**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2004**

 

**Commission File Number: 0-23642**

 

**NORTHWESTAIRLINES CORPORATION**

(Exact name of registrant as specified in itscharter)

 
| **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)                            |

** **

**(612) 726-2111**

(Registrant’s telephone number, includingarea code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 the registrantis an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).      Yes  ý      No o

 

As of June 30, 2004, there were 86,426,363shares of the registrant’s Common Stock outstanding.

 

 

----

 

*Northwest Airlines Corporation*

 
| PART I.   FINANCIAL INFORMATION |    |
|--------------------------------------|---------|
|                                 |    |   |   |
|                                 | Item 1. | Financial Statements. |   |
|                                 |    |   |   |
|                                 |    | Condensed Consolidated Statements of  Operations – Three months and six months ended June 30, 2004 and 2003 |   |
|                                 |    |   |   |
|                                 |    | Condensed Consolidated Balance Sheets -  June 30, 2004 and December 31, 2003 |   |
|                                 |    |   |   |
|                                 |    | Condensed Consolidated Statements of Cash  Flows - Six months ended June 30, 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 4. | Submission of Matters to a Vote of Security Holders. |   |
|                                 | Item 6. | Exhibits and Reports on Form 8-K. |   |
|                                 |    |   |   |
| SIGNATURE                            |    |
|                                 |    |   |   |
|                                 |    |   |   |
| EXHIBIT  INDEX                       |    |

 

2

----

 

PART I. FINANCIAL INFORMATION

 

**Item 1. Financial Statements.**

 

*Northwest Airlines Corporation*

 

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                               | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(Unaudited, in millions except  per share amounts)**   | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating Revenues**                                   |       |                            |       |                          |       |   |   |   |   |
| Passenger                                                |       | $                               | 2,180      |                          | $          | 1,818 |   | $ | 4,143 |   | $ | 3,617 |   |
| Regional carrier revenues                                |       | 274                             |       | 214                           |       | 491 |   | 387 |   |
| Cargo                                                    |       | 193                             |       | 181                           |       | 376 |   | 348 |   |
| Other                                                    |       | 224                             |       | 210                           |       | 464 |   | 446 |   |
| Total operating revenues                                 |       | 2,871                           |       | 2,423                         |       | 5,474 |   | 4,798 |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| **Operating Expenses**                                   |       |                            |       |                          |       |   |   |   |   |
| Salaries, wages and benefits                             |       | 964                             |       | 944                           |       | 1,901 |   | 1,989 |   |
| Aircraft fuel and taxes                                  |       | 499                             |       | 375                           |       | 949 |   | 786 |   |
| Depreciation and amortization                            |       | 237                             |       | 162                           |       | 378 |   | 304 |   |
| Selling and marketing                                    |       | 204                             |       | 170                           |       | 379 |   | 346 |   |
| Other rentals and landing fees                           |       | 149                             |       | 138                           |       | 295 |   | 281 |   |
| Aircraft rentals                                         |       | 115                             |       | 120                           |       | 229 |   | 238 |   |
| Aircraft maintenance materials and repairs               |       | 109                             |       | 95                            |       | 220 |   | 228 |   |
| Regional carrier expenses                                |       | 288                             |       | 126                           |       | 544 |   | 251 |   |
| Other                                                    |       | 358                             |       | 366                           |       | 739 |   | 774 |   |
| Total operating expenses                                 |       | 2,923                           |       | 2,496                         |       | 5,634 |   | 5,197 |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| **Operating Income (Loss)**                              |       | (52                             | )          | (73                           | )          | (160 | ) | (399 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| **Other Income (Expense)**                               |       |                            |       |                          |       |   |   |   |   |
| U. S. Government Appropriations                          |       | —                          |       | 209                           |       | — |   | 209 |   |
| Interest expense, net                                    |       | (125                            | )          | (113                          | )          | (257 | ) | (224 | ) |
| Interest of mandatorily redeemable security  holder      |       | —                          |       | (6                            | )          | — |   | (12 | ) |
| Investment income                                        |       | 13                              |       | 11                            |       | 26 |   | 20 |   |
| Gain (loss), other                                       |       | (11                             | )          | 199                           |       | (7 | ) | 207 |   |
| Total other income (expense)                             |       | (123                            | )          | 300                           |       | (238 | ) | 200 |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| **Income (Loss) Before Income Taxes**                    |       | (175                            | )          | 227                           |       | (398 | ) | (199 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Income tax benefit                                       |       | —                          |       | —                        |       | — |   | (30 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| **Net Income (Loss)**                                    |       | (175                            | )          | 227                           |       | (398 | ) | (169 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Preferred stock requirements                             |       | (7                              | )          | —                        |       | (14 | ) | — |   |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| **Net Income (Loss) Applicable to Common  Stockholders** |       | $                               | (182       | )                             | $          | 227 |   | $ | (412 | ) | $ | (169 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Earnings (loss) per common share:                        |       |                            |       |                          |       |   |   |   |   |
| *Basic*                                                  |       | $                               | (2.11      | )                             | $          | 2.64 |   | $ | (4.77 | ) | $ | (1.97 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| *Diluted*                                                |       | $                               | (2.11      | )                             | $          | 2.45 |   | $ | (4.77 | ) | $ | (1.97 | ) |
|                                                     |       |                            |       |                          |       |   |   |   |   |
| Average shares used in computation:                      |       |                            |       |                          |       |   |   |   |   |
| *Basic*                                                  |       | 86                              |       | 86                            |       | 86 |   | 86 |   |
| *Diluted*                                                |       | 86                              |       | 93                            |       | 86 |   | 86 |   |

 

*See accompanying notes.*

 

3

----

 

*Northwest Airlines Corporation*

 

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| **(Unaudited, in millions)**                                        | ** ** | **June 30  2004** | ** ** | **December 31  2003** | ** ** |
|---------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
|                                                                |       |              |       |                  |       |
| **Assets**                                                          |       |              |       |                  |       |
|                                                                |       |              |       |                  |       |
| **Current Assets**                                                  |       |              |       |                  |       |
| Cash and cash equivalents                                           |       | $                 | 1,687      |                  | $          | 1,608 |   |
| Unrestricted short-term investments                                 |       | 1,170             |       | 1,149                 |       |
| Restricted short-term investments                                   |       | 131               |       | 126                   |       |
| Accounts receivable, net                                            |       | 495               |       | 478                   |       |
| Flight equipment spare parts, net                                   |       | 136               |       | 174                   |       |
| Prepaid expenses and other                                          |       | 562               |       | 447                   |       |
| Total current assets                                                |       | 4,181             |       | 3,982                 |       |
|                                                                |       |              |       |                  |       |
| **Property and Equipment**                                          |       |              |       |                  |       |
| Flight equipment, net                                               |       | 6,965             |       | 6,698                 |       |
| Other property and equipment, net                                   |       | 733               |       | 725                   |       |
| Total property and equipment                                        |       | 7,698             |       | 7,423                 |       |
|                                                                |       |              |       |                  |       |
| **Flight Equipment Under Capital Leases, net**                      |       | 161               |       | 250                   |       |
|                                                                |       |              |       |                  |       |
| **Other Assets**                                                    |       |              |       |                  |       |
| Intangible pension asset                                            |       | 750               |       | 750                   |       |
| International routes                                                |       | 634               |       | 634                   |       |
| Investments in affiliated companies                                 |       | 70                |       | 67                    |       |
| Other                                                               |       | 897               |       | 1,048                 |       |
| Total other assets                                                  |       | 2,351             |       | 2,499                 |       |
| Total Assets                                                        |       | $                 | 14,391     |                  | $          | 14,154 |   |
|                                                                |       |              |       |                  |       |
| **Liabilities and Stockholders’ Equity  (Deficit)**            |       |              |       |                  |       |
|                                                                |       |              |       |                  |       |
| **Current Liabilities**                                             |       |              |       |                  |       |
| Air traffic liability                                               |       | $                 | 1,655      |                  | $          | 1,272 |   |
| Accounts payable and other liabilities                              |       | 2,205             |       | 2,274                 |       |
| Current maturities of long-term debt and  capital lease obligations |       | 611               |       | 733                   |       |
| Total current liabilities                                           |       | 4,471             |       | 4,279                 |       |
|                                                                |       |              |       |                  |       |
| **Long-Term Debt**                                                  |       | 7,393             |       | 7,198                 |       |
|                                                                |       |              |       |                  |       |
| **Long-Term Obligations Under Capital Leases**                      |       | 339               |       | 354                   |       |
|                                                                |       |              |       |                  |       |
| **Deferred Credits and Other Liabilities**                          |       |              |       |                  |       |
| Pension and postretirement benefits                                 |       | 3,474             |       | 3,228                 |       |
| Deferred income taxes                                               |       | 148               |       | 146                   |       |
| Other                                                               |       | 738               |       | 724                   |       |
| Total deferred credits and other  liabilities                       |       | 4,360             |       | 4,098                 |       |
|                                                                |       |              |       |                  |       |
| **Preferred Redeemable Stock**                                      |       | 249               |       | 236                   |       |
|                                                                |       |              |       |                  |       |
| **Common Stockholders’ Equity (Deficit)**                      |       |              |       |                  |       |
| Common stock                                                        |       | 1                 |       | 1                     |       |
| Additional paid-in capital                                          |       | 1,464             |       | 1,460                 |       |
| Accumulated deficit                                                 |       | (1,499            | )          | (1,083                | )          |
| Accumulated other comprehensive income  (loss)                      |       | (1,351            | )          | (1,340                | )          |
| Treasury stock                                                      |       | (1,036            | )          | (1,049                | )          |
| Total common stockholders’ equity (deficit)                    |       | (2,421            | )          | (2,011                | )          |
| Total Liabilities and Stockholders’ Equity  (Deficit)          |       | $                 | 14,391     |                  | $          | 14,154 |   |

