Northwest Airlines Form 10-K 2005

(Mark One)
~
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMl0-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number 0-23642
NORTHWEST AIRLINES CORPORATION
(Debtor-in-Possession)
(Exact name of registrant as specified in its charter)
Delaware 41-1905580
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2700 Lone Oak Parkway, Eagan, Minnesota
(Address of principal executive offices)
Registrant's telephone number, including area code (612) 726-2111
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
55121
(Zip Code)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ~ No D
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Iii
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 thatthe registrant was required tofile such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes Iii 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 l 0-K or any amendment to
this Form l 0-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer Accelerated filer Iii Non-accelerated filer
Indicate by check mark wh~ther the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No Iii
The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2005 was $387 million.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes Iii No
As of January 31, 2006, there were 87,262,242 shares of the registrant's Common Stock outstanding.
DOCUMENTS IN CORPORA TED BY REFERENCE
C~rtain information required to be included in Part III of this Form 10-K will be provided in accordance with General Instruction G3 no later than April 30, 2006.
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 fifth largest airline, as measured by
2005 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 c~ers, Pinnacle Airlines, Inc. ("Pinnacle
Airlines") and Mesaba Aviation, Inc. ("Mesaba"), both of which operate as Northwest Airlink ("Airlink"); and
a cargo business that operates 14 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 Fonn 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"). Additiona, ~nformation concerning the Company's Chapter
11 restructuring is at: http://www.nwa-restructuring.com. '
See "Item I. 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 20- Geographic Regions" for a discussion of Northwest's operations by geographic region.
Chapter 11 Proceedings
On September 14, 2005 (the "Petition Date"), NWA Corp. and 12 of its. direct and indirect subsidiaries (collectively, the
"Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code with the United States
Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). Subsequently, on September 30, 2005,
NWA Aircraft Finance, Inc., an indirect subsidiary of NW A Corp., also filed
a voluntary petition for relief under Chapter 11.
The Bankruptcy Court is jointly administering these cases under the caption "In re Northwest Airlines Corporation, et al.,
Case No. 05-17930 (ALG)" (the "Chapter 1 I case"). Accordingly, the accompanying consolidated financial statements have
been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankruptcy Code ("SOP 90-7''), and on a going concern basis,
which contemplates continuity of operations, realization of assets and liquidation of post-petition liabilities in the ordinary
course of business. In accordance with SOP 90-7, the financial statements (or the periods presented distinguish transactions
and events that are directly associated with the reorganization from the ongoing operations of the Company. The consolidated
financial statements shown herein include certain subsidiaries that did not file to reorganize under Chapter 11. The assets and
liabilities of these subsidiaries are not considered material to the consolidated financial statements.
Our consolidated financial statements have been prepared in accordance with GAAP on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course ofbusiness. Accordingly, our
consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should we be unable to continue as a going concern.
2
However, as a result of the matters discussed under "Item 1. Business - Risk Factors Related to Northwest and
the Airline Industry," including the Company's Chapter 11 proceedings, realization of assets and satisfaction of
liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainties. Given these
uncertainties, there is substantial doubt about the Company's ability to continue as a going concern.
The Company intends to use the provisions of Chapter 11 to reorganize its business in order to return to profitability on a
sustained basis. The Chapter 11 process will allow the Company to realize three major elements essential to its
transformation including:
Resizing and optimization of the Company's fleet to better serve Northwest's markets;
Realizing a competitive cost structure, including $2.2 billion in annual reductions in both labor and non-labor
costs, $1.7 billion of which is incremental to year-end 2005 results;
Restructuring and recapitalization of the Company's balance sheet, including a targeted reduction in debt and
lease obligations of approximately $4.2 - $4.4 billion, providing debt and equity levels consistent with long-term
profitability.
The Company has taken a number of actions necessary to achieve these objectives. These actions are outlined below and
in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Chapter 11
Proceedings." In addition, any business plan that forms the basis for a plan of reorganization will have to produce sufficient
returns to permit the Company to have adequate access to the capital markets. Any plan will likely require profit
improvements and/or cost reductions beyond those elements identified above. The Company will continue to refine its
Chapter 11 related goals and objectives in response to market conditions.
As required by the Bankruptcy Code, the United States Trustee for the Southern District of New York appointed on
September 30, 2005, an Official Committee of Unsecured Creditors (the "Creditors' Committee"). The Creditors' Committee
and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court concerning the
reorganization. There can be no assurance that the Creditors' Committee will support the Company's positions or plan of
reorganization.
With the exception of the Company's non-debtor subsidiaries, the Company continues to operate the business as "debtor-
in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and applicable court orders. In general, as debtor-in-
possession, the Company is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage
in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. In conjunction
with the commencement of the Chapter 11 case, the Debtors sought and obtained several orders from the Bankruptcy Court
that were intended to enable the Debtors to operate in the normal course of business during the Chapter 11 case. The most
significant of these orders (i) authorize the Company to honor pre-petition obligations to customers, (ii) authorize the
Company to honor obligations to employees for pre-petition employee salaries, wages, incentive compensation, and benefits,
and (iii) permit the Debtors to operate their consolidated cash management system during the Chapter 11 case in substantially
the same manner as it was operated prior to the commencement of the Chapter 11 case.
The bankruptcy filing triggered defaults on substantially all the Company's debt and lease obligations. Under Section
362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including
most actions to collect pre-petition indebtedness or to exercise control over the property of a debtor's estate. Absent an order
of the Bankruptcy Court, substantially all pre-petition liabilities are subjectto settlement under the plan ofreorganization.
The Debtors' rights to possess and operate certain qualifying aircraft, aircraft engines and other aircraft-related
equipment that are leased or subject to a security interest or conditional sale contract are governed by Section 1110 of the
Bankruptcy Code ("Section 111 O"). Section 1110 provides that unless the Debtors take certain action within 60 days after the
Petition Date or such later date as is agreed by the applicable lessor, secured party, or conditional vendor, the contractual
rights of such financier to take possession of such equipment and to enforce any of its other rights or remedies under the
applicable agreement are not limited or otherwise affected by the automatic stay or any other provision of the Bankruptcy
Code.
3
The Section 1110 deadline for the Debtors was November 14, 2005. The Debtor has targeted to restructure
approximately 50% of its fleet count and is currently on track to realize a projected reduction of approximately $2.6 billion in
balance sheet debt and present value of operating lease payments related to these assets. Agreements are in place or have
been tentatively reached for the majority of the targeted savings; manufacturer agreements have also been reached with
certain aircraft, aircraft engine, and aircraft-related equipment manufacturers. The Company is currently in negotiations with
the other parties.
The Debtors' balance sheet debt as of December 31, 2005 included $1.7 billion in unsecured pre-petition debt
obligations. These obligations are reflected in the Debtors' liabilities subject to compromise. See "Item 8. Consolidated
Financial Statements and Supplementary Data, Note 6 - Liabilities Subject to Compromise" for additional information.
Under Section 365 of the Bankruptcy Code, debtors may assume, assume and assign, or reject certain executory
contracts and unexpired leases, including leases of real property, aircraft, and aircraft engines, subject to the approval of the
Bankruptcy Court and other conditions. In general, rejection of an unexpired }ease or executory contract is treated as a pre-
petition breach of the lease or contract in question. Subject to certain exceptions, this rejection relieves debtors of performing
their future obligations under that lease or contract but entitles the lessor or contract counterparty to a pre-petition general
unsecured claim for damages caused by the deemed breach. These pre-petition general unsecured claims for damages, where
appropriate, are reflected in the Debtors' liabilities subject to compromise. See "Item 8. Consolidated Financial Statements
and Supplementary Data, Note 6 - Liabilities Subject to Compromise" for additional information. The Company expects that
additional liabilities subject to compromise will arise in the future as a result of damage claims resulting from the rejection of
certain executory contracts and unexpired leases by the Debtors. However, the Company expects that the assumption of
certain executory contracts and unexpired leases may convert liabilities subject to compromise to liabilities not subject to
compromise. Due to the uncertain nature of many of the potential rejection and abandonment related claims, the Company is
unable to project the magnitude of these overall claims with any degree of certainty at this time.
The Bankruptcy Code provides special treatment for collective bargaining agreements ("CBAs"). In particular, Section
1113(c) of the Bankruptcy Code permits the Company to move to reject its CBAs if the Company first satisfies a number of
statutorily prescribed substantive and procedural prerequisites and obtains the Bankruptcy Court's approval of the rejection.
After bargaining in good faith and sharing relevant information with its unions, a debtor must make proposals to modify its
existing CBAs based on the most complete and reliable information available at the time. The proposed modifications must
be necessary to permit the reorganization of a debtor and must provide that ~11-the affected parties are treated fairly and
equitably. Ultimately, rejection of the CBAs is appropriate if the unions refuse to agree to a debtor's necessary proposal
"without good cause" and the Bankruptcy Court determines that the balance of the equities favors rejection. The Company
has commenced Section 1 l 13(c) proceedings with three of its unions, and has completed the Section 1113(c) hearings with
the Professional Flight Attendants Association ("PF AA") and the Air Line Pilots Association ("ALPA"), although the judge
has not yet ruled.
On January 13, 2006, the International Association of Machinists and Aerospace Workers ("IAM"), which represents the
Company's ground employees, agreed to submit the Company's contract settlement proposal to its members for ratification.
As a result of the IAM's agreement, the Company did not begin the Section 1113(c) hearing related to the 1AM collective
bargaining agreements. On March 7, 2006, the 1AM announced that the contract proposal, covering the Company's customer
service and reservations employees, was ratified by a majority of its members. However, the Company's contract proposal
was not ratified by the !AM-represented equipment service employees ("ESEs"). As a consequence of the ESE ratification
vote results, the Company will request that the Bankruptcy Court proceed with the motion for a Section 1113( c) hearing
related to the ESE members of the 1AM.
On March 1, 2006, the Company reached a tentative consensual agreement on a new contract with its flight attendants
represented by the PFAA. The flight attendant agreement is subject to ratification by the Company's PF AA-represented
employees. On March 3, 2006, the Company reached a tentative consensual agreement on a new contract with its pilots,
represented by ALPA. The pilot agreement is subject to approval by Northwest's ALP A-represented employees. Currently,
all of the tentative agreements, and the 1AM contract proposal, are conditioned on the other agreements becoming effective or
on the Company's obtaining the contemplated savings through implementation of new contract terms.
In November 2005, the Company obtained interim wage reductions either consensually or through Section 1113(e),
which will remain in place until the resolution of the Section l l 13(c) process:
4
The Company has also commenced proceedings under Section 1114 of the Bankruptcy Code in conjunction with its
Section l l 13(c) hearings pursuant to which the Company is seeking reductions in the costs it incurs to provide medical
benefits to retirees. . ,
See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Chapter 11
Proceedings" for further information on the Company's labor cost restructuring.
On October 28, 2005, the Bankruptcy Court entered an order that restricts the trading of the common stock and debt
interests in the Company. The purpose of the order is to ensure that the Company does not lose the benefit of its net operating
loss carryforwards ("NOLs") for tax purposes. Under federal and state inco~e tax law, NOLs can be used to offset future
taxable income, and thus are a valuable asset of the Debtors' estate. Certain trading in the Company's stock (or debt when the
Company is in bankruptcy) could adversely affect the Company's ability to use the NOLs. Thus, the Company obtained an
order that enables it to closely monitor certain transfers of stock and claims and restrict those transfers that may compromise
the Company's ability to use its NOLs. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 13 -
Income Taxes" for further information related to the Company's NOLs.
The Company's common stock ceased trading on the NASDAQ stock market on September 26, 2005 and now trades in
the "over-the-counter" market under the symbol NW ACQ.PK. However, the Company currently believes that no value will
be ascribed to the Company's outstanding common stock, preferred redeemable stock, or other equity securities in any plan
of reorganization.
The New York Stock Exchange advised the Company on September 15, 2005 that trading in Northwest's 10.5% Class D
Pass Through Certificates, Series 2003-1 due April 1, 2009, ticker symbol NWB RP09, as well as the 9.5% Senior Quarterly
Interest Bonds due August 15, 2039 (QUIBS), ticker symbol NWB, was suspended. The QUIBS can still be traded on the
"over-the-counter" market under the symbol NWBBQ.PK; however, the Company is no longer accruing or paying interest.
In order to exit Chapter 11 successfully, the Company must propose, and obtain confirmation by the Bankruptcy Court
of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would resolve,
among other things, the Debtors' pre-petition obligations and set forth the .revised capital structure of the newly reorganized
entity. The Debtors have the exclusive right for 120 days from the Petition:Date to file a plan of reorganization and, if they do
so, 60 additional days to obtain necessary acceptance of the plan. On January 10, 2006, pursuant to Section l 12l(d) of the
Bankruptcy Code, the Bankruptcy Court approved a motion filed by the Debtors to extend the deadline of the Debtors'
exclusive right to file a plan of reorganization and the deadline to obtain necessary acceptance of the plan to July 13, 2006
and September 12, 2006, respectively.
A plan of reorganization must be voted on by holders of impaired claims and equity interests, and must satisfy certain
requirements of the Bankruptcy Code and, as noted above, be confirmed by the Bankruptcy Court. A plan has been accepted
by holders of claims against and equity interests in a Debtor if (1) at least one-half in number and two-thirds in dollar amount
of claims actually voting in each impaired class of claims have voted to acc~pt the plan and (2) at least two-thirds in amount
of equity interests actually voting in each impaired class of equity interests have voted to accept the plan. Under certain
circumstances set forth in the provisions of section l 129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a
plan even if such plan has not been accepted by all impaired classes of ~laims and equity interests. A class of claims or an
equity interest that does not receive or retain any property under the plan on account of such claims or interests is deemed to
have voted to reject the plan. The precise requirements and evidentiary showing for confirming a plan, notwithstanding its
rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors, including the status
and seniority of the claims or equity interests in rejecting class, i.e., secured claims or unsecured claims, subordinated or
senior claims, preferred or common stock.
Although the Debtors expect to develop a reorganization plan during 2006 for emergence from Chapter 11, or obtain
additional extensions to its exclusivity period, there can be no assurance that a reorganization plan will be proposed by the
Debtors within the required time frame or that additional extensions, if required, will be approved. Also, there is no assurance
that the proposed plan will be approved by claim holders or confirmed by th~ Bankruptcy Court.
5
Operations and Route Network
Northwest and its Airlink partners operate substantial domestic and international route networks and directly serve more
than 248 destinations in 23 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, 2005, they enplaned 59% of originating
passengers from Detroit, while the next largest competitor enplaned 12%.
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 161 destinations from Minneapolis/St. Paul. For the six months ended June 30, 2005, they
enplaned 62% of originating passengers from Minneapolis/St. Paul, while the next largest competitor enplaned 13%.
Memphis. Memphis is the seventeenth largest origination/destination hub in the U.S. Northwest and its Airlink carriers
together serve 88 destinations from Memphis. For the six months ended June 30, 2005, they enplaned 57% of originating
passengers from Memphis, while the next largest competitor enplaned 14%.
Other Domestic System Operations. Domestic "non-hub" operations include service to as many as 18 destinations from
Indianapolis, seven destinations from Milwaukee, service from several heartland cities to Las Vegas, Washington D.C. and
Florida destinations, and service from several west coast gateway cities to Hawaii.
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, 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, 2005, 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 seven U.S. gateways and twelve Asian destinations via Tokyo. The Asian destinations
served via Tokyo are Bangkok, Beijing, Busan, Guam, Guangzhou, Hong Kong, Manila, Nagoya, Saipan, Seoul, Shanghai,
and Singapore. Additionally, Northwest flies nonstop between Detroit and Osaka and Nagoya, and beyond both cities to
Saipan and Guam, 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, Northwest is currently the only U.S. carrier operating
combination service to Guangzhou ..
6
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 17 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 59 European, six Middle Eastern, ten 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, the
joint venture can be terminated on three years' notice. In May 2004, Air France acquired KLM, and KLM and Air France
became wholly-owned subsidiaries of a new holding company.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 20 - 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 codesharing, frequent flyer program reciprocity and other
cooperative marketing programs. The alliance agreement has a term through 2025.
In August 2002, the Company entered into a strategic commercial alliance 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 marketing programs. The combined network
has increased Northwest's presence in the South, East and Mountain West regions of the U.S., as well as in Latin America.
In September 2004, Northwest, together with KLM and Continental Airlines, joined the global SkyTeam Alliance. The
addition ofNorthwest, KLM and Continental made SkyTeam the world's second largest airline alliance. The nine members
of the SkyTeam alliance, including Northwest, KLM, Continental, Delta, Air France, Alitalia, Aeromexico, CSA Czech
Airlines and Korean Air, currently serve over 343 million passengers annuallywith more than 15,000 daily departures to 684
destinations in 133 countries. Northwest customers are now able to accrue and redeem frequent flyer miles in their
WorldPerks accounts and enjoy travel on any flight operated by a SkyTeam Alliance member carrier. This alliance affords
customers the benefits and service options when traveling on multiple airlines while being treated similarly to a customer
traveling on a single airline.
Northwest also has domestic frequent flyer and codesharing agreements with several other airlines including Alaska
Airlines, Horizon Air, Hawaiian Airlines, American Eagle, Gulfstream International Airlines, and Big Sky Airlines.
In Central America, Northwest has a frequent flyer agreement with Copa Airlines.
In the Pacific, Northwest has frequent flyer agreements with Malaysia Airlines, Japan Airlines, Jet Airways oflndia,
Garuda Indonesia, Cebu Pacific Airlines, Air Tahiti Nui, and China Southern.
In the Atlantic, in addition to its extensive relationship with KLM, Northwest has frequent flyer agreements with KLM
cityhopper, 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.
7
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 busine_
ss 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. As part of its overall restructuring efforts, the Company is evaluating its service
agreements with its regional carriers and has initiated a request for proposal from its existing and other regional carrier
operators. The results of the request for proposal are under review. In addition, the Company has obtained the right, under the
tentative agreement with ALPA, to contract with operators that utilize 51-76 seat regional jets, including anoperator that can
be a subsidiary of the Company.
Pinnacle Airlines. 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 ofrequired 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., and accounts for this investment under the equity method of accounting. The
Pinnacle Airlines Corp. common stock had a market value of $16.6 million and a book value of $3.0 million as of December
31, 2005. Pinnacle Airlines is scheduled to provide passenger service for up to 128 cities.
Mesaba. On October 13, 2005, Mesaba, a wholly-owned subsidiary of MAIR Holdings, Inc. ("MAIR"), filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in the District of Minnesota (Case No. 05-39258
(GFK)). In accordance with the provisions of the Bankruptcy Code, Mesaba will continue to operate its business as a debtor-
in-possession. The Company is currently unable to determine the impact ofMesaba's bankruptcy on its operations or
financial condition with any certainty. The Company owns 27.5% ofMAIR's common stock and accounts for this investment
under the equity method of accounting. The book value and market value of this investment as of December 31, 2005, was
$26.6 million. Mesaba is scheduled to provide passenger service for up to 1~5-cities.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 19 - 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 2005, cargo accounted for 7.7% of the Company's operating revenues, with approximately 78%
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 14 Boeing 747-200
freighter aircraft, the last of which was added to the freighter fleet in January 2006. 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.
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 September 2005, the Company extended and expanded its
agreement with OHL Worldwide Express ("DHL") until 2008, to provide OHL with a specified amount of cargo capacity on
Northwest's flights from DHL's U.S. hub operation in Wilmington, Ohio to various points in Asia. Northwest has a cargo
alliance with Japan Airlines under which the two airlines codeshare on certain routes between the U.S. and Japan. In October
2004, the Company and Korean Airlines entered into an agreement to codeshare on certain routes between the U.S. and Asia.
Under this agreement, implemented in February 2005, the two airlines transfer freight between their respective flights at
Northwest's cargo hub in Anchorage.
8
In 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, which the Company is
using for freighter service 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.
The Company intends to use these frequencies to expand cargo service to Guangzhou via the Tokyo hub.
Effective September 30, 2005, Northwest Airlines Cargo joined SkyTeam Cargo. SkyTeam Cargo is the largest global
airline cargo alliance. The eight members of SkyTeam Cargo, Northwest Airlines Cargo, Aeromexico Cargo, Air France
Cargo, Delta Air Logistics, Korean Air Cargo, Alitalia Cargo, CSA Cargo, and KLM Cargo, currently operate approximately
8,700 daily flights, to 540 destinations in 127 countries. This alliance offers customers a consistent standard of performance,
quality and detailed attention to service.
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 2005, MLT had
$499 million in operating revenues.
Frequent Flyer Program. Northwest operates a frequent flyer loyalty program known as "WorldPerks." WorldPerks is
designed to retain and increase traveler loyalty by offering incentives for their continued patronage. Under the WorldPerks
program, miles are earned by flying on Northwest or its alliance partners and by using the services of program partners for
such things as credit card use, hotel stays, car rentals and other activities. Northwest sells mileage credits to the program
partners. WorldPerks members accumulate mileage in their accounts and later redeem mileage for free or upgraded travel on
Northwest and other participating airlines. WorldPerks members that achieve certain mileage thresholds also receive
enhanced service benefits from Northwest like special service lines, advance flight boarding and upgrades.
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 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 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.
9
Northwest's right to operate to foreign countries, including Japan, China and other countries in Asia and Europe, is
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 by the aggregate of costs paid by all air carriers in calendar year 2000 for screening passengers and
property. The per-carrier limit is capped at the amount expended by that individual air carrier in calendar year 2000. This cap
will remain in effect until the TSA revises the per-carrier limit by market share or any other appropriate method. In the fiscal
year 2005 Department of Homeland Security Appropriations Act, Congress required the Government Accountability Office
("GAO") to conduct a review of the carrier reported costs; as a result of this review, the GAO concluded that the industry-
wide aviation security cost were underreported, leaving an uncollected air carrier fee. Using various criteria, the TSA has
assessed this underreported amount on certain air carriers, including a $4.8 million assessment on Northwest. The Company
has asked for an administrative review of this assessment.
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.
On April 7, 2005, the Bureau of Customs and Border Protection ("CBP") issued a rule requiring airlines, for security
screening purposes, to electronically transmit passenger and crew data to the CBP before flights arrive in or depart from the
U.S.
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 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, DOT continues to assert statutory jurisdiction over the conduct of CRSs,
and in November 2005 a federal appeals court upheld DOT's assertion of jurisdiction.
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.
The FAA has implemented voluntary arrangements with the largest operators at Chicago O'Hare, which currently restrict
their operations there until April 2006. The FAA also has proposed to impose more broadly-applicable restrictions at Chicago
O'Hare until April 2008.
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 six domestic unions representing nine 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.
Under the RLA, 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.
See "Item 1. Business - Risk Factors Related to Northwest and the Airline Industry" for additional labor discussion.
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 United Nations International Civil Aviation Organization (the "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 100 -Century
of Aviation Reauthorization Act" and signed into law by the President on December 12, 2003, required the FAA, by April I,
2005, to issue regulations implementing Chapter 4 noise standards consistent with ICAO recommendations. In July 2005, the
FAA issued a rule adopting Chapter 4 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 aircraft require various levels of maintenance or "checks"
and periodically undergo complete overhauls. Maintenance programs are monitored closely by the FAA, with FAA
representatives routinely present at the Company's maintenance facilities. The FAA issues Airworthiness Directives
("ADs"), which mandate changes to an air carrier's maintenance program. These ADs (which include requirements for
structural modifications to certain aircraft) are issued to ensure that the nation's transport aircraft fleet remains airworthy. The
Company is currently, and expects to remain, in compliance with all applicable requirements under all ADs and the FAA
approved maintenance 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.
11
In November 2005, the Environmental Protection Agency (the "EPA") issued a rule implementing the aircraft emissions
standards previously approved by the ICAO, of which the United States is a member. Following issuance of the EPA rule, a
lawsuit was filed in the U.S. Court of Appeals for the District of Columbia Circuit on behalf of state and local air regulators
against the EPA challenging its rule regulating aircraft emissions on the grounds that the international emissions standards
codified by the EPA rule are not stringent enough. Northwest believes it is in compliance with the emissions standards that
were codified by the EPA rule.
