**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2004**

 

**Commissionfile number 0-23642**

 

**NORTHWEST AIRLINES CORPORATION**

**(Exactname 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**                                                                    |   | **55121**                                 |
| **(Address  of principal executive offices)**                                                                   |   | **(Zip  Code)**                           |
|                                                                                                            |   |                                      |
| **Registrant’s  telephone number, including area code     **(612)   726-2111 |

** **

**Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.Yes  **ý  No  o

** **

**Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  Yes  **ý  No  o

** **

**As of March 31, 2004, there were86,132,067 shares of the registrant’s Common Stock outstanding.**

 

 

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*Northwest AirlinesCorporation*

 
| PART I.  FINANCIAL INFORMATION |    |
|-------------------------------------|---------|
|                                |    |
|                                | Item 1. | Financial Statements. |   |
|                                |    |
|                                |    | Condensed Consolidated Statements of  Operations - Three months ended March 31, 2004 and 2003 |   |
|                                |    |
|                                |    | Condensed Consolidated Balance Sheets -  March 31, 2004 and December 31, 2003 |   |
|                                |    |
|                                |    | Condensed  Consolidated Statements of Cash Flows - Three months ended March 31, 2004 and  2003 |   |
|                                |    |
|                                |    | Notes to Condensed Consolidated Financial  Statements |   |
|                                |    |
|                                |    | The  Computations of Ratio of Earnings to Fixed Charges and Ratio of Earnings to  Fixed Charges and Preferred Stock Requirements are attached hereto and filed  as Exhibits 12.1 and 12.2 |   |
|                                |    |
|                                | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. |   |
|                                |    |
|                                | Item 3. | Quantitative and Qualitative Disclosures  About Market Risk. |   |
|                                |    |
|                                | Item 4. | Controls and Procedures. |   |
|                                |    |
| PART II. OTHER INFORMATION          |    |
|                                |    |
|                                | Item 1. | Legal Proceedings. |   |
|                                |    |
|                                | Item 6. | Exhibits and Reports on Form 8-K. |   |
|                                |    |
| SIGNATURE                           |    |
|                                |    |
| EXHIBIT  INDEX                      |    |

 

2

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PART I.  FINANCIAL INFORMATION

 

**Item1.  Financial Statements.**

 

*Northwest Airlines Corporation*

 

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
|                                                     |   | **Three  Months Ended  March 31** |   |
|----------------------------------------------------------|--------|-----------------------------------|--------|
| ***(Unaudited, in millions except per share  amounts)*** |   | **2004**                          |   | **2003** |   |
| **Operating Revenues**                                   |   |                              |   |   |   |
| Passenger                                                |   | $                                 | 1,963  |   | $ | 1,799 |   |
| Regional carrier revenues                                |   | 217                               |   | 173 |   |
| Cargo                                                    |   | 183                               |   | 167 |   |
| Other                                                    |   | 240                               |   | 236 |   |
| Total operating revenues                                 |   | 2,603                             |   | 2,375 |   |
|                                                     |   |                              |   |   |   |
| **Operating Expenses**                                   |   |                              |   |   |   |
| Salaries, wages and benefits                             |   | 937                               |   | 1,045 |   |
| Aircraft fuel and taxes                                  |   | 450                               |   | 411 |   |
| Selling and marketing                                    |   | 175                               |   | 176 |   |
| Other rentals and landing fees                           |   | 146                               |   | 143 |   |
| Depreciation and amortization                            |   | 141                               |   | 142 |   |
| Aircraft rentals                                         |   | 114                               |   | 118 |   |
| Aircraft maintenance materials and repairs               |   | 111                               |   | 133 |   |
| Regional carrier expenses                                |   | 256                               |   | 125 |   |
| Other                                                    |   | 381                               |   | 408 |   |
| Total operating expenses                                 |   | 2,711                             |   | 2,701 |   |
|                                                     |   |                              |   |   |   |
| **Operating Income (Loss)**                              |   | (108                              | )      | (326 | ) |
|                                                     |   |                              |   |   |   |
| **Other Income (Expense)**                               |   |                              |   |   |   |
| Interest expense, net                                    |   | (132                              | )      | (111 | ) |
| Interest of mandatorily redeemable security  holder      |   | —                            |   | (6 | ) |
| Investment income                                        |   | 13                                |   | 9 |   |
| Other                                                    |   | 4                                 |   | 8 |   |
| Total other income (expense)                             |   | (115                              | )      | (100 | ) |
|                                                     |   |                              |   |   |   |
| **Income (Loss) Before Income Taxes**                    |   | (223                              | )      | (426 | ) |
|                                                     |   |                              |   |   |   |
| Income tax benefit                                       |   | —                            |   | (30 | ) |
|                                                     |   |                              |   |   |   |
| **Net Income (Loss)**                                    |   | (223                              | )      | (396 | ) |
|                                                     |   |                              |   |   |   |
| Preferred stock requirements                             |   | (7                                | )      | — |   |
|                                                     |   |                              |   |   |   |
| **Net Income (Loss) Applicable to Common  Stockholders** |   | $                                 | (230   | ) | $ | (396 | ) |
|                                                     |   |                              |   |   |   |
| Earnings (Loss) per common share:                        |   |                              |   |   |   |
| *Basic*                                                  |   | $                                 | (2.67  | ) | $ | (4.62 | ) |
|                                                     |   |                              |   |   |   |
| *Diluted*                                                |   | $                                 | (2.67  | ) | $ | (4.62 | ) |
|                                                     |   |                              |   |   |   |
| Average shares used in computation:                      |   |                              |   |   |   |
| *Basic*                                                  |   | 86                                |   | 86 |   |
| *Diluted*                                                |   | 86                                |   | 86 |   |

 

*Seeaccompanying notes.*

 

3

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*Northwest Airlines Corporation*

 