 

*See accompanying notes.*

 

4

----

 

*Northwest Airlines Corporation*

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
| ** **                                                                                         | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **(Unaudited, in millions)**                                                                       | ** ** | **2004**                      | ** ** | **2003** | ** ** |
|                                                                                               |       |                          |       |   |   |
| **Cash Flows from Operating Activities**                                                           |       |                          |       |   |   |
| Net loss                                                                                           |       | $                             | (398       | ) | $ | (169 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities:         |       |                          |       |   |   |
| Gain on sale of investment in Worldspan  L.P.                                                      |       | —                        |       | (199 | ) |
| Depreciation and amortization                                                                      |       | 378                           |       | 304 |   |
| Income tax expense (benefit)                                                                       |       | —                        |       | (30 | ) |
| Net receipts (payments) of income taxes                                                            |       | (3                            | )          | 216 |   |
| Pension and other postretirement benefit  contributions less than expense                          |       | 140                           |       | 279 |   |
| Changes in certain assets and liabilities                                                          |       | 284                           |       | 107 |   |
| Other, net                                                                                         |       | 24                            |       | 11 |   |
| Net cash provided by (used in) operating  activities                                               |       | 425                           |       | 519 |   |
|                                                                                               |       |                          |       |   |   |
| **Cash Flows from Investment Activities**                                                          |       |                          |       |   |   |
| Capital expenditures                                                                               |       | (192                          | )          | (386 | ) |
| Net increase (decrease) in short-term  investments                                                 |       | (16                           | )          | (16 | ) |
| Proceeds from sale of investment in  Worldspan L.P.                                                |       | —                        |       | 278 |   |
| Other, net                                                                                         |       | 15                            |       | 23 |   |
| Net cash provided by (used in) investing  activities                                               |       | (193                          | )          | (101 | ) |
|                                                                                               |       |                          |       |   |   |
| **Cash Flows from Financing Activities**                                                           |       |                          |       |   |   |
| Proceeds from long-term debt                                                                       |       | 388                           |       | 499 |   |
| Payments of long-term debt and capital  lease obligations                                          |       | (534                          | )          | (152 | ) |
| Other, net                                                                                         |       | (7                            | )          | (48 | ) |
| Net cash provided by (used in) financing  activities                                               |       | (153                          | )          | 299 |   |
|                                                                                               |       |                          |       |   |   |
| **Increase (Decrease) in Cash and Cash  Equivalents**                                              |       | 79                            |       | 717 |   |
|                                                                                               |       |                          |       |   |   |
| Cash and cash equivalents at beginning of  period                                                  |       | 1,608                         |       | 2,097 |   |
| Cash and cash equivalents at end of period                                                         |       | $                             | 1,687      |   | $ | 2,814 |   |
|                                                                                               |       |                          |       |   |   |
| Cash and cash equivalents and unrestricted  short-term investments at end of period                |       | 2,857                         |       | 2,814 |   |
|                                                                                               |       |                          |       |   |   |
| Supplemental Cash Flow Information:                                                                |       |                          |       |   |   |
| Interest paid                                                                                      |       | $                             | 238        |   | $ | 215 |   |
|                                                                                               |       |                          |       |   |   |
| Investing and Financing Activities Not  Affecting Cash:                                            |       |                          |       |   |   |
| Manufacturer financing of aircraft,  aircraft predelivery deposits and other non-cash transactions |       | $                             | 208        |   | $ | 97 |   |

 

*See accompanying notes.*

 

5

----

 

*Northwest Airlines Corporation*

 

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1 –Basis of Presentation**

 

The condensed consolidated financialstatements of Northwest Airlines Corporation (“NWA Corp.”), a holding companywhose principal indirect operating subsidiary is Northwest Airlines, Inc.(“Northwest”), include the accounts of NWA Corp. and all consolidatedsubsidiaries (collectively, the “Company”). The condensed consolidated financial statements included herein havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”).  Theinformation and footnote disclosures normally included in annual financialstatements prepared in accordance with U.S. Generally Accepted AccountingPrinciples (“GAAP”) have been condensed or omitted as permitted by such rulesand regulations. These financial statements and related notes should be read inconjunction with the financial statements and notes included in the Company’saudited consolidated financial statements, which are provided in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2003.  The Company’s accounting and reportingpolicies are summarized in “Note 1 of the Notes to Consolidated FinancialStatements” in the Annual Report on Form 10-K for 2003.

 

The Company maintains a Web site at *http://www.nwa.com*.  Information contained on the Company’s websiteis not incorporated into this Quarterly Report on Form 10-Q.  Annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, all amendments to thosereports and other information about the Company are available free of chargethrough this Web site at *http://ir.nwa.com*as soon as reasonably practicable after those reports are electronically filedwith or furnished to the Securities and Exchange Commission.

 

In the opinion of management, the interimfinancial statements reflect adjustments, consisting of normal recurringaccruals, unless otherwise noted, 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**

## ** **

The Medicare Prescription Drug, Improvementand Modernization Act of 2003 was passed by Congress and signed into law onDecember 8, 2003.  The Act establishes avoluntary prescription drug benefit for eligible participants beginning January1, 2006, at which time the U.S. Government will also begin to pay a specialsubsidy equal to 28% of a retiree’s covered prescription drug expenses between$250 and $5,000 (adjusted annually for changes in Medicare per capita prescriptiondrug costs) to employers who sponsor equivalent plans.  In accordance with Financial AccountingStandards Board (“FASB”) Staff Position 106-2, which prescribes accounting forthe Act and is effective for interim periods beginning after June 15, 2004, theCompany has elected to defer including the effects of the Act in any measuresof liabilities and expenses reflected in the Consolidated Financial Statementsand accompanying notes.  Clarifyingregulations related to the interpretation or determination of actuariallyequivalent plans are still pending. Therefore, any such effects included in the Company’s financialstatements would be subject to change once final regulations have beenissued.  The Company estimates that theAct will not have a significant impact on postretirement liabilities andbenefit costs.

 

In December 2003, the FASB revised Statementof Financial Accounting Standards (“SFAS”) No. 132, *Employers’ Disclosures about Pensions and Other PostretirementBenefits.*  This revisionrequires the disclosure in interim reports of the amount of net periodicbenefit cost recognized for the period and the total amount of contributionspaid and expected to be paid during the current fiscal year if significantlydifferent from amounts previously disclosed. The Company adopted the provisions of this revised statement as ofDecember 31, 2003, and has included the required disclosures in Note 11 –Pension and Other Postretirement Benefits.

