002 2001 2000
Earnings:
Income (loss) before income taxes ..................... .
Less: Income (loss) from less than 50% owned investees ..
Add:
Rent expense representative of interest(!) ............ .
Interest expense net of capitalized interest ........... .
Interest of preferred security holder ................. .
Amortization of debt discount and expense ........... .
Amortization of interest capitalized ................. .
Adjusted earnings . .............................. .
Fixed charges and preferred stock requirements:
Rent expense representative of interest(l) .............. .
Interest expense net of capitalized interest .............. .
Preferred stock requirements ......................... .
Interest of preferred security holder ................... .
Amortization of debt discount and expense ............. .
Capitalized interest .................................. .
Fixed charges and preferred stock requirements .... .
Ratio of earnings to fixed charges and preferred stock
$(861)
8
248
505
30
8
$ (78)
$ 248
505
30
29
8
$ 820
$ 218
18
253
441
25
24
10
$ 953
$(1,220)
37
247
385
25
17
5
$ (578)
$ 253 $ 247
441 385
12 1
25 25
24 17
10 25
$ 765 $ 700
requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -(2) 1.25
$(670)
(5)
237
326
25
14
4
$ (59)
$ 237
326
1
25
14
29
$ 632
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
$ 435
92
229
316
27
11
4
$ 930
$ 229
316
1
27
11
23
$ 607
(2) Earnings were inadequate to cover fixed charges by $898 million, $1.28 billion and $691 million for the
years ended December 31, 2004, 2002 and 2001, respectively.
EXIIlBIT31.1
Certification by the Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Douglas M. Steenland, certify that:
1. I have reviewed this annual report on Form 10-K of Northwest Airlines Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this annual repor_t;
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 lSd-15( e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
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) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) 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
d) Disclosed in this 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 of the registrant'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 2, 2005
Isl DOUGLAS M. STEENIAND
Douglas M. Steenland
President and Chief Executive Officer
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Bernard L. Han, certify that:
EXHIBIT 31.2
1. I have reviewed this annual report on Form 10-K of Northwest AirlinesCorporation;
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)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
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) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) 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
d) Disclosed in this 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 of the registrant'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 2, 2005
/s/ BERNARD L. HAN
Bernard L. Han
Executive Vice President and
Chief Financial Officer
EXHIBIT 32.1
Certification by the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Northwest Airlines Corporation (the "Company") on Form
10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on
the date hereof ( the "Report"), I, Douglas M. Steenland, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of section 13( a) or 15( d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results.of operations of the Company.
Date: March 2, 2005
/s/ DOUGIAS M. STEENlAND
Douglas M. Steenland
President and Chief Executive Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 and shall not, except to the .extent required by such Act, be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such certification will not be deemed to be incorporated by reference into any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.
EXHIBIT 32.2
Certification by the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the annual report of Northwest Airlines Corporation (the "Company") on Form
10-K for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Bernard L. Han, Executive Vice President and Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13( a) or 15( d) of the Securities
Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Date: March 2, 2005
Isl BERNARD L. HAN
Bernard L. Han
Executive Vice President and
Chief Financial Officer
This certification accompanies this Report on Form 10-K pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the
Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Such certification will not be deemed to be incorporated by reference into,any filing under the
Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company
specifically incorporates it by reference.