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ***(Unaudited, in millions)***                                      |   | **March 31  2004** |   | **December  31  2003** |   |
|---------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                                |   |               |   |                   |   |
| **Assets**                                                          |   |               |   |                   |   |
|                                                                |   |               |   |                   |   |
| **Current Assets**                                                  |   |               |   |                   |   |
| Cash and cash equivalents                                           |   | $                  | 1,792  |                   | $      | 1,608 |   |
| Unrestricted short-term investments                                 |   | 1,144              |   | 1,149                  |   |
| Restricted short-term investments                                   |   | 172                |   | 126                    |   |
| Accounts receivable, net                                            |   | 473                |   | 478                    |   |
| Flight equipment spare parts, net                                   |   | 164                |   | 174                    |   |
| Prepaid expenses and other                                          |   | 523                |   | 447                    |   |
| Total current assets                                                |   | 4,268              |   | 3,982                  |   |
|                                                                |   |               |   |                   |   |
| **Property and Equipment**                                          |   |               |   |                   |   |
| Flight equipment, net                                               |   | 6,850              |   | 6,698                  |   |
| Other property and equipment, net                                   |   | 735                |   | 725                    |   |
| Total property and equipment                                        |   | 7,585              |   | 7,423                  |   |
|                                                                |   |               |   |                   |   |
| **Flight Equipment Under Capital Leases, net**                      |   | 162                |   | 250                    |   |
|                                                                |   |               |   |                   |   |
| **Other Assets**                                                    |   |               |   |                   |   |
| Intangible pension asset                                            |   | 750                |   | 750                    |   |
| International routes                                                |   | 634                |   | 634                    |   |
| Investments in affiliated companies                                 |   | 69                 |   | 67                     |   |
| Other                                                               |   | 965                |   | 1,048                  |   |
| Total other assets                                                  |   | 2,418              |   | 2,499                  |   |
| Total Assets                                                        |   | $                  | 14,433 |                   | $      | 14,154 |   |
|                                                                |   |               |   |                   |   |
| **Liabilities and Stockholders’ Equity  (Deficit)**            |   |               |   |                   |   |
|                                                                |   |               |   |                   |   |
| **Current Liabilities**                                             |   |               |   |                   |   |
| Air traffic liability                                               |   | $                  | 1,512  |                   | $      | 1,272 |   |
| Accounts payable and other liabilities                              |   | 2,163              |   | 2,274                  |   |
| Current maturities of long-term debt and  capital lease obligations |   | 845                |   | 733                    |   |
| Total current liabilities                                           |   | 4,520              |   | 4,279                  |   |
|                                                                |   |               |   |                   |   |
| **Long-Term Debt**                                                  |   | 7,260              |   | 7,198                  |   |
|                                                                |   |               |   |                   |   |
| **Long-Term Obligations Under Capital Leases**                      |   | 339                |   | 354                    |   |
|                                                                |   |               |   |                   |   |
| **Deferred Credits and Other Liabilities**                          |   |               |   |                   |   |
| Pension and postretirement benefits                                 |   | 3,464              |   | 3,228                  |   |
| Deferred income taxes                                               |   | 148                |   | 146                    |   |
| Other                                                               |   | 709                |   | 724                    |   |
| Total deferred credits and other  liabilities                       |   | 4,321              |   | 4,098                  |   |
|                                                                |   |               |   |                   |   |
| **Preferred Redeemable Stock**                                      |   | 242                |   | 236                    |   |
|                                                                |   |               |   |                   |   |
| **Common Stockholders’ Equity (Deficit)**                      |   |               |   |                   |   |
| Common stock                                                        |   | 1                  |   | 1                      |   |
| Additional paid-in capital                                          |   | 1,461              |   | 1,460                  |   |
| Accumulated deficit                                                 |   | (1,314             | )      | (1,083                 | )      |
| Accumulated other comprehensive income  (loss)                      |   | (1,351             | )      | (1,340                 | )      |
| Treasury stock                                                      |   | (1,046             | )      | (1,049                 | )      |
| Total common stockholders’ equity (deficit)                    |   | (2,249             | )      | (2,011                 | )      |
| Total Liabilities and Stockholders’ Equity  (Deficit)          |   | $                  | 14,433 |                   | $      | 14,154 |   |

 

*Seeaccompanying notes.*

 

4

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*Northwest Airlines Corporation*

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                               |   | **Three  Months Ended  March 31** |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| ***(Unaudited, in millions)***                                                                     |   | **2004**                          |   | **2003** |   |
|                                                                                               |   |                              |   |   |   |
| **Cash Flows from Operating Activities**                                                           |   |                              |   |   |   |
| Net loss                                                                                           |   | $                                 | (223   | ) | $ | (396 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities:         |   |                              |   |   |   |
| Depreciation and amortization                                                                      |   | 141                               |   | 142 |   |
| Income tax expense (benefit)                                                                       |   | —                            |   | (30 | ) |
| Net receipts (payments) of income taxes                                                            |   | (3                                | )      | 217 |   |
| Pension and other postretirement benefit  contributions less than expense                          |   | 114                               |   | 164 |   |
| Changes in certain assets and liabilities                                                          |   | 174                               |   | 86 |   |
| Other, net                                                                                         |   | (5                                | )      | 4 |   |
| Net cash provided by (used in) operating  activities                                               |   | 198                               |   | 187 |   |
|                                                                                               |   |                              |   |   |   |
| **Cash Flows from Investment Activities**                                                          |   |                              |   |   |   |
| Capital expenditures                                                                               |   | (132                              | )      | (168 | ) |
| Net increase in restricted short-term  investments                                                 |   | (31                               | )      | (45 | ) |
| Other, net                                                                                         |   | 12                                |   | — |   |
| Net cash provided by (used in) investing  activities                                               |   | (151                              | )      | (213 | ) |
|                                                                                               |   |                              |   |   |   |
| **Cash Flows from Financing Activities**                                                           |   |                              |   |   |   |
| Proceeds from long-term debt                                                                       |   | 388                               |   | 163 |   |
| Payments of long-term debt and capital  lease obligations                                          |   | (245                              | )      | (73 | ) |
| Other, net                                                                                         |   | (6                                | )      | (6 | ) |
| Net cash provided by (used in) financing  activities                                               |   | 137                               |   | 84 |   |
|                                                                                               |   |                              |   |   |   |
| **Increase (Decrease) in Cash and Cash Equivalents**                                               |   | 184                               |   | 58 |   |
|                                                                                               |   |                              |   |   |   |
| Cash and cash equivalents at beginning of  period                                                  |   | 1,608                             |   | 2,097 |   |
| Cash and cash equivalents at end of period                                                         |   | $                                 | 1,792  |   | $ | 2,155 |   |
|                                                                                               |   |                              |   |   |   |
| Cash and cash equivalents and unrestricted  short-term investments at end of period                |   | 2,936                             |   | 2,155 |   |
|                                                                                               |   |                              |   |   |   |
| Supplemental Cash Flow Information:                                                                |   |                              |   |   |   |
| Interest paid                                                                                      |   | $                                 | 101    |   | $ | 90 |   |
|                                                                                               |   |                              |   |   |   |
| Investing and Financing Activities Not  Affecting Cash:                                            |   |                              |   |   |   |
| Manufacturer financing of aircraft,  aircraft predelivery deposits and other non-cash transactions |   | $                                 | 19     |   | $ | 49 |   |

 

*See accompanyingnotes.*

 

5

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*Northwest AirlinesCorporation*

 

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1 – Basis of Presentation**

 

The condensedconsolidated financial statements of Northwest Airlines Corporation (“NWACorp.”), a holding company whose principal indirect operating subsidiary isNorthwest Airlines, Inc. (“Northwest”), include the accounts of NWA Corp. andall consolidated subsidiaries (collectively, the “Company”).  The condensed consolidated financialstatements included herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosuresnormally included in annual financial statements prepared in accordance withGenerally Accepted Accounting Principles (“GAAP”) have been condensed oromitted as permitted by such rules and regulations. These financial statementsand related notes should be read in conjunction with the financial statementsand notes included in the Company’s audited consolidated financial statements,which are provided in the Company’s Annual Report on Form 10-K for the yearended December 31, 2003.  The Company’saccounting and reporting policies are summarized in Note 1 of the Notes to ConsolidatedFinancial Statements in the Annual Report on Form 10-K for 2003.

 

The Companymaintains a Web site at http://www.nwa.com. Annual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K, all amendments to those reports, and other informationabout the Company are available free of charge through this Web site athttp://ir.nwa.com as soon as reasonably practicable after those reports areelectronically filed with or furnished to the SEC.

 

In the opinionof management, the interim financial statements reflect adjustments, consistingof normal recurring accruals, which are necessary to present fairly theCompany’s financial position, results of operations and cash flows for theperiods indicated.  As noted in theCompany’s Form 8-K filed with the SEC on January 28, 2004, regional carrierrevenues and related Airline Service Agreement (“ASA”) payments previouslyreported as a net amount in passenger revenues are now reported separately inrevenues and expenses for all periods presented.

 

## **Note 2 – Recent Accounting Pronouncements**

 

In December2003, the FASB revised SFAS No. 132, *Employers’Disclosures about Pensions and Other Postretirement Benefits*.  This revision requires the disclosure ininterim reports of the amount of net periodic benefit cost recognized for theperiod and the total amount of contributions paid and expected to be paidduring the current fiscal year if significantly different from amountspreviously disclosed.  The Companyadopted the provisions of this revised statement as of December 31, 2003, andhas included the required disclosures in Note 10 – Pension and OtherPostretirement Benefits.