 

6

----

 

**Note 3 –Segment Information**

 

The Company is managed as one cohesivebusiness unit, for which revenues are derived primarily from the commercialtransportation of passengers and cargo. Operating revenues from flight segments serving foreign destinations areclassified into the Pacific or Atlantic regions, as appropriate.  The following table shows the operatingrevenues for each region (in millions):

 
| ** **         | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|--------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **         | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Domestic           |       | **$**                           | **1,993**  |                          | $          | 1,674 |   | **$** | **3,789** |   | $ | 3,302 |   |
| Pacific            |       | **574**                         |       | 431                           |       | **1,127** |   | 941 |   |
| Atlantic           |       | **304**                         |       | 318                           |       | **558** |   | 555 |   |
| Operating revenues |       | **$**                           | **2,871**  |                          | $          | 2,423 |   | **$** | **5,474** |   | $ | 4,798 |   |

 

**Note4 – Earnings (Loss) Per Share Data**

 

The following table sets forth thecomputation of basic and diluted earnings (loss) per common share:

 
| ** **                                                                                                  | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                  | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                                                                                  |       |                            |       |                          |       |   |   |   |   |
| Net income (loss) (in millions)                                                                             |       | **$**                           | **(175**   | **)**                         | $          | 227 |   | **$** | **(398** | **)** | $ | (169 | ) |
| Preferred stock requirements (in millions)                                                                  |       | **(7**                          | **)**      | —                        |       | **(14** | **)** | — |   |
| Net income (loss) applicable to common  shareholders (in millions)                                          |       | **$**                           | **(182**   | **)**                         | $          | 227 |   | **$** | **(412** | **)** | $ | (169 | ) |
|                                                                                                        |       | ** **                      | ** ** |                          |       | ** ** | ** ** |   |   |
| Denominator:                                                                                                |       | ** **                      | ** ** |                          |       | ** ** | ** ** |   |   |
| Weighted-average shares outstanding for  basic earnings (loss) per share                                    |       | **86,342,487**                  | ** ** | 85,834,989                    |       | **86,228,407** | ** ** | 85,830,393 |   |
| Effect of dilutive securities:                                                                              |       | ** **                      | ** ** |                          |       | ** ** | ** ** |   |   |
| Series C Preferred Stock                                                                                    |       | **—**                      | ** ** | 6,555,778                     |       | **—** | ** ** | — |   |
| Shares held in non-qualified rabbi trusts                                                                   |       | **—**                      | ** ** | 3,902                         |       | **—** | ** ** | — |   |
| Employee stock options and unvested  restricted shares                                                      |       | **—**                      | ** ** | 305,099                       |       | **—** | ** ** | — |   |
| Adjusted weighted-average shares  outstanding and assumed conversions for diluted earnings (loss) per share |       | **86,342,487**                  | ** ** | 92,699,768                    |       | **86,228,407** | ** ** | 85,830,393 |   |
|                                                                                                        |       | ** **                      | ** ** |                          |       | ** ** | ** ** |   |   |
| Basic earnings (loss) per common share:                                                                     |       | ** **                      | ** ** |                          |       | ** ** | ** ** |   |   |
| Net income (loss) before preferred stock  requirements                                                      |       | **$**                           | **(2.03**  | **)**                         | $          | 2.64 |   | **$** | **(4.61** | **)** | $ | (1.97 | ) |
| Preferred stock requirements                                                                                |       | **(0.08**                       | **)**      | —                        |       | **(0.16** | **)** | — |   |
| Net income (loss) applicable to common  shareholders                                                        |       | **$**                           | **(2.11**  | **)**                         | $          | 2.64 |   | **$** | **(4.77** | **)** | $ | (1.97 | ) |
|                                                                                                        |       | ** **                      | ** ** |                          |       | ** ** | ** ** |   |   |
| Diluted earnings (loss) per common share:                                                                   |       | ** **                      | ** ** |                          |       | ** ** | ** ** |   |   |
| Net income (loss) before preferred stock  requirements                                                      |       | **$**                           | **(2.03**  | **)**                         | $          | 2.45 |   | **$** | **(4.61** | **)** | $ | (1.97 | ) |
| Preferred stock requirements                                                                                |       | **(0.08**                       | **)**      | —                        |       | **(0.16** | **)** | — |   |
| Net income (loss) applicable to common  shareholders                                                        |       | **$**                           | **(2.11**  | **)**                         | $          | 2.45 |   | **$** | **(4.77** | **)** | $ | (1.97 | ) |

 

For the three and six months ended June 30,2004, incremental shares related to dilutive securities of 514,221 and 695,513,respectively, and for the six months ended June 30, 2003, incremental sharesrelated to dilutive securities of 6,736,372, were not included in the dilutedearnings per share calculation because the Company reported a net loss forthose periods.  Incremental sharesrelated to dilutive securities have an anti-dilutive impact on earnings per sharewhen a net loss is reported and therefore are not included in the calculation.

 

7

----

 

Beginning in the third quarter 2003, theSeries C Preferred Stock is excluded from the effect of dilutive securities asa result of the stated intent of the parties to settle the Series C PreferredStock with cash rather than by the Company issuing additional commonstock.  See “Note 6-Redeemable Preferredand Common Stock”, in the Company’s December 31, 2003 Annual Report on Form10-K for additional information regarding this security.

 

The dilutive securities described above donot include 2,531,117 employee stock options for the three months ended June30, 2003, because the exercise prices of these options are greater than theaverage market price of the common stock for the respective period.  Total employee stock options outstanding of6,741,795 as of June 30, 2004 and 6,481,334 as of June 30, 2003, respectively,were not included in diluted securities because the Company reported a net lossfor these periods.    Additionally, 19.1million shares issuable upon conversion of the Company’s 6.625% and 7.625%senior convertible notes issued in 2003 were excluded from dilutive securitiesfor the three and six months ended June 30, 2004 because the contingentconversion features of the notes had not been met and due to the Company’spresent intention to use cash for any redemptions of notes at the repurchasedates.  See “Note 3-Long-Term Debt andShort-Term Borrowings” in the Company’s December 31, 2003 Annual Report on Form10-K for additional information regarding these securities.

 

**Note 5 –Comprehensive Income (Loss)**

 

Comprehensive income (loss) consisted of thefollowing (in millions):

 
| ** **                                                       | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                       | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                                                |       | **$**                           | **(175**   | **)**                         | $          | 227 |   | **$** | **(398** | **)** | $ | (169 | ) |
| Minimum pension liability adjustments                            |       | **—**                      | ** ** | —                        |       | **—** | ** ** | (156 | ) |
| Change in unrealized gain/loss on  available-for-sale securities |       | **(8**                          | **)**      | —                        |       | **(7** | **)** | — |   |
| Change in deferred gain/loss from hedging  activities            |       | **10**                          | ** ** | (9                            | )          | **(3** | **)** | 13 |   |
| Foreign currency translation adjustments                         |       | **(3**                          | **)**      | 2                             |       | **(1** | **)** | 1 |   |
| Comprehensive income (loss)                                      |       | **$**                           | **(176**   | **)**                         | $          | 220 |   | **$** | **(409** | **)** | $ | (311 | ) |

 

**Note6 – Stock-based Compensation**

 

Effective January 1, 2003, the Companyadopted the fair value method of recording stock-based employee compensationprescribed by SFAS No. 123, *Accounting for Stock-BasedCompensation*, and accounts for this change in accounting principleusing the “prospective method” as described by SFAS No. 148, *Accounting for Stock-Based Compensation – Transition and Disclosure, anamendment of FASB Statement No. 123*.

 

For the three and six monthsended June 30, 2004 and 2003, the pro forma results and per share amountsassuming the fair value based method had been applied to all outstanding optionawards are materially the same as the reported amounts because a minimal numberof outstanding options were granted prior to January 1, 2003.