Northwest, along with other airlines, has been identified as a potentially responsible party at various environmental sites.
Management believes that Northwest's share ofliability 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, 2005 and ending
September 30, 2006, 19 Boeing 747-200/400 passenger aircraft, 16 Boeing 757-300 passenger aircraft, 15 DCI0-30
passenger aircraft, 11 Airbus A330-300 passenger aircraft, seven Airbus A330-200 passenger aircraft and 14 Boeing 747-200
freighter aircraft for use by the U.S. military under certain stages ofreadiness related to national emergencies. The program is
a standby arrangement that allows the U.S. Department of Defense U.S. Air Force Air Mobility Command to call on some or
all of these 82 contractually committed Northwest aircraft and their crews to supplement military airlift capabilities.
Risk Factors Related to Northwest and the Airline Industry
Attempts to reduce labor costs may not be successful
Labor has always been a critical issue for major airlines, including the Company. Approximately 90% of our employees
are represented by unions. Salary and benefit costs are our largest operating expense and reducing these expenses by
approximately $1.35 billion is a major goal of our restructuring plan.
The Company commenced 1113( c) proceedings with three of its largest unions. Before the judge ruled on the
Company's motions, the Company reached tentative agreements with the A_
ir Line Pilots Association ("ALPA") and the
Professional Flight Attendants Association ("PFAA"), representing the Company's pilot and flight attendant employees,
respectively. These tentative agreements are now subject to ratification by the respective employee groups. There can be no
assurance that these tentative agreements will be ratified. In addition, all of the tentative agreements, and the 1AM contract
proposal, are conditioned on the other agreements becoming effective or on the Company's obtaining the contemplated
savings through implementation of new contract terms.
Prior to the commencement of the Company's Section l l 13(c) hearing, the International Association of Machinists and
Aerospace Workers ("IAM"), which represents the Company's ground employees, agreed to submit the Company's contract
settlement proposal to its members for ratification. On March 7, 2006, the 1AM announced that the contract proposal,
covering the Company's customer service and reservations employees, was ratified by a majority of its members. However,
the Company's contract proposal was not ratified by the !AM-represented eq:uipment service employees ("ESEs"). As a
result of the ESE ratification vote, the Company will ask the Bankruptcy Court to commence the hearing on the Company's
Section 1113( c) application relating to the ESE members of the 1AM. -
If a tentative agreement is not ratified, the Company would seek to impose new contract terms pursuant to the Section
1113( c) process. Certain of the Company's unions have threatened to strike were new contract terms to be imposed. The
Company believes that the impacted employee groups are not permitted to strike or engage in self-help remedies under the
RLA. In the event the Company were to impose new contract terms under Section 1113( c) and the impacted union sought to
strike or engage in self-help, the Company would attempt to obtain an injunct~on against such activities, although there is no
controlling judicial authority that specifically addresses this issue. Failure to obtain such an injunction could lead to a strike
or other form of self-help which could have a material adverse effect on the Company.
See the Labor discussion above and "Item 7. Management's Discussio:11 and Analysis of Financial Condition and Results
of Operations - Chapter 11 Proceedings" for additional information related to labor unions.
12
Employee Group
Approximate
Number of
Full-time
Equivalent
Employees
Covered Union
Amendable
Date (1)
Pilots ......................................... .. 5,000 Air Line Pilots Association, International
("ALPA") 12/31/06
Agents and Clerks ...................... . 7,300 International Association of Machinists &
Aerospace Workers ("JAM") 2/25/03
Equipment Service Employees and International Association of Machinists &
Aerospace Workers ("IAM")
Stock Clerks ........................... . 5,600
7,700
2/25/03
Flight Attendants ........................ . Professional Flight Attendants Association
("PFAA") 5/30/05
Mechanics and Related Aircraft Mechanics Fraternal Association
("AMFA")
NIA- Imposed
Terms
Employees .............................. . 1,000
(1) The following are amendable dates for proposed collective bargaining agreements:
ALP A - tentative agreement - December 31, 2010 if the Company emerges from bankruptcy in 2006;
December 31, 2011 if the Company emerges from bankruptcy post
2006.
1AM -final contract proposal- December 31, 2010 if the Company emerges from bankruptcy in 2006;
December 31, 2011 if the Company emerges from bankruptcy post
2006.
PF AA - tentative agreement - December 31, 2011.
In addition to the groups described above, as of December 31, 2005, we had approximately 1,900 foreign national
employees, working primarily in Asia. Collective bargaining agreements are also in place for the majority of those foreign
national employees.
The Company is currently operating under a voluntary reorganization under Chapter 11.
The Company and 13 of its direct and indirect subsidiaries filed voluntary petitions for relief under Chapter 11 of the
United States Bankruptcy Code. Risks and uncertainties associated with the Company's Chapter 11 proceedings include the
following:







Significant costs have been incurred and will continue to be incurred throughout our process of reorganization;
Garnering support from the Creditors' Committee for critical bankruptcy proceedings;
Our ability to obtain court approval of specific motions filed in the bankruptcy proceedings;
Access to capital markets and our ability to secure debtor-in-possession financing if and when needed;
The potential negative impact of the bankruptcy proceedings on customer and employee relations;
Maintaining or renegotiating business terms with our vendors; and
Our ability to propose and obtain approval for a plan of reorganization .
In order to exit Chapter 11 successfully, the Company must propose, and obtain confirmation by the Bankruptcy Court
of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization must be voted on
by holders of impaired claims, and must satisfy certain requirements of the Bankruptcy Code and, as noted above, be
confirmed by the Bankruptcy Court. Although the Debtors expect to develop a reorganization plan during 2006 for
emergence from Chapter 11, or obtain additional extensions to its exclusivity period, there can be no assurance that a
reorganization plan will be proposed by the Debtors within the required timeframe or that additional extensions, if required,
, will be approved. Also, there is no assurance that the proposed plan will be approved by claim holders or confirmed by the
Bankruptcy Court.
13
The Company's stock has ceased trading on the NASDAQ stock market.
Effective September 26, 2005, our stock ceased trading on the NASDAQ stock market. We believe that no value will be
ascribed to our outstanding common stock, preferred redeemable stock, or other equity securities in any plan of
reorganization.
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 our
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, or raise cash
quickly, irrespective of the impact to long-term profitability.
Industry revenues have declined substantially and we continue to ex,perience 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. We do not anticipate that the revenue environment will materially improve in 2006 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 and carriers who have achieved lower labor costs 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. 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.
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 advantage_
s. 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 exacerbated the decline in airline industry revenue in 2003, and had ongoing effects thereafter. The
aftermath of the war in Iraq depressed 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 war, expanded hostilities in Iraq, or another outbreak of SARS, Avian flu, 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.
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.
14
Our indebtedness, including pension funding liabilities, is substantial
We have substantial levels of indebtedness. As of December 31, 2005, we had long-term debt and capital lease
obligations, including current maturities, not subject to compromise, of $1.2 billion. This obligation excludes $7. 7 billion of
debt and capital lease obligations classified as subject to compromise. We are currently in negotiations with certain creditors
related to these obligations. See "Item 8. Consolidated Financial Statements.and Supplementary Data, Note 6- Liabilities
Subject to Compromise and Note 7 - Long-Term Debt and Short-Term Borrowings" for further information related to
outstanding debt obligations and maturities.
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 also have defined benefit pension plans covering our pilots, other contract employees and salaried employees.
Funding requirements for defined pension plans are governed by the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). As of December 31, 2005, our pension plans were underfunded by $3.7 billion, as calculated in
accordance with SFAS No. 87, Employers' Accounting for Pensions ("SFAS No. 87"). Absent a distressed plan termination
or future asset returns substantially in excess of plan assumptions, we will have to satisfy the underfunded amounts through
cash contributions over time. The timing and amount of funding requirements are also dependent upon a number of other
factors, including asset returns, interest rates, changes in pension legislation related to funding requirements, the Company's
Chapter 11 proceedings and labor negotiations, applications for and receipt of waivers to reschedule contributions, and
changes to pension plan benefits. The funding requirement to meet the normal cost component of the qualified plans'
minimum funding requirements related to post-petition service is currently estimated at approximately $75 million for
calendar year 2006. Due to the extent of the uncertainties, including the amount and timing of asset returns, interest rate
levels, the Company's Chapter 11 proceedings, and in particular, the impact of proposed pension funding legislation, the
Company is not able to reasonably estimate its future required contributions beyond 2006. If the Company is unable to obtain
sufficient legislative pension relief, termination of the defined benefit plans would become inevitable. Moreover, termination
of the pilot defined benefit pension plan would become more likely should the tentative new collective bargaining agreement
reached between ALP A and the Company not be ratified.
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 in China and
India, the levels of inventory carried by industries, the amounts of reserves built by governments, disruptions to production
and refining facilities and weather. In 2005 Hurricane Katrina and Hurricane Rita caused widespread disruption to oil
production, refinery operations and pipeline capacity in portions of the U.S. Gulf Coast. As a result of these disruptions, the
price of jet fuel increased significantly and the availability of jet fuel supplies were diminished during the fall of 2005. 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 2005 mainline and regional aircraft fuel consumption). The Company's
mainline fuel expense per available seat mile increased from $2.14 per gallon to $2.99 per gallon, on average, from 2004 to
2005. 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. As of December 31, 2005, and
up until the date of this filing, we had no fuel hedges in place.
15
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 $52 million higher in 2005 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, 2006. 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 insurance 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.
We are exposed to foreign currency 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 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. As of December 31, 2005, the Company had
entered into forward contracts to hedge approximately 5% of its anticipated 2006 yen-denominated sales at an average rate of
101 yen per U.S. dollar.
We are exposed to changes in interest rates.
We had $6.4 billion of debt and capital lease obligations that were accruing interest as of December 31, 2005 and $1.9
billion of total balance sheet cash, cash equivalents, and short term investments as of December 31, 2005. Of this
indebtedness, 66% 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 ability of the Company to continue as a going concern, the ability of the
Company to obtain and maintain any necessary financing for operations and other purposes, whether debtor-in-possession
financing or other financing, the ability of the Company to maintain adequate liquidity, the ability of the Company to absorb
escalating fuel costs, the Company's ability to obtain court approval with respect to motions in the Chapter 11 proceedings
prosecuted by it from time to time, the ability of the Company to develop, confirm and consummate a plan of reorganization
with respect to the Chapter 11 proceedings, risks associated with third parties seeking and obtaining court approval to
terminate or shorten the exclusivity period for the Company to propose and confirm a plan of reorganization, to appoint a
16
Chapter 11 trustee or to convert the cases to Chapter 7 cases, the ability of the Company to obtain and maintain normal terms
with vendors and service providers, the Company's ability to maintain contracts that are critical to its operations, the ability
of the Company to realize assets and satisfy liabilities without substantial adjustments and/or changes in ownership, the
potential adverse impact of the Chapter 11 proceedings on the Company's liquidity or results of operations, the ability of the
Company to operate pursuant to the terms of its financing facilities (particularly the related financial covenants), the ability of
the Company to attract, motivate and/or retain key executives and associates, the future level of air travel demand, the
Company's future passenger traffic and yields, the airline industry 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; Avian flu or other influenza or contagious
illnesses, work disruptions, 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 these and other events that could
cause differences between forward-looking statements and future actual results is contained in "Risk Factors Related to
Northwest and the Airline Industry" above.
Developments in any of these areas, as well as other risks and uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings, could cause the Company's results to differ from results that have been or may
be projected by or on behalf of the Company. The Company 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.
17
Item 2. PROPERTIES
Flight Equipment
As shown in the following table, Northwest operated a fleet of379 aircraft at December 31, 2005, consisting of 314
narrow-body and 65 wide-body aircraft. Northwest's purchase commitments for aircraft as of December 31, 2005 are also
provided.
In Service-
Average Aircraft
Seating Capital Operating Age on Firm
Aircraft Type Capacity Owned Lease Lease Total (Years) Order
Passenger Aircraft
Airbus:
A319 .............................................. 124 64 2 66 3.5 5
A320 .............................................. 148 43 2 30 75 11.1 2
A330-200 ...................................... 243 7 7 1.3 5
A330-300 ...................................... 298 11 11 1.7 9
Boeing:
787-800 ......................................... 221 18 (1)
757-200 ......................................... 180-184 30 4 8 42 14.6
757-300 224 16 16 2.8
747-200 ......................................... 353-430 2 2 4 23.1
747-400 ......................................... 403 4 11 15 11.8
McDonnell Douglas:
DC9 ............................................... 100-125 115 115 34.5
DCl0 ............................................. 273 13 2 15 25.5
305 6 55 366 39
Freighter Aircraft
Boeing 747F .................................. 8 5 13 23.8
Total Northwest Operated Aircraft 313 6 60 379 17.6 (2) 39
Regional Aircraft
Avro RJ85 ..................................... 69 10 16 26 7.2
CRJ-200/440 ................................. 44-50 126 126 2.7 13 (1)
Saab 340 ........................................ 30-34 49 49 8.1
Total Airlink Operated Aircraft ..... 10 191 201 13
Total Aircraft ................................... 323 6 . 251 580 52
( 1) The Company entered into these aircraft commitments prior to its Chapter 11 filing; the applicable agreements have not
yet been affirmed as part of the Company's overall plan of reorganization.
(2) Excluding DC9 aircraft, the average age of Northwest-operated aircraft is 9.6 years.
In total, the Company took delivery of six Airbus A3 l 9 aircraft, three Airbus A330-300 aircraft, and 24 Bombardier CRJ
aircraft during the twelve months ended December 31, 2005. The Company entered into debt agreements on the nine Airbus
18
aircraft with an aggregate amount of debt incurred of $425 million. The Company entered into long-term operating leases on
23 CRJ aircraft with aggregate minimum lease payments from inception through lease expiration totaling $568 million. One
CRJ aircraft was acquired in 2005 as a substitute for a similar CRJ aircraft that was under a lease and was subject to an event
of loss in 2004. Subsequent to the Company's bankruptcy filing, seven out of the 24 CRJ leases signed in 2005 were rejected
with total aggregate minimum lease payments from inception of the leases totaling $179 million. The Company subleased 15
of the remaining Bombardier CRJ aircraft to Pinnacle Airlines, and the other two were subleased to Mesaba.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 8- Leases and Note 14- 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, 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 McNamara
terminal at Detroit Metropolitan Wayne County Airport that was completed in February 2002. The terminal complex features
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, 18 luggage carousels and a 404 room hotel. The Company is also
managing and supervising the design and construction of a $190 million expansion of the McNamara terminal's west
concourse, scheduled for completion in mid-2006, providing 25 additional gates and an expanded west concourse
WorldClub.
Minneapolis/St. Paul International Airport is nearing completion of a $2.9 billion construction program that began in
1998. The major components completed include a new north/south runway, an additional 15 mainline jet gates, 30 commuter
gates, a 50% increase in vehicle parking and new automated people movers. Northwest currently has 66 mainline and 35
commuter gates at the airport. The airport is also considering a three-phase $860 million plan to expand terminal facilities to
meet air service demand through the year 2020.
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 January 2005, the Company sold its Livonia, Michigan reservation center property, which the Company had closed in
2003.
Item 3. LEGAL PROCEEDINGS
On September 14, 2005, NWA Corp. and certain of its direct and indirect subsidiaries filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of
New York. Subsequently, on September 30, 2005, NW A Aircraft Finance, Inc., an indirect subsidiary of NW A Corp., also
filed a voluntary petition for relief under Chapter 11. The Bankruptcy Court is jointly administering these cases under the
caption "In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)". Each of the Debtors continues to operate
its business and manage its property as a debtor-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy Code.
As a result of the current Chapter 11 filings, attempts to collect, secure or enforce remedies with respect to pre-petition claims
against the Debtors are subject to the automatic stay provisions of Section 362(a) of the Bankruptcy Code, including the
19
litigation described below.
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 ofrestrictions 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. U.S. 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.
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 monopoliz.ation complaint against Northwest in the U.S. District Court for the Eastern
District of Michigan alleging that Northwest had monopolized, or attempted to monopolize, air transportation service
between Detroit and Philadelphia and between Detroit and Boston in 1996 by engaging in predatory pricing and other actions
to exclude Spirit from those markets. Northwest believes the case to be without merit and intends to defend against the claim.
On March 31, 2003, the Court granted Northwest's motion for summary judgment. In October 2005, the Bankruptcy Court
approved a stipulation to lift the stay for the limited purpose of permitting the Sixth Circuit to issue its opinion. On November
9, 2005, the Sixth Circuit issued a decision in which it reversed the trial court's grant of summary judgment in favor of
Northwest. Northwest has filed a petition for reconsideration which 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 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 I, 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. Before discovery was complete, plaintiffs filed motions for summary judgment. On
March 24, 2005, the judge ruled that the Company had breached the arrangements related to the Series C Preferred Stock, and
indicated that a trial on damages would be necessary. On August 24, 2005, Northwest and the plaintiffs reached an
agreement, among other things, to cancel the trial and to establish the amount of damages owed to employees represented by
the plaintiffs should the trial court's liability determination be upheld (nearly $277 million). The agreement also established
the procedural process for Northwest to appeal the trial court's liability judgment and to seek a stay of enforcement of the
judgment. The plaintiffs also agreed not to take any action to enforce the judgment unless and until the New York State
Appellate Division denies Northwest's motion to stay enforcement of the j~dgment.
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 ofNorth Dakota, Case No. Al-04-033), and in federal court in Tennessee, Copelandv. 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. On February 28, 2005, the
Tennessee District Court dismissed the Tennessee case and plaintiffs did not appeal.
20
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.
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 2005.
MANAGEMENT
Executive Officers of the Registrant
Douglas M. Steenland, age 54, has served as President and Chief Executive Officer ofNWA 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.
Neal S. Cohen, age 45, has served as Executive Vice President and Chief Financial Officer of the Company since May
2005. Prior to rejoining the Company, Mr. Cohen served at US Airways as Executive Vice President and ChiefFinancial
Officer from April 2002 to April 2004, and served as Chief Financial Officer for Conseco Finance from April 2001 to March
2002. Prior to his position at Conseco Finance, Mr. Cohen served as Chief Financial Officer for Sylvan Leaming Systems.
From 1991 to 2000, Mr. Cohen held a number of senior marketing and finance positions at Northwest Airlines, including
Senior Vice President and Treasurer and Vice President Market Planning.
J. Timothy Griffin, age 54, has served as Executive Vice President-Marketing and Distribution of Northwest since
January 1999. From June 1993 to January 1999, he served as Senior Vice President-Market Planning and Systems. Prior to
joining Northwest in 1993, Mr. Griffin held senior positions with Continental Airlines and American Airlines.
Philip C. Haan, age 50, 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.
Andrew C. Roberts, age 45, 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 63, 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 ceased trading on the NASDAQ stock market on September 26, 2005 and now trades in
the "over-the-counter" market under the symbol NWACQ.PK. However, the Company currently believes that no value will
be ascribed to the Company's outstanding common stock, preferred redeemable stock, or other equity securities in any plan
of reorganization.
The table below shows the high and low sales prices for the Company's common stock during 2005 and 2004:
Quarter
1st. ................................................... .
2nd .................................................. .
3rd ................................................... .
4th ................................................... .
2005
___!!!KL
10.95
6.95
5.66
0.72
Low
6.61
4.41
0.63
0.35
2004
___!!!KL Low
14.33 8.30
11.42 8.60
11.20 7.50
11.83 7.09
As of January 31, 2006, there were 3,390 stockholders of record.
The following table summarizes information as of December 31, 2005, 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.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category
Equity Compensation Plans
Approved by Security
Holders (1) ............................... .
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)
2,478,982
5,400,066
7,879,048
(I) Comprised of the Company's 2001 Stock Incentive Plan.
Weig~ted-A verage
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
$ 10.28
$ 11.19
$ 10.90
Number of Shares Remaining
Available for Future Issuance
Under Equity Compensation Plans
(Excluding Securities Reflected in
Column (a))
(c)
5,636,074
3,655,245
9,291,319
(2) Comprised of the Company's 1999 Stock Incentive Plan and the 1998 Pilots Stock Option Plan.
See "Item 8. Consolidated Financial Statements and Supplementary Data, Note I I-Stock Based Compensation" for
additional information regarding the Company's equity compensation plans.
22
ITEM6. SELECTED FINANCIAL DAT A
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
Year Ended December 31
2005 2004 2003 2002 2001
Statements of Operations (In millions, except per share
data)
Operating revenues
Passenger ......................................................................... $ 8,902 $ 8,432 $ 7,632 $ 7,823 $ 8,207
Regional carrier ................................................................ 1,335 1,083 860 689 691
Cargo ................................................................................ 947 830 752 735 720
Other ................................... -.-............................................ 1,102 934 833 729 768
12,286 11,279 10,077 9,976 10,386
Operating expenses .............................................................. 13,205 11,784 10,342 10,822 11,254
Operating income (loss) ....................................................... (919) (505) (265) (846) (868)
Operating margin ................................................................ (7.5)% (4.5)% (2.6)% (8.5)% (8.4)%
Net income (loss) before cumulative effect of accounting
change .............................................................................. {2,464) (862) 248 (798) (423)
Cumulative effect of accounting change .......................... (69)
Net income (loss) ................................................................. $ (2,533) $ (862) $ 248 $ (798) $ (423)
Earnings (loss) per common share:
Basic ............................................................................ $ (29.36) $ (10.32) $ 2.75 $ (9.32) $ (5.03)
Diluted ......................................................................... $ (29.36) $ (10.32) $ 2.62 $ (9.32) $ (5.03)
Balance Sheets (In millions)
Cash, cash equivalents and unrestricted short-term
investments ...................................................................... $ 1,262 $ 2,459 $ 2,757 $ 2,097 $ 2,512
Total assets ........................................................................... 13,083 14,042 14,008 13,289 12,975
Long-term debt, including current maturities ...................... 1,159 8,411 7,866 6,531 5,051
Long-term obligations under capital leases, including current
obligations ........................................................................ 11 361 419 451 586
Long-term pension and postretirement health care
benefits ............................................................................. 292 3,593 3,228 3,050 1,749
Liabilities subject to compromise ........................................ 14,162
Mandatorily redeemable security ......................................... 553 492
Preferred redeemable stock .................................................. 280 263 236 226 227
Common stockholders' equity (deficit) ............................... (5,628) (3,087) (2,011) (2,262) (431)
"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.
23
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
Year Ended December 31
2005 2004 2003 2002 2001
Operating Statistics (1)
Scheduled service:
Available seat miles (ASM) (millions) ............................ 91,775 91,378 88,593 93,417 98,356
Revenue passenger miles (RPM) (millions) ..................... 75,820 73,312 68,476 72,027 73,126
Passenger load factor ....................................................... 82.6% 80.2% 77.3% 77.1% 74.3%
Revenue passengers (millions) ......................................... 56.5 55.4 51.9 52.7 54.l
Passenger revenue per RPM (yield) ................................. 11.74 11.50 11.15 10.86 11.22
Passenger revenue per scheduled ASM (RASM) ............ 9.70 9.23 8.61 8.37 8.34
Total available seat miles (ASM) (millions) ........................ 91,937 91,531 89,158 93,583 98,544
Passenger Service operating expense per total
ASM (2)(3)(4) .................................................................. 11.53 10.62 9.87 9.96 9.95
Aircraft impairment, curtailment charge, severance expense
and other per total ASM ( 4) ............................................. 0.14 0.31 0.11 0.46 0.28
Mainline fuel expense per ASM .......................................... 2.99 2.14 1.53 1.38 1.61
Cargo ton miles (millions) ................................................... 2,397 2,338 2,184 2,221 2,161
Cargo revenue per ton mile .................................................. 39.51 35.48 34.42 33.08 33.28
Fuel gallons consumed (millions) ........................................ 1,745 1,766 1,752 1,896 2,029
Average fuel cost per gallon, excluding taxes ..................... 170.73 118.17 80.68 69.33 79.26
Number of operating aircraft at year end ............................. 379 435 430 439 428
Full-time equivalent employees at year end ......................... 32,460 39,342 39,100 44,323 45,708
( l) All statistics exclude Northwest Airlink regional carriers, which is consistent with how the Company reports statistics to
the DOT.