 

**Note3 – Segment Information**

 

The Company ismanaged as one cohesive business unit, for which revenues are derived primarilyfrom the commercial transportation of passengers and cargo.  Operating revenues from flight segmentsserving foreign destinations are classified into the Pacific or Atlanticregions, as appropriate.  The followingtable shows the operating revenues for each region (in millions):

 

|               |   | **Three  months ended  March 31** |      |
|--------------------|--------|-----------------------------------|-----------|
|               |   | **2004**                          |      | **2003** |   |
| Domestic           |   | **$**                             | **1,796** |   | $ | 1,627 |   |
| Pacific            |   | **553**                           |      | 511 |   |
| Atlantic           |   | **254**                           |      | 237 |   |
| Operating revenues |   | **$**                             | **2,603** |   | $ | 2,375 |   |

 

6

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## **Note 4 – Earnings (Loss) Per Share Data**

 

The followingtable sets forth the computation of basic and diluted earnings (loss) percommon share:

 
|                                                                                 |   | **Three  months ended  March 31** |       |
|--------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                 |   | **2004**                          |       | **2003** |   |
| Numerator:                                                                           |   |                              |       |   |   |
| Net income (loss) (in millions)                                                      |   | **$**                             | **(223**   | **)** | $ | (396 | ) |
| Preferred stock requirements (in millions)                                           |   | **(7**                            | **)**      | — |   |
| Net income (loss) applicable to common  shareholders (in millions)                   |   | **$**                             | **(230**   | **)** | $ | (396 | ) |
|                                                                                 |   |                              | ** ** |   |   |
| Denominator:                                                                         |   |                              | ** ** |   |   |
| Weighted-average shares outstanding for  basic and diluted earnings (loss) per share |   | **86,114,328**                    | ** ** | 85,825,747 |   |
|                                                                                 |   |                              | ** ** |   |   |
| Earnings (loss) per common share:                                                    |   |                              | ** ** |   |   |
| Net income (loss) before preferred stock  requirements                               |   | **$**                             | **(2.59**  | **)** | $ | (4.62 | ) |
| Preferred stock requirements                                                         |   | **(0.08**                         | **)**      | — |   |
| Net income (loss) applicable to common  shareholders                                 |   | **$**                             | **(2.67**  | **)** | $ | (4.62 | ) |

 

For the threemonths ended March 31, 2004 and 2003, 876,803 and 6,606,539 incremental sharesrelated to dilutive securities, respectively, were not included in the dilutedearnings per share calculation because the Company reported a net loss forthese periods.  Incremental sharesrelated to dilutive securities have an anti-dilutive impact on earnings pershare when a net loss is reported and therefore are not included in thecalculation.

 

The dilutivesecurities described above do not include employee stock options of 1,301,747and 3,703,944 as of March 31, 2004 and 2003, respectively, because the exerciseprices of these options are greater than the average market price of the commonstock for the respective periods. Additionally, 19.1 million shares issuable upon conversion of theCompany’s 6.625% and 7.625% senior convertible notes issued in 2003 were alsoexcluded from the March 31, 2004 dilutive securities because the contingentconversion features of the notes had not been met.

 

**Note5 – Comprehensive Income (Loss)**

 

Comprehensiveincome (loss) consisted of the following (in millions):

 
|                                                             |   | **Three  months ended  March 31** |       |
|------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                             |   | **2004**                          |       | **2003** |   |
| Net income (loss)                                                |   | **$**                             | **(223**   | **)** | $ | (396 | ) |
| Minimum pension liability adjustments                            |   | **—**                        | ** ** | (156 | ) |
| Change in unrealized gain/loss on  available-for-sale securities |   | **1**                             | ** ** | — |   |
| Change in deferred gain/loss from hedging  activities            |   | **(13**                           | **)**      | 22 |   |
| Foreign currency translation adjustments                         |   | **2**                             | ** ** | (1 | ) |
| Comprehensive income (loss)                                      |   | **$**                             | **(233**   | **)** | $ | (531 | ) |

 

**Note 6 – Stock-based Compensation**

 

EffectiveJanuary 1, 2003, the Company adopted the fair value method of recordingstock-based employee compensation prescribed by SFAS No. 123, *Accountingfor Stock-Based Compensation*, and accounts for this change inaccounting principle using the “prospective method” as described by SFAS No.148, *Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123*.

 

7

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For the three months ended March 31, 2004 and 2003, the pro forma netloss and loss per share assuming the fair value based method had been appliedto all outstanding option awards are materially the same as the reportedamounts because a minimal number of outstanding options were granted prior toJanuary 1, 2003.

 

**Note 7 – Income Taxes**

 

Under theprovisions of SFAS No. 109, *Accounting for Income Taxes*, therealization of future tax benefits of a net deferred tax asset is dependent onfuture taxable income against which such tax benefits can be applied.  SFAS No. 109 requires that all availableevidence be considered in the determination of whether sufficient futuretaxable income will exist.  Suchevidence includes, but is not limited to, a company’s financial performance forthe current and prior two years, the market environment in which a companyoperates, the utilization of past tax credits, and the length of relevantcarryback and carryforward periods.  Asa result of the Company’s cumulative losses over the past three fiscal yearsand the full utilization of its loss carryback potential, future pre-tax lossesare not expected to be reduced by the recognition of associated tax benefits atleast until a net deferred tax liability is generated or the Company achievessubstantial profitability.

 

**Note8 – Long-term Debt**

 

At March 31,2004 maturities of long-term debt, excluding capital lease obligations, throughDecember 31, 2008 are as follows (in millions):

 

| 2004 |   | $     | 527    |   |
|------|--------|-------|--------|--------|
| 2005 |   | 1,490 |   |
| 2006 |   | 802   |   |
| 2007 |   | 813   |   |
| 2008 |   | 512   |   |

 

The amount due in 2005 includes $962 million ofprincipal outstanding under the Company’s secured credit facilities.  The facilities currently bear interest at avariable rate equal to the three-month London Interbank Offered Rate (“LIBOR”)plus 3.25% (4.40% as of April 20, 2004). The credit agreement includes a covenant that requires the Company,beginning with the three month period ending June 30, 2004, to maintain atleast a one-to-one ratio of earnings (defined as operating income adjusted toexclude the effects of depreciation, amortization and aircraft rents and toinclude the effects of interest income) to fixed charges (comprising interestexpense and aircraft rents).  If theCompany fails to meet this fixed charges coverage ratio, repayment ofborrowings under the credit facility could be accelerated by the banks.  While the Company currently believes that itwill satisfy this requirement, compliance with the covenant depends upon manyfactors that could impact future revenues and expenses, some of which arebeyond the Company’s control.

 

On January 26, 2004, Northwest completed an offeringof $300 million of unsecured notes due 2009. The notes have a coupon rate of 10%, payable semi-annually in cash onFebruary 1 and August 1 of each year, beginning on August 1, 2004, and are notredeemable prior to maturity.  Each notewas issued at a price of $962 per $1,000 principal amount, resulting in a yieldto maturity of 11.0%.  Proceeds from thenotes will be used for working capital and general corporate purposes.   The notes are guaranteed by NWA Corp.

 

In March and April 2004, the Company repaid theremaining $333 million outstanding under two issues of unsecured notes, asscheduled, with a combined original face amount of $350 million.  On March 15, $138 million of 8.375% senior unsecurednotes were repaid, net of $12 million previously exchanged for newly issuednotes in conjunction with an exchange offer in December 2003.  The 8.375% unsecured notes were originallyissued in 1997.  Additionally, theCompany repaid $195 million of 8.52% senior unsecured notes that matured onApril 7, net of $5 million previously exchanged for newly issued notes inconjunction with the same December 2003 exchange offer. The 8.52% unsecurednotes were originally issued in 1998.