 

**Note 7 –Income Taxes**

 

Under the provisions of SFAS No. 109, *Accounting for Income Taxes*, the realization of future taxbenefits of a net deferred tax asset is dependent on future taxable incomeagainst which such tax benefits can be applied. SFAS No. 109 requires that all available evidence be considered in thedetermination of whether sufficient future taxable income will exist.  Such evidence includes, but is not limitedto, a company’s financial performance for the current and prior two years, themarket environment in which a company operates, the utilization of past taxcredits, and the length of relevant carryback and carryforward periods.  As a result of the Company’s cumulativelosses over the past three fiscal years and the full utilization of its losscarryback potential, future pre-tax losses are not expected to be reduced bythe recognition of associated tax benefits at least until a net deferred taxliability is generated or the Company achieves substantial profitability.

 

8

----

 

**Note8 – Long-term Debt**

 

At June 30, 2004, maturities of long-termdebt, excluding capital lease obligations, through December 31, 2008 are asfollows (in millions):

 
| 2004 |   | $     | 196    |   |
|------|--------|-------|--------|--------|
| 2005 |   | 1,491 |   |
| 2006 |   | 821   |   |
| 2007 |   | 894   |   |
| 2008 |   | 515   |   |

 

The amount shown in 2005 includes $962million of principal outstanding under the Company’s secured credit facilitiesdue in October, 2005.  The facilitiescurrently bear interest at a variable rate equal to the one-month LondonInterbank Offered Rate (“LIBOR”) plus 3.25% (4.67% as of July 20, 2004).  The credit agreement includes a covenant thatrequires the Company, beginning with the three month period ending June 30,2004, and measured quarterly thereafter for the period from April 1, 2004 or(if later) the date twelve months prior to such quarterly measurement date, tomaintain at least a one-to-one ratio of earnings (defined as operating incomeadjusted to exclude the effects of depreciation, amortization and aircraftrents and to include the effects of interest income) to fixed charges(comprising interest expense and aircraft rents).  If the Company fails to meet this fixedcharges coverage ratio, repayment of borrowings under the credit facility couldbe accelerated by the banks.  The Companysatisfied this requirement as of June 30, 2004. Compliance with the covenant in subsequent periods depends upon manyfactors that could impact future revenues and expenses, some of which arebeyond the Company’s control.

 

On January 26, 2004, Northwest completed anoffering of $300 million of unsecured notes due 2009.  The notes have a coupon rate of 10%, payablesemi-annually in cash on February 1 and August 1 of each year, beginning onAugust 1, 2004, and are not redeemable prior to maturity.  Each note was issued at a price of $962 per$1,000 principal amount, resulting in a yield to maturity of 11.0%.  Proceeds from the notes will be used forworking capital and general corporate purposes.   The notes are guaranteed by NWA Corp.

 

In March and April 2004, the Company repaidthe remaining $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 pass-through certificates in conjunction with an exchange offer inDecember 2003.  The 8.375% unsecurednotes were originally issued in 1997. Additionally, the Company repaid $195 million of 8.52% senior unsecurednotes that matured on April 7, net of $5 million previously exchanged for newlyissued pass-through certificates in conjunction with the same December 2003exchange offer. The 8.52% unsecured notes were originally issued in 1998.

 

9

----

 

**Note9 – Fleet Information and Commitments**

 

The following table presents the number ofaircraft in service and on firm order as of June 30, 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                   |       | —                           |       | 78                              |       | 6                            |       |
| A330-200                              |       | 243                   |       | —     |       | —             |       | —               |       | —                           |       | —                          |       | 10                           |       |
| A330-300                              |       | 298                   |       | 8          |       | —             |       | —               |       | —                           |       | 8                               |       | 6                            |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| Boeing:                               |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| 757-200                               |       | 180-184               |       | 29         |       | 8                  |       | 19                   |       | (5                               | )          | 51                              |       | —                       |       |
| 757-300                               |       | 224                   |       | 16         |       | —             |       | —               |       | —                           |       | 16                              |       | —                       |       |
| 747-200                               |       | 353-430               |       | 4          |       | —             |       | 5                    |       | (2                               | )          | 7                               |       | —                       |       |
| 747-400                               |       | 403                   |       | 4          |       | —             |       | 12                   |       | —                           |       | 16                              |       | —                       |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| DC9                                   |       | 78-125                |       | 158        |       | —             |       | 5                    |       | (7                               | )          | 156                             |       | —                       |       |
| DC10                                  |       | 273                   |       | 14         |       | —             |       | 8                    |       | —                           |       | 22                              |       | —                       |       |
|                                  |       |                  |       | 334        |       | 12                 |       | 92                   |       | (14                              | )          | 424                             |       | 29                           |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Freighter Aircraft**                |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| Boeing 747-200F                       |       |                  |       | 5          |       | —             |       | 7                    |       | —                           |       | 12                              |       | —                       |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Total Northwest Operated Aircraft** | ** ** | ** **            | ** ** | **339**    | ** ** | **12**             | ** ** | **99**               | ** ** | **(14**                          | **)**      | **436**                         | ** ** | **29**                       | ** ** |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Regional Aircraft**                 |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| BAE AVRO RJ85                         |       | 69                    |       | 10         |       | —             |       | 25                   |       | —                           |       | 35                              |       | —                       |       |
| Bombardier CRJ-200/440                |       | 44-50                 |       | —     |       | —             |       | 101                  |       | —                           |       | 101                             |       | 28                           |       |
| SAAB 340                              |       | 30-34                 |       | —     |       | —             |       | 49                   |       | —                           |       | 49                              |       | —                       |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Total Airlink Operated Aircraft**   |       | ** **            |       | **10**     | ** ** | **—**         | ** ** | **175**              | ** ** | **—**                       | ** ** | **185**                         | ** ** | **28**                       |       |
| ** **                            |       | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **           | ** ** | ** **                       | ** ** | ** **                      |       |                         |       |
| **Total Aircraft**                    |       | ** **            |       | **349**    | ** ** | **12**             | ** ** | **274**              | ** ** | **(14**                          | **)**      | **621**                         | ** ** | **57**                       |       |

 

Committed expenditures for the 57 aircraftand related equipment on firm order, including estimated amounts forcontractual price escalations and predelivery deposits, will be approximately$853 million for the remainder of 2004, $758 million in 2005, $572 million in2006, $205 million in 2007 and $189 million in 2008.  Consistent with prior practice, the Companyintends to finance its aircraft deliveries through a combination of internallygenerated funds, debt and long-term lease financing.  Financing commitments available for use bythe Company are in place for all of the aircraft on firm order and range from80% - 100% of each aircraft’s purchase price. The Company intends to finance all of the CRJ-200/440 aircraft on orderthrough long-term operating lease financing commitments from the manufacturer.  These aircraft will, in turn, be subleased toand operated by Pinnacle Airlines, Inc. (“Pinnacle Airlines”).  The manufacturer has the right not to providefinancing for the regional aircraft in the event a credit rating on the Companyis downgraded from its current level; however, if the manufacturer does notprovide financing, the Company is not obligated to take delivery.

 

10

----

 

**Note10 – Aircraft Impairments**

 

In June 2004, as part of a revised fleetplan, the Company determined that it does not currently intend to return toservice 10 Boeing 747-200 passenger aircraft that had been temporarily removedfrom operations.  As a result, theCompany recorded, as additional depreciation expense, impairment charges of$104 million associated with these aircraft and related inventory.

 

**Note11 – Pension and Other Postretirement Benefits**

 

The Company has several noncontributorypension plans covering substantially all of its employees.  The benefits for these plans are basedprimarily on years of service and, in some cases, employee compensation.