(2) 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.
(3) Passenger service operating expense excludes the following items unrelated to passenger service operations:
{In millions) 2005 2004 2003 2002 2001
7 4 7 Freighter operations ............................................. $ 791 $ 608 $ 497 $ 486 $ 474
ML T Inc. - net of intercompany eliminations ............. 193 192 197 260 281
Regional carriers ......................................................... 1,576 1,210 567 487 480
Pinnacle Airlines, Inc. - net of intercompany
eliminations (a) ....................................................... 255 230 183
Other ........................................................................... 43 56 26 35 32
(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.
(4) Passenger service operating expense per ASM includes the following items:
{In millions) 2005 2004 2003 2002 2001
Aircraft and aircraft related write-downs .............. $ 48 $ 203 $ 21 $ 366 $ 161
Curtailment charges .............................................. 82 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 2005 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 $2.6 billion for the year ended December 31,
2005, compared to a net loss applicable to common stockholders of$891 million in 2004. The basic and diluted loss per
common share was $29.36 in 2005 compared with the basic and diluted loss per common share of $10.32 in 2004. In 2005,
the Company reported an operating loss of$919 million, compared with an operating loss of$505 million in 2004.
Full year 2005 results included $1.20 billion of net unusual and reorganization related losses. Operating expenses
included $130 million of unusual items related to pension curtailment charges and aircraft and aircraft related write-downs.
Unusual non-operating items consisted of an $18 million loss on the sale of the Company's Pinnacle Airlines note to Pinnacle
Airlines Corp. and a gain of $102 million from the sale of the Prudential Financial Inc. common stock received in
conjunction with Prudential's demutualization. Reorganization expenses recorded during 2005 totaled $1.08 billion. See
"Item 8. Consolidated Financial Statements and Supplementary Data, Note 5 - Reorganization Related Items" for further
information related to the Company's reorganization items. The Company also recorded a cumulative effect of accounting
change in the amount of $69 million during 2005.
Full year 2004 results included $165 million of net unusual 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 a $77 million charge resulting from an increase in frequent flyer liability, partially offset by a
$115 million gain from the sale of the Company's investment in Orbitz.
Full year 2003 results included $801 million of net unusual 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.
Chapter 11 Proceedings
On September 14, 2005, NW A Corp. and 12 of its direct and indirect subsidiaries filed voluntary petitions for relief
under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the Southern District of
New York. Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NW A Corp., also
filed a voluntary petition for relief under Chapter 11. The Bankruptcy Court is jointly administering these cases under the
caption "In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)". The consolidated financial statements
shown herein include certain subsidiaries that did not file to reorganize under Chapter 11. The assets and liabilities of these
subsidiaries are not considered material to the consolidated financial statements. See "Item 8. Consolidated Financial
Statements and Supplementary Data, Note 1 - Voluntary Reorganization Under Chapter 11" for additional information
related to the Company's rights, risks and obligations under the Chapter 11 filing.
Our consolidated financial statements have been prepared in accordance with GAAP on a going concern basis, which
contemplates the realization of assets and the satisfaction ofliabilities in the normal course of business. Accordingly, our
consolidated financial statements do not include any adjustments relating to the recoverability of assets and classification of
liabilities that might be necessary should we be unable to continue as a going concern.
25
However, as a result of the matters discussed under "Item 1. Business - Risk Factors Related to Northwest and
the Airline Industry," including the Company's Chapter 11 proceedings, realization of assets and satisfaction of
liabilities, without substantial adjustments and/or changes in ownership, are subject to uncertainties. Given these
uncertainties, there is substantial doubt about the Company's ability to continue as a going concern.
The bankruptcy filing triggered defaults on substantially all the Company's debt and lease obligations. Under
Section 362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor,
including most actions to collect pre-petition indebtedness or to exercise control over the property of a debtor's estate.
Absent an order of the Bankruptcy Court, substantially all pre-petition liabilities are subject to settlement under the plan of
reorganization.
Notwithstanding the preceding general discussion of the automatic stay, the Debtors' rights to possess and operate
certain qualifying aircraft, aircraft engines and other aircraft-related equipment that are leased or subject to a security interest
or conditional sale contract are governed by a particular provision of the Bankruptcy Code that specifies different treatment.
Section 1110 provides that unless the Debtors take certain action within 60 days after the Petition Date or such later date as is
agreed by the applicable lessor, secured party, or conditional lender, the contractual rights of such financier to take possession
of such equipment and to enforce any of its other rights or remedies under the applicable agreement are not limited or
otherwise affected by the automatic stay or any other provision of the Bankruptcy Code. This applies to substantially all of
the Company's encumbered aircraft.
The Section 1110 deadline for the Debtors was November 14, 2005. The Debtor has targeted to restructure
approximately 50% of its fleet count and is on track to realize a projected reduction of approximately $2.6 billion in balance
sheet debt and present value of operating lease payments related to these assets. Agreements are in place or have been
tentatively reached for the majority of the targeted savings; manufacturer agreements have also been reached with certain
aircraft, aircraft engine, and aircraft-related equipment manufacturers. The Company is currently in negotiations with the
other parties.
In order to exit Chapter 11 successfully, the Company must propose, and obtain confirmation by the Bankruptcy Court
of a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would resolve,
among other things, the Debtors' pre-petition obligations and set forth the revised capital structure of the newly reorganized
entity. The Debtors have the exclusive right for 120 days from the Petition Date to file a plan of reorganization and, if they
do so, 60 additional days to obtain necessary acceptance of the plan. On January 10, 2006, pursuant to Section l 12l(d) of the
Bankruptcy Code, the Bankruptcy Court approved a motion filed by the Debtors to extend the deadline of the Debtors'
exclusive right to file a plan of reorganization and the deadline to obtain necessary acceptance of the plan to July 13, 2006
and September 12, 2006, respectively.
The Company intends to use the provisions of Chapter 11 to reorganize its business in order to return to profitability on a
sustained basis. The Chapter 11 process will allow the Company to realize three major elements essential to its
transformation including:
Resizing and optimization of the Company's fleet to better serve Northwest's markets;
Realizing a competitive cost structure, including $2.2 billion in annual reductions in both labor and non-labor
costs, $1. 7 billion of which is incremental to year-end 2005 results;
Restructuring and recapitalization of the Company's balance sheet, including a targeted reduction in debt and
lease obligations of approximately $4.2 - $4.4 billion, providing debt and equity levels consistent with long-term
profitability.
In addition, any business plan that forms the basis for a plan of reorganization will have to produce sufficient returns to
permit the Company to have adequate access to the capital markets. Any plan will likely require profit improvements and/or
cost reductions beyond those elements identified above. The Company will continue to refine its Chapter 11 related goals
and objectives in response to market conditions.
Labor Cost Restructuring. The Company is making progress in achievmg its target of approximately $1.35 billion (target
excluding pension savings) in annual labor cost savings through a combination of agreements negotiated with its employee
labor groups, savings generated by the imposed AMF A contract, reductions .in retiree medical benefit costs, and pay and
benefit reductions from its management employees.
In 2004, as a first step toward achieving labor savings, the Company reached a bridge agreement with its pilots. The
bridge agreement, effective December I, 2004, generated $285 million in annual labor cost savings from the Company's pilot
26
and management employees.
On August 19, 2005, the AMF A, which represents mechanics, cleaners and custodians at Northwest, declined to send the
terms of the Company's final contract offer to its membership for ratification and called a strike against the Company. As a
result, the Company implemented its previously developed contingency plans. Since August 19, the Company has held
multiple negotiations with AMF A, but no resolution has been reached. The Company has subsequently replaced the aircraft
mechanics and cleaners who went on strike with a combination of newly hired personnel, AMF A members who crossed the
picket lines to reclaim their jobs, and third party contractors.
The Company reached consensual agreements on permanent wage and benefit reductions with employees represented by
three of its union groups, the Aircraft Technical Support Association ("ATSA"), the Northwest Airlines Meteorology
Association ("NAMA") and the Transport Workers Union of America {"TWU"), in November 2005. The Company
implemented management and salaried pay and benefit reductions on December 1, 2005.
On January 13, 2006, the 1AM, which represents the Company's ground employees, agreed to submit the Company's
contract settlement proposal to its members for ratification. As a result of the IAM's agreement, the Company did not begin
the Section 1113( c) hearing related to the 1AM collective bargaining agreements. On March 7, 2006, the 1AM announced
that the contract proposal, covering the Company's customer service and reservations employees, was ratified by a majority
of its members. However, the Company's contract proposal was not ratified by the JAM-represented ESEs. As a
consequence of the ESE ratification vote results, the Company will request that the Bankruptcy Court proceed with the
motion for a Section l l 13(c) hearing related to the ESE members of the 1AM.
On March 1, 2006, the Company reached a tentative consensual agreement on a new contract with its flight attendants
represented by the PF AA. The flight attendant agreement is subject to ratification by the Company's PF AA-represented
employees. On March 3, 2006, the Company reached a tentative consensual agreement on a new contract with its pilots,
represented by ALPA. The pilot agreement is subject to approval by Northwest's ALP A-represented employees. Currently,
all of the tentative agreements, and the 1AM contract proposal, are conditioned on the other agreements becoming effective or
on the Company's obtaining the contemplated savings through implementation of new contract terms.
In November 2005, the Company obtained interim wage reductions either consensually or through Section l 113(e),
which will remain in place until the resolution of the Section 1113(c) process.
The Company has also commenced proceedings under Section 1114 of the Bankruptcy Code in conjuction with its
Section 1113( c) hearings pursuant to which the Company is seeking reductions in the costs it incurs to provide medical
benefits to retirees.
Non-labor Cost Restructuring. Since 2001, the Company has achieved approximately $1.4 billion of operating
improvements through cost reductions and revenue enhancement initiatives. The Company intends to obtain additional
savings of $150 million annually through further reductions in non-labor costs. Areas targeted for reduction include
technology related costs, distribution expenses, procurement costs and other items. Additionally, cost reductions through
restructuring of the Company's agreements with its regional carriers will be pursued.
Balance Sheet Restructuring. In the face of mounting losses and prior to its bankruptcy filing, the Company sustained its
operations largely through a strategy that included borrowing cash and selling assets. This had the consequence of leaving
the Company with a debt burden of $14 billion, which includes $5 billion of aircraft-related operating lease present value
commitments. To successfully restructure and exit bankruptcy, the Company must eliminate excess debt and recapitalize its
balance sheet. With respect to its aircraft-related debt, the Company intends to use the authority provided by its Chapter 11
proceedings to negotiate reductions in above-market aircraft leases or, in cases where this is not possible, to return the
affected aircraft. The Company will reduce unprofitable flying and re-optimize its network as part of any capacity reduction.
The Company is targeting annual cost reductions of $400 million related to reductions in aircraft ownership costs (interest,
rent and depreciation expense) and $150 million in unsecured debt restructuring savings (primarily interest expense) as part
of its overall balance sheet restructuring.
Results of Operations----2005 Compared to 2004
Operating Revenues. Operating revenues increased 8.9% ($1.0 billion), the result of higher system passenger, regional
carrier, cargo and other revenue.
System passenger revenues increased 5.6% ($470 million). The increase in system passenger revenues was primarily
attributable to a 3.4% increase in traffic and a 2.1 % increase in yields. The following analysis by region is based on
27
information reported to the DOT and excludes regional carriers:
Sistem Domestic Pacific Atlantic
2005
Passenger revenues (in millions) ........... $ 8,902 $ 5,774 $ 1,987 $ 1,141
Increase (Decrease) from 2004:
Passenger revenues (in millions) ........... 470 108 210 152
Percent. .............................................. 5.6% 1.9% 11.8% 15.4%
Scheduled service ASMs (capacity) ...... 0.4% (1.7)% 2.2% 6.7%
Scheduled service RPMs (traffic) ......... 3.4% 2.6% 2.7% 8.4%
Passenger load factor ............................ 2.4pts. 3.3pts. 0.4pts. l .3pts.
Yield ...................................................... 2.1% (0.6)% 8.9% 6.4%
Passenger RASM .................................. 5.1% 3.7% 9.5% 8.0%
As indicated in the above table:
Domestic passenger revenues increased primarily due to improved traffic. Year over year decrease in capacity was
driven by a 9.2% capacity reduction in the fourth quarter of 2005.
Pacific passenger revenues increased as a result of stronger traffic and substantially improved yields.
Atlantic passenger revenues increased significantly primarily due to improved traffic and yields.
Regional carrier revenues increased 23.3% ($252 million) to $1.3 billion, due primarily to the increased capacity from
Bombardier CRJ aircraft deliveries.
Cargo revenues increased 14.1 % ($117 million) to $947 million due to a 2.5% increase in cargo ton miles and an 11.4%
increase in yield. Cargo revenues consist of freight and mail carried on passenger aircraft and the Company's 13 Boeing
747-200F dedicated freighters.
Other revenues, the principal components of which are ML T, other transportation fees, charter and rental revenues,
increased 18.0% ($168 million). This increase was primarily due to the higher rental revenues and other transportation
related revenues.
Operating Expenses. Operating expenses increased 12.1 % ($1.4 billion) for 2005. The following table and notes present
operating expenses for the years ended December 31, 2005 and 2004 and describe significant year-over-year variances (in
millions):
Year Ended
Increase
December31
(Decrease)
Percent
200S 2004 from 2004 Change Note
Operating Expenses
Salaries, wages and benefits .................................................. $ 3,721 $ 3,796 $ (75) (2.0)% A
Aircraft fuel and taxes ............................................................ 3,132 2,203 929 42.2 B
Selling and marketing ............................................................ 811 847 (36) (4.3) C
Aircraft maintenance materials and repairs ............................ 703 463 240 51.8 D
Other rentals and landing fees ................................................ 627 596 31 5.2 E
Depreciation and amortization ............................................... 552 731 (179) (24.5) F
Aircraft rentals ....................................................................... 429 446 (17) (3.8) G
Regional carrier expenses ...................................................... 1,576 1,210 366 30.2 H
Other ...................................................................................... 1,654 1,492 162 10.9 I
Total operating expenses ................................................. $ 13,205 $ 11,784 $ 1,421 12.1%
A. Salaries, wages and benefits decreased primarily due to pilot and management wage reductions implemented in
December 2004, reduced AMF A mechanic pay and headcount, and interim wage reductions, partially offset by higher
pension related expense including an $82 million pension curtailment.
28
B. Aircraft fuel and taxes were higher due to a 44.5% increase in the average fuel cost per gallon to $1. 71, net of hedging
transactions. Fuel hedge transactions reduced fuel costs by $21 million in 2005 and $29 million in 2004.
C. Selling and marketing expenses decreased, primarily due to the one-time $77 million frequent flyer liability adjustment
recorded in 2004, partially offset by transaction costs on year over year higher revenue.
D. The increase in aircraft maintenance materials and repairs expense was largely due to the shift to third party maintenance
vendors versus internally completed maintenance work and higher maintenance volume compared to 2004.
E. Other rentals and landing fees increased due to higher rates and increased capacity.
F. Depreciation and_
amortization _
expense decreased in 2005, primarily due to the level of aircraft impairments recorded in
2004 versus 2005. In 2005 the Company recorded $8 million in impairments associated with certain Boeing DCI0-30
and DC9-30 aircraft; in 2004, the Company recorded $203 million in write-downs on certain Boeing 747-200, Boeing
DCI0-30 and DC9-10 aircraft. Additional aircraft impairments in 2005 were recorded as reorganization items. See
"Item 8. Consolidated Financial Statements and Supplementary Data, Note 5 - Reorganization Related Items."
G. Aircraft rentals expense decreased due to the purchase of four aircraft off lease in 2004 and the rejection of aircraft leases
in 2005.
H. The increase in regional carrier expenses was primarily driven by the increase in fuel costs ($181 million) and the
increase in regional carrier capacity ($185 million).
I. Other expenses (which include MLT operating expenses, outside services, insurance, passenger food, personnel
expenses, communication expenses and supplies) increased principally due to contingency planning related expenses,
vendor training and transition related expense, and wet-leased freighter flying.
Other Income and Expense. Non-operating expense increased 332% ($1.18 billion) primarily due to reorganization
expenses that totaled $1.08 billion. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 5 -
Reorganization Related Items" for additional information related to the Company's reorganization items.
Tax Expense (Benefit). Given recent loss experience, the Company provides a valuation allowance 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 13 - Income Taxes" for additional
discussion of the Company's tax accounts.
29
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:
System Domestic Pacific Atlantic
2004
Passenger revenues (in millions) ....................................... . $ 8,432 $ 5,666 $ 1,777 $
Increase (Decrease) from 2003:
Passenger revenues (in millions) ....................................... . 800 326 357
Percent .......................................................................... . 10.5% 6.1% 25.1%
Scheduled service ASMs (capacity) .................................. . 3.1% 3.0% 2.9%
Scheduled service RP Ms (traffic) ..................................... . 7.1% 6.0% 9.9%
Passenger load factor ........................................................ . 2.9pts. 2. lpts. 5.5pts.
Yield ................................................................................. . 3.1% 0.2% 13.8%
Passenger RASM .............................................................. . 7.2% 3.0% 21.6%
As indicated in the above table:
Domestic passenger revenues increased primarily due to improved traffic.
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.
989
117
13.5%
4.1%
6.3%
l.7pts.
6.8%
9.0%
Regional carrier revenues increased 25.9% ($233 million) to $1.1 billion, 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% ($7.8 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 halfof2003, 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, and 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 rental revenue from the additional CRJ aircraft leased to
Pinnacle Airlines from Northwest, and the 2003 elimination of intercompany transactions.
Operating Expenses. Operating expenses increased 13 .9% ($1.4 billion) for 2004. The following table and notes present
operating expenses for the year ended December 31, 2004 and describes significant variances from the year ended
December 31, 2003 (in millions):
Year Ended Increase
December 31 (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 (5) (0.3) I
Total operating expenses ................................................. $ 11,784 $ 10,342 $ 1,442 13.9%
30
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 DCI0-30 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 ML T operating expenses and the
consolidation of Pinnacle Airlines in 2003.
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 Co,npany'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, the Company
provides a valuation allowance 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 13 - Income Taxes" for additional discussion of the Company's tax accounts.
31
Liquidity and Capital Resources
As of December 31, 2005, the Company's total liquidity, consisting of unrestricted balance sheet cash, cash equivalents
and short-term investments, was $1.26 billion. This amount excludes $600 million of restricted short-term investments
( which may include amounts held as cash). Liquidity decreased by $1.2 billion during the year ended December 31, 2005.
Significant Liquidity Events
Bank Term Loan. 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 had an initial principal amount of$975 million and was comprised of two tranches bearing different
interest rates and with different principal amortization periods.
On April 15, 2005, the Company refinanced the first principal repayment of $148 million due in November 2005 under
the $975 million term loan facility by creating a third tranche of debt.
On December 22, 2005, the Bankruptcy Court approved a stipulation permitting the Company to pay interest at the non-
default contract interest rate and stay current on interest going forward on its $975 million term loan, as well as requiring the
Company to comply with certain reporting covenants. This stipulation allows the Company during bankruptcy proceedings
to avoid repaying principal and to continue paying interest based on LIBOR while allowing the Company and the lenders to
reserve their rights and remedies under the existing agreement. Additionally, the stipulation did not remove the automatic
stay the Company is entitled to with respect to requirements to meet financial covenants and collateral tests under the term
loan. The term loan has an outstanding principal amount of $975 million and currently bears interest at a blended rate of
LIBOR plus 6.01 %. The term loan is secured by the Company's Pacific route system and certain aircraft.
Credit Card Processing Agreements. In September 2005, Northwest executed an agreement that amended and restated
its Credit Card Processing Agreement with U.S. Banlc The new agreement extends the term until December 31, 2008,
includes a provision that will allow a certain level of funds to be withheld by U.S. Bank from credit card sales, and secures all
obligations under the agreement as well as those under the Co-Branded Credit Card Agreement and the letter of credit facility
with U.S. Bank referred to below. Such amounts withheld by U.S. Bank would be released in part or in whole upon
Northwest meeting certain financial requirements. As part of this agreement, U.S. Bank is currently holding certain amounts,
which are reflected as components of Other assets on the Company's Consolidated Balance Sheets.
The agreement also provides for certain amendments to the Co-Branded Credit Card Agreement, which was also
extended until December 31, 2008. In addition, the agreement includes an extension ofNorthwest's $98 million standby
letter of credit facility through April 30, 2006, which allows for letters of credit to be outstanding through April 30, 2007.
The Bankruptcy Court entered a final order in October 2005 that authorized Northwest to assume the Credit Card
Processing Agreement, to continue to perform under the Co-Branded Credit Card Agreement, and to continue the $98 million
standby letter of credit facility.
In October 2005, Northwest executed an addendum to its airline card services agreement with American Express Travel
Related Services Company, Inc., ("American Express"), that provides for tQ.e retention of certain funds by American Express
from credit card sales. The initial reserve will increase or decrease based on Northwest achieving certain financial
requirements. As part of this agreement, American Express is currently holding certain amounts, which are reflected as
components of Other assets on the Company's Consolidated Balance Sheets. The Bankruptcy Court entered a final order in
November 2005, which authorized Northwest to assume certain agreements, as modified, with American Express.
Cash Flow Activities
Operating Activities. Net cash used in operating activities for the year ended December 31, 2005 totaled $437 million, a
$713 million decrease from the $276 million of cash provided by operating activities for the year ended December 31, 2004.
This decrease was driven primarily by an increase in net loss in 2005 versus 2004 and a $290 million increase in vendor
deposits and holdbacks.
32
Investing Activities. Investing activities during 2005 consisted primarily of the sale of short-term investments, aircraft
capital expenditures and other related costs. Other related costs include engine purchases, costs to commission aircraft before
entering revenue service, deposits on ordered aircraft, facility improvements and ground equipment purchases.
Investing activities during 2005 also included $277 million of additional funding to the Company's irrevocable tax trust,
which increased the Company's restricted cash, cash equivalents and short-term investment balance. See "Item 8.
Consolidated Financial Statements and Supplementary Data, Note 2 - Summary of Significant Accounting Policies" for
additional information regarding the Company's irrevocable tax trust. Additionally, investing activities during 2005 included
proceeds of $102 million from the sale of the Company's note receivable from Pinnacle Airlines and $102 million in
proceeds from the sale of the Prudential Financial Inc. common stock received in conjunction with Prudential's
demutualization.
Financing Activities. Financing activities during 2005 included financing one Airbus A330-300 aircraft with long-term
debt, debt proceeds of $227 million from three secured financing agreements, debt proceeds of $101 million from the
financing of certain of the Company's properties in Tokyo, repayment of $188 million unsecured notes due in March 2005,
plus payment of other debt and capital lease obligations.
Non-Cash Flow Transactions and Leasing Activities. In addition to the one Airbus A330-300 aircraft financed with debt
proceeds discussed above, the Company also took delivery of six Airbus A3 l 9, two Airbus A330-300 and 24 Bombardier
CRJ aircraft during 2005. The six Airbus A319 and two Airbus A330 aircraft were acquired largely through non-cash
transactions with the manufacturer, which are not classified as cash flow activities. The Company entered into long-term
operating leases on 23 CRJ aircraft. One CRJ aircraft was acquired in 2005 as a substitute for a similar CRJ aircraft that was
under a lease and was subject to an event of loss in 2004. Subsequent to the Company's bankruptcy filing, seven out of the
24 CRJ leases signed in 2005 were rejected. The Company subleased 15 of the remaining Bombardier CRJ aircraft to
Pinnacle Airlines, and the other two were subleased to Mesaba.