 

8

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**Note 9 – Fleet Information and Commitments**

 

The following table presents the number of aircraft in service and onfirm order as of March 31, 2004:

 
| **Aircraft Type**                     |   | **Seating  Capacity** |   | **Owned** |       | **Capital  Lease** |       | **Operating  Lease** |       | **Temporarily  Not in  Service** |       | **Total  Aircraft  in Service** |       | **Aircraft  on Firm  Order** |   |
|---------------------------------------|--------|-----------------------|--------|-----------|------------|--------------------|------------|----------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------------|--------|
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| **Passenger Aircraft**                |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| Airbus:                               |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| A319                                  |   | 124                   |   | 58        |       | —             |       | 12                   |       | —                           |       | 70                              |       | 7                            |   |
| A320                                  |   | 148                   |   | 43        |       | 4                  |       | 31                   |       | (2                               | )          | 76                              |       | 6                            |   |
| A330-200                              |   | 243                   |   | —    |       | —             |       | —               |       | —                           |       | —                          |       | 10                           |   |
| A330-300                              |   | 298                   |   | 6         |       | —             |       | —               |       | —                           |       | 6                               |       | 8                            |   |
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| Boeing:                               |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| 757-200                               |   | 180-184               |   | 29        |       | 8                  |       | 19                   |       | (5                               | )          | 51                              |       | —                       |   |
| 757-300                               |   | 224                   |   | 16        |       | —             |       | —               |       | —                           |       | 16                              |       | —                       |   |
| 747-200                               |   | 353-430               |   | 12        |       | —             |       | 5                    |       | (10                              | )          | 7                               |       | —                       |   |
| 747-400                               |   | 403                   |   | 4         |       | —             |       | 12                   |       | —                           |       | 16                              |       | —                       |   |
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| DC9                                   |   | 78-125                |   | 155       |       | —             |       | 10                   |       | (9                               | )          | 156                             |       | —                       |   |
| DC10                                  |   | 273                   |   | 14        |       | —             |       | 8                    |       | —                           |       | 22                              |       | —                       |   |
|                                  |   |                  |   | 337       |       | 12                 |       | 97                   |       | (26                              | )          | 420                             |       | 31                           |   |
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| **Freighter Aircraft**                |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| Boeing 747-200F                       |   |                  |   | 5         |       | —             |       | 7                    |       | —                           |       | 12                              |       | —                       |   |
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| **Total Northwest Operated Aircraft** |   |                  |   | **342**   | ** ** | **12**             | ** ** | **104**              | ** ** | **(26**                          | **)**      | **432**                         | ** ** | **31**                       |   |
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| **Regional Aircraft**                 |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| BAE AVRO RJ85                         |   | 69                    |   | 10        |       | —             |       | 25                   |       | —                           |       | 35                              |       | —                       |   |
| Bombardier CRJ-200/440                |   | 44-50                 |   | —    |       | —             |       | 87                   |       | —                           |       | 87                              |       | 42                           |   |
| SAAB 340                              |   | 30-34                 |   | —    |       | —             |       | 49                   |       | —                           |       | 49                              |       | —                       |   |
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| **Total Airlink Operated Aircraft**   |   |                  |   | **10**    | ** ** | **—**         | ** ** | **161**              | ** ** | **—**                       | ** ** | **171**                         | ** ** | **42**                       |   |
|                                  |   |                  |   |      |       |               |       |                 |       |                             |       |                            |       |                         |   |
| **Total Aircraft**                    |   |                  |   | **352**   | ** ** | **12**             | ** ** | **265**              | ** ** | **(26**                          | **)**      | **603**                         | ** ** | **73**                       |   |

 

Committed expenditures for the 73 aircraft and relatedequipment on firm order, including estimated amounts for contractual priceescalations and predelivery deposits, will be approximately $1.30 billion forthe remainder of 2004, $748 million in 2005, $568 million in 2006, $202 millionin 2007 and $188 million in 2008. Consistent with prior practice, the Company intends to finance itsaircraft deliveries through a combination of internally generated funds, debtand long-term lease financing. Financing commitments available for use by the Company are in place forall of the aircraft on firm order and range from 80% - 100% of each aircraft’spurchase price.  The Company intends tofinance all of the CRJ-200/440 aircraft on order through long-term operatinglease financing commitments from the manufacturer.  These aircraft will, in turn, be subleased to and operated byPinnacle Airlines.  In the event themanufacturer does not provide financing for the regional aircraft, the Companyis not obligated to take delivery.

 

9

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**Note10 – Pension and Other Postretirement Benefits**

 

The Company has several noncontributory pension planscovering substantially all of its employees. The benefits for these plans are based primarily on years of serviceand, in some cases, employee compensation.

 

The components of net periodic cost of defined benefitplans included the following (in millions):

 

|                                            |   | **Three  months ended March 31** |       |
|-------------------------------------------------|--------|----------------------------------|------------|
|                                            |   | **Pension  Benefits**            |       | **Other  Benefits** |   |
|                                            |   | **2004**                         |       | **2003** |   | **2004** |   | **2003** |   |
| Service cost                                    |   | **$**                            | **63**     | ** ** | $ | 65 |   | **$** | **7** | ** ** | $ | 7 |   |
| Interest cost                                   |   | **134**                          | ** ** | 130 |   | **13** | ** ** | 11 |   |
| Expected return on plan assets                  |   | **(124**                         | **)**      | (121 | ) | **—** | ** ** | — |   |
| Amortization of prior service cost              |   | **19**                           | ** ** | 19 |   | **(2** | **)** | (2 | ) |
| Recognized net actuarial loss and other  events |   | **20**                           | ** ** | 68 |   | **6** | ** ** | 4 |   |
| Net periodic benefit cost                       |   | **$**                            | **112**    | ** ** | $ | 161 |   | **$** | **24** | ** ** | $ | 20 |   |

 

On December 23, 2003, the Company applied to the IRSto reschedule some of its plan year 2004 pension contributions, which includedamounts due in both 2004 and 2005, for the contract and salaried employees’pension plans.  Subsequently, on April10, 2004, the President signed into law the Pension Funding Equity Act (the“Pension Act”), which reduces the Company’s required contributions through twomechanisms: 1) certain companies may elect partial relief from the deficitreduction contribution requirements that otherwise would have applied in 2004and 2005, an election the Company has made; and 2) the applicable discount rateused to determine funding was increased to reflect yields on indices of highquality corporate bonds instead of 30 year U.S. Treasury rates.

 

Including the impact of the new legislation, theCompany’s 2004 calendar year cash contributions to qualified pension plans isexpected to approximate $255 million. Following enactment of the Pension Act, the Company withdrew its requestto the IRS to reschedule its plan year 2004 pension contributions.

 

10

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**Item2.    Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

The U.S. airline industry continues to face unprecedentedchallenges.  Although the U.S. economyhas shown recent evidence of strengthening, revenues for the industry as awhole have remained significantly below the levels that would have beenexpected based on historical trends. This decline has resulted from the rapid growth of low cost airlines,increased distribution through the Internet, higher taxes levied on airlinepassengers, fear of additional terrorist activities and inconveniencesintroduced by new airport security initiatives.  Moreover, Northwest continues to be impacted by events that havedepressed the global demand for air travel, including the ongoing effects ofthe September 11, 2001 attacks, the Iraq War and its aftermath, and theoutbreak of Severe Acute Respiratory Syndrome (“SARS”) in several countries theCompany serves.

 

Many airlines, including Northwest, continue to suffer from operatingexpenses that are out of line with the new revenue environment, with laborcosts remaining the single largest obstacle to financial recovery.  In addition, the price of aircraft fuelduring the most recent quarter reached levels not seen since the Gulf War ofthe early 1990s, further eroding financial results.  See “Northwest and the Current Status of the Airline Industry -Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in the Company’s December 31, 2003 Annual Report on Form 10-K for adetailed discussion of the factors contributing to the revenue shortfall andother financial and operational challenges the Company faces.