 

The components of net periodic cost ofdefined benefit plans included the following (in millions):

 

| ** **                                      | ** ** | **Three months ended June 30** | ** ** |
|-------------------------------------------------|------------|--------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**           | ** ** | **Other Benefits** | ** ** |
| ** **                                      | ** ** | **2004**                       | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                                    |       | **$**                          | **59**     | ** ** | $ | 60 |   | **$** | **8** | ** ** | $ | 6 |   |
| Interest cost                                   |       | **130**                        | ** ** | 134 |   | **12** | ** ** | 12 |   |
| Expected return on plan assets                  |       | **(127**                       | **)**      | (116 | ) | **—** | ** ** | — |   |
| Amortization of prior service cost              |       | **19**                         | ** ** | 19 |   | **(2** | **)** | (2 | ) |
| Recognized net actuarial loss and other  events |       | **25**                         | ** ** | 16 |   | **7** | ** ** | 5 |   |
| Net periodic benefit cost                       |       | **$**                          | **106**    | ** ** | $ | 113 |   | **$** | **25** | ** ** | $ | 21 |   |

 

| ** **                                      | ** ** | **Six months ended June 30** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**         | ** ** | **Other Benefits** | ** ** |
| ** **                                      | ** ** | **2004**                     | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service cost                                    |       | **$**                        | **121**    | ** ** | $ | 125 |   | **$** | **15** | ** ** | $ | 13 |   |
| Interest cost                                   |       | **264**                      | ** ** | 263 |   | **26** | ** ** | 23 |   |
| Expected return on plan assets                  |       | **(250**                     | **)**      | (236 | ) | **—** | ** ** | — |   |
| Amortization of prior service cost              |       | **38**                       | ** ** | 38 |   | **(4** | **)** | (4 | ) |
| Recognized net actuarial loss and other  events |       | **45**                       | ** ** | 84 |   | **12** | ** ** | 9 |   |
| Net periodic benefit cost                       |       | **$**                        | **218**    | ** ** | $ | 274 |   | **$** | **49** | ** ** | $ | 41 |   |

 

On December 23, 2003, the Company applied tothe Internal Revenue Service (“IRS”) to reschedule some of its plan year 2004pension contributions, which included amounts due in both 2004 and 2005, forthe contract and salaried employees’ pension plans.  Subsequently, on April 10, 2004, thePresident signed into law the Pension Funding Equity Act (the “Pension Act”),which temporarily 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 discountrate used to determine funding was increased to reflect yields on indices ofhigh quality corporate bonds instead of 30-year U.S. Treasury rates.  Following enactment of the Pension Act, theCompany withdrew its request to the IRS to reschedule its plan year 2004pension contributions.

 

Including the impact of the new legislation,the Company’s 2004 calendar year cash contributions to qualified pension planswill approximate $253 million.  On April15, 2004, the Company contributed $84 million to these plans.  Subsequently, on July 15, 2004, the Companycontributed an additional $84 million to these plans, with the balance dueduring the remainder of 2004.  As of thedate of this filing, the Company anticipates that calendar 2005 pensioncontributions to qualified plans will be at or below the level of pension expensefor the year.  Actual 2005 pension contributionsand expense are dependent on a number of factors, including interest rates andreturn on plan assets, which will not be determinable until year end 2004.

 

11

----

 

The Medicare Prescription Drug, Improvementand Modernization Act of 2003 was passed by Congress and signed into law onDecember 8, 2003.  The Act establishes avoluntary prescription drug benefit for eligible participants beginning January1, 2006, at which time the U.S. government will also begin to pay a specialsubsidy equal to 28% of a retiree’s covered prescription drug expenses between$250 and $5,000 (adjusted annually for changes in Medicare per capitaprescription drug costs) to employers who sponsor equivalent plans.  In accordance with FASB Staff Position 106-2,which prescribes accounting for the Act and is effective for interim periodsbeginning after June 15, 2004, the Company has elected to defer including theeffects of the Act in any measures of liabilities and expenses reflected in theConsolidated Financial Statements and accompanying notes.  Clarifying regulations related to theinterpretation or determination of actuarially equivalent plans are stillpending.  Therefore, any such effectsincluded in the Company’s financial statements would be subject to change oncefinal regulations have been issued.  TheCompany estimates that the Act will not have a significant impact onpostretirement liabilities and benefit costs.

 

12

----

 

**Item 2.****           Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

U.S. airlines continue to face enormousfinancial challenges.  While passengertraffic has rebounded somewhat along with the strengthening U.S. economy,revenues for the industry as a whole remain significantly below historicaltrend levels.  Continuing losses amongthe major airlines, including Northwest, largely reflect a permanent,structural decline in domestic revenues that has resulted from the rapid growthof low cost airlines, increased ticket distribution through the Internet,higher taxes levied on airline passengers, fear of additional terroristactivities, and inconveniences introduced by new airport security initiatives.  Moreover, with its significant internationaloperations, Northwest’s results have been impacted by events that havedepressed the global demand for air travel, including the ongoing effects ofthe September 11, 2001 attacks, terrorist activities in other regions, thecontinuing conflict in Iraq, and the outbreak of Severe Acute RespiratorySyndrome (“SARS”) in several countries the Company serves.

 

Northwest, like several other large networkcarriers, continues to suffer from operating expenses that are unsustainablegiven the new revenue environment.  Whilethe Company has achieved operating efficiencies that now place it among theindustry leaders in non-labor unit expenses, Northwest’s wage and benefit ratesare well above prevailing norms among U.S. airlines and remain the largest obstacleto financial recovery.  See “Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Northwest and the Current Status of the Airline Industry” in theCompany’s December 31, 2003 Annual Report on Form 10-K for a detaileddiscussion of the factors contributing to the structural decline in industryrevenue and other financial and operational challenges the Company faces.

 

For the quarter ended June 30, 2004, theCompany reported a net loss applicable to common stockholders of $182 millionand an operating loss of $52 million, versus net income applicable to commonstockholders of $227 million and an operating loss of $73 million for thequarter ended June 30, 2003.  Net loss percommon share was $2.11 in the second quarter of 2004 compared with dilutedearnings per common share of $2.45 in the second quarter of 2003.

 

In June 2004, as part of a revised fleetplan, the Company determined that it does not currently intend to return toservice 10 Boeing 747-200 passenger aircraft that had been temporarily removedfrom operations.  As a result, theCompany recorded, as additional depreciation expense, impairment charges of$104 million associated with these aircraft and related inventory.  Results in the June, 2003 quarter includednet gains of $387 million from several unusual items, consisting of a $209million reimbursement of security fees from the U.S. government, a $199 milliongain from the sale of the Company’s interest in Worldspan L.P., and a $21million charge related to the writedown of certain aircraft.

 

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’s 2003financial statements also included the results of Pinnacle Airlines.  On November 24, 2003, an initial public offeringof 88.6% of Pinnacle Airlines Corp., the holding company of Pinnacle Airlines,was completed.  As a result of thisoffering, the Company no longer consolidates the financial results of PinnacleAirlines Corp., which modestly affects year-over-year comparisons.

 

The Company’s results of operations forinterim periods are not necessarily indicative of the results for an entireyear due to seasonal factors as well as competitive and general economicconditions.  The Company’s second andthird quarter operating results have historically been more favorable due toincreased leisure travel on domestic and international routes during the springand summer months.

 

13

----

 

Information with respect to the Company’soperating statistics follows (1):