Investing activities affecting cash flows and non-cash flow transactions and leasing activities related to the initial
acquisition of aircraft consisted of the following for the year ended December 31, 2005:
Airbus A3 19 ................................................... .
Airbus A330-300 ........................................... .
Bombardier CRJ - 440 ................................... .
Bombardier CRJ - 200 ................................... .
Investing Activities
Affecting Cash Flows
Non-cash Transactions and
Leasing Activities
6
2
12
12
32
The bankruptcy filing triggered defaults on substantially all the Company's debt and lease obligations. For further
discussion related to the Company's long-term pre-petition debt and capital lease obligations that are classified as liabilities
subject to compromise, refer to "Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 - Liabilities
Subject to Compromise." Additionally, see "Item 8. Consolidated Financial Statements and Supplementary Data, Note 7 -
Long-Term Debt and Short-Term Borrowings, and Note 8 - Leases," for additional information related to the Company's
debt and lease obligations that are not classified as subject to compromise.
Prior Years ' Cash Flow Activities
As of December 31, 2004, the Company's total liquidity, consisting of unrestricted balance sheet cash, cash equivalents
and short-term investments, was $2.46 billion. This amount excludes $156 million ofrestricted short-term investments
(which may include amounts held as cash). As of December 31, 2003, the Company had total liquidity of $2.76 billion.
Operating Activities. Net cash provided by operating activities for the year ended December 31, 2004 totaled $276
million, a $99 million decrease from the $375 million of cash provided by operating activities for the year ended
December 31, 2003.
33
Investing Activities. 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% ofthe 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 for the sale of
the Company's interest in Hotwire and $13 million from the sale of a portion of its investment in Orbitz.
Financing Activities. Financing activities in 2004 consisted primarily of the issuance of $300 million ofunsecured notes
due in 2009, repayment of$138 million of 8.375% unsecured notes in March 2004, repayment of$195 million of 8.52%
unsecured notes in April 2004, the restructuring of the Company's $975 million revolving bank credit facility, 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.
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 of7.625% 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 A3 l 9 aircraft with long-term debt.
Contractual Obligations. The following table summarizes the Compan.y' s commitments to make long-term debt and
minimum lease payments, aircraft purchases, and certain other obligations for the years ending December 31 that were
entered into by the Company post-petition. The Company is evaluating all its commitments as part of its overall plan of
reorganization. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 6 -Liabilities Subject to
Compromise" for additional information on liabilities stayed as part of the Company's Chapter 11 filing.
(In millions) 2006 2007 2008 2009 2010 Thereafter Total
Long-term debt (1) ............. $ 74 $ 78 $ 233 $ 142 $ 84 $ 548 $ 1,159
Capital leases (2) ................ 11 11
Operating leases: (3)
Aircraft ........................... 79 86 84 78 74 309 710
Non-aircraft .................... 2 2 1 1 1 12 19
Aircraft
commitments ( 4) ............ 595 831 93 109 73 1,701
Other purchase
obligations (5) ................
Total (6) ............................. $ 761 $ 997 $ 318 $ 314 $ 268 $ 942 $ 3,600
(1) Amounts represent principal payments only for long-term debt that is not subject to compromise.
(2) Amounts represent principal payments only for capital leases that are not subject to compromise. See "Item 8.
Consolidated Financial Statements and Supplementary Data, Note 8 - Leases" for information related to interest on
these amounts.
(3) Amounts represent minimum lease payments for noncancelable operating leases that are not subject to compromise
with initial or remaining terms of more than one year. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 8 -Leases" for information related to these amounts and the Company's overall lease
commitments.
(4) The amounts presented represent contractual commitments for firm-order aircraft which have been assumed post-
petition. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 14- Commitments" for a
discussion of these purchase commitments.
(5) The Company is reviewing its executory contracts under Section 365 of the Bankruptcy Code. No non-cancelable
commitments related to Other Purchase Obligations have been entered by the Company subsequent to its Chapter 11
filing.
34
(6) Purchase orders made in the ordinary course of business are excluded from the table. Any amounts for which the
Company is liable under purchase orders are reflected in the consolidated balance sheets as accounts payable and
accrued liabilities.
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 FASB.
Pension Funding Obligations. The Company has several defined benefit plans covering substantially all of its
employees. As of December 31, 2005, the Company's pension plans were substantially underfunded as measured under the
provisions of SF AS No. 87. Projected benefit obligations under the plans totaled $9 .5 billion, approximately $3. 7 billion in
excess of the fair value of plan assets. Absent a distressed plan termination or future asset returns substantially in excess of
plan assumptions, we will have to satisfy the underfunded amounts through cash contributions over time. The timing and
amount of funding requirements are also dependent upon a number of other factors, including asset returns, interest rates,
changes in pension legislation related to funding requirements, the Company's Chapter 11 proceedings and labor
negotiations, applications for and receipt of waivers to reschedule contributions, and changes to pension plan benefits.
Effective August 31, 2005 and January 31, 2006 the Company froze future benefit accruals under the Northwest Airlines
Pension Plans for Salaried and Pilot Employees, respectively. Replacement pension coverage will be provided for these
employees through a 401 (k)-type defined contribution plan. See "Item 8. Consolidated Financial Statements and
Supplementary Data, Note 16 - Pension and Other Postretirement Health Care Benefits" for additional discussion of actuarial
assumptions used in determining pension liability and expense.
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 and foreign slots, international routes, aircraft and engines).
On April I 0, 2004, the President signed into law the Pension Funding Equity Act ("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 th~t 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 of30-year U.S. Treasury rates. Including the effect of the Pension Act, the Company's
2005 calendar year cash contributions to qualified defined benefit pension pfans were expected to approximate $411 million.
Through September 14, 2005, the Company had contributed $268 million to these plans. As a result of the Company's
voluntarily filing for Chapter 11 on September 14, 2005, the Company did not make scheduled minimum cash contributions
to its qualified defined benefit pension plans for September and October, 2005 in the amounts of $59 million and $83 million,
respectively. The Company currently intends, however, to continue timely to pay the normal cost component of the plans'
minimum funding requirements relating to service rendered post-petition. The Company has appointed an independent
fiduciary for all of its tax-qualified defined benefit pension plans, who is charged with pursuing, on behalf of the plans,
claims to recover minimum funding contributions due under federal law, to the extent that the Debtors are not continuing to
fund the plans due to bankruptcy prohibitions. The plans' level of underfunding is expected to increase during the Chapter
11 cases.
The U.S. Senate approved a pension reform bill in November 2005 that would give airlines the option of amortizing
pension liabilities over a twenty-year period. The pension reform bill passed by the U.S. House of Representatives in
December 2005 does not include a similar provision. The bills are expected to go to conference committee in early 2006 and
it is currently not possible to predict the outcome.
35
The funding requirement to meet the normal cost component of the qualified plans' minimum funding requirements
related to post-petition service is currently estimated at approximately $75 million for calendar year 2006. Due to
uncertainties regarding significant assumptions involved in estimating future required contributions to its defined benefit
pension plans, such as the amount and timing of asset returns, interest rate levels, the Company's Chapter 11 proceedings,
and in particular, the impact of proposed pension legislation related to funding requirements, the Company is not able to
reasonably estimate its future required contributions beyond 2006. If the Company is unable to obtain sufficient legislative
pension relief, termination of the defined benefit plans would become inevitable. Moreover, termination of the pilot defined
benefit pension plan would become more likely should the tentative new collective bargaining agreement reached between
ALP A and the Company not be ratified.
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.
The accompanying consolidated financial statements have been prepared in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the
Bankruptcy Code ("SOP 90-7"), and on a going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of post-petition liabilities in the ordinary course of business. In accordance with SOP 90-7, the
financial statements for the periods presented distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the Company. While operating as debtors-in-possession under the protection
of Chapter 11 of the Bankruptcy Code and subject to approval of the Bankruptcy Court or otherwise as permitted in the
ordinary course of business, the Debtors may sell or otherwise dispose of assets, or liquidate and settle liabilities, for some
amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization could materially
change the amounts and classifications in the historical financial statements.-
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 2 - 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.
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 passenger behavior that affect these estimates could have a significant impact on the
Consolidated Financial Statements.
Asset Valuation and Impairments. The Company evaluates long-lived assets for potential impairments in compliance
with SFAS No. 144, Accounting/or 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.
36
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 goodwill and indefinite lived intangible
assets for impairment on an annual basis rather than amortize such assets. The Company adopted SF AS No. 142 as of
January 1, 2002, and as a result no longer amortizes its indefinite lived intangible assets and goodwill, but instead tests the
balance for impairment annually and/or when an impairment indicator exists.
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, 2005. 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.
Pension Liability and Expense. The Company has several defined benefit pension plans covering substantially all of its
employees. The Company accounts for its defined benefit pension plans in accordance with SF AS 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. Effective August 31, 2005 and January 31, 2006
the Company froze future benefit accruals under the Northwest Airlines Pension Plans for Salaried and Pilot Employees,
respectively. Replacement pension coverage will be provided for these employees through a 401 (k)-type defined
contribution plan. See "Item 8. Consolidated Financial Statements and Supplementary Data, Note 16 - Pension and Other
Postretirement Health Care Benefits" for additional discussion of actuarial assumptions used in determining pension liability
and expense.
During the second quarter of 2005, the Company changed its method ofrecognizing certain pension plan administrative
expenses associated with the Company's defined benefit pension plans and now includes them as a service cost component of
net periodic pension cost. These expenses include trustee fees, other administrative expenses and insurance premiums paid to
the PBGC, all of which were previously reflected as a reduction in the market value of plan assets and therefore amortized
with other asset gains and losses. The Company believes the change is preferable because it more appropriately ascribes the
expenses to the period in which they are incurred. The cumulative effect of applying this change to net periodic pension
expense in prior years is $69 .1 million, which has been retroactively recorded as of January 1, 2005, and is included in the
Company's Consolidated Statements of Operations for the twelve months ended December 31, 2005.
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.
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 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 ofactive management the funds have provided historically. The Company's expected long-term rate of
return for 2006 is based on target asset allocations of 45% domestic equities with an expected rate of return of 8. 75%; 25%
international equities with an expected rate of return of 8.75%; 10% private markets with an expected rate ofreturn of
12.25%; 15% long-duration bonds with an expected rate of return of 5.75%; and 5% high yield bonds with an expected rate
of return of 7%. These assumptions result in a weighted geometric average rate of return of 9% on an annual basis. The
Company has historically weighted these assumptions based on an arithmetic average. Beginning in 2006, the Company will
weight the above category rate-of-return assumptions based on a geometric average. The Company believes this change in
estimate is preferable to its prior method in that it incorporates the underlying volatility of various asset category rate-of-
return trends. The Company's expected long-term rate ofreturn on plan assets for calendar year 2005 and 2004 was 9.5%.
37
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 5.71% to be appropriate at December 31, 2005, versus the 5.90% discount rate used at December 31, 2004.
For the year ended December 31, 2005, accounting for the changes r~lated to the Company's pension plans resulted in a
net decrease to accumulated other comprehensive income of $16 million on a pre-tax basis. The negative impact on
accumulated other comprehensive income was principally due to a 5.1 % rise in benefit obligations driven by a .19% decrease
in the discount rate from 5.90% to 5.71%, offset by a 6.8% 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 0.25% woul.d have changed accumulated
other comprehensive income by $317 million on a pre-tax basis.
As of February I, 2006 the majority of the Company's qualified pension plans whose benefits were in part impacted by
projected rate of future compensation increases were frozen. Compensation increases assumption for remaining plans does
not materially impact the Company's pension expense.
For the year ended December 31, 2005, the Company recognized consolidated pre-tax pension expense of $567 million,
including replacement defined contribution requirements, up from $444 million in 2004. 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 $29 million in 2006. 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 $23 million in 2006.
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.
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 frequ~nt 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 CQmpany expects to receive for their frequent flyer
members' redemption travel on Northwest. Northwest recorded a liability for these estimated awards of $248 million, $215
million, and $119 million at December 31, 2005, 2004 and 2003, respectively.
38
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.
Deferred Tax Asset: 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. 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.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections ("SFAS No. 154"). This
Statement, which replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements, requires that a voluntary change in accounting principle be applied retroactively to
all prior period financial statements presented, unless it is impractical to do so. SFAS No. 154 also provides that a change in
method of depreciating or amortizing a long-lived non-financial asset be accounted for as a change in estimate effected by a
change in accounting principle, and also provides that correction of errors in previously issued financial statements should be
termed a "restatement." SFAS No. 154 is effective for the fiscal year beginning January 1, 2006.
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, Accounting for Stock Issued to Employees ("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 SF AS 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. The Company will adopt SFAS No. 123R, using the
modified-prospective transition method, effective January 1, 2006.
Item 7 A. 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 17 - 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, 2005 cost per gallon of fuel,
assuming projected 2006 mainline and regional aircraft fuel usage, would result in an increase to aircraft fuel expense of
approximately $323 million in 2006, compared to an estimated $243 million for 2005 measured at December 31, 2004. As of
December 31, 2005, the Company had no fuel hedges in place for 2006. As of December 31, 2004, the Company had hedged
approximately 25% and 6% of2005 first quarter and full year mainline fuel requirements, respectively.
39
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 ofa uniform 10% strengthening in the value ofthe U.S. dollar from December 31, 2005 levels relative to each ofthe
currencies in which the Company's revenues and expenses are denominated would result in a decrease in operating income of
approximately $126 million for the year ending December 31, 2006, compared to an estimated decrease of $99 million for
2005 measured at December 31, 2004. This sensitivity analysis was prepar_
ed based upon projected foreign currency-
denominated revenues and expenses as of December 31, 2005 and 2004. 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 Company is
currently in a net liability position, as its foreign currency-denominated liabilities exceed its foreign currency-denominated
assets. The result of a I 0% weakening in the value of the U.S. dollar would result in a decrease to other income of an
estimated $1 million in 2006, caused by the remeasurement of net foreign currency-denominated liabilities as of
December 31 , 2005. In comparison, the Company was in a net asset position in 2004, as its foreign currency-denominated
assets exceeded its foreign currency-denominated liabilities. The result of a 10% strengthening in the value of the U.S. dollar
would have resulted in a decrease to other income of an estimated $12 million,- caused by the remeasurement of net foreign
currency denominated assets at December 31, 2004. This sensitivity analysis was prepared based upon foreign currency ...
denominated assets and liabilities as of December 31, 2005 and 2004, respectively.
In 2005, the Company's yen-denominated m~t cash inflow was approximately 66 billion yen (approximately $610
million) and its yen-denominated assets exceeded its yen-denominated liabilities by an average of7 billion yen
(approximately $64 million), compared with 54 billion yen (approximately $487 million) and 15 billion yen (approximately
$143 million), respectively, in 2004. 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 2005 was favorably impacted by approximately $1 million due to the average yen being stronger in 2005
compared to 2004 and favorably impacted in 2004 by approximately $88 million due to the average yen being stronger in
2004 compared to 2003. Excluding the impact of hedging activities, the average yen to U.S. dollar exchange rate for the
years ending December 31, 2005, 2004 and 2003 was 110, 108 and 117, respectively. Including the impact of hedge
activities, the average yen to U.S. dollar exchange rate for the years ending December 31, 2005, 2004 and 2003 was 108, 110
and 117, respectively. The Japanese yen financial instruments utilized to he.dge net yen-denominated cash flows resulted in a
gain of$10.9 million and a loss of$7.8 million in 2005 and 2004, respectively. As of December 31, 2005, the Company had
entered into forward contracts to hedge approximately 5% of its anticipated 2006 yen-denominated sales at an average rate of
101 yen per U.S. dollar. This compares to 12% of its anticipated 2005 yen-denominated sales hedged as of December 31,
2004.
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 frotn 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, 2005 and December 31, 2004, the Company's interest income from cash equivalents and short-term
investments would increase by approximately $19 million and $26 million, respectively.
Subsequent to its Chapter 11 filing, the Company records or accrues post-petition interest expense on pre-petition
obligations only to the extent it believes the interest will be paid during the bankruptcy proceeding or that it is probable that
the interest will be an allowed claim. The Company's floating rate indebtedness was approximately 66% and 48% of its total
long-term debt and capital lease obligations that were accruing interest as of December 31, 2005 and 2004, respectively. If
short-term interest rates were to increase by 100 basis points throughout 2006 as measured at December 31, 2005, the
Company's interest expense would increase by approximately $42 million, compared to an estimated $42 million for 2005
measured at December 31, 2004. These amounts are determined by considering the impact of the hypothetical interest rates
on the Company's floating rate indebtedness including debt obligations subject to compromise that continue to accrue
interest, cash equivalent and short-term investment balances at December 31, 2005 and 2004.
Market risk for fixed-rate indebtedness that was not classified as subject to compromise as of December 31, 2005 is
estimated as the potential decrease in fair value resulting from a hypothetical -100 basis point increase in interest rates and
amounts to approximately $10 million measured at December 31, 2005. Thi.$ compares to an estimated $137 million
measured at December 31, 2004. The fair values of the Company's indebtedness were estimated using estimated or quoted
market prices and discounted future cash flows based on the Company's incremental borrowing rates for similar types of
arrangements.
40
Item 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Northwest Airlines Corporation (Debtor-in-Possession)
We have audited the accompanying consolidated balance sheets of Northwest Airlines Corporation (Debtor-in-
Possession) as of December 31, 2005 and 2004, 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, 2005. 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 (Debtor-in-Possession) at December 31, 2005 and 2004, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles.
As discussed in Notes 1 and 2, Northwest Airlines Corporation (Debtor-in-Possession) filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. The accompanying financial statements do not purport to reflect or
provide for the consequences of bankruptcy proceedings. In particular, sue}) financial statements do not purport to show (a) as
to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities,
all amounts that may be allowed for claims or contingencies, or the status and priority thereof; ( c) as to stockholder accounts,
the effect of any changes that may be made in the capitalization of the Company; or ( d) as to operations, the effect of any
changes that may be made in its business.
The accompanying financial statements have been prepared assuming that Northwest Airlines Corporation (Debtor-in-
Possession) will continue as a going concern. As more fully described in Notes 1 and 2, as a result of the bankruptcy filing,
realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are subject to
uncertainty and raise substantial doubt about the Company's ability to continue as a going concern. Management's plan
concerning these matters is also discussed in Notes 1 and 2. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.
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 (Debtor-in-Possession) internal control over financial reporting
as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2006 expressed an unqualified
opinion thereon.
As discussed in Note 3 to the financial statements, in 2005 the Comp3.Jly changed its method of recognizing certain
pension plan administrative expenses associated with the Company's defined benefit pension plans.
~TnLLP
Minneapolis, Minnesota
March 13, 2006
41
CURRENT ASSETS
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(In millions)
ASSETS
Cash and cash equivalents .............................................................................................................. .
Unrestricted short-term investments .......................................................... ; ................................... .
Restricted cash, cash equivalents and short-term investments ...................................................... ..
Accounts receivable, less allowance (2005-$12; 2004-$12) ..................................................... .
Flight equipment spare parts, less allowance (2005-$243; 2004-$240) .................................... .
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 ...................................................................................................................................... ..
$
$
The accompanying notes are an integral part of these consolidated financial statements.
42
December 31
2005 2004
684
578
600
592
136
128
275
2,993
10,055
2,661
7,394
1,792
1,039
753
8,147
180
80
100
363
634
41
805
1,843
13,083
$
$
707
1,752
156
460
125
92
286
3,578
9,890
2,535
7,355
1,783
1,014
769
8,124
257
111
146
671
634
55
834
2,194
14,042
CURRENT LIABILITIES
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
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 ................................................................................. .
LIABILITIES SUBJECT TO COMPROMISE ............................................................................ .
PREFERRED REDEEMABLE STOCK SUBJECT TO COMPROMISE ................................ .
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.01 par value; shares authorized-315,000,000; shares issued (2005-111,280,322;
2004-111,124,304) .................................................................................................................... .
Additional paid-in capital. .............................................................................................................. .
Accumulated deficit ....................................................................................................................... .
Accumulated other comprehensive income (loss) ......................................................................... .
Treasury stock (2005-24,024,989 shares; 2004-24,018,221 shares) ............................................. .
Total common stockholders' equity (deficit) ............................................................................. .
Total Liabilities and Stockholders' Equity (Deficit) ..................................................................... .
$
$
The accompanying notes are an integral part of these consolidated financial statements.
43
December 31
2005 2004
1,586
303
342
116
74
284
74
11
2,790
1,085
292
102
394
14,162
280
1
1,500
(4,548)
(1,568)
{1,013)
{5,628)
$
13,083 $
1,422
895
612
135
267
417
696
53
4,497
7,715
308
3,593
753
4,346
263
1,471
(1,999)
(1,547)
{1,013)
(3,087)
14,042
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
Year Ended DecemberJl
2005
OPERA TING REVENUES
Passenger .................................................................................................................................................... . s 8,902 $
Regional carrier revenues ............................................................................................................................ . 1,335
Cargo ............................ ; ............................................................................................................................. . 947
Other ........................................................................................................................................................... . 1,102
Total operating revenues ........................................................................................................................ . 12,286
OPERA TING EXPENSES
Salaries, wages and benefits ........................................................................................................................ . 3,721
Aircraft fuel and taxes ................................................................................................................................. . 3,132
Set I ing and marketing ................................................................................................................................. .
811
Aircraft maintenance materials and repairs ................................................................................................. . 703
Other rentals and landing fees ..................................................................................................................... . 627
Depreciation and amortization .................................................................................................................... . 552
Aircraft rentals ............................................................................................................................................ . 429
Regional carrier expenses ........................................................................................................................... . 1,576
Other ........................................................................................................................................................... . 1,654
Total operating expenses ........................................................................................................................ . 13,205
OPERA TING INCOME (LOSS) ........................................................................................... . (919)
OTHER INCOME (EXPENSE)
U.S. Government appropriations ................................................................................................................. .
Interest expense ........................................................................................................................................... . (610)
Interest capitalized ...................................................................................................................................... . 10
Interest of mandatorily redeemable security holder .................................................................................... ..
Investment income ...................................................................................................................................... . 80
Earnings of affiliated companies ............................................................................................ : .................... . (14)
Reorganization items, net ............................................................................................................................ . (1,081)
Other, net .................................................................................................................................................... . 77
Total other income (expense) ................................................................................................................. . (1,538)
INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE ................................................................................................................................................... .
(2,457)
Income tax expense (benefit) ...................................................................................................................... .
7
NET INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ............... . (2,464)
Cumulative effect of accounting change .................................................................................................... .. (69)
NET INCOME (LOSS) ........................................................................................................ . (2,533)
Preferred stock requirements ....................................................................................................................... . (22)
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS .................................. . s (2,555) $
EARNINGS (LOSS) PER COMMON SHARE:
Basic
Income (loss) applicable to common stockholders before cumulative effect of accounting change .. . s (28.57) $
Cumulative effect of accounting change ........................................................................................... . (0.79)
Net Income (loss) applicable to common stockholders ..................................................................... . $ (29.36) $
Diluted
Income (loss) applicable to common stockholders before cumulative effect of accounting change .. . s (28.57) $
Cumulative effect of accounting change ........................................................................................... . (0.79)
Net Income (loss) applicable to common stockholders ..................................................................... . s (29.36) $
The accompanying notes are an integral part of these consolidated financial statements.
44
2004 2003
8,432 $ 7,632
1,083 860
830 752
934 833
11,279 10,077
3,796 3,905
2,203 1,554
847 709
463 474
596 569
731 586
446 481
1,210 567
1,492 1,497
11,784 10,342
(505) (265)
209
(543) (475)
8 10
(25)
51 43
8 18
120 703
(356) 483
(861) 218
1 (30)
(862) 248
(862) 248
(29) (12)
(891) $ 236
(10.32) $ 2.75
(10.32) $ 2.75
(10.32) $ 2.62
(10.32) $ 2.62
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31
2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ........................................................................................................ .