 

For the quarter ended March 31, 2004, the Companyreported a net loss applicable to common stockholders of $230 million and anoperating loss of $108 million, versus net and operating losses of $396 millionand $326 million for the quarter ended March 31, 2003, respectively.  Net loss per common share was $2.67 in thefirst quarter of 2004 compared with a net loss per common share of $4.62 in thefirst quarter of 2003.

 

The March 2003 quarter results included $78 million inpre-tax charges for severance and pension curtailment expenses associated withworkforce reductions, which were necessitated by a decrease in capacity inresponse to the Iraq War.  The net lossfor that period also reflected a reduced tax benefit, which was limited to $30million under prevailing accounting requirements due to the Company’s netdeferred tax asset position and recent history of losses.  As described previously in Note 7 – IncomeTaxes, no tax benefit was reflected in the March 2004 quarterly results.

 

Substantially all of the Company’s results ofoperations are attributable to its principal indirect operating subsidiary,Northwest, and the following discussion pertains primarily to Northwest.  The Company’s results of operations alsoinclude other subsidiaries, of which MLT Inc. (“MLT”) is presently the mostsignificant.  However, the Company’s2003 financial statements also included the results of Pinnacle Airlines, Inc.(“Pinnacle Airlines”).  On November 24,2003 the Company completed an initial public offering of 88.6% of PinnacleAirlines Corp., the holding company of Pinnacle Airlines.  As a result of this offering, the Company nolonger consolidates the financial results of Pinnacle Airlines Corp., whichmodestly affects year-over-year comparisons.

 

The Company’s results of operations for interimperiods are not necessarily indicative of the results for an entire year due toseasonal factors as well as competitive and general economic conditions.  The Company’s second and third quarteroperating results have historically been more favorable due to increasedleisure travel on domestic and international routes during the spring andsummer months.

 

11

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Informationwith respect to the Company’s operating statistics follows (1):

 
|                                                     |   | **Three  months ended  March 31** |         |     |     |
|----------------------------------------------------------|--------|-----------------------------------|--------------|----------|----------|
|                                                     |   | **2004**                          |         | **2003** |     | **% Chg.** |   |
| Scheduled service:                                       |   |                              |         |     |     |   |   |
| Available seat miles (ASM) (millions)                    |   | **21,831**                        | ** **   | 22,526   |     | (3.1 | ) |
| Revenue passenger miles (RPM) (millions)                 |   | **16,705**                        | ** **   | 16,562   |     | 0.9 |   |
| Passenger load factor                                    |   | **76.5**                          | **%**        | 73.5     | %        | 3.0 | pts. |
| Revenue passengers (millions)                            |   | **12.5**                          | ** **   | 12.3     |     | 1.9 |   |
| Passenger revenue per RPM (yield)                        |   | **11.75**                         | ***¢*** | 10.87    | *¢* | 8.1 |   |
| Passenger revenue per ASM (RASM)                         |   | **8.99**                          | ***¢*** | 7.99     | *¢* | 12.5 |   |
|                                                     |   |                              | ** **   |     |     |   |   |
| Total operating ASM (millions)                           |   | **21,894**                        | ** **   | 22,737   |     | (3.7 | ) |
| Passenger service operating expense per  total ASM(2)(3) |   | **10.23**                         | ***¢*** | 10.16    | *¢* | 0.7 | * * |
|                                                     |   |                              | ** **   |     |     |   |   |
| Cargo ton miles (millions)                               |   | **540**                           | ** **   | 484      |     | 11.6 |   |
| Cargo revenue per ton mile                               |   | **33.79**                         | ***¢*** | 34.45    | *¢* | (1.9 | ) |
|                                                     |   |                              | ** **   |     |     |   |   |
| Fuel gallons consumed (millions)                         |   | **421**                           | ** **   | 442      |     | (4.8 | ) |
| Average fuel cost per gallon, excluding  taxes           |   | **100.16**                        | ***¢*** | 84.85    | *¢* | 18.0 | * * |
|                                                     |   |                              | ** **   |     |     |   |   |
| Number of operating aircraft at end of  period           |   | **432**                           | ** **   | 435      |     | (0.7 | ) |
| Full-time equivalent employees at end of  period         |   | **39,230**                        | ** **   | 42,781   |     | (8.3 | ) |

 

----

(1)          All statistics exclude NorthwestAirlink regional carriers, which is consistent with how the Company reportsstatistics to the Department of Transportation (“DOT”) and is comparable tostatistics reported by other major network airlines.

(2)          Thesefinancial measures exclude non-passenger service expenses.  The Company believes that providingfinancial measures directly related to passenger service operations allowsinvestors to evaluate and compare the Company’s core operating results to thoseof the industry.

(3)          Areconciliation of passenger service operating expenses to total operatingexpenses is provided below:

 
|                                                  |   | **Three  months ended  March 31** |      |
|-------------------------------------------------------|--------|-----------------------------------|-----------|
| **(In  millions)**                                    |   | **2004**                          |      | **2003** |   |
| Passenger service operating expenses (a)              |   | **$**                             | **2,240** |   | $ | 2,311 |   |
| Freighter operations                                  |   | **140**                           |      | 121 |   |
| MLT Inc. - net of intercompany eliminations           |   | **60**                            |      | 72 |   |
| Regional carriers - net of intercompany  eliminations |   | **256**                           |      | 188 | (b) |
| Other                                                 |   | **15**                            |      | 9 |   |
| Operating expenses                                    |   | **$**                             | **2,711** |   | $ | 2,701 |   |

 
| (a) | Included in passenger  service operating expenses are the following: |
|-----|----------------------------------------------------------------------|

 
|                 |   | **Three  months ended  March 31** |               |
|----------------------|--------|-----------------------------------|--------------------|
|                 |   | **2004**                          |               | **2003** |   |
| Curtailment expenses |   | **—**                        | ** **         | (58 | ) |
| Severance expenses   |   | **—**                        | ** **         | (20 | ) |
|                 |   | **—**                        |               | (78 | ) |
| Per total ASM        |   | **—**                        | ***¢ *** | 0.34 | *¢* |

 

(b)         The amount shown in 2003 includes regional carrier expenses as well asPinnacle Airlines, Inc. operating expenses, net of eliminations.  Pinnacle Airlines, Inc. results wereconsolidated with the Company’s financial statements prior to its initial publicoffering on November 24, 2003.

 

12

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**Resultsof Operations—Three months ended March 31, 2004 and 2003**

 

*Operating Revenues*.  Operating revenues increased 9.6% ($228million), the result of higher system passenger, regional carrier, cargo andother revenues.

 

System passenger revenues increased 9.1% ($164 million).  The following analysis by region is based oninformation reported to the Department of Transportation and excludes regionalcarriers:

 
|                               |   | **System** |   | **Domestic** |   | **Pacific** |   | **Atlantic** |   |
|------------------------------------|--------|------------|--------|--------------|--------|-------------|--------|--------------|--------|
| **2004**                           |   |       |   |         |   |        |   |         |   |
| Passenger revenues (in millions)   |   | $          | 1,963  |         | $      | 1,376       |   | $            | 393    |   | $ | 194 |   |
|                               |   |       |   |         |   |        |   |         |   |
| **Increase (Decrease) from 2003:** |   |       |   |         |   |        |   |         |   |
| Passenger revenues (in millions)   |   | $          | 164    |         | $      | 103         |   | $            | 28     |   | $ | 33 |   |
| Percent                            |   | 9.1        | %      | 8.1          | %      | 7.5         | %      | 20.6         | %      |
|                               |   |       |   |         |   |        |   |         |   |
| Scheduled service ASMs (capacity)  |   | (3.1       | )%     | 0.8          | %      | (13.5       | )%     | 0.7          | %      |
| Scheduled service RPMs (traffic)   |   | 0.9        | %      | 1.9          | %      | (4.3        | )%     | 8.7          | %      |
| Passenger load factor              |   | 3.0        | pts.   | 0.7          | pts.   | 8.5         | pts.   | 5.9          | pts.   |
| Yield                              |   | 8.1        | %      | 6.1          | %      | 12.4        | %      | 11.0         | %      |
| Passenger RASM                     |   | 12.5       | %      | 7.3          | %      | 24.4        | %      | 19.7         | %      |

 

As indicated in the abovetable:

 

•                  Domesticpassenger revenues increased primarily due to improved yields and slightlyhigher traffic.