 
| ** **                                                | ** ** | **Three months ended  June 30** | ** ** | ** ** | ** ** | **Six months ended  June 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|------------|------------|-------------------------------|------------|------------|------------|
| ** **                                                | ** ** | **2004**                        | ** ** | **2003**   | ** ** | **% Chg.**                    | ** ** | **2004**   | ** ** | **2003** | ** ** | **% Chg.** | ** ** |
| Scheduled service:                                        |       |                            |       |       |       | ** **                    |       |       |       |   |   |   |   |
| Available seat miles (ASM) (millions)                     |       | **22,764**                      |       | 21,397     |       | 6.4                           |       | **44,595** |       | 43,922 |   | 1.5 |   |
| Revenue passenger miles (RPM) (millions)                  |       | **18,775**                      |       | 16,356     |       | 14.8                          |       | **35,480** |       | 32,918 |   | 7.8 |   |
| Passenger load factor                                     |       | **82.5**                        | *%*        | 76.4       | %          | 6.1                           | pts.       | **79.6**   | *%*        | 74.9 | % | 4.7 | pts. |
| Revenue passengers (millions)                             |       | **14.3**                        |       | 12.8       |       | 11.7                          |       | **26.8**   |       | 25.1 |   | 6.9 |   |
| Passenger revenue per RPM (yield)                         |       | **11.61**                       | *¢*   | 11.11      | *¢*   | 4.5                           | * *   | **11.68**  | *¢*   | 10.99 | *¢* | 6.3 | * * |
| Passenger revenue per ASM (RASM)                          |       | **9.58**                        | *¢*   | 8.50       | *¢*   | 12.7                          | * *   | **9.29**   | *¢*   | 8.24 | *¢* | 12.7 | * * |
| Total operating ASM (millions)                            |       | **22,791**                      |       | 21,680     |       | 5.1                           |       | **44,685** |       | 44,418 |   | 0.6 |   |
| Passenger service operating expense per total ASM (2) (3) |       | **10.61**                       | *¢*   | 9.84       | *¢*   | 7.8                           | * *   | **10.43**  | *¢*   | 10.01 | *¢* | 4.2 | * * |
|                                                      |       | ** **                      |       |       |       |                          |       | ** ** |       |   |   |   |   |
| Cargo ton miles (millions)                                |       | **577**                         |       | 536        |       | 7.6                           |       | **1,117**  |       | 1,019 |   | 9.6 |   |
| Cargo revenue per ton mile                                |       | **33.46**                       | *¢*   | 33.76      | *¢*   | (0.9                          | )          | **33.62**  | *¢*   | 34.09 | *¢* | (1.4 | ) |
| Fuel gallons consumed (millions)                          |       | **441**                         |       | 426        |       | 3.5                           |       | **863**    |       | 868 |   | (0.6 | ) |
| Average fuel cost per gallon, excluding  taxes            |       | **107.93**                      | *¢*   | 80.29      | *¢*   | 34.4                          | * *   | **104.13** | *¢*   | 82.61 | *¢* | 26.1 | * * |
| Number of operating aircraft at end of  period            |       | ** **                      |       |       |       |                          |       | **436**    |       | 426 |   | 2.3 |   |
| Full-time equivalent employees at end of  period          |       | ** **                      |       |       |       |                          |       | **39,154** |       | 39,442 |   | (0.7 | ) |

 

----

(1)          All statistics exclude Northwest Airlinkregional carriers, which is consistent with how the Company reports statisticsto the Department of Transportation (“DOT”) and is comparable to statisticsreported by other major network airlines.

(2)          These financial measures excludenon-passenger service expenses.  TheCompany believes that providing financial measures directly related topassenger service operations allows investors to evaluate and compare the Company’score operating results to those of the industry.

(3)          A reconciliation of passenger serviceoperating expenses to total operating expenses is provided below:

 
| ** **                                                      | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| **(In  millions)**                                              | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Passenger service operating expenses (a)                        |       | **$**                           | **2,419**  | ** **                    | $          | 2,134 |   | **$** | **4,661** | ** ** | $ | 4,445 |   |
| Freighter operations                                            |       | **152**                         | ** ** | 117                           |       | **291** | ** ** | 237 |   |
| MLT Inc. - net of intercompany eliminations                     |       | **49**                          | ** ** | 47                            |       | **109** | ** ** | 119 |   |
| Regional carriers - net of intercompany  eliminations           |       | **288**                         | ** ** | 126                           |       | **544** | ** ** | 251 |   |
| Pinnacle Airlines, Inc. - net of  intercompany eliminations (b) |       | **—**                      | ** ** | 69                            |       | **—** | ** ** | 133 |   |
| Other                                                           |       | **15**                          | ** ** | 3                             |       | **29** | ** ** | 12 |   |
| Operating expenses                                              |       | **$**                           | **2,923**  | ** **                    | $          | 2,496 |   | **$** | **5,634** | ** ** | $ | 5,197 |   |

 

----

(a)          Includedin passenger service operating expenses are the following:

 
| ** **           | ** ** | **Three months ended  June 30** | ** ** | **Six months ended  June 30** | ** ** |
|----------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **           | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Curtailment expenses |       | **—**                      |       | —                        |       | **—** |   | (58 | ) |
| Severance expenses   |       | **—**                      |       | —                        |       | **—** |   | (20 | ) |
| Aircraft impairments |       | **(104**                        | **)**      | (21                           | )          | **(104** | **)** | (21 | ) |
|                 |       | **(104**                        | **)**      | (21                           | )          | **(104** | **)** | (99 | ) |
| Per total ASM        |       | **0.45**                        | *¢*   | 0.09                          | *¢*   | **0.23** | *¢* | 0.23 | *¢* |

 

(b)         PinnacleAirlines results were consolidated with the Company’s financial statementsprior to the initial public offering of Pinnacle Airlines Corp. on November 24,2003.

 

14

----

 

**Resultsof Operations—Three months ended June 30, 2004 and 2003**

 

*Operating Revenues*.  Operating revenues increased 18.5% ($448million), the result of higher system passenger, regional carrier, cargo andother revenues.

 

System passengerrevenues increased 19.9% ($362 million). The following analysis by region is based on information reported to theDepartment of Transportation and excludes regional carriers:

 
| ** **                         | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2004**                           |       |       |       |         |       |        |       |         |       |
| Passenger revenues (in millions)   |       | $          | 2,180      |         | $          | 1,485       |       | $            | 429        |   | $ | 266 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2003:** |       |       |       |         |       |        |       |         |       |
| Passenger revenues (in millions)   |       | $          | 362        |         | $          | 158         |       | $            | 159        |   | $ | 45 |   |
| Percent                            |       | 19.9       | %          | 11.9         | %          | 58.7        | %          | 20.6         | %          |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled service ASMs (capacity)  |       | 6.4        | %          | 4.7          | %          | 9.8         | %          | 8.0          | %          |
| Scheduled service RPMs (traffic)   |       | 14.8       | %          | 9.5          | %          | 34.6        | %          | 7.0          | %          |
| Passenger load factor              |       | 6.1        | pts.       | 3.4          | pts.       | 16.3        | pts.       | (0.9         | )pts.      |
| Yield                              |       | 4.5        | %          | 2.2          | %          | 18.0        | %          | 12.8         | %          |
| Passenger RASM                     |       | 12.7       | %          | 6.9          | %          | 44.6        | %          | 11.8         | %          |

 

As indicated in the abovetable:

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

•                  Pacificpassenger revenues increased substantially due to a strong rebound in bothtraffic and yields.

•                  Atlanticpassenger revenues increased, with traffic rising commensurate with capacityand significantly improved yields.

 

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

 

Regionalcarrier revenues increased 28.0% ($60 million) to $274 million, due primarilyto the increased capacity from 37 additional Bombardier CRJ aircraft that haveentered service since June 30, 2003.

 

Cargo revenuesincreased 6.6% ($12 million) to $193 million due to 7.6% more cargo ton milesflown.  Other revenue increased 6.7% ($14million) as a result of increased rental revenue, a rise in MLT revenues andhigher ticket change fees, partially offset by the Civil Reserve Air Fleetprogram revenue recorded in 2003.

 

*Operating Expenses*.  Operating expenses increased 17.1% ($427million) for the three months ended June 30, 2004.  The following table and notes presentoperating expenses for the three months ended June 30, 2004 and 2003 anddescribe significant year-over-year variances:

 
| ** **                                 | ** ** | **Three months ended** | ** ** | **Increase  (Decrease)  from 2003** | ** ** | **Percent  Change** | ** ** | **Note**   | ** ** |
|--------------------------------------------|------------|------------------------|------------|-------------------------------------|------------|---------------------|------------|------------|------------|
| ** **                                 | ** ** | ** **             | ** ** | ** **                          | ** ** |
| **(in  millions)**                         | ** ** | **2004**               | ** ** | **2003**                            | ** ** | ** **          | ** ** | ** ** |
| **Operating Expenses**                     |       |                   |       |                                |       |                |       |       |       |   |   |
| Salaries, wages and benefits               |       | **$**                  | **964**    |                                | $          | 944                 |       | $          | 20         |   | 2.1 | % | A |   |
| Aircraft fuel and taxes                    |       | **499**                |       | 375                                 |       | 124                 |       | 33.1       |       | B |   |
| Depreciation and amortization              |       | **237**                |       | 162                                 |       | 75                  |       | 46.3       |       | C |   |
| Selling and marketing                      |       | **204**                |       | 170                                 |       | 34                  |       | 20.0       |       | D |   |
| Other rentals and landing fees             |       | **149**                |       | 138                                 |       | 11                  |       | 8.0        |       | E |   |
| Aircraft rentals                           |       | **115**                |       | 120                                 |       | (5                  | )          | (4.2       | )          | F |   |
| Aircraft maintenance materials and repairs |       | **109**                |       | 95                                  |       | 14                  |       | 14.7       |       | G |   |
| Regional carrier expenses                  |       | **288**                |       | 126                                 |       | 162                 |       | 128.6      |       | H |   |
| Other                                      |       | **358**                |       | 366                                 |       | (8                  | )          | (2.2       | )          | I |   |
| **Total operating expenses**               |       | **$**                  | **2,923**  |                                | $          | 2,496               |       | $          | 427        |   | 17.1 | % |   |   |

 

15

----

 

----

A.           Salaries, wages and benefits increased largely due to annual wage rateincreases, partially offset by savings from a 0.7% decrease in averagefull-time equivalent employees.