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Reorganization items, net. ....................................................................................... .
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 supplies, prepaid expenses and other .............................. .
Decrease (increase) in vendor deposits/ho ldbacks .............................................. .
Increase (decrease) in air traffic liability ............................................................. .
Increase (decrease) in accounts payable .............................................................. .
Increase (decrease) in other liabilities ................................................................. .
Net cash provided by (used in) operating activities ........................................ .
NET CASH PROVIDED BY (USED IN) REORGANIZATION ACTIVITIES ..... .
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures .................................................................................................... .
Purchases of short-term investments ........................................................................... .
Proceeds from sales of short-term investments ........................................................... .
Decrease (increase) in restricted cash, cash equivalents and short-term investments ..
Proceeds from sale of property, equipment and other assets ...................................... .
Proceeds from sale of Pinnacle note receivable .......................................................... .
$ (2,533) $
1,081
552
7
(3)
457
14
(80)
20
(102)
(37)
(290)
144
206
127
(437)
1
(359)
(301)
1,606
(444)
6
102
(862) $
731
1
(3)
190
(8)
(95)
78
46
(50)
186
33
29
276
(480)
(241)
128
(34)
160
Investments in affiliated companies and other, net ..................................................... . (6)
_ _ (~l) _ _
Net cash provided by (used in) investing activities ......................................... . 609
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt .......................................................................................... . (606)
Payment of capital lease obligations ........................................................................... . (16)
Payment of short-term borrowings .............................................................................. . (14)
Proceeds from long-term debt ..................................................................................... . 448
Other, net .................................................................................................................... . (8)
Net cash provided by (used in) financing activities ........................................ . (196)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (23)
Cash and cash equivalents at beginning of period .......................................................... . 707
Cash and cash equivalents at end of period .................................................... ................ . $ 684 $
Available to be borrowed under credit facilities ............................................................. . $ $
Cash and cash equivalents and unrestricted short-term investments at end of period ...... $ 1,262 $
Supplemental Cash Flow Information:
Interest paid ................................................................................................................. . $ 529 $
Investing and Financing Activities Not Affecting Cash:
Manufacturer financing ofaircraft and other non-cash transactions ........................... . $ 344 $
The accompanying notes are an integral part of these consolidated financial statements.
45
(473)
(1,664)
(70)
(13)
1,512
(7)
(242)
(439)
1,146
707 $
$
2,459 $
505 $
705 $
248
586
(30)
215
90
(18)
(702)
14
(20)
53
36
(89)
(8)
375
(1,123)
(1,377)
1
615
(117)
(2,001)
(301)
(49)
(34)
1,359
(72)
903
(723)
1,869
1,146
1
2,757
448
290
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (DEFICIT)
(In millions)
Balance January 1, 2003 ................................ .
Net income (loss) ............................................. .
Other comprehensive income (loss) ................. .
Foreign Currency (net of $17 million of tax)
Deferred gain/loss from hedging activities
(net of $20 million of tax) ....................... .
Unrealized gain/loss on investments ........... .
Minimum pension liability adjustments (net
of $7 million of tax) .......................... .
Total ................................................................ .
Preferred Series C dividends accrued .............. .
Series C Preferred Stock converted to Common
Stock ........................................................... .
Step-up in basis of Orbitz Investment... ........... .
$225 million Convertible Debt call spread ...... .
Other ................................................................ .
Balance December 31, 2003 .......................... .
Net income (loss) ............................................. .
Other comprehensive income (loss) ................. .
Foreign Currency ........................................ .
Deferred gain/loss from hedging activities .. .
Unrealized gain/loss on investments ........... .
Minimum pension liability adjustments ...... .
Total ................................................................ .
Preferred Series C dividends accrued .............. .
Series C Preferred Stock converted to Common
Stock ........................................................... .
Stock options expensing .................................. .
Issuance of Treasury Stock .............................. .
Other ................................................................ .
Balance December 31, 2004 .......................... .
Net income (loss) ............................................. .
Other comprehensive income (loss) ................. .
Foreign Currency ........................................ .
Deferred gain/loss from hedging activities .. .
Unrealized gain/loss on investments ........... .
Minimum pension liability adjustments ..... ..
Total ................................................................ .
Preferred Series C dividends accrued .............. .
Series C Preferred Stock converted to Common
Stock ........................................................... .
Stock options expensing .................................. .
Issuance of Treasury Stock .............................. .
Other ................................................................ .
Balance December 31, 2005 ......................... ..
Common Stock
Shares Amount
110.8 $
0.1
110.9
0.1
0.1
111.1
0.2
Accumulated
Other
Additional
Paid-In Accumulated Comprehensive Treasury
$
Capital
1,455 $
Deficit Income (Loss) Stock Total
(1,316) $ (1,347) $ (1,055) $ (2,262)
248 248
(12)
30
(35)
(I)
13
30
(35)
(1)
13
255
(12)
2
11
(10)
2 ...__ ___ (:.,_3) - - - - - 6
2
11
(10)
5
1,460
2
7
2
1,471
16
13
(1,083)
(862)
(29)
(25)
(1,999)
(2,533)
(22)
6
(1,340)
3
8
4
(222)
(1,049) (2,011)
(862)
3
8
4
(222)
(1,069)
(29)
2
7
36 11
2
(1,547) (1,013) (3,087)
(7)
11
(9)
(16)
(2,533)
(7)
11
(9)
(16)
(2,554)
(22)
16
13
6
111.3 _s __
l $ 1,500 $ (4,548) _s __
( __
l,5_6_,8) $ (1,013) $ (5,628)
The accompanying notes are an integral part of these conse>lidated financial statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note I-Voluntary Reorganization Under Chapter 11 Proceedings
Bankruptcy Proceedings. On September 14, 2005 (the "Petition Date"), NWA Corp. and 12 of its direct and indirect
subsidiaries (collectively, the "Debtors") filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy
Code with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").
Subsequently, on September 30, 2005, NWA Aircraft Finance, Inc., an indirect subsidiary of NWA Corp., also filed a
voluntary petition for relief under Chapter 11 . The Bankruptcy Court is jointly administering these cases under the caption
"In re Northwest Airlines Corporation, et al., Case No. 05-17930 (ALG)" (the "Chapter 11 case"). The consolidated financial
statements shown herein include certain subsidiaries that did not file to reorganize under Chapter 11. The assets and liabilities
of these subsidiaries are not considered material to the consolidated financial statements.
The Company intends to use the provisions of Chapter 11 to reorganize its business in order to return to profitability on a
sustained basis. The Chapter 11 process will allow the Company to realize three major elements essential to it~_ __
transformation including:
Resizing and optimization of the Company's fleet to better serve Northwest's markets;
Realizing a competitive cost structure, including $2.2 billion in annual reductions in both labor and non-labor
costs, $1. 7 billion of which is incremental to year-end 2005 results;
Restructuring and recapitalization of the Company's balance sheet, including a targeted reduction in debt and
lease obligations of approximately $4.2 - $4.4 billion, providing debt and equity levels consistent with long-
term profitability.
In addition, any business plan that forms the basis for a plan of reorganization will have to produce sufficient returns to
permit the Company to have adequate access to the capital markets. Any plan will likely require profit improvements and/or
cost reductions beyond those elements identified above. The Company will continue to refine its Chapter 11 related goals and
objectives in response to market conditions.
As required by the Bankruptcy Code, the United States Trustee for the Southern District of New York appointed on
September 30, 2005, an Official Committee of Unsecured Creditors (the "Creditors' Committee"). The Creditors' Committee
and its legal representatives have a right to be heard on all matters that come before the Bankruptcy Court concerning the
reorganization. There can be no assurance that the Creditors' Committee will support the Company's positions or plan of
reorganization.
With the exception of the Company's non-debtor subsidiaries, the Company continues to operate the business as "debtor-
in-possession" under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable court orders. In general, as debtor-in-
possession, the Company is authorized under Chapter 11 to continue to operate as an ongoing business, but may not engage
in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. In conjunction
with the commencement of the Chapter 11 case, the Debtors sought and obtained several orders from the Bankruptcy Court
that were intended to enable the Debtors to operate in the normal course of business during the Chapter 11 case. The most
significant of these orders (i) authorize the Company to honor pre-petition obligations to customers, (ii) authorize the
Company to honor obligations to employees for pre-petition employee salaries, wages, incentive compensation, and benefits
and (iii) permit the Debtors to operate their consolidated cash management system during the Chapter 11 case in substantially
the same manner as it was operated prior to the commencement of the Chapter 11 case.
The bankruptcy filing triggered defaults on substantially all the Company's debt and lease obligations. Under Section
362 of the Bankruptcy Code, the filing of a bankruptcy petition automatically stays most actions against a debtor, including
most actions to collect pre-petition indebtedness or to exercise control over the property of a debtor's estate. Absent an order
of the Bankruptcy Court, substantially all pre-petition liabilities are subject to settlement under the plan of reorganization.
The Debtors' rights to possess and operate certain qualifying aircraft, aircraft engines and other aircraft-related
equipment that are leased or subject to a security interest or conditional sale contract are governed by Section 1110 of the
Bankruptcy Code ("Section 111 O"). Section 1110 provides that unless the Debtors take certain action within 60 days after the
Petition Date or such later date as is agreed by the applicable lessor, secured party, or conditional vendor, the contractual
rights of such financier to take possession of such equipment and to enforce any of its other rights or remedies under the
47
applicable agreement are not limited or otherwise affected by the automatic stay or any other provision of the Bankruptcy
Code.
The Debtors' balance sheet debt as of December 31, 2005 included $1 .7 billion in unsecured pre-petition debt
obligations. These obligations are reflected in the Debtors' liabilities subject to compromise. See "Note 6 - Liabilities
Subject to Compromise" for additional information.
Under Section 365 of the Bankruptcy Code, debtors may assume, assume and assign, or reject certain executory
contracts and unexpired leases, including leases of real property, aircraft and aircraft engines, subject to the approval of the
Bankruptcy Court and other conditions. In general, rejection of an unexpired lease or executory contract is treated as a pre-
petition breach of the lease or contract in question. Subject to certain exceptions, this rejection relieves debtors of performing
their future obligations under that lease or contract but entitles the lessor or contract counterparty to a pre-petition general
unsecured claim for damages caused by the deemed breach. These pre-petition general unsecured claims for damages, where
appropriate, are reflected in the Debtors' liabilities subject to compromise - See "Note 6 - Liabilities Subject to
Compromise." The Company expects that liabilities subject to compromise will arise in the future as a result of damage
claims resulting from the rejection of certain executory contracts and unexpired leases by the Debtors. However, the
Company expects that the assumption of certain executory contracts and unexpired leases may convert liabilities subject to
compromise to liabilities not subject to compromise. Due to the uncertain nature of many of the potential rejection and
abandonment related claims, the Company is unable to project the magnitude of these overall claims with any degree of
certainty at this time.
The Bankruptcy Code provides special treatment for collective bargaining agreements ("CBAs"), which covers
approximately 90% of the Company's employees. In particular, Section 1113( c) of the Bankruptcy Code permits the
Company to move to reject its CBAs if the Company first satisfies a number of statutorily prescribed substantive and
procedural prerequisites and obtains the Bankruptcy Court's approval of the rejection. After bargaining in good faith and
sharing relevant information with its unions, a debtor must make proposals to modify its existing CBAs based on the most
complete and reliable information available at the time. The proposed modifications must be necessary to permit the
reorganization of a debtor and must provide that all the affected parties are -
treated fairly and equitably. Ultimately, rejection
of the CB As is appropriate if the unions refuse to agree to a debtor's necessary proposal "without good cause" and the
Bankruptcy Court determines that the balance of the equities favors rejection.
On January 13, 2006, the International Association of Machinists and Aerospace Workers ("IAM''), which represents the
Company's ground employees, agreed to submit the Company's contract settlement proposal to its members for ratification.
On March 7, 2006, the 1AM announced that the contract proposal, covering the Company's customer service and reservations
employees, was ratified by a majority of its members. However, the Company's contract proposal was not ratified by the
!AM-represented equipment service employees ("ESEs"). As a consequence of the ESE ratification vote results, the
Company will request that the Bankruptcy Court proceed with the motion for a Section 1113( c) hearing related to the ESE
members of the 1AM.
On March 1, 2006, the Company reached a tentative consensual agreement on a new contract with its flight attendants
represented by the Professional Flight Attendants Association ("PF AA"). The flight attendant agreement is subject to
ratification by the Company's PF AA-represented employees. On March 3, 2006, the Company reached a tentative consensual
agreement on a new contract with its pilots, represented by the Air Line Pilots Association ("ALPA"). The pilot agreement is
subject to approval by Northwest's ALP A-represented employees.
On October 28, 2005, the Bankruptcy Court entered an order that restricts the trading of the common stock and debt
interests in the Company. The purpose of the order is to ensure that the Company does not lose the benefit of its net operating
loss carryforwards ("NOLs") for tax purposes. Under federal and state income tax law, NOLs can be used to offset future
taxable income, and thus are a valuable asset of the Debtors' estate. Certain trading in the Company's stock (or debt when the
Company is in bankruptcy) could adversely affect the Company's ability to use the NOLs. Thus, the Company obtained an
order that enables it to closely monitor certain transfers of stock and claims and restrict those transfers that may compromise
the Company's ability to use its NOLs. See "Note 13 -Income Taxes" for further information on the Company's NOLs.
The Company's common stock ceased trading on the NASDAQ stock market on September 26, 2005 and now trades in
the "over-the-counter" market under the symbol NWACQ.PK. However, the Company currently believes that no value will
be ascribed to the Company's outstanding common stock, preferred redeemable stock, or other equity securities in any plan
of reorganization.
The New York Stock Exchange advised the Company on September 15, 2005 that trading in Northwest's 10.5% Class D
48
Pass Through Certificates, Series 2003-1 due April, 1, 2009, ticker symbol NWB RP09, as well as the 9.5% Senior Quarterly
Interest Bonds due August 15, 2039 (QUIBS), ticker symbol NWB, was suspended. The QUIBS can still be traded on the
"over-the-counter" market under the symbol NWBBQ.PK, however, the Company is no longer accruing or paying interest.
In order to exit Chapter 11 successfully, the Company must propose, and obtain confirmation by the Bankruptcy Court
of, a plan of reorganization that satisfies the requirements of the Bankruptcy Code. A plan of reorganization would resolve,
among other things, the Debtors' pre-petition obligations and set forth the revised capital structure of the newly reorganized
entity. The Debtors have the exclusive right for 120 days from the Petition Date to file a plan ofreorganization and, if they do
so, 60 additional days to obtain necessary acceptance of the plan. On January 10, 2006, pursuant to Section l 12l(d) of the
Bankruptcy Code, the Bankruptcy Court approved a motion filed by the Debtors to extend the deadline of the Debtors'
exclusive right to file a plan ofreorganization and the deadline to obtain necessary acceptance of the plan to July 13, 2006
and September 12, 2006, respectively.
A plan of reorganization must be voted on by holders of impaired claims and equity interests, and must satisfy certain
requirements of the Bankruptcy Code and, as noted above, be confirmed by the Bankruptcy Court. A plan has been accepted
by holders of claims against and equity interests in a Debtor if (1) at least one-half in number and two-thirds in dollar amount
of claims actually voting in each impaired class of claims have voted to accept the plan and (2) at least two-thirds in amount
of equity interests actually voting in each impaired class of equity interests have voted to accept the plan. Under certain
circumstances set forth in the provisions of section l 129(b) of the Bankruptcy Code, the Bankruptcy Court may confirm a
plan even if such plan has not been accepted by all impaired classes of claims and equity interests. A class of claims or an
equity interest that does not receive or retain any property under the plan on account of such claims or interests is deemed to
have voted to reject the plan. The precise requirements and evidentiary showing for confirming a plan, notwithstanding its
rejection by one or more impaired classes of claims or equity interests, depends upon a number of factors, including the status
and seniority of the claims or equity interests in rejecting class, i.e., secured claims or unsecured claims, subordinated or
senior claims, preferred or common stock.
Although the Debtors expect to develop a reorganization plan during 2006 for emergence from Chapter 11, or obtain
additional extensions to its exclusivity period, there can be no assurance that a reorganization plan will be proposed by the
Debtors within the required timeframe or that additional extensions, if required, will be approved. Also, there is no assurance
that the proposed plan will be approved by claim holders or confirmed by the Bankruptcy Court.
Note 2-Summary of Significant Accounting Policies
Financial Statement Presentation: The accompanying consolidated financial statements have been prepared in
accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by
Entities in Reorganization under the Bankruptcy Code ("SOP 90-7"), and on a going concern basis, which contemplates
continuity of operations, realization of assets and liquidation of post-petition liabilities in the ordinary course of business. In
accordance with SOP 90-7, the financial statements for the periods presented distinguish transactions and events that are
directly associated with the reorganization from the ongoing operations of the Company. While operating as debtors-in-
possession under the protection of Chapter 11 of the Bankruptcy Code and subject to approval of the Bankruptcy Court or
otherwise as permitted in the ordinary course of business, the Debtors may sell or otherwise dispose of assets, or liquidate
and settle liabilities, for some amounts other than those reflected in the consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications in the historical financial statements.
The Company's consolidated financial statements have been prepared in accordance with GAAP on a going concern
basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Accordingly, our consolidated financial statements do not include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should we be unable to continue as a going concern. There are, however,
significant risks facing the Company in this regard, including the following:



The Company is currently operating under a voluntary reorganization under Chapter 11;
Attempts to reduce labor cuts may not be successful; and
The airline industry is intensely competitive .
Given these uncertainties, there is substantial doubt about the Company's ability to continue as a going concern.
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,
49
directly serving more than 248 cities in 23 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, Aeromexico, 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 14 freighter aircraft that operate through hubs in Anchorage and Tokyo.
Basis of Consolidation: NWA 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.
Increase in Restricted Cash: The Company, in the ordinary course of business, collects funds from passengers and
withholdings from employees that are required to be paid to various taxing authorities, in addition to certain taxes that are
self assessed. These include U.S. transportation taxes, passenger facility charges, fuel taxes and the employee portion of
payroll taxes, among others. The Company established an irrevocable trust in 2002 and since then has made regular deposits
to the trust from which payments are issued to the taxing authorities. The increase in the irrevocable trust balance from $5
million as of December 31, 2004, to $282 million as of December 31, 2005, represents the Company's decision in the first
quarter of2005 to increase its trust funding. Additionally, as a result of the Company filing for bankruptcy, a receivables
financing required the Company to establish a cash collateral account, the balance of which was $153 million as of December
31, 2005. These balances are included in restricted cash, cash equivalents and short-term investments on the Company's
Consolidated Balance Sheets.
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.
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 ML T, transportation fees and charter revenues, and are recognized when the service or
transportation is provided.
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 usefuf 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 F ASB Interpretation No. 2 3, 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 $357 million at December 31, 2005 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, liabilities subject to compromise, and other
liabilities. During the construction of the Detroit airport project, capital expenditures are reflected in other property and
equipment with a corresponding liability on the balance sheet. This amount totaled $133 million as of December 31, 2005.
Upon project completion, the corresponding asset and obligation will be removed from the balance sheet and will be
accounted for as an operating lease.
50
Impairment 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 or restructuring 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 December 2005, as part of the implementation of its restructuring driven fleet plan, the Company removed 18 DC9-30
aircraft from operations and determined that the Avro RJ85 fleet would be removed from service by the end of 2006. As a
result, the Company recorded, as restructuring expense, impairment charges of $153 million for the DC9-30 aircraft and the
10 owned Avro RJ85 aircraft in the fourth quarter of 2005.
In June 2005, the Company recorded $48 million for the impairment and other charges related to nine owned and two
leased aircraft of various types that it does not intend to return to service. Of the $48 million recorded, approximately $40
million related to acceleration of aircraft rent expense and other charges on the two leased aircraft and $8 million was
attributable to aircraft impairments on the nine owned aircraft.
In June 2004, as part of a revised fleet plan, the Company determined that it did not 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 DCI0-30 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 9- Mandatorily Redeemable Security" for additional information regarding impairment of foreign real property.
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 as an adjustment to the allowance for depreciation and therefore do not generate gain or loss recognition
for income statement purposes.
Airframe and Engine Maintenance: Routine maintenance, airframe and engine overhauls are charged to expense as
incurred or when the asset is inducted at the vendor for service, except engine overhaul costs covered by power-by-the-hour
type 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: 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 Intangible Assets, the Company does not amortize these intangible assets, but instead tests the balance for impairment
annually and/or when an impairment indicator exists.
Frequent Flyer Program: Northwest operates a frequent flyer loyalty program known as "WorldPerks." WorldPerks is
designed to retain and increase traveler loyalty by offering incentives for their continued patronage. Under the WorldPerks
program, miles are earned by flying on Northwest or its alliance partners and by using the services of program partners for
51
such things as credit card use, hotel stays, car rentals and other activities. Northwest sells mileage credits to the program
partners. World.Perks members accumulate mileage in their accounts and later redeem mileage for free or upgraded travel on
Northwest and other participating airlines. World.Perks members that achieve certain mileage thresholds also receive
enhanced service benefits from Northwest like special service lines, advance flight boarding and upgrades.
The Company utilizes a number of estimates in accounting for its World.Perks frequent flyer program. The Company
accounts for the frequent flyer program obligations by recording a liability fot 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 to other airlines for
WorldPerks members' redemption travel 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, 2005, 2004, and 2003 was approximately 3.6, 3.8, and 7.2 million,
respectively. Northwest recorded a liability for these estimated awards of$248 million, $215 million, and $119 million at
December 31, 2005, 2004 and 2003, respectively.
The number of travel awards used for travel on Northwest during the years ended December 31, 2005, 2004 and 2003
was approximately 1,492,000, 1,380,000 and 1,408,000, representing an estimated 7.3%, 6.9%, and 7.5% ofNorthwesfs
total RPMs for each such year, respectively. Including travel allowed on Northwest and travel on partner airlines, travel
awards represented an estimated 8.9%, 8.5%, and 8.6% ofNorthwest's total RPMs for December 31, 2005, 2004 and 2003
respectively. Northwest believes displacement ofrevenue passengers is minimal based on the low ratio of World.Perks 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.
Advertising: Advertising costs, included in selling and marketing expenses, are expensed as incurred and were $63
million, $72 million, and $82 million in 2005, 2004, and 2003, respectively.
Stock Based Compensation: As of December 31, 2005, the Company maintains stock incentive plans for officers and
key employees of the Company and a stock option plan for pilot employees. See ''Note 11 - Stock Based Compensation" for
additional discussion of stock based compensation. Effective January 1, 2003, the Company adopted the fair value method of
recording stock-based employee compensation prescribed by SFAS No. 123, Accounting/or Stock-Based Compensation
("SFAS No. 123") and accounted for this change in accounting principle using the "prospective method" as described by
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement
No. 123 ("SFAS No. 148").
In December 2004, the FASB issued SF AS No. 123R, Share-Based Payment ("SF AS No. 123R"). In addition to
requiring supplemental disclosures, SFAS No. 123R eliminates the option to apply the intrinsic value measurement
52
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
should be recognized in income based on the estimate of remaining forfeitures for awards outstanding as of the date SF AS
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. The Company will adopt SFAS No. 123R, using the modified-prospective transition method, effective January 1,
2006.
Foreign Currency: Assets and liabilities denominated in foreign currency are remeasured at current exchange rates with
resulting gains and losses generally included in net income.
Deferred Tax Assets: 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. Under the provisions ofSFAS No. 109, Accounting/or 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.