•                  Pacificpassenger revenues increased due to significantly improved yields, partiallyoffset by lower traffic.

•                  Atlanticpassenger revenues increased due to substantially improved traffic and yields.

 

Theyear-over-year comparisons noted above are affected by the negative impact ofSARS and the Iraq War, which were significantly greater in the March 2003quarter than in the current period.

 

Regionalcarrier revenues increased 25.4% ($44 million) to $217 million, due primarilyto the increased capacity from 29 additional Bombardier CRJ aircraft that haveentered service since March 31, 2003.

 

Cargo revenuesincreased 9.6% ($16 million) to $183 million due to 11.6% more cargo ton milesflown.  Other revenue increased 1.7% ($4million) as a result of increased rental revenue and higher ticket change fees,partially offset by lower ground support revenues and other non-transportationservice fees.

 

*Operating Expenses*.  Operating expenses increased 0.4% ($10million) for the three months ended March 31, 2004.  The following table and notes present operating expenses for thethree months ended March 31, 2004 and 2003 and describe significantyear-over-year variances:

 

** **
|                                       |   | **Three  months ended** |   | **Increase  (Decrease)** |   | **Percent**   |   |       |   |
|--------------------------------------------|--------|-------------------------|--------|--------------------------|--------|---------------|--------|------------|--------|
| **(in  millions)**                         |   | **2004**                |   | **2003**                 |   | **from 2003** |   | **Change** |   | **Note** |   |
| Operating Expenses                         |   |                    |   |                     |   |          |   |       |   |   |   |
| Salaries, wages and benefits               |   | $                       | 937    |                     | $      | 1,045         |   | $          | (108   | ) | (10.3% | ) | A |   |
| Aircraft fuel and taxes                    |   | 450                     |   | 411                      |   | 39            |   | 9.5        |   | B |   |
| Selling and marketing                      |   | 175                     |   | 176                      |   | (1            | )      | (0.6       | )      | C |   |
| Other rentals and landing fees             |   | 146                     |   | 143                      |   | 3             |   | 2.1        |   | D |   |
| Depreciation and amortization              |   | 141                     |   | 142                      |   | (1            | )      | (0.7       | )      | E |   |
| Aircraft maintenance materials and repairs |   | 111                     |   | 133                      |   | (22           | )      | (16.5      | )      | F |   |
| Regional carrier expenses                  |   | 256                     |   | 125                      |   | 131           |   | 104.8      |   | G |   |
| Aircraft rentals                           |   | 114                     |   | 118                      |   | (4            | )      | (3.4       | )      | H |   |
| Other                                      |   | 381                     |   | 408                      |   | (27           | )      | (6.6       | )      | I |   |
| Total operating expenses                   |   | $                       | 2,711  |                     | $      | 2,701         |   | $          | 10     |   | 0.4 | % |   |   |

 

13

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A.           Salaries,wages and benefits decreased primarily due to $20 million of severance expensesand a $58 million pension curtailment charge both recorded in 2003, theconsolidation of Pinnacle Airlines in 2003 (prior to its initial publicoffering in November), and an 8.3% decrease in average full-time equivalentemployees.  These were partially offsetby higher ongoing pension expense and annual wage rate increases.

B.             Aircraftfuel and taxes were higher due to an 18.0% increase in the average fuel costper gallon to $1.00, net of hedging transactions, partially offset by theconsolidation of Pinnacle Airlines in 2003, 4.8% fewer****gallons consumed as a resultof reduced capacity and the use of more fuel efficient aircraft.  Fuel hedge transactions reduced fuel costsby $49 million in the first quarter of 2003.

C.             Sellingand marketing expense remained relatively unchanged.

D.            Otherrentals and landing fee rates were higher across the system, but were largelyoffset by lower volume.

E.              Depreciationexpense remained relatively unchanged as the cost associated with newdeliveries was offset by certain assets becoming fully depreciated.

F.              Aircraftmaintenance materials and repairs decreased by $22 million, due primarily tolower material usage and a reduced level of flying.

G.             Theincrease in regional carrier expenses was largely due to the 2003 eliminationof $98 million of airline service agreement (“ASA”) payments to PinnacleAirlines, which was a wholly-owned subsidiary of Northwest until its initialpublic offering on November 24, 2003. The remaining increase of $33 million was primarily driven by theaddition of 29 CRJ aircraft leased by Pinnacle Airlines from Northwest sinceMarch 31, 2003 and increased fuel costs.

H.            Aircraftrental expense remained relatively unchanged. Increases from additional leased aircraft and higher synthetic leaseamortization were offset by the consolidation of Pinnacle Airlines in 2003.

I.                 Otherexpenses (which include MLT operating expenses, outside services, insurance,passenger food, personnel expenses, communication expenses and supplies)decreased principally due to lower MLT operating expenses and the consolidationof Pinnacle Airlines in 2003.

 

*Other Income andExpense.* Non-operating expense increased 15.0% ($15 million) primarily due tohigher interest expense related to increased debt levels and reduced earningsof affiliates, primarily from the 2003 sale of Worldspan L.P.

 

**Liquidity and Capital Resources**

 

As of March31, 2004, the Company had cash, cash equivalents and short-term investments of$3.11 billion.  This amount includes$172 million of restricted short-term investments (which may include amountsheld as cash), resulting in liquidity of $2.94 billion.

 

*Cash flows.*Liquidity increased by $179 million during the quarter, largely due to cashflows from operations and proceeds from the issuance of $300 million unsecurednotes due in 2009, partially offset by capital expenditures, the repayment of$138 million of unsecured notes in March, 2004, and other scheduled debtpayments.

 

Net cashprovided by operating activities for the three months ended March 31, 2004 was$198 million, an $11 million increase from the $187 million of cash provided byoperating activities for the three months ended March 31, 2003.  This increase resulted from a lower net lossin 2004 and a higher level of forward bookings, offset by proceeds from asubstantial tax refund and the settlement of fuel hedge contracts in 2003.

 

Investingactivities consisted primarily of capital expenditures on aircraft, facilityimprovements and ground equipment purchases, and included the acquisition ofthe following aircraft:

 
|            |   | **Three  months ended  March 31** |   |
|-----------------|--------|-----------------------------------|--------|
|            |   | **2004**                          |   | **2003** |   |
| Airbus A319     |   | **—**                        |   | 2 |   |
| Airbus A330-300 |   | **1**                             |   | — |   |
| Boeing 757-300  |   | **—**                        |   | 2 |   |
|            |   | **1**                             |   | 4 |   |

 

14

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Financingactivities in the first quarter of 2004 consisted primarily of financing oneAirbus A330-300 aircraft with long-term debt, the issuance of $300 millionunsecured notes due 2009, repayment of $138 million unsecured notes due inMarch 2004, plus payment of other debt and capital lease obligations.  Financing activities in the first quarter of2003 consisted primarily of financing two Airbus A319 aircraft and one Boeing757-300 aircraft with escrowed funds from pass-through certificate offeringsand one Boeing 757-300 aircraft with long-term debt, plus payment of debt andcapital lease obligations.

 

In addition tothe purchase of the aircraft discussed above, the Company took delivery of 11Bombardier CRJ aircraft during the three months ended March 31, 2004.  These aircraft were financed with long-termoperating leases and subleased to Pinnacle Airlines.