B.             Aircraftfuel and taxes were significantly higher due to a 34.4% increase in the averagefuel cost per gallon to $1.08, net of hedging transactions, and 3.5% moregallons consumed as a result of increased capacity.

C.             Depreciationexpense increased in the second quarter 2004 primarily due to a $104 millionwrite-down on certain Boeing 747-200 aircraft; in 2003, a $21 millionwrite-down was recorded on Boeing 727-200 aircraft.

D.            Sellingand marketing expense increases were primarily volume related, reflecting a19.9% increase in passenger revenue.

E.              Otherrentals and landing fees were higher due primarily to increased capacity versus2003.

F.              Aircraftrentals decreased primarily due to the consolidation of Pinnacle Airlines in2003, partially offset by higher synthetic lease amortization.

G.             Aircraftmaintenance materials and repairs increased by $14 million, due primarily tohigher materials usage.

H.            Theincrease in regional carrier expenses was largely due to the 2003 consolidationof Pinnacle Airlines operating expenses ($69 million) on other line items andthe 2003 elimination of intercompany transactions ($39 million). The remainingincrease of $54 million was primarily driven by the addition of 37 CRJ aircraftleased by Pinnacle Airlines from Northwest and higher fuel costs.

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

 

*Other Income and Expense.*  Non-operating expense increased $423 million,primarily due to the receipt in 2003 of $209 million under the EmergencyWartime Supplemental Appropriations Act as reimbursement for security feespreviously paid to the Transportation Security Administration (“TSA”), a $199million gain from the sale of the Company’s investment in Worldspan L.P. andhigher 2004 interest expense related to increased debt levels.

 

**Results ofOperations—Six months ended June 30, 2004 and 2003**

 

*Operating Revenues*.  Operating revenues increased 14.1% ($676million), the result of higher system passenger, regional carrier, cargo andother revenues.

 

Systempassenger revenues increased 14.5% ($526 million).  The following analysis by region is based on informationreported to the Department of Transportation and excludes regional carriers:

 
| ** **                         | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2004**                           |       |       |       |         |       |        |       |         |       |
| Passenger revenues (in millions)   |       | $          | 4,143      |         | $          | 2,861       |       | $            | 822        |   | $ | 460 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2003:** |       |       |       |         |       |        |       |         |       |
| Passenger revenues (in millions)   |       | $          | 526        |         | $          | 261         |       | $            | 186        |   | $ | 79 |   |
| Percent                            |       | 14.5       | %          | 10.0         | %          | 29.3        | %          | 20.6         | %          |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled service ASMs (capacity)  |       | 1.5        | %          | 2.7          | %          | (2.8        | )%         | 4.5          | %          |
| Scheduled service RPMs (traffic)   |       | 7.8        | %          | 5.7          | %          | 12.6        | %          | 7.7          | %          |
| Passenger load factor              |       | 4.7        | pts.       | 2.2          | pts.       | 12.1        | pts.       | 2.5          | pts.       |
| Yield                              |       | 6.3        | %          | 4.1          | %          | 14.8        | %          | 12.1         | %          |
| Passenger RASM                     |       | 12.7       | %          | 7.1          | %          | 33.2        | %          | 15.5         | %          |

 

As indicated in the abovetable:

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

•                  Pacificpassenger revenues increased significantly as a result of stronger traffic andyields.

•                  Atlanticpassenger revenues increased primarily due to improved traffic andsignificantly improved yields.

 

Theyear-over-year comparisons noted above are affected by the negative impact ofSARS and the Iraq War, which were significantly greater for the period endedJune 2003 than in the current period, particularly in the latter three months.

 

16

----

 

Regionalcarrier revenues increased 26.9% ($104 million) to $491 million, due primarilyto the increased capacity from 37 additional Bombardier CRJ aircraft that haveentered service since June 30, 2003.

 

Cargo revenuesincreased 8.0% ($28 million) to $376 million due to 9.6% more cargo ton milesflown.  Other revenue increased 4.0% ($18million) as a result of increased rental revenue, a rise in MLT revenues andticket change fees, partially offset by the Civil Reserve Air Fleet programrevenue recorded in 2003.

 

*Operating Expenses*.  Operating expenses increased 8.4% ($437million) for the six months ended June 30, 2004.  The following table and notes presentoperating expenses for the six months ended June 30, 2004 and 2003 and describesignificant year-over-year variances:

 
| ** **                                 | ** ** | **Six months ended** | ** ** | **Increase  (Decrease)  from 2003** | ** ** | **Percent  Change** | ** ** | **Note** | ** ** |
|--------------------------------------------|------------|----------------------|------------|-------------------------------------|------------|---------------------|------------|----------|------------|
| ** **                                 | ** ** | ** **           |
| **(in  millions)**                         | ** ** | **2004**             | ** ** | **2003**                            | ** ** |
| **Operating Expenses**                     |       |                 |       |                                |       |                |       |     |       |   |   |
| Salaries, wages and benefits               |       | **$**                | **1,901**  |                                | **$**      | 1,989               |       | $        | (88        | ) | (4.4 | )% | A |   |
| Aircraft fuel and taxes                    |       | **949**              |       | 786                                 |       | 163                 |       | 20.7     |       | B |   |
| Depreciation and amortization              |       | **378**              |       | 304                                 |       | 74                  |       | 24.3     |       | C |   |
| Selling and marketing                      |       | **379**              |       | 346                                 |       | 33                  |       | 9.5      |       | D |   |
| Other rentals and landing fees             |       | **295**              |       | 281                                 |       | 14                  |       | 5.0      |       | E |   |
| Aircraft rentals                           |       | **229**              |       | 238                                 |       | (9                  | )          | (3.8     | )          | F |   |
| Aircraft maintenance materials and repairs |       | **220**              |       | 228                                 |       | (8                  | )          | (3.5     | )          | G |   |
| Regional carrier expenses                  |       | **544**              |       | 251                                 |       | 293                 |       | 116.7    |       | H |   |
| Other                                      |       | **739**              |       | 774                                 |       | (35                 | )          | (4.5     | )          | I |   |
| **Total operating expenses**               |       | **$**                | **5,634**  |                                | **$**      | 5,197               |       | $        | 437        |   | 8.4 | % |   |   |

 

----

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 the initial publicoffering of Pinnacle Airlines Corp. in November), and a 0.7% decrease inaverage full-time equivalent employees. These were partially offset by annual wage rate increases.

B.             Aircraftfuel and taxes were higher due to a 26.1% increase in the average fuel cost pergallon to $1.04, net of hedging transactions, partially offset by theconsolidation of Pinnacle Airlines in 2003. Fuel hedge transactions reduced fuel costs by $4 million in the firsthalf of 2004 compared with a $52 million reduction in the first half of 2003.

C.             Depreciationexpense increased in the first half of 2004 primarily due to a $104 millionwrite-down on certain Boeing 747-200 aircraft; in 2003, a $21 millionwrite-down was recorded on Boeing 727-200 aircraft.

D.            Sellingand marketing expenses were higher, primarily due to a 14.5% increase inpassenger revenue.

E.              Otherrentals and landing fees were higher due primarily to increased capacity.

F.              Aircraftrentals expense decreased primarily due to the consolidation of PinnacleAirlines in 2003, partially offset by higher synthetic lease amortization.