Note 3-Change in Accounting for Certain Pension Plan Administrative Expenses
During the second quarter of 2005, the Company changed its method of recognizing certain pension plan administrative
expenses associated with the Company's defined benefit pension plans and now includes them as a service cost component of
net periodic pension cost. These expenses include trustee fees, other administrative expenses and insurance premiums paid to
the Pension Benefit Guaranty Corporation ("PBGC"), all of which previously were reflected as a reduction in the market
value of plan assets and therefore amortized with other asset gains and losses. The Company believes this change is
preferable because it more appropriately ascribes the expenses to the period in which they are incurred. The cumulative effect
of applying this change to net periodic pension expense in prior years is $69.1 million, which has been retroactively recorded
as ofJanuary 1, 2005, and is included in the Company's Consolidated Statements of Operations for the year ended
December 31, 2005. The impact of this change on the year ended December 31, 2005, was an increase in net periodic benefit
cost of $3 7. 7 million.
The following table illustrates pro forma amounts as of December 31, assuming the new accounting method is applied
retroactively:
(In millions, except per share amounts)
Net Income (Loss) Applicable to Common Stockholders
Basic ...................................................................................................... .
Diluted ................................................................................................... .
Earnings (loss) per common share:
Basic ...................................................................................................... .
Diluted ................................................................................................... .
53
2005
$ (2,486) $
(2,486)
2004
(929) $
(929)
2003
219
228
$ (28.57) $ (10.75) $ 2.55
(28.57) (10.75) 2.44
Note 4--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 3 1:
(In millions, except share data)
Numerator:
Net income (loss) before cumulative effect of accounting
change ................................................................................... .
Cumulative effect of accounting change ................................... .
Preferred stock requirements ................................................... ..
Net income (loss) applicable to common stockholders ............. .
Effect of dilutive securities:
Interest on contingently convertible debt .............................. .
Adjusted net Income for diluted earnings (loss) per share ........ .
Denominator:
Weighted-average shares outstanding for basic earnings (loss)
per share ................................................................................ .
Effect of dilutive securities:
Contingently convertible debt... ............................................ .
Shares held in non-qualified rabbi trusts .............................. ..
Employee stock options and unvested restricted shares ....... .
Adjusted weighted-average shares outstanding and assumed
conversions for diluted earnings (loss) per share .................. .
Basic earnings (loss) per common share:
Net income (loss) before cumulative effect of accounting
change ............................................................................... .
Cumulative effect of accounting change ............................... .
Preferred stock requirements ................................................ .
Net income (loss) applicable to common stockholders ......... .
Diluted earnings (loss) per common share:
Net income (loss) before cumulative effect of accounting
change ............................................................................... .
Cumulative effect of accounting change ............................... .
Interest on contingently convertible debt .............................. .
Preferred stock requirements ................................................ .
Net income (loss) applicable to common stockholders ......... .
$
$
$
$
2005
(2,464) $
(69)
{22)
{2,555) $
(2,555) $
87,003,280
87,003,280
2004 2003
(862) $ 248
(29) (12)
(891) $ 236
9
(891) $ 245
86,403,384 85,889,584
7,281,552
3,033
471,192
86,403,384 93,645,361
(28.32) $ (9.98) $ 2.89
(0.79)
_ ___,{.___0.2_5) __ _,_(0_.3_4) (0.14)
$ (29.36) $ (10.32) _s __ 2_.7_5
$ (28.32) $ (9.98) $ 2.65
(0.79)
0.09
{0.2S) (0.34) (0.12)
$ (29.36) $ !10.32) $ 2.62
For the twelve months ended December 31, 2005 and 2004, 19,311,599 and 19,768,222 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.
Additionally, 6,315,026 and 6,456,063 shares of Series C Preferred Stock were excluded from the effect of dilutive
securities for the years ended December 31, 2005 and 2004, respectively, because the Company reported a net loss for these
periods and the inclusion of these shares would have had an anti-dilutive effect on the earnings per share calculation. Due to
the determination of the Company in 2003 to use cash to redeem the Series C Preferred Stock rather than issuing additional
common stock, 6,521,300 shares of Series C Preferred Stock were excluded from the effect of dilutive securities for the year
ended December 31, 2003. See "Note 10 - Redeemable Preferred Stock" for additional information regarding this security.
The dilutive securities described above do not include 7,879,048, 1,337,224 and 1,232,128 employee stock options and
restricted shares for the years ended December 31, 2005, 2004 and 2003, respectively, because the exercise prices of these
54
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 of7,879,048 and 9,449,561 as of December 31, 2005 and 2004, respectively, were not included
in diluted securities because the Company reported a net loss for the years ended December 31, 2005 and 2004.
Note 5-Reorganization Related Items
The consolidated financial statements have been prepared in accordance with SOP 90-7 and on a going concern basis
that contemplates continuity of operations, realization of assets, and liquidation of post-petition liabilities in the ordinary
course of business. In accordance with SOP 90-7, the financial statements for the periods presented distinguish transactions
and events that are directly associated with the reorganization from the ongoing operations of the Company.
Reorganization items recorded from the commencement ofthe Chapter 11 case through December 31, 2005, largely
consisted of aircraft restructuring, aircraft impairment and rejection charges, the write-off of debt and lease valuation
adjustments, and pension plan curtailment charges. The charges for restructuring aircraft leases result from the recognition of
anticipated damage claims associated with the renegotiation of aircraft lease terms. Aircraft impairment charges are the non-
cash write-downs of owned aircraft that were rejected or permanently grounded as part of the Company's fleet restructuring.
Aircraft rejection charges are non-cash costs that include the estimated claims resulting from the Company's rejection or
renegotiation of certain aircraft leases and/or return of aircraft as part of the bankruptcy process. Debt and lease valuation
adjustments represent one time non-cash charges related to the write-off of issuance costs, discounts and premiums related to
the Company's debt and leases classified as liabilities subject to compromise. Pension plan curtailment charges are non-cash
costs associated with the freezing of the pilot pension plan.
Net reorganization items, as shown on the Consolidated Statement of Operations, consist of the following:
(In millions) 2005
Restructured aircraft leases ................................................. . $ 498
Aircraft related impairment ................................................. . 153
Aircraft related rejection charges ........................................ . 128
Debt and lease valuation adjustments ................................. . 144
Pension plan curtailment ..................................................... . 127
Professional fees ................................................................. . 23
Other ................................................................................... . 8
Reorganization items, net ................................................ . $ 1,081
Note 6-Liabilities Subject to Compromise
Liabilities subject to compromise refers to both secured and unsecured obligations that will be accounted for under a plan
of reorganization, including claims incurred prior to the Petition Date. They represent the estimated amount expected to be
allowed on known or potential claims to be resolved through the Chapter 11 process, and remain subject to future
adjustments arising from negotiated settlements, actions of the Bankruptcy Court, rejection of executory contracts and
unexpired leases, the determination as to the value of any collateral securing claims, proofs of claim, or other events.
The Debtors have endeavored to notify all of their known or potential creditors whose claims are subject to the Chapter
11 cases. Subject to certain exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed the
continuation of any judicial or administrative proceedings or other actions against the Debtors or their property to recover on,
collect or secure a claim arising prior to the time of filing on September 14, 2005. The deadline for creditors to file proofs of
claim with the Bankruptcy Court (the "Bar Date") has not yet been determined. A proof of claim arising from the rejection of
an executory contract or an expired lease must be filed the later of the Bar Date or 30 days from the effective date of the
authorized rejection.
Differences between liability amounts the Company has estimated and future claims to be filed by its creditors will be
examined by the Debtors and if necessary will be subject to a final determination of the allowable claims by the Bankruptcy
Court. The determination of how these liabilities will ultimately be treated will not be known until an approved plan of
reorganization is confirmed by the Bankruptcy Court and the claims resolution process is complete. Completion of the claims
resolution process may occur well after confirmation of a plan of reorganization. The Company will continue to evaluate the
amounts of these liabilities through the remainder of the Chapter 11 process. To the extent that the Company identifies
additional amounts subject to compromise, they will be recognized accordingly. As a result, the amounts of liabilities subject
to compromise are subject to change.
55
Subsequent to its Chapter 11 filing, the Company recorded post-petition interest expense on pre-petition obligations only
to the extent it believes the interest will be paid during the bankruptcy proceeding or that it is probable that the interest will
be an allowed claim. Had the Company recorded interest expense based on its pre-petition contractual obligations, interest
expense would have increased by $59.2 million during the year ended December 31, 2005.
At December 31, 2005, the Company had liabilities subject to compromise of$14.2 billion consisting of the following:
(In millions) 2005
Long-term debt (1) .............................................................. . $ 7,348
Accrued interest on long-term debt .................................... .. 63
Pension, postretirement and other employee related
expenses .......................................................................... . 3,948
Aircraft-related accruals and deferrals (2) .......................... . 1,455
Capital lease obligations, includfog accrued interest (3) ..... . 350
Accounts payable and other liabilities ................................ . 998
Total Liabilities Subject to Compromise ........................ . $ 14,162
In addition to the $14.2 billion ofliabilities subject to compromise itemized above, the Company's $280 million of
Preferred Redeemable Stock is also subject to compromise. This preferred _
security is not presented as a liability on the
Company's Consolidated Balance Sheets due to its conversion features, as required by the provisions of SF AS 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
(1) Long-term debt subject to compromise includes pre-petition and post-petition accrued interest and unpaid principal
for financings that remain subject to negotiations that may ultimately result in a return of collateral, settlement or a
renegotiated agreement. It also includes estimated unsecured damage claims to be resolved through the Company's
Chapter 11 settlement process, resulting from debt agreements that have been restructured subsequent to the petition
date. Refer to "Note 7 - Long-Term Debt and Short-Term Borrowings" for information related to the Company's
debt not classified as subject to compromise. At December 31, 2005, the Company's long-term debt subject to
compromise was as follows:
(lo millions) 200S
Aircraft Enhanced Equipment Trust Certificates (a)(b) ...... . $ 1,987
Aircraft Secured Loans ( a)( c) ............................................. . 2,156
Term Loan (a)(d) ................................................................ . 975
Other Secured Notes (a)(e) ................................................. . 528
Other Secured Debt (a) ...................................................... .. I
Unsecured Notes ................................................................. . 1,313
Convertible Unsecured Notes ................................. ." .......... .. 375
Unsecured Debt ................................................................... . 2
Pre-Petition Claims (f) ........................................................ . 11
Total Debt Liabilities Subject to Compromise (g) .......... . $ 7,348
(a) On certain secured financings that are classified as subject to compromise, the Company continues to make
principal and interest payments, either through Bankruptcy Court approval or interim payment agreements
negotiated with the related creditors.
(b) At December 31, 2005, the $1.99 billion of equipment notes underlying the pass-through trust certificates issued
for 78 aircraft are direct obligations of Northwest.
( c) The Company took delivery of four Airbus A319-100 aircraft during 2005 prior to the Chapter 11 filing date
that were financed in the amount of $113 million. Since these aircraft were delivered and financed prior to the
filing date, they are considered subject to compromise. At December 31, 2005, the $2.16 billion of equipment
notes underlying the secured loans were secured by 69 aircraft.
(d) The term loan had an initial principal amount of$975 million and was comprised of two tranches. On April 15,
2005, the Company refinanced the first principal repayment of$148 million due in November 2005 under the
$975 million term loan facility by creating a third tranche of debt. The term loan is secured by the Pacific routes
and certain aircraft.
56
(e) During the second quarter of 2005, Northwest entered into three separate secured loan agreements. The loan
agreements include:
A $140 million Accounts Receivable Loan commitment secured by credit card, passenger and cargo
receivables. The outstanding draw on this commitment is $127 million.
A $50 million Stock Loan secured by Northwest equity investments in its regional carriers.
A $50 million Equipment Loan secured by various aircraft, spare engines and engine spare parts .
(t) As a result ofrestructuring debt for two B757-300 aircraft subsequent to the filing date, the Company has
recorded an unsecured pre-petition claim of $11 million.
(g) Assets having an aggregate book value of $7 .2 billion at December 31, 2005, consisting principally of aircraft
and route authorities, were pledged under various loan agreements. See "Note 7 - Long-Term Debt and Short-
Term Borrowings" for further information on debt obligations not classified as subject to compromise.
(2) Includes estimated unsecured creditor claims of $814 million related to post-petition restructured operating and
capital leases. This amount also includes accrued rent for leases still in the process of being renegotiated. Refer to
"Note 8 - Leases" for information related to the Company's leases not subject to compromise.
(3) Capital lease obligations subject to compromise includes accrued interest and unpaid principal for financings that
remain subject to negotiations that may ultimately result in a return of collateral, settlement or a renegotiated
agreement.
Note 7-Long-Term Debt and Short-Term Borrowings
Long-term debt not classified as subject to compromise as of December 31 consisted of the following (with interest rates
as of December 31, 2005):
(In millions) 2005 (I) 2004
Aircraft enhanced equipment trust certificates due through 2012, 9.8% weighted-average
rate (2) ............................................................................................................................ . $ 182 $ 2,406
Aircraft secured loans due through 2025, 7.5% weighted-average rate (3) ....................... . 671 2,526
Bank Term Loan due 2006 through 2010, ......................................................................... . 975
Other secured notes due through 2010, 6.4% weighted-average rate ................................ . 195 531
Other secured debt through 2031, 4.5% weighted-average rate (4) ................................... . 111 102
Total secured debt .............................................................................................................. . 1,159 6,540
Unsecured notes due 2006 through 2039 ........................................................................... . 1,494
Convertible unsecured notes due through 2023 ................................................................. . 375
Other unsecured debt ......................................................................................................... . 2
Total unsecured debt .......................................................................................................... . 1,871
Total debt ........................................................................................................................... . 1,159 8,411
Less current maturities ............................................................................................... . 74 696
Total Long-term debt ......................................................................................................... . $ 1,085 $ 7,715
(1) The financings listed in the table above are considered "not subject to compromise" either due to Bankruptcy Court-
approved post-petition negotiated agreements or due to the fact that the debt represents obligations of Non-Debtor
consolidated subsidiaries. Assets having an aggregate book value of $1.5 billion at December 31, 2005, consisting
principally of aircraft, were pledged under various loan agreements. Refer to "Note 6 - Liabilities Subject to
Compromise" for information related to long-term debt and short-term borrowings that are classified as liabilities
subject to compromise.
(2) At December 31, 2005, the $182 million of equipment notes underlying the pass-through trust certificates issued for
13 aircraft are direct obligations of Northwest. Interest on the pass-through trust certificates is payable semi-
annually.
(3) The Company took delivery of and financed three Airbus A330-300 and two Airbus A3 l 9-100 aircraft during the
twelve months ended December 31, 2005, resulting in an increase of$312 million aircraft secured loans. On
December 31, 2005, the $671 million of equipment notes underlying the secured loans issued for 14 aircraft are
direct obligations of Northwest.
57
(4) On April 1, 2005, the Company completed an 8.5 billion yen (approximately $72 million) financing with Shinsei
Bank, Limited, maturing on June 20, 2006 ("Shinsei" loan). The loan proceeds were reduced by fees and expenses,
pre-paid interest and a liquidity reserve. This financing bears interest at the rate of2.878% per annum. The
financing is secured by certain Company properties in Tokyo. On April 20, 2005, the Company completed a 2.5
billion yen (approximately $21 million) financing with Airline Funding, LLC ("Airline Funding" loan), which will
remain outstanding concurrently with the Shinsei loan until maturity on June 20, 2006. This financing bears interest
at the rate of 5.0% per annum with interest payable semi-annually. The Airline Funding loan financing is secured by
a second lien on properties in Tokyo, with the first lien being held by Shinsei Bank, Limited. As a result of a binding
commitment outstanding at December 31, 2005 from Airline Funding, LLC to refinance the Shinsei and Airline
Funding loans into one 25-year mortgage, both loans maturing on June 20, 2006 are classified as long-term debt and
are therefore included in the "Thereafter" column in the Debt Maturity Table below.
Debt Maturity Table:
Maturities of long-term debt classified as not subject to compromise for the five years subsequent to December 31, 2005
are as follows:
{In millions} 2006 2007 2008 2009 2010 Thereafter Total
Aircraft enhanced equipment
trust certificates .............. $ 15 $ 24 $ 24 $ 25 $ 25 $ 69 $ 182
Aircraft secured loans ........ 18 31 188 21 23 390 671
Bank Term Loan ................
Other secured notes ............ 21 21 21 96 36 195
Other secured debt ............. 20 2 89 111
Total secured debt .............. 74 78 233 142 84 548 1,159
Total unsecured debt ..........
Total long-term debt .......... $ 74 $ 78 $ 233 $ 142 $ 84 $ 548 $ 1,159
The weighted-average interest rates on short-term borrowings outstanding at December 31 were 3.73% and 3.97% for
2004 and 2003, respectively. As of December 31, 2005 there were no short-term borrowings.
Note 8--Leases
The Company leases 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. As allowed under Section 365 of the
Bankruptcy Code, the Company may assume, assume and assign, or reject certain executory contracts and unexpired leases,
including leases ofreal property, aircraft and aircraft engines, subject to the approval of the Bankruptcy Court and certain
other conditions. Consequently, the majority of the Company's operating leases and all of the Company's capital leases are
currently classified as subject to compromise. See "Note 6 - Liabilities Subject to Compromise" for information related to
operating leases and capital leases that are classified as liabilities subject to compromise.
At December 31, 2005, future minimum lease payments for noncancelable operating leases that are not subject to
compromise, primarily due to post-petition Bankruptcy Court approved agreements, with initial or remaining terms of more
than one year are as follows:
{In millions} Aircraft Non-aircraft
2006 ....................................................... . $ 79 $ 2
2007 86 2
2008 ....................................................... . 84 1
2009 ....................................................... . 78 I
2010 ....................................................... . 74 I
Thereafter ............................................... . 309 12
Total minimum operating lease
payments ( 1) ...................................... . $ 710 $ 19
(1) As of December 31, 2005, the Company had future minimum lease payments for noncancelable operating leases
classified as subject to compromise in the amount of $4.2 billion, net of sublease rental income of $3 .3 billion.
58
Rental expense for all operating leases for the years ended December 31 consisted of the following (in millions):
(In millions)
Gross rental expense ........ .
2005 2004 2003
$ 991 $ . 928 $ 908
Sublease rental income .... . (371) (314) (172)
Net rental expense ............ . $ 620 $ 614 $ 736
At December 31, 2005, Northwest leased 66 ofthe 379 aircraft it operates; ofthese 66 leases, six were capital leases and
60 were operating leases.
Note 9-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 IO-Redeemable Preferred Stock
Series C Preferred Stock: As part of labor agreements reached in 1993, NWA 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, 2005, 4.4 million shares of Series C Preferred Stock have been converted into Common Stock and the
remaining 4.7 million shares outstanding are convertible into 6.3 million shares of Common Stock. During 2005, 103,399
shares of Series C Preferred Stock were converted into 141,036 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, NWA 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 August 1, 2003, at 12% per annum and the employee unions are entitled to
three additional Board of Directors positions. Effective with the petition date, the Company discontinued accruing additional
unpaid dividends.
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
59
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. On March 24,
2005, the judge ruled that the Company had breached the arrangements related to the Series C Preferred Stock, and indicated
that a trial on damages would be necessary. On August 24, 2005, Northwest and the plaintiffs reached an agreement, among
other things, to cancel the trial and to establish the amount of damages owed to employees represented by the plaintiffs
should the trial court's liability determination be upheld (nearly $277 million). The agreement also established the procedural
process for Northwest to appeal the trial court's liability judgment and to seek a stay of enforcement of the judgment. The
plaintiffs also agreed not to take any action to enforce the judgment unless and until the New York State Appellate Division
denies Northwest's motion to stay enforcement of the judgment. Further proceedings in this litigation have been stayed
following the Company's Chapter 11 filing.
The financial statement carrying value of the Series C Preferred Stock that accreted over 10 years commencing August
1993 to the ultimate put price, was $280 million at December 31, 2005, inclu,ding approximately $62 million of unpaid
dividends accrued from August 1, 2003 through September 14, 2005 (the petition date). This balance was considered subject
to compromise as of December 31, 2005. The Company currently believes that no value will be ascribed to the Cempany's
outstanding common stock, preferred redeemable stock, or other equity securities in any plan of reorganization.
Note 11-Stock Based Compensation
As of December 31, 2005, the Company maintains stock incentive plans for officers and key employees of the Company
(the "Management Plans") and a stock option plan for pilot employees (the ~'Pilot Plan"). Effective January 1, 2003,'the
Company adopted the fair value method of recording stock-based employee compensation contained in SFAS No. 123 and
accounted for this change in accounting principle using the "prospective method" as described by SFAS 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 2 - 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 in prior years had an
exercise price equal to the market value of the underlying common stock on the date of grant and under the accounting
principles used by the Company at that time, no compensation expense attributable to fair market value options was required
to be recognized.
Stock Incentive Plans for Officers and Key Employees: Following is a summary of infonnation regarding awards made
under the Management Plans for the years ended December 31 :
2005 2004 2003
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
{Shares in thousands} Shares Price Shares Price Shares Price
Outstanding at beginning of
year .................................. 2,948 $ 12.64 3,507 $ 12.06 7,923 $ 25.27
Granted ................................ 185 4.71 2,965 8.31
Forfeited .............................. (303) 8.79 (343) 9.40 (7,357) 24.81
Exercised ............................. {15) 5.71 (216) 8.31 (24) 4.74
Outstanding at end of year ... 2,815 12.59 2,948 12.64 3,507 12.06
Exercisable at end of year .... 1,690 15.80 1,154 19.18 599 27.73
Reserved for issuance .......... 21,802 21,802 21,802
Available for future grants ... 9,291 8,392 11,367
60
.f
At December 31, 2005:
Options Outstanding Options Exercisable
Weighted-Average
(Shares in thousands)
Range of Exercise Prices
Remaining Weighted-Average Weighted-Average
Exercise Price
Shares Contractual Life Exercise Price Shares
$4.61 to $24.59 (1 ) ........ .
26.16 to 39.31 ............... .
43.56 to 51.97 ............... .
2,489
300
26
6.8 years $
2.2 years
3.1 years
9.56
34.52
50.49
1,363 $
300
26
11 .02
34.53
50.49
( 1) 1.8 million of the 2.5 million shares outstanding had an exercise price of $8.31, and approximately 931,000 of these
shares were exercisable.
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:
2005 2004 2003
Weighted average risk-free
interest rate ....................................... 4.0% NIA 3.2%
Stock price volatility .................... 50.0% NIA 40%
Expected lives in years ................. 6 NIA 6
The weighted-average fair value of options granted during 2005 and 2003 was $2.63 and $3.62 per option, respectively.
There were no options granted under the Management Plans in 2004.
Management Stock Option Exchange Program: On January 14, 2003, the Company completed an option exchange
program, pursuant to which participants were able to exchange their stock options at a ratio of two old options for one newly
issued option. The replacement 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 replacement options will be
amortized over a four-year vesting period using the fair value method of recording stock-based employee compensation.
Certain participants were able to exchange outstanding stock options for phantom units at a ratio of three old options for one
replacement 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: The Pilot Plan was established in September 1998, in conjunction with the labor
agreement reached between Northwest and the Air Line Pilots Association, International. In addition, in October 2004, in
conjunction with the agreement with ALP A providing for labor cost restructuring, the Company granted 3 .5 million
additional stock options to pilot employees. Since at the time this agreement was reached there were no shares that remained
available for grant under the Pilot Plan, the 3.5 million additional options were granted under the Management Plans.
Following is a summary of information regarding awards made under the Pilot Plan and the additional awards made to
pilot employees under the Management Plans for the years ended December 31 :
200S 2004 2003
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
Outstanding at beginning of
year ................................... . 5,064 $ 9.96 1,564 $ 15.85 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 5,064 9.96 1,564 15.85
61
At December 31, 2005:
(Shares in thousands)
Exercise Prices
$ 7.325
9.185
19.62
24.688
27.875
Shares
Options Outstanding
3,500
926
134
123
381
Weighted-Average
Remaining
Contractual Uf e
8.8 years
7.6 years
5.7 years
3.7 years
3.4 years
Options Exercisable
Shares
1,751
465
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 ......................... .