 

*Debt.*At March 31, 2004, maturities of long-term debt excluding capital leaseobligations through December 31, 2008 are as follows (in millions):

 

| 2004 |   | $     | 527    |   |
|------|--------|-------|--------|--------|
| 2005 |   | 1,490 |   |
| 2006 |   | 802   |   |
| 2007 |   | 813   |   |
| 2008 |   | 512   |   |

 

The amount due in 2005 includes $962 million of principaloutstanding under the Company’s secured credit facilities.  The Company’s secured credit facilities atMarch 31, 2004, consisted of a $725 million revolving credit facility ($12million of which has been utilized to establish letters of credit) availableuntil October 2005, and a $250 million 364-day revolving credit facilityavailable until October 2004 and renewable annually at the option of thelenders; however, to the extent any portion of the $250 million facility is notrenewed for an additional 364-day period, the Company may borrow up to theentire non-renewed portion of the facility and such borrowings would thenmature in October 2005.  Borrowingsunder the credit agreement are secured by the Company’s Pacific route systemand certain aircraft.  Borrowings underboth revolving credit facilities bear interest at a variable rate equal to thethree-month LIBOR plus 3.25% (4.40% at April 20, 2004).  The credit agreement includes a covenantthat requires the Company, beginning with the three month period ending June30, 2004, to maintain at least a one-to-one ratio of earnings (defined asoperating income adjusted to exclude the effects of depreciation, amortizationand aircraft rents and to include the effects of interest income) to fixedcharges (comprising interest expense and aircraft rents).  If the Company fails to meet this fixedcharges coverage ratio, repayment of the borrowings under the credit facilitycould be accelerated by the banks. While the Company currently believes that it will satisfy thisrequirement, compliance with the covenant depends upon many factors that couldimpact future revenues and expenses, some of which are beyond the Company’scontrol.

 

On January 26, 2004, Northwest completed an offeringof $300 million of unsecured notes due 2009. The notes have a coupon rate of 10%, payable semi-annually in cash onFebruary 1 and August 1 of each year, beginning on August 1, 2004, and are notredeemable prior to maturity.  Each notewas issued at a price of $962 per $1,000 principal amount, resulting in a yieldto maturity of 11.0%.  Proceeds from thenotes will be used for working capital and general corporate purposes.   The notes are guaranteed by NWA Corp.

 

In March and April 2004, the Company repaid theremaining $333 million outstanding under two issues of unsecured notes, asscheduled, with a combined original face amount of $350 million.  On March 15, $138 million of 8.375% seniorunsecured notes were repaid, net of $12 million previously exchanged for newlyissued notes in conjunction with an exchange offer in December 2003.  The 8.375% unsecured notes were originallyissued in 1997.  Additionally, theCompany repaid $195 million of 8.52% senior unsecured notes that matured onApril 7, net of $5 million previously exchanged for newly issued notes inconjunction with the same December 2003 exchange offer. The 8.52% unsecurednotes were originally issued in 1998.

 

*Aircraft Commitments.*  Committed expenditures for the 73 aircraftand related equipment on firm order, including estimated amounts forcontractual price escalations and predelivery deposits, will be approximately$1.30 billion for the remainder of 2004, $748 million in 2005, $568 million in2006, $202 million in 2007 and $188 million in 2008.  Consistent with prior practice, the Company intends to financeits aircraft deliveries through a combination of internally generated funds,debt and long-term lease financing. Financing commitments available for use by the Company are in

 

15

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place for all of the aircrafton firm order and range from 80% - 100% of each aircraft’s purchase price.  The Company intends to finance all of theCRJ-200/440 aircraft on order through long-term operating lease financingcommitments from the manufacturer. These aircraft will, in turn, be subleased to and operated by PinnacleAirlines.  In the event the manufacturerdoes not provide financing for the regional aircraft, the Company is notobligated to take delivery.

 

*Pension Funding Obligations.*  TheCompany has several noncontributory pension plans covering substantially all ofits employees.  As of December 31, 2003,the Company’s plans were substantially underfunded as measured under theprovisions of SFAS No. 87, *Employers’Accounting for Pensions. *Projectedbenefit obligations under the plans totaled $8.55 billion, approximately $3.75billion in excess of the fair value of plan assets.  Pension funding requirements are dependent upon various factors,including interest rate levels, asset returns, regulatory requirements forfunding purposes and changes to pension plan benefits.  Absent favorable changes to these factors,the Company will have to satisfy the underfunded amounts of its plans throughcash contributions over time.

 

On April 15, 2003, the IRS approved theapplication submitted by the Company to reschedule, over a five year periodbeginning in April 2004, the $454 million in 2003 plan year contributions underthe pension plans for contract and salaried employees.  The Company satisfied the conditions forwaiving plan year 2003 contributions by granting the plans a lien on certainassets of the Company (certain domestic slots, international routes, aircraftand engines).

 

On December23, 2003, the Company applied to the IRS to reschedule some of its plan year2004 pension contributions, which included amounts due in both 2004 and 2005,for the contract and salaried employees’ pension plans.  Subsequently, on April 10, 2004, thePresident signed into law the Pension Funding Equity Act (the “Pension Act”),which reduces the Company’s required contributions through two mechanisms: 1)certain companies may elect partial relief from the deficit reductioncontribution requirements that otherwise would have applied in 2004 and 2005,an election the Company has made; and 2) the applicable discount rate used todetermine funding was increased to reflect yields on indices of high qualitycorporate bonds instead of 30 year U.S. Treasury rates.

 

Including theimpact of the new legislation, the Company’s 2004 calendar year cashcontributions to qualified pension plans is expected to approximate $255million.  Following enactment of thePension Act, the Company withdrew its request to the IRS to reschedule its planyear 2004 pension contributions.

 

**Other Information**

 

*Labor Agreements.*Approximately90% of the Company’s employees are members of collective bargaining units.  The Company has entered into mediation withthe International Association of Machinists and Aerospace Workers under thesupervision of the National Mediation Board. The Company has also commenced negotiations with the Air Line PilotsAssociation under the provisions of the Railway Labor Act and is in discussionswith the rest of its labor unions in an effort to align wages, benefits andwork rules with the industry’s new revenue environment and to remaincompetitive with other airlines achieving permanent cost reductions throughbankruptcy proceedings or the threat of bankruptcy proceedings.

 

*Foreign Currency.*The Company is exposed to the effect of foreign currency exchange ratefluctuations on the U.S. dollar value of foreign currency-denominated operatingrevenues and expenses, with the largest exposure coming from the Japanese yen.Forward contracts, collar options or put options are utilized to hedge aportion of anticipated yen-denominated sales from time-to-time.  Hedging gains or losses are recorded inaccumulated other comprehensive income (loss) until the associatedtransportation is provided, at which time they are recognized as an increase ordecrease in revenue.  The Company didnot hedge any of its first quarter 2004 or 2003 yen-denominated sales.  The average yen rate for the quarters endedMarch 31, 2004 and 2003 was 107 and 119, respectively.  At March 31, 2004, the Company has hedgedapproximately 28% and 8% of its remaining 2004 and 2005 anticipatedyen-denominated sales at an average rate of 114 and 106 yen per U.S. dollar,respectively, and has recorded $22.9 million of unrealized losses inaccumulated other comprehensive income associated with those hedges.

 

*Aircraft Fuel.*  The Company’s earnings are affected bychanges in the price of aircraft fuel. In order to provide a measure of control over price, the Companyperiodically hedges a portion of the price risk of fuel costs, primarily

 

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utilizing futures contractstraded on regulated exchanges, swap agreements and options.  As of April 28, 2004, the Company has hedgedthe price of approximately 27% of its projected fuel requirements for thesecond quarter of 2004 through collars established at a crude oil price of $34to $39 per barrel.