2005
NIA
NIA
NIA
2004
3.5%
50%
6
2003
3.5%
40%
6
There were no options granted under the Pilot Plan in 2005. The weighted-average fair value of options granted during
2004 and 2003 was $3.78 and $4.04 per option, respectively.
Pilot Stock Option Exchange Program: On July 30, 2003, the Company completed an option exchange program for its
pilots holding stock options or stock appreciation rights ("SARs") granted pursuant to the Pilot Plan. This exchange program
was adopted as part of a letter of agreement with ALP A entered into in connection with obtaining approval from ALP A for a
codeshare agreement with Delta. Eligible participants were allowed to exchange their outstanding stock options or SARs for
a designated number ofreplacement options or replacement SARs, respectively at a ratio of two shares subject to an old
award for one share subject to a replacement award. The exercise price of the replacement 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.
Restricted Stock: Shares ofrestricted stock were awarded at no cost to certain officers and key employees in 2005, 2004
and 2003. These shares are subject to forfeiture until vested and the shares are issued or released upon vesting. Unearned
compensation, representing the fair market value of the stock on the measurement date, is amortized over the applicable
vesting period. Outstanding shares of restricted stock were cancelled during the fourth quarter of 2005. As a result of these
cancellations, the remaining $8.4 million of unamortized compensation expense related to these awards was expensed in
November 2005. The related non-cash charge is reflected as a reorganization item. As of December 31, 2005, there were no
remaining restricted shares outstanding under any of the Company's stockplans.
Phantom Stock Awards: Phantom stock awards were granted pursuant to the Management Plans to certain officers and
other key employees. In 2005, 2004 and 2003, a total of709,467, 2,076,350 and 1,683,414 phantom stock units, respectively,
were granted. The phantom stock vests over either a three or four year period based on continued employment of the
participant during such periods, and in some cases, 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 common stock as defined in the
plan.
Total stock based compensation recognized for the years ended December 31, 2005, 2004, and 2003 was $18.1 million,
$18.9 million, and $19 .3 million, respectively. This expense was primarily recognized on a straight-line basis.
62
Note 12-Accumulated Other Comprehensive Income (Loss)
The following table sets forth information with respect to accumulated other comprehensive income (loss) ("OCI"):
Foreign Deferred Minimum Unrealized Accumulated
Currency Gain (Loss) Pension Gain (Loss) Other
Translation on Hedging Liability on Comprehensive
(In millions) Adjustment Activities Adjustment Investments Income (Loss)
Balance at January 1, 2003 .......... $ (37) $ 22 $ (1,332) $ $ (1,347)
Before tax amount ..................... 47 (55) 20 (1) 11
Tax effect .................................. (17) 20 (7) (4)
Net-of-tax amount.. ................... 30 (35) 13 (1) 7
Balance at December 31, 2003 ..... (7) (13) (1,319) (1) (1,340)
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)
Before tax amount ..................... (7) 11 (16) (9) (21)
Tax Effect .................................
Net-of-tax amount ..................... (7) 11 (16) (9) (21)
Balance at December 31, 2005 .... $ (11) $ 6 $ (1,557) $ (6) $ (1,568)
Note 13- Income Taxes
Income tax expense (benefit) consisted of the following for the years ended December 31:
(In millions) 2005 2004 2003
Current:
Federal .................................................................. . $ 6 $ (3) $ 1
Foreign ................................................................. . 4 2
State ...................................................................... . 1 1
7 4
Deferred:
Federal .................................................................. . (29)
Foreign ................................................................. . (2)
State ...................................................................... . (3)
(34)
Total income tax expense (benefit) .............................. . $ 7 $ $ (30)
Reconciliations of the statutory rate to the Company's income tax expense (benefit) for the years ended December 31 are
as follows:
(In millions)
Statutory rate applied to income (loss) before income taxes .. ;
Add (deduct):
Mandatorily Redeemable Preferred Security .................... ..
State income tax expense (benefit) net offederal benefit ... .
Non-deductible expenses ...................... ~ ............................ .
Increase to Minimum Tax Credit Carryforward ................ ..
Adjustment to valuation allowance and other income tax
accruals .......................................................................... .
Other .................................................................................. .
Total income tax expense (benefit) ......................................... .
63
2005
$ (860) $
(39)
13
883
10
$ 7 $
2004 2003
(301) $ 76
8 (219)
(14) 4
6 7
(54)
297 156
5
1 $ (30)
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.
Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
(In millions) 2005 2004
Deferred tax liabilities:
Accounting basis of assets in excess of tax basis ................................... . $ 2,169 $ 2,081
Expenses other than accelerated depreciation and amortization ............ . 16 131
Other ..................................................................................................... .. 23 16
Total deferred tax liabilities ............................................ : ................. .. 2,208 2,228
Deferred tax assets:
Expenses not yet deducted for tax purposes ........................................... . 284 309
Reorganization charges not yet deducted for tax purposes ................... .. 384
Pension and postretirement benefits ....................................................... . 1,320 1,194
Gains from the sale-leaseback of aircraft .............................................. .. 99 116
Rent expense .......................................................................................... . 101 101
Travel award programs .......................................................................... . 95 84
Net operating loss carryforward ............................................................. . 1,213 784
Alternative minimum tax credit carryforward .............................. ~ ......... . 134 134
Other ...................................................................................................... . 25 44
Total deferred tax assets ..................................................................... . 3,655 2,766
Valuation allowance for deferred tax assets ........................................... . {1,447) (538)
Net deferred tax assets ....................................................................... . 2,208 2,228
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 $3 .3 billion, general business credits of $6 million and foreign tax credits of
$9 million. The deferred tax assets available for utilization in the AMT system are: net operating loss carryforwards of $3 .1
billion and foreign tax credits of $6 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 2005,
expiring in 2006 through 2025.
The Company also has the following deferred tax assets available at December 31, 2005 for use in certain states: net
operating losses with tax benefit value of approximately $88 million and state job credits of $7 million available for
carryforward to years beyond 2005, expiring in 2008 through 2025.
The Company's valuation allowance increased by $909 million during 2005. 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. 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.
64
On October 28, 2005, the Bankruptcy Court entered an order that restricts the trading of the common stock and debt
interests in the Company. The purpose of the order is to ensure that the Company does not lose the benefit of its net operating
loss carryforwards ("NOLs") for tax purposes. Under federal and state income tax law, NOLs can be used to offset future
taxable income, and thus are a valuable asset of the Debtors' estate. Certain trading in the Company's stock (or debt when the
Company is in bankruptcy) could adversely affect the Company's ability to use the NOLs. Thus, the Company obtained an
order that enables it to closely monitor certain transfers of stock and claims and restrict those transfers that may compromise
the Company's ability to use its NOLs.
Note 14-Commitments
The Company's firm orders for 39 new aircraft to be operated by Northwest consist of scheduled deliveries for nine
Airbus A330-300 aircraft and five Airbus A330-200 aircraft from 2006 through 2007, 18 Boeing 787-800 aircraft from 2008
through 2010, two Airbus A320 aircraft in 2009 and five Airbus A3 l 9 aircraft from 2010 through 2011. As of December 31,
2005, the Company also had firm orders for five Bombardier CRJ-200 aircraft in 2006 and was scheduled to take delivery of
eight CRJ-200 aircraft in 2005.
Committed expenditures for aircraft and related equipment confirmed post Chapter 11 filing, including estimated
amounts for contractual price escalations and predelivery deposits, will be approximately $595 million in 2006, $831 million
in 2007, $93 million in 2009, $109 million in 2010, and $73 million in 2011. 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. The Company had firm financing commitments for all aircraft on order prior to filing for bankruptcy, and is in the
process of determining which of these commitments will be available in the future. During the fourth quarter, the Company
concluded agreements with Airbus and Pratt & Whitney that permit continued delivery and financing of the remaining 14
A330-300 and A330-200 wide body aircraft that Northwest had on order. Airbus agreed to finance 10 of the 14 A330s, and
Pratt & Whitney will finance the remainder.
Note 15 - 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, operatt~n 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 $267.9 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. See "Note 8 - Leases" for further information related to the Company's operating lease commitments classified as
subject to compromise. The lease terms end between 2011 and 2029.
The Company obtains letters of credit (LOCs) from commercial banks in favor of various parties to secure obligations of
the Company to such parties. As of December 31, 2005, the total outstanding amount of these LOCs was $93.0 million
( excluding an additional $143 .9 million of LOCs that were fully secured by the Company's pledge of cash collateral). The
obligations of the Company with respect to this $93.0 million ofLOCs, together with certain other obligations of the
Company, are secured by the Company's routes, certain aircraft and cash collateral.
65
Note 16- Pension and Other Postretirement Health Care Benefits
The Company has several defined benefit pension plans or defined contribution 401 (k)-type 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. Effective August 31, 2005 and January 31, 2006 the Company froze future benefit accruals under the
Northwest Airlines Pension Plans for Salaried and Pilot Employees, respectively. Replacement pension coverage will be
provided for these employees through a 40l(k)-type defined contribution plan. It is the Company's policy to annually fund at
least the minimum contribution as required by the ERISA. However, as a result of the Company's voluntary filing for
Chapter 11 on September 14, 2005, the Company did not make minimum c~sh contributions to its defined benefit pension
plans that were due in 2005 subsequent to September 14, 2005.
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/air value of
plan assets:
Pension Benefits Other Benefits
(In millions) 200S 2004 200S 2004
Change in benefit obligations:
Benefit obligations at beginning of year ..... . $ 9,245 $ 8,554 $ 926 $ 820
Service cost ................................................. . 278 239 34 30
Interest cost ................................................. . 553 534 56 51
Plan amendments ........................................ . (106) (17)
Actuarial loss and other .............................. . 110 284 89 91
Transfer ofliability out of plan (I) ............. . (162)
Benefits paid ............................................... . {446) (366) {54) (49)
Benefit obligations at end of year ............... . 9,472 9,245 1,051 926
Change in plan assets:
Fair value of plan assets at beginning of
year ......................................................... . 5,425 4,806 5 5
Actual return on plan assets ........................ . 507 679 1
Employer contributions ............................... . 308 306 54 48
Benefits paid ............................................... . (446) (366) (54) (49)
Fair value of plan assets at end of year ....... . 5,794 5,425 5 5
Funded Status - underfunded ..................... .. (3,678) (3,820) (1,046) (921)
Unrecognized net actuarial loss (income) ... . 2,363 2,591 566 510
Unrecognized prior service cost... ............... . 320 627 (84) (97)
Net amount recognized ............................... . $ {99S) $ (602) $ {564) $ (508)
( 1) The Company transferred the liability associated with certain long-term disability benefits previously provided in
the Northwest Airlines Pension Plan for Pilots to a self-funded long-term disability plan that provides substantially
similar benefits.
66
Amounts recognized in the Consolidated Balance Sheets as of December 31:
Pension Benefits Other Benefits
(In millions) 2005 2004 2005 2004
Prepaid benefit costs ........................................... . $ 6 $ 6 $ $
Intangible asset ................................................... . 362 671
Accrued benefit liability ..................................... . (3,686) (3,586) (564) (508)
Accumulated other comprehensive loss
(income) .......................................................... . 2,323 2,307
Net amount recognized ....................................... . $ (995) $ (602) $ (564) $ (508)
The accumulated benefit obligations for all defined benefit pension plans were $9.45 billion and $8.99 billion at
December 31, 2005 and 2004, respectively. The Company's pension plans with accumulated benefit obligations in excess of
plan assets as of December 31 were as follows:
(In millions)
Projected benefit obligations .................................................. .
Accumulated benefit obligations .......................................... .
Fair value of plan assets ........................................................ .
2005
$ 9,451 $
9,437
5,769
2004
9,226
8,971
5,401
Weighted average assumptions used to determine benefit obligations for pension and other benefits at December 31:
Pension Benefits Other Benefits
2005 2004 2005 2004
Discount rate ....................................................... . 5.71% 5.90% 5.71% 5.90%
Rate of future compensation increase ................. . 3.50% (1)- 2.15% NIA NIA
(I) Not applicable to frozen plans.
Minimum liability recorded in other comprehensive loss for the year ended December 31:
Pension Benefits Other Benefits
(In millions) 2005 2004 2005 2004
(Increase) decrease in other comprehensive loss
due to change in minimum pension liability .... $ (16) $ (222) NIA NIA
Components of net periodic benefit cost of defined benefit plans and defined contribution plan costs:
Pension Benefits Other Benefits
(In millions) 2005 2004 2003 2005 2004 2003
Defined benefit plans
Service cost ........................ $ 278 $ 239 $ 248 $ 34 $ 30 $ 26
Interest cost ........................ 553 534 531 S6 51 46
Expected return on plan
assets .............................. (S18) (503) (476)
Amortization of prior service
cost ................................. 73 75 77 (10) (8) (8)
Recognized net actuarial loss
and other events ............. 170 99 111 31 25 19
Net periodic benefit cost .... 556 444 491 111 98 83
Defined contribution plan
costs ................................... 11
Total benefit cost ................... $ 567 $ 444 $ 491 $ 111 $ 98 $ 83
67
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
2005 2004
5.90% 6.25%
9.50%
2.15%
9.50%
1.93%
2005
Other Benefits
5.90%
5.00%
NIA
2004
6.25%
7.00%
NIA
For the year ended December 31, 2005 the Company recorded $209 million in pension curtailment charges. Pension
curtailment charges of $54 million were recorded for the Northwest Airlines Pension Plan for Contract Employees ("Contract
Plan") as a result of contract employee headcount reductions that occurred-in conjunction with the Aircraft Mechanics
Fraternal Association ("AMF A") strike. The Company recorded $28 million in pension curtailment charges for the Northwest
Airlines Pension Plan for Salaried Employees ("Salaried Plan,,) as a result of freezing future benefit accruals effective August
31, 2005. In conjunction with the curtailment charges related to the Contract Plan and Salaried Plan, the liabilities for these
plans were remeasured using a 5.71% discount rate. Additionally, $127 million in pension curtailment charges were recorded
for the Northwest Airlines Pension Plan for Pilots as a result of the Company and Airline Pilots Association ("ALPA")
agreeing to a freeze of future benefit accruals effective January 31, 2006; this charge was recorded as a reorganization related
item.
For the year end December 31, 2003 the Company recorded $58 million in pension curtailment charges due to reductions
in anticipated future service, as a result of layoffs of approximately 9 .6% of Contract plan employees.
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, 2005 and 2004:
Asset Category
Domestic Stocks .......................... .
International Stocks ..................... .
Private Markets ........................... .
Long-Duration Bonds .................. .
High Yield Bonds ........................ .
Total ............................................ .
Target
45.0%
25.0%
10.0%
15.0%
5.0%
100%
Plan Assets
2005 2004
47.7% 46.2%
27.5%
5.3%
14.7%
4.8%
100.0%
27.3%
6.7%
14.7%
5.1%
100.0%
----
The investment policy also emphasizes the following key objectives: (1) maintain a diversified portfolio among asset
classes and investment styles; (2) maintain an acceptable level ofrisk in pursuit oflong-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: {l) 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.
68
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 ofreturn is
based on target asset allocations of 45% domestic equities with an expected rate of return of 8. 7 5%; 25% international
equities with an expected rate of return of 8.75%; 10% private markets with an expected rate ofreturn of 12.25%; 15% long-
duration bonds with an expected rate of return of 5.75%; and 5% high yield bonds with an expected rate of return of 7%.
These assumptions result in a weighted geometric average rate of return of 9% on an annual basis.
For measurement purposes, a 9.0% annual rate of increase in the per capita cost of covered health care benefits was
assumed for 2006. The rate was assumed to decrease 1.0% per year for four years to 5.0% in 2010 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 percent-change in assumed health care cost trend rates would have the following effects:
(In millions)
Effect on total of service and interest cost
components................................................................... $
Effect on accumulated postretirement benefit
obligations ................................................................... .
One Percentage-
Point Increase
11.3 $
98.5
One Percentage-
Point Decrease
(9.7)
(86.1)
The estimated future benefit payments expected to be made by the pension and other postretirement benefit plans are
shown below:
(In millions)
Estimated Future Benefit Payments:
2006 .................................................... .
2007 .................................................... .
2008 .................................................... .
2009 .................................................... .
2010 ................................................... ..
Years 2011-2015 ................................ ..
Pension Benefits
$ 408
432
466
484
515
2,972
Employer
Provided Other
Postretirement Benefits
$ 62
65
69
72
75
418
On April 10, 2004, the President signed into law the Pension Funding Equity 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 Funding Equity Act,
the Company's 2005 calendar year cash contributions to qualified defined benefit pension plans were expected to
approximate $411 million. Through September 14, 2005, the Company had contributed $268 million to these plans. As a
result of the Company's voluntarily filing for Chapter 11 on September 14, 2005, the Company did not make scheduled
minimum cash contributions to its qualified defined benefit pension plans for September and October, 2005 in the amounts of
$59 million and $83 million, respectively. The Company currently intends, however, to continue timely to pay the normal
cost component of the plans' minimum funding requirements relating to service rendered post-petition. The Company has
appointed an independent fiduciary for all of its tax-qualified defined benefit pension plans, who is charged with pursuing, on
behalf of the plans, claims to recover minimum funding contributions due under federal law, to the extent that the Debtors are
not continuing to fund the plans due to bankruptcy prohibitions. The plans' level of underfunding is expected to increase
during the Chapter 11 cases.
The U.S. Senate approved a pension reform bill in November 2005 that would give airlines the option of amortizing
pension liabilities over a twenty-year period. The pension reform bill passed by the U.S. House of Representatives in
December 2005 does not include a similar provision. The bills are expected to go to conference committee in early 2006 and
it is not possible to predict the outcome.
69
The funding requirement to meet the normal cost component of the qualified plans' minimum funding requirements
related to post-petition service is currently estimated at approximately $75 million for calendar year 2006. Due to
uncertainties regarding significant assumptions involved in estimating future required contributions to its defined benefit
pension plans, such as the amount and timing of asset returns, interest rate levels, the Company's Chapter 11 proceedings,
and in particular, the impact of proposed pension legislation related to funding requirements, the Company is not able to
reasonably estimate its future required contributions beyond 2006. If the Company is unable to obtain sufficient legislative
pension relief, termination of the defined benefit plans would become inevitable. Moreover, termination of the pilot defined
benefit pension plan would become more likely should the tentative new collective bargaining agreement reached between
ALP A and the Company not be ratified.
Note 17 - Risk Management and Financial Instruments
The Company adopted SFAS No. 133, Accounting/or 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. SFAS No. 133 requires
that for cash flow hedges, which hedge the exposure to variable cash flows of a forecasted transaction, the effective portion
of the derivative's gain or loss be initially reported as a component of other comprehensive income (loss) in the equity
section of the balance sheet and subsequently reclassified into earnings when the forecasted transaction affects earnings: 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 2005, the Company's yen-denominated net cash inflow was approximately 66 billion yen ($610 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, 2005, the Company recorded $7 .25 million of unrealized gains in
accumulated other comprehensive income (loss) as a result of forward contracts to sell 6.5 billion yen ($64 million) at an
average forward rate of 10 l yen per dollar with various settlement dates through December 2006. These forward contracts
hedge approximately 5% of the Company's 2006 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 gain of$1 l million in 2005, a realized loss of$8 million in 2004, and realized gains of$1 million in
2003.
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 24 months.
Aircraft Fuel: The Company is exposed to the effect of changes in the price and availability of aircraft fuel. In order to
provide a measure of control over price and supply, the Company trades and ships fuel and maintains fuel storage facilities to
support its flight operations. To further manage the price risk of fuel costs, the Company primarily utilizes futures contracts
traded on regulated futures exchanges, swap agreements and options. The changes in market value of such contracts have
historically been highly effective at offsetting fuel price fluctuations. It is the Company's policy to participate in hedging
transactions with a maximum span of 18 months.
As of December 31, 2005, the Company had no fuel hedges in place for future periods, and therefore had no related
unrealized gains (losses) in accumulated other comprehensive income (loss). Fuel hedge contract effectiveness is evaluated
on a monthly basis and any ineffective portion is recorded in fuel expense immediately. No amounts were recorded in fuel
expense for ineffectiveness in 2005 and immaterial amounts were recorded in 2004 and 2003.
70
Fair Values of Financial Instruments: The financial statement carrying values equal the fair values of the Company's
cash, cash equivalents and short-term investments. As of December 31, these amounts were:
Cash and Short-term Investments
Cash E9uivalents Unrestricted Restricted
(In millions) 2005 2004 2005 2004 2005 2004
Cash .................................. $ 121 $ 62 $ $ $ $
Available for sale
securities ....................... 563 645 578 1,752 600 156
Total. ................................. $ 684 $ 707 $ 578 $ 1,752 $ 600 $ 156
Cash equivalents are carried at cost and consisted primarily of unrestricted money market funds as of December 3 I,
2005. 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 3 I were:
2005 2004
Carrying Fair Carrying Fair
(In millions) Value Value Value Value
Long-Term Debt ........................................ .. $ 1,159 $ 1,061 $ 8,411 $ 7,317
Series C Preferred Stock ............................ .. 280 n/a 263 263
The fair values of the Company's long-term debt classified as not subject to compromise were estimated using
discounted cash flow analyses. The discount rates were based on internal estimates of market rates supported by restructuring
efforts on similar types of instruments.
As a result of the Company's Chapter I 1 filing and the related uncertainty as to the ultimate disposition of future
payments to be made in connection with the Company's financial instruments classified as subject to compromise, the
Company was unable to estimate the fair value of its long-term debt, classified as subject to compromise, and Series C
Preferred Stock as of December 31, 2005.
Note 18- Investment Securities
The amortized cost, gross unrealized gains and losses, and fair value of short-term investment securities classified as
available-for-sale as of December 31 were as follows:
2005 2004
(In millions) Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Available-for-sale Securities (1) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
Mutual Funds ............................... $ 139 $ s (2) s 137 $ 425 $ 2 $
U.S. Treasury securities ............... 45 45 69 I
Corporate securities ..................... 65 (1) 64 147 I (I)
Mortgage-backed securities ......... 118 (2) 116 208 I (1)
Asset-backed securities ................ 213 (1) 212 894 2 (2)
Other securities and investments 4 4 6
Total available-for-sale
securities ................................. s 584 $ $ !6) s 578 $ 1,749 $ 7 $ (4)
(1) Available-for-sale securities are carried at fair value, with unrealized net gains or losses reported within other
comprehensive income in stockholders' equity.
$ 427
70
147
208
894
6
$ 1,752
As ofDecember 31, 2005, the fair value of available-for-sale securities includes investments totaling $70 million, with
unrealized losses of $1.8 million, which have been in an unrealized loss position for greater than 12 months. The investments
consist of 48 securities that are primarily high credit quality fixed income securities. All other available-for-sale securities,
with unrealized losses of$4.5 million, which have been in an unrealized loss position for less than 12 months, have an
aggregate fair value of $277 million. These securities primarily represent fixed income investments with temporary
impairments resulting from increases in interest rates since the purchase of the investments.
71
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:
(In millions) 2005 2004 2003
Realized gains ( 1) .......................................... . $ 24 $ 6 $ I
Realized losses (1) ......................................... . ---~-7) _____
(1_0) _ _ _ ~(1)
Net realized gains (losses) ............................. . _s ___
(3_) $ (4)_$ _ _ _
(I) Realized gains and losses are identified using the specific identification method.
The contractual maturities of debt securities available-for-sale at December 31, 2005 are shown below. Expected
maturities may differ from contractual maturitie.
s because borrowers may have the right to recall or prepay obligations with or
without call or prepayment penalties.
Amortized .