 

*Forward-LookingStatements.* Certain of the statements made throughout Management’s Discussion andAnalysis of Financial Condition and Results of Operations are forward-lookingand are based upon information available to the Company on the datehereof.  The Company, through itsmanagement, 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 Companyis hereby identifying important factors that could cause actual results todiffer materially from those contained in any forward-looking statement made byor on behalf of the Company.  Any suchstatement is qualified by reference to the following cautionary statements.

 

The Companybelieves that the material risks and uncertainties that could affect theoutlook of an airline operating in the global economy include, among others,the future level of air travel demand, the Company’s future passenger trafficand yields, the airline pricing environment, increased costs for security, thecost and availability of aviation insurance coverage and war risk coverage, thegeneral 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, thepossibility of additional terrorist attacks or the fear of such attacks,concerns about SARS or other influenza or contagious illnesses, labornegotiations both at other carriers and the Company, low cost carrierexpansion, capacity decisions of other carriers, actions of the U.S. andforeign governments, foreign currency exchange rate fluctuation, inflation andother factors discussed herein. Additional information with respect to these factors and these and otherevents that could cause differences between forward-looking statements andfuture actual results is contained in “Item 2. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” above, and “Item 1.Business - Risk Factors Related to Northwest and the Airline Industry” and“Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations” in the Company’s Annual Report on Form 10-K for the yearended December 31, 2003.

 

Developmentsin any of these areas, as well as other risks and uncertainties detailed fromtime to time in the Company’s Securities and Exchange Commission filings, couldcause the Company’s results to differ from results that have been or may beprojected by or on behalf of the Company. The Company undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  These statementsdeal with the Company’s expectations about the future and are subject to anumber of factors that could cause actual results to differ materially from theCompany’s expectations.  All subsequentwritten or oral forward-looking statements attributable to the Company, orpersons acting on behalf of the Company, are expressly qualified in theirentirety by the factors described above.

 

## **Item 3.    Quantitativeand Qualitative Disclosures About Market Risk.**

## ** **

Informationrequired by this item is provided under the captions “Foreign Currency” and“Aircraft Fuel” within “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in this Quarterly Report on Form10-Q.  Also see “Item 7a. Quantitativeand Qualitative Disclosures About Market Risk” in the Company’s Annual Reporton Form 10-K for 2003.

 

## **Item 4.    Controls and Procedures.**

## ** **

An evaluationwas performed under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and Executive Vice Presidentand Chief Financial Officer, of the effectiveness of the design and operationof the Company’s disclosure controls and procedures as of March 31, 2004.  Based on that evaluation, the Company’smanagement, including the Chief Executive Officer and Executive Vice Presidentand Chief Financial Officer, concluded that the Company’s disclosure controlsand procedures were effective in ensuring that material information relating tothe Company with respect to the period covered by this report was made known tothem.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to March 31, 2004.

 

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PART II. OTHER INFORMATION

 

**Item1.    Legal Proceedings.**

 

Reference ismade to “Item 3.  Legal Proceedings” inthe Company’s Annual Report on Form 10-K for 2003.

 

*McCoy-Johnson v.Northwest Airlines, Rodney v. Northwest Airlines, and Sax vs. NorthwestAirlines.*  OnMarch 31, 2004, the Court denied the plaintiffs’ motion for class certificationin the *Rodney*and *Sax* cases.  The plaintiffs have appealed the denial of classcertification.  The plaintiffs have notmoved for class certification in the *McCoy-Johnson*case.

 

In addition,in the ordinary course of its business, the Company is party to various otherlegal actions which the Company believes are incidental to the operation of itsbusiness.  The Company believes that theoutcome of the proceedings to which it is currently a party will not have amaterial adverse effect on the Company’s consolidated financial statementstaken as a whole.

 

**Item 6.    Exhibitsand Reports on Form 8-K.**

 

(a)   Exhibits:

 

10.1                           Amendment No. 3 to the A330Purchase Agreement, dated April 30, 2003, between AVSA, S.A.R.L. and NorthwestAirlines Inc. originally included in Exhibit 10.18 to NWA Corp.’s Annual Reporton Form 10-K for the year ended December 31, 2003 and filed in substitutionthereof (filed as Exhibit 10.1 to NWA Corp.’s Form S-3, file no. 333-113623,and incorporated herein by reference; certain portions of this exhibit havebeen omitted pursuant to a request for confidential treatment which has beengranted by the Securities and Exchange Commission; omitted portions have beenseparately filed with the Securities and Exchange Commission).

 

10.2                           Amendment No. 4 to the A330Purchase Agreement, dated December 18, 2003, between AVSA, S.A.R.L. andNorthwest Airlines Inc. originally included in Exhibit 10.19 to NWA Corp.’sAnnual Report on Form 10-K for the year ended December 31, 2003 and filed insubstitution thereof (filed as Exhibit 10.2 to NWA Corp.’s Form S-3, file no.333-113623, and incorporated herein by reference; certain portions of thisexhibit have been omitted pursuant to a request for confidential treatmentwhich has been granted by the Securities and Exchange Commission; omittedportions have been separately filed with the Securities and ExchangeCommission).

 

12.1                           Computationof Ratio of Earnings to Fixed Charges

12.2                           Computationof Ratio of Earnings to Fixed Charges and Preferred Stock Requirements

31.1                           Rule13a-14(a)/15d-14(a) Certification

31.2                           Rule13a-14(a)/15d-14(a) Certification

32.1                           Section1350 Certification

32.2                           Section1350 Certification

 

(b)   Reports on Form 8-K:

On January 28,2004, the Company filed a Form 8-K containing a press release issued January23, 2004, and forward looking guidance. This press release contained the Company’s fourth quarter and full year2003 earnings release and forward looking guidance, which was also provided inthe Company’s fourth quarter 2003 earnings conference call.

 

#### SIGNATURE

 

Pursuant tothe 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 theundersigned, thereunto duly authorized this 6th day of May 2004.

 
|   | NORTHWEST AIRLINES CORPORATION |
|--------|--------------------------------|
|   |                           |
|   |                           | By | /s/ James G.  Mathews |   |
|   |                           |   | James G. Mathews |
|   |                           |   | *Vice President – Finance and Chief  Accounting Officer  (principal accounting officer)* |

 

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EXHIBIT INDEX

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1             |   | Amendment  No. 3 to the A330 Purchase Agreement, dated April 30, 2003, between AVSA,  S.A.R.L. and Northwest Airlines Inc. originally included in Exhibit 10.18 to  NWA Corp.’s Annual Report on Form 10-K for the year ended December 31, 2003  and filed in substitution thereof (filed as Exhibit 10.1 to NWA Corp.’s Form  S-3, file no. 333-113623, and incorporated herein by reference; certain  portions of this exhibit have been omitted pursuant to a request for  confidential treatment which has been granted the Securities and Exchange  Commission; omitted portions have been separately filed with by the  Securities and Exchange Commission).    |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2             |   | Amendment  No. 4 to the A330 Purchase Agreement, dated December 18, 2003, between AVSA,  S.A.R.L. and Northwest Airlines Inc. originally included in Exhibit 10.19 to  NWA Corp.’s Annual Report on Form 10-K for the year ended December 31, 2003  and filed in substitution thereof (filed as Exhibit 10.2 to NWA Corp.’s Form  S-3, file no. 333-113623, and incorporated herein by reference; certain  portions of this exhibit have been omitted pursuant to a request for  confidential treatment which has been granted by the Securities and Exchange  Commission; omitted portions have been separately filed with the Securities  and Exchange Commission). |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 12.1             |   | Computation  of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 12.2             |   | Computation  of Ratio of Earnings to Fixed Charges and Preferred Stock Requirements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1             |   | Rule  13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 31.2             |   | Rule  13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 32.1             |   | Section 1350  Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 32.2             |   | Section 1350  Certification                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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