(In millions) Cost Fair Value
Within one year ............................................................ . $ 252 $ 248
Between one and five years ......................................... . 148 147
Between five and ten years .......................................... . 22 22
After ten years .............................................................. . 162 161
Total short-term investments ....................................... . $ 584 $ 578
Note 19-Related Party Transactions
MAIR Holdings, Inc.: On October 13, 2005, Mesaba, a wholly owned subsidiary of MAIR, filed a voluntary petition
for reliefunder Chapter 11 of the United States Bankruptcy Code in the District of Minnesota (Case No. 05-39258 (GFK)). In
accordance with the provisions of the Bankruptcy Code, Mesaba will continue to operate its business as a debtor-in-
possession.
The Company owns 5.7 million shares, or 27.5% ofMAIR's common stock and accounts for this investment under the
equity method of accounting. The book value and market value of this investment as of December 31, 2005, was $26.6
million. Any losses incurred by Mesaba during its bankruptcy would negatively impact the Company's net earnings, as well
as the book value of the Company's investment in MAIR, as Mesaba's financial results are fully consolidated into MAIR's
net income (loss) applicable to common stockholders. Other than noted above, the Company is currently unable to determine
the impact ofMesaba's bankruptcy on its operations or financial condition with any certainty.
Northwest and Mesaba have entered into an airline service agreement under which Northwest determines Mesaba's
turboprop and A vro regional jet aircraft scheduling and fleet composition. This agreement is structured as a capacity purchase
arrangement whereby Northwest pays Mesaba to operate the flights on Northwest's behalf and Northwest is entitled to all
revenues associated with those flights. Northwest paid $393 million, $421 million and $439 million for the years ended
December 31, 2005, 2004 and 2003, respectively, to Mesaba for airline services. These payments are recorded on a gross
basis as an operating expense. The Company had a payable to Mesaba of$53 million and $24 million as of December 31,
2005 and 2004, respectively. As of December 31, 2005, the Company has leased 49 Saab 340 aircraft and 2 CRJ aircraft
which are in tum subleased to Mesaba. In addition, as of December 31, 2005, the Company has leased 10 owned and
subleased 25 A vro regional jet aircraft to Mesaba. As part of its overall restructuring efforts, the Company is evaluating its
service agreements with its regional carriers and has initiated a request for proposal from its existing and other regional
carrier operators. The results of the request for proposal are under review.
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., and accounts for this investment under the equity method of
accounting. The Pinnacle Airlines Corp. common stock had a market value
of $16.6 million and a book value of$3.0 million
as of December 31, 2005.
72
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 $572 million, $493 million and $357
million for the years ended December 31, 2005, 2004 and 2003, respectively. The Company had payables of $81 million, $23
million, and $18 million to Pinnacle Airlines as of December 31, 2005, 2004, and 2003 respectively. As of December 31,
2005, the Company has leased 124 CRJ aircraft, which are in turn subleased to Pinnacle Airlines. As part of its overall
restructuring efforts, the Company is evaluating its service agreements with its regional carriers and has initiated a request for
proposal from its existing and other regional carrier operators. The results of the request for proposal are under review.
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.
Orbitz: 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% ofNorthwest'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 Inter Active 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.
Note 20 - Geographic Regions
The Company is managed as one cohesive business unit, of which revenues are derived primarily from the commercial
transportation of passengers and cargo. Operating revenues from flight segments serving a foreign destination are classified
into the Pacific or Atlantic regions, as appropriate. The following table shows the operating revenues for each region for the
years ended December 31:
{In millions} 2005 2004 2003
Domestic ............................................................................. $ 8,274 $ 7,787 $ 7,011
Pacific, principally Japan .................................................... 2,639 2,343 1,939
Atlantic ............................................................................... 1,373 1,149 1,127
Total operating revenues ................................................. $ 12,286 $ 11,279 $ 10,077
The Company's tangible assets consist primarily of flight equipment, which are utilized across geographic markets and
therefore have not been allocated.
73
Note 21- Quarterly Financial Data (Unaudited)
Unaudited quarterly results of operations for the years ended December 31 are summarized below:
{In millions, exce~t ~er share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
200S:
Operating revenues .................................................. $ 2,798 $ 3,195 $ 3,378 $ 2,915
Operating income (loss) ........................................... (301) (190) (167) (261)
Net income (loss) applicable to common stockholders $ (537) $ (234) $ (475) $ (1,309)
Basic earnings (loss) per common share ................ $ (6.19) $ (2.69) $ (5.45) $ (15.01)
Diluted earnings (loss) per common share ............. $ (6.19) $ (2.69) $ (5.45) $ (15.01)
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)
Unaudited quarterly net income (loss) applicable to common stockholders in the table above includes the following
unusual items:
(In millions) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
2005:
Aircraft and aircraft related write-downs ................ . $ $ (48) $ $
Gain (loss) on sale of assets .................................... . (18) 102
Pension Curtailment Charges .................................. . (82)
Reorganization Items .............................................. . (159) (922)
Cumulative Effect of Change in Accounting
Principle .............................................................. . (69)
Impact on net income (loss) from unusual
items ................................................................ . $ (87) $ 54 $ (241) $ (922)
2004:
Aircraft impairments ............................................... . $ $ (104) $ $ (99)
Gain on sale of assets .............................................. . 115
Frequent flyer liability adjustment .......................... . (77)
Impact on net income (loss) from unusual
items ................................................................ . $ $ (104) $ $ (61)
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 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.
74
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, 2005, 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, 2005. 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, 2005 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 76.
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.
75
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
To the Stockholders and Board of Directors
Northwest Airlines Corporation (Debtor-in-Possession)
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over
Financial Reporting, that Northwest Airlines Corporation (Debtor-in-Possession) maintained effective internal control over
financial reporting as of December 31, 2005, 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 (Debtor-in-Possession) maintained effective
internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Northwest Airlines Corporation (Debtor-in-Possession) maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005, 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 ofNorthwest Airlines Corporation (Debtor-in-Possession) as of December 31, 2005 and
2004, 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 March 13, 2006 expressed an unqualified opinion
thereon and included explanatory paragraphs related to (i) the Company's reorganization under Chapter 11 of the United
States Bankruptcy Code, (ii) the Company's ability to continue as a going concern, and (iii) the change in method of
recognizing certain pension plan administrative expenses associated with the Company's defined benefit pension plans.
~-tnLLP
Minneapolis, Minnesota
March 13, 2006
76
PART III
Item IO.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be included in this Form I 0-K in accordance with General Instruction G3 no
later than April 30, 2006. 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 will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2006.
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2006. 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 will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2006.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item will be included in this Form 10-K in accordance with General Instruction G3 no
later than April 30, 2006.
PARTIV
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
Page
Consolidated Balance Sheets-December 31, 2005 and December 31, 2004 42-43
Consolidated Statements of Operations-For the years ended December 31, 2005, 2004 and 2003 44
Consolidated Statements of Cash Flows-For the years ended December 31, 2005, 2004 and 2003 45
Consolidated Statements of Common Stockholders' Equity (Deficit)-For the years ended December 31, 2005, 2004 46
and 2003
Notes to Consolidated Financial Statements 47
77
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 Reserves-For the years ended December 31, 2005, 2004
and 2003 S-1
15(a)(3) Exhibits. The following is an index of the exhibits to this Report. Nothing contained in this Report shall constitute
an assumption by NWA Corp. or Northwest (as applicable) of any of these agreements.
3.1 Restated Certificate of Incorporation ofNorthwest 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 NWA 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 ofNorthwest 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 ofNorthwest Airlines, Inc. (filed as Exhibit 3.4 to NWA Corp.'s Annual Report on Form 10-K for the
year ended December 31, 2004 and incorporated herein by reference).
4.1 Certificate of Designation of Series C Preferred Stock of Northwest Airlines Corporation (included in Exhibit
3.1).
4.2 The registrant hereby agrees to furnish to the Commission, upon request, copies of certain instruments defining
the rights of holders oflong-term debt of the kind described in Item 601 (b) (4) of Regulation S-K.
10.1 Standstill Agreement dated as ofNovember 15, 2000 among Continental Airlines, Inc., Northwest Airlines
Corporation, Northwest Airlines Holdings Corporation and Northwest Airlines, Inc. (filed as Exhibit 10.1 to
NW A Corp.' s Annual Report on Form 10-K for the year ended December 31, 2004 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 Airport Use and Lease Agreement dated as of June I, 2005 between Wayne County Airport Authority and
Northwest Airlines, Inc.
10.4 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.
10.5 Second Amended and Restated Credit and Guarantee Agreement dated as of April 15, 2005 among Northwest
Airlines Corporation, Northwest Airlines Holdings Corporation, NW A Inc., Northwest Airlines, Inc. and
various lenders and agents ( filed as Exhibit 10 .2 to NW A Corp.' s Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005 and incorporated herein by reference).
10.6 Route Security Agreement dated as of October 23, 2001 between Northwest Airlines, Inc. and The Chase
Manhattan Bank, as Collateral Agent (filed as Exhibit 10.9 to NWA Corp.'s Annual Report on Form 10-K for
the year ended December 31, 2004 and incorporated herein by reference).
10.7 Route Security Agreement dated as ofNovember 23, 2004 between Northwest Airlines, Inc. and JPMorgan
Chase Bank, N.A., as Collateral Agent (filed as Exhibit 10.10 to NWA Corp.'s Annual Report on Form 10-K
for the year ended December 31, 2004 and incorporated herein by reference).
10.8 Aircraft Mortgage and Security Agreement dated as of October 23, 2001 between Northwest Airlines, Inc. and
The Chase Manhattan Bank, as Collateral Agent (filed as Exhibit 10.11 to NWA Corp.'s Annual Report on
Form 10-K for the year ended December 31, 2004 and incorporated herein by reference).
78
10.9 A330 Purchase Agreement dated as of December 21, 2000 between AVSA, S.A.R.L. and Northwest Airlines,
Inc. (filed as Exhibit 10.1 to NWA Corp. 's Form 10-Q for the quarter ended March 31, 2001 and incorporated
herein by reference; the Commission has granted confidential treatment for certain portions of this document).
10.10 Amendment No. 1 to A330 Purchase Agreement dated as of November 26, 2001 between AVSA, S.A.R.L. and
Northwest Airlines, Inc. (filed as Exhibit 10.14 to NWA Corp. 's Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference; the Commission has granted confidential
treatment as to certain portions of this document).
10.11 Amendment No. 2 to A330 Purchase Agreement dated as of December 20, 2002 between AVSA, S.A.R.L. and
Northwest Airlines, Inc. (filed as Exhibit 10.15 to NWA Corp.'s Annual Report on Form 10-K for the year
ended December 31, 2002 and incorporated herein by reference; the Commission has granted confidential
treatment as to certain portions of this document).
10.12 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 NW A 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).
10.13 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 I 0.2 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).
10.14 Amendment No. 7 to A330 Purchase Agreement dated as of January 21, 2005 between AVSA, 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, 2005 and incorporated herein by reference; the Commission has granted confidential treatment
for certain portions of this document).
10.15 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).
10.16 A330 Financing Letter Agreement No. 1 dated as of December 21, 2000 between Northwest Airlines, Inc. and
A VSA S.A.R.L. (filed as Exhibit 10.19 to NWA Corp. 's Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference; the Commission has granted confidential treatment
for certain portions of this document).
10.17 Amendment No. I to the A330 Financing Letter Agreement No._ I dated as of December 20, 2002 between
Northwest Airlines, Inc. and AVSA S.A.R.L. (filed as Exhibit 10.20 to NWA Corp.'s Annual Report on Form
10-K for the year ended December 31, 2004 and incorporated herein by reference; the Commission has granted
confidential treatment for certain portions of this document).
10.18 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. (filed as Exhibit 10.21 to NWA Corp. 's Annual Report on Form I 0-K for the
year ended December 31, 2004 and incorporated herein by reference; the Commission has granted confidential
treatment for certain portions of this document).
10.19 New A330 Financing Letter Agreement No. I dated as of January 21, 2005 between Northwest Airlines, Inc.
and A VSA S.A.R.L. (filed as Exhibit 10.22 to NWA Corp. 's Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference; the Commission has granted confidential treatment
for certain portions of this document).
10.20 Form of Credit Agreement to be entered into pursuant to Exhibits I 0.16 and I 0.19 (filed as Exhibit I 0.23 to
NW A Corp.' s Annual Report on Form I 0-K for the year ended December 31, 2004 and incorporated herein by
reference; the Commission has granted confidential treatment for certain portions of this document).
79
10.21 Form of Mortgage to be entered into pursuant to Exhibits 10.16 and 10.19 (filed as Exhibit 10.24 to NWA
Corp. 's Annual Report on Fonn 10-K for the year ended December 31, 2004 and incorporated herein by
reference; the Commission has granted confidential treatment for certain portions of this document).
10.22 Purchase Agreement No. 2924 dated May 5, 2005 between The Boeing Company and Northwest Airlines, Inc.
(filed as Exhibit 10.1 to NWA Corp. 's Quarterly Report on Form 10-Q for the quarter ended June 30, 2005 and
incorporated herein by reference; NW A Corp. has filed a request with the Commission for confidential
treatment as to certain portions of this document).
10.23 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 NWA Corp. 's Annual Report on Form 10-K for the year
ended December 31, 2003 and incorporated herein by reference).
*10.24 Management Compensation Agreement dated as of September 14, 2005 between Northwest Airlines, Inc. and
Douglas M. Steenland tfiled as Exhibit IO.I to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 and incorporated herein by reference.
* 10.25 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).
*10.26 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).
*10.27 Management Compensation Agreement dated as of May 2, 2005 between Northwest Airlines, Inc. and Neal S.
Cohen (filed as Exhibit 10.3 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
2005 and incorporated herein by reference).
*10.28 Management Compensation Agreement dated as of April 17, 2002 between Northwest Airlines, Inc. and
Andrew C. Roberts (filed as Exhibit 10.30 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference).
*10.29 Management Compensation Agreement dated as of December 3, 2004 between Northwest Airlines, Inc. and
Barry P. Simon (filed as Exhibit 10.31 to NWA Corp.'s Annual Report on Form 10-K for the year ended
December 31, 2004 and incorporated herein by reference).
* 10.30 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).
*10.31 Northwest Airlines, Inc. Excess Pension Plan for Salaried Employees (2001 Restatement) (filed as Exhibit
10 .23 to NW A Corp.' s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated
herein by reference).
* 10.32 First Amendment of Northwest Airlines Excess Pension Plan for Salaried Employees (2001 Restatement) (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).
*10.33 Northwest Airlines, Inc. Supplemental Executive Retirement Plan (2001 Restatement) (filed as Exhibit 10.24 to
NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by
reference).
* 10.34 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 (filed as Exhibit 10.35 to NWA
Corp.' s Annual Report on Form I 0-K for the year ended December 31, 2004 and incorporated herein by
reference).
* 10.35 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 (filed as Exhibit 10.36 to NWA
Corp.'s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated herein by
reference).
80
*10.36 Northwest Airlines Corporation 1999 Stock Incentive Plan, as amended (filed as Exhibit 10.26 to NWA Corp.'s
Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
*10.37 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 (filed as Exhibit
10.38 to NWA Corp.'s Annual Report on Form 10-K for the year ended December 31, 2004 and incorporated
herein by reference).
*10.38 2001 Northwest Airlines Corporation Stock Incentive Plan, as amended (filed as Exhibit 10.43 to NWA Corp.'s
Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
*10.39 Northwest Airlines Corporation 1998 Pilots Stock Option Plan (filed as Exhibit 10.34 to NWA Corp.'s Annual
Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference).
* 10.40 Amendment to Northwest Airlines Corporation 1998 Pilots Stock Option Plan (filed as Exhibit 10.35 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 Form ofNon-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).
*10.42 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).
*10.43 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).
*10.44 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).
*10.45 Northwest Airlines Corporation E-Commerce Incentive Compensation Program (as amended and restated),
including form of Award Agreement (filed as Exhibit 10.4 to NWA Corp.'s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2004 and incorporated herein by reference).
*10.46 Letter Agreement dated as of July 1, 2005 between Northwest Airlines Corporation and J. Timothy Griffin
amending an outstanding A ward under the Northwest Airlines Corporation E-Commerce Incentive
Compensation Program (filed as Exhibit 10.2 to NWA Corp.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005 and incorporated herein by reference).
*10.47 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-K for the year ended December 31, 2003 and
incorporated herein by reference).
*10.48 Ancillary Agreement to the Northwest Airlines, Inc. Supplemental Executive Retirement Plan dated as of April
29, 2005 between Northwest Airlines, Inc. and Neal S. Cohen.
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.l Powers of Attorney (included in signature page).
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
81
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-O:xley Act of 2002
32.1 Section 1350 Certification of Chief Executive Officer.
32.2 -
Section 13 50 Certification of Chief Financial Officer.
* Compensatory plans in which the directors and executive officers of Northwest participate.
82
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 16, 2006
NORTHWEST AIRLINES CORPORATION
By Isl ANNA M. SCHAEFER
Anna M. Schaefer
Vice President - 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, Neal S. Cohen and Anna M. Schaefer, 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 16th day
of March, 2006 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 NEAL S. COHEN
Neal S. Cohen
Executive Vice President & Chief
Financial Officer (principal financial officer)
Isl ANNA M. SCHAEFER
Anna M. Schaefer
Vice President-Finance and
Chief Accounting Officer (principal
accounting officer)
Isl GARY L. WILSON
Gary L. Wilson
Chairman of the Board
Isl RAY W. BENNING, JR.
Ray W. Benning, Jr.
Director
Isl ROY BOSTOCK
Roy Bostock
Director
Isl JOHN ENGLER
John Engler
Director
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 JEFFREY G. KATZ
Jeffrey G. Katz
Director
Isl GEORGE J. KOURPIAS
George J. Kourpias
Director
Isl FREDERIC V. MALEK
Frederic V. Malek
Director
Isl MICHAEL G. RISTOW
Michael G. Ristow
Director
Isl LEO M. VAN WIJK
Leo M. van Wijk
Director
83
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
SCHEDULE II - VALUATION OF QUALIFYING ACCOUNTS AND RESERVES
(In millions)
Col.A
Description
Year Ended December 31, 2005
Allowances deducted from asset
accounts:
Allowance for doubtful accounts .....
Accumulated allowance for
depreciation of flight equipment
spare parts ....................................
Year Ended December 31, 2004
Allowances deducted from asset
accounts:
Allowance for doubtful accounts .....
Accumulated allowance for
depreciation of flight equipment
spare parts ....................................
Year Ended December 31, 2003
Allowances deducted from asset
accounts:
Allowance for doubtful accounts .....
Accumulated allowance for
depreciation of flight equipment
spare parts ................................... .
Col. B
Balance at
Beginning
of Period
$ 12
240
19
202
19
175
(1) Uncollectible accounts written off, net ofrecoveries
(2) Interaccount transfers
(3) Dispositions and write-offs
Col.C Col.D
Additions
Charged to
Charged to Other
Costs and Accounts Deductions
Expenses -Describe -Describe
$ 10 $ $ 10 (1) $
9 4 (2) 10 (3)
6 13 (1)
16 28 (2) 6 (3)
11 11 (1)
25 5 (2) 3 (3)
S-1
Col.E
Balance at
End
of Period
12
243
12
240
19
202
Exhibit 12.1
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
Year ended December 31
2005 2004 2003 2002 2001
Earnings:
Income (loss) before income taxes ..................................... $ (2,457) $ (861) $ 218 $ (1,220) $ (670)
Less: Income (loss) from less than 50% owned
investees .......................................................................... (14) 8 18 37 (5)
Add:
Rent expense representative of interest (1) .................... 255 248 253 247 237
Interest expense net of capitalized interest (2) ............... 582 505 441 385 326
Interest of preferred security holder ............................... 25 25 25
Amortization of debt discount and expense ................... 18 30 24 17 14
Amortization of interest capitalized ............................... 8 8 10 5 4
Adjusted earnings ................................................ $ (1,580) $ (78) $ 953 $ (578) $ (59)
Fixed charges:
Rent expense representative of interest (1) ........................ $ 255 $ 248 $ 253 $ 247 237
Interest expense net of capitalized interest (2) ................... 582 505 441 385 326
Interest of preferred security holder ................................... 25 25 25
Amortization of debt discount and expense ....................... 18 30 24 17 14
Capitalized interest ............................................................ 10 8 10 25 29
Fixed charges ........................................................ $ 865 $ 791 $ 753 $ 699 $ 631
Ratio of earnings to fixed charges .................................. -(3) -(3) 1.27 -(3) -(3)
{l) Calculated as one-third ofrentals, which is considered representative of the interest factor.
(2) Subsequent to its Chapter 11 filing, the Company recorded post-petition interest expense on pre-petition obligations only
to the extent it believes the interest will be paid during the bankruptcy proceeding or that it is probable that the interest
will be an allowed claim.
(3) Earnings were inadequate to cover fixed charges by $2.45 billion, $869 million, $1.28 billion, and $690 million for the
years ended December 31, 2005, 2004, 2002, and 2001 respectively.
Exhibit 12.2
NORTHWEST AIRLINES CORPORATION
(DEBTOR-IN-POSSESSION)
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK REQUIREMENTS
(Dollars in millions)
Year ended December 31
2005 2004 2003 2002 2001
Earnings:
Income (loss) before income taxes ..................................... $ (2,457) $ (861) $ 218 $ (1,220) $ (670)
Less: Income (loss) from less than 50% owned
investees ......................................................................... (14) 8 18 37 (5)
Add:
Rent expense representative of interest ( 1) .................... 255 248 253 247 237
Interest expense net of capitalized interest (2) ............... 582 505 441 385 326
Interest of preferred security holder ............................... 25 25 25
Amortization of debt discount and expense ................... 18 30 24 17 14
Amortization of interest capitalized ............................... 8 8 IO 5 4
Adjusted earnings ................................................ $ (1,580) $ (78) $ 953 $ (578) $ (59)
Fixed charges and preferred stock requirements:
Rent expense representative of interest (1) ........................ $ 255 $ - 248 $ 253 $ 247 $ 237
Interest expense net of capitalized interest (2) ................... 582 505 441 385 326
Preferred stock requirements ............................................. 22 29 12 1 1
Interest of preferred security holder ................................... 25 25 25
Amortization of debt discount and expense ....................... 18 30 24 17 14
Capitalized interest ............................................................ 10 8 10 25 29
Fixed charges and pref erred stock
requirements ..................................................... $ 887 $ 820 $ 765 $ 700 $ 632
Ratio of earnings to fixed charges and preferred stock
requirements ................................................................. -(3) -(3) 1.25 -(3) -(3)
(1) Calculated as one-third of rentals, which is considered representative of the interest factor.
(2) Subsequent to its Chapter 11 filing, the Company recorded post-petition interest expense on pre-petition obligations only
to the extent it believes the interest will be paid during the bankruptcy proceeding or that it is probable that the interest
will be an allowed claim.
(3) Earnings were inadequate to cover fixed charges by $2.47 billion,$898 million, $1.28 billion, and $573 million for the
years ended December 31, 2005, 2004, 2002 and 2001, respectively.
"
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;
EXHIBIT 31.1
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 myknowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of <;>perations 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(t) 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 16, 2006
Isl DOUGLAS M. STEENLAND
Douglas M. Steenland
President and Chief Executive Officer
I, Neal S. Cohen, certify that:
EXHIBIT 31.2
Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I. I have reviewed this annual report on Form 10-K of Northwest Airlines Corporation;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-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 16, 2006
Isl NEAL S. COHEN
Neal S. Cohen
Executive Vice President and
Chief Financial Officer
EXHIBIT 32. l
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, 2005 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 16, 2006
Isl DOUGLAS 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 of2002 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
Co~pany 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 of2002
In connection with the annual report of Northwest Airlines Corporation (the "Company") on Form l 0-K for the period
ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Neal
S. Cohen, 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 16, 2006
Isl NEAL S. COHEN
Neal S. Cohen
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 of2002 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.