G.             Aircraftmaintenance materials and repairs decreased by $8 million, due primarily tolower material usage.

H.            Theincrease in regional carrier expenses was largely due to the 2003 consolidationof Pinnacle Airlines operating expenses ($133 million) on other line items andthe 2003 elimination of intercompany transactions ($73 million). The remainingincrease of $87 million was primarily driven by the addition of 37 CRJ aircraftleased by Pinnacle Airlines from Northwest and higher fuel costs.

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 and Expense.*  Non-operating expense increased $438 million,primarily due to the receipt in 2003 of $209 million under the EmergencyWartime Supplemental Appropriations Act as reimbursement for security feespreviously paid to the TSA, a $199 million gain from the sale of the Company’sinvestment in Worldspan L.P. and higher 2004 interest expenses related toincreased debt levels.

 

17

----

 

**Liquidityand Capital Resources**

 

As of June 30,2004, the Company had cash, cash equivalents and short-term investments of$2.99 billion.  This amount includes $131million of restricted short-term investments (which may include amounts held ascash), resulting in liquidity of $2.86 billion.

 

*Cash flows.*Liquidity increased by $79 million during the six months ended June 30, 2004,largely due to cash flows from operations, partially offset by capitalexpenditures and debt payments.

 

Net cashprovided by operating activities for the six months ended June 30, 2004 was$425 million, a $94 million decrease from the $519 million of cash provided byoperating activities for the six months ended June 30, 2003.  This decrease was driven by significantunusual items included in 2003’s cash flows from operations including a $217million tax refund and a one-time $209 million reimbursement of security feesreceived from the U.S. Government offset by improved performance in 2004 and ahigher level of forward bookings.

 

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

 
| ** **      | ** ** | **Six months ended  June 30** | ** ** |
|-----------------|------------|-------------------------------|------------|
| ** **      | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Airbus A319     |       | **—**                    |       | 7 |   |
| Airbus A330-300 |       | **3**                         |       | — |   |
| Boeing 757-300  |       | **—**                    |       | 3 |   |
|            |       | **3**                         |       | 10 |   |

 

Financingactivities in the six months ended June 30, 2004 included financing two AirbusA330-300 aircraft with long-term debt, the issuance of $300 million unsecurednotes due 2009, repayment of $138 million of 8.375% unsecured notes in March2004, repayment of $195 million 8.52% unsecured notes in April 2004, pluspayment of other debt and capital lease obligations.  Financing activities in the six months endedJune 30, 2003 consisted primarily of financing six Airbus A319 aircraft and twoBoeing 757-300 aircraft with escrowed funds from pass-through certificatesofferings, one Boeing 757-300 aircraft with long-term debt, the issuance of$150 million of 6.625% senior convertible notes due 2023 and payments of debtand capital lease obligations.

 

In addition tothe financed aircraft discussed above, the Company also took delivery of oneAirbus A330-300 and 25 Bombardier CRJ200/440 regional jets during the sixmonths ended June 30, 2004.  The AirbusA330-300 aircraft was acquired largely through a non-cash transaction with themanufacturer.  The Bombardier CRJaircraft were acquired with long-term operating leases and subleased toPinnacle Airlines.

 

*Debt.* At June 30, 2004, maturities oflong-term debt, excluding capital lease obligations, through December 31, 2008are as follows (in millions):

 
| 2004 |   | $     | 196    |   |
|------|--------|-------|--------|--------|
| 2005 |   | 1,491 |   |
| 2006 |   | 821   |   |
| 2007 |   | 894   |   |
| 2008 |   | 515   |   |

 

The amountshown in 2005 includes $962 million of principal outstanding under theCompany’s secured credit facilities due in October, 2005.  The Company’s secured credit facilities atJune 30, 2004, consisted of a $725 million revolving credit facility ($11million 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 the entirenon-renewed portion of the facility and such borrowings would then mature inOctober 2005.  Borrowings under thecredit agreement are secured by the Company’s Pacific route system and certainaircraft.  Borrowings under bothrevolving credit facilities currently bear interest

 

18

----

 

at a variable rate equal to theone-month LIBOR plus 3.25% (4.67% as of July 20, 2004).  The credit agreement includes a covenant thatrequires the Company, beginning with the three month period ending June 30,2004, and measured quarterly thereafter for the period from April 1, 2004 or(if later) the date twelve months prior to such quarterly measurement date, tomaintain at least a one-to-one ratio of earnings (defined as operating incomeadjusted to exclude the effects of depreciation, amortization and aircraftrents and to include the effects of interest income) to fixed charges(comprising interest expense and aircraft rents).  If the Company fails to meet this fixedcharges coverage ratio, repayment of borrowings under the credit facility couldbe accelerated by the banks.  The Companysatisfied this requirement as of June 30, 2004. Compliance with the covenant in subsequent periods 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 offering of $300 million of unsecured notes due2009.  The notes have a coupon rate of10%, payable semi-annually in cash on February 1 and August 1 of each year,beginning on August 1, 2004, and are not redeemable prior to maturity.  Each note was issued at a price of $962 per$1,000 principal amount, resulting in a yield to maturity of 11.0%.  Proceeds from the notes will be used forworking capital and general corporate purposes.   The notes are guaranteed by NWA Corp.

 

In March andApril 2004, the Company repaid the remaining $333 million outstanding under twoissues of unsecured notes, as scheduled, with a combined original face amountof $350 million.  On March 15, $138million of 8.375% senior unsecured notes were repaid, net of $12 millionpreviously exchanged for newly issued pass-through certificates in conjunctionwith an exchange offer in December 2003. The 8.375% unsecured notes were originally issued in 1997.  Additionally, the Company repaid $195 millionof 8.52% senior unsecured notes that matured on April 7, net of $5 millionpreviously exchanged for newly issued pass-through certificates in conjunctionwith the same December 2003 exchange offer. The 8.52% unsecured notes wereoriginally issued in 1998.

 

*Aircraft Commitments.*  Committed expenditures for the 57 aircraftand related equipment on firm order, including estimated amounts forcontractual price escalations and predelivery deposits, will be approximately$853 million for the remainder of 2004, $758 million in 2005, $572 million in2006, $205 million in 2007 and $189 million in 2008.  Consistent with prior practice, the Companyintends to finance its aircraft deliveries through a combination of internallygenerated funds, debt and long-term lease financing.  Financing commitments available for use bythe Company are in place for all of the aircraft on firm order and range from80% - 100% of each aircraft’s purchase price. The Company intends to finance all of the CRJ-200/440 aircraft on orderthrough long-term operating lease financing commitments from themanufacturer.  These aircraft will, inturn, be subleased to and operated by Pinnacle Airlines.  The manufacturer has the right not to providefinancing for the regional aircraft in the event a credit rating on the Companyis downgraded from its current level; however, if the manufacturer does notprovide financing, the Company is not obligated 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 dependentupon various factors, including interest rate levels, asset returns, regulatoryrequirements for funding purposes and changes to pension plan benefits.  Absent favorable changes to these factors,the Company will have to satisfy the underfunded amounts of its plans throughcash contributions over time.

 

On April 15, 2003, the IRS approved the application submitted by theCompany to reschedule, over a five year period beginning in April 2004, the$454 million in 2003 plan year contributions under the pension plans forcontract and salaried employees.  TheCompany satisfied the conditions for waiving plan year 2003 contributions bygranting the plans a lien on certain assets of the Company (certain domesticslots, international routes, aircraft and 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 Act, which temporarily reduces theCompany’s required contributions through two mechanisms: (1) certain companiesmay elect partial relief from the deficit reduction contribution requirementsthat otherwise would have applied in 2004 and 2005, an election the Company hasmade; and (2) the applicable discount rate used to determine funding wasincreased to reflect yields on indices of high quality corporate bonds insteadof 30-year U.S. Treasury rates. Following enactment of the Pension Act, the Company withdrew its requestto the IRS to reschedule its plan year 2004 pension contributions.

 

19

----

 

Including theimpact of the new legislation, the Company’s 2004 calendar year cashcontributions to qualified pension plans will approximate $253 million.  On April 15, 2004, the Company contributed$84 million to these plans. Subsequently, on July 15, 2004, the Company contributed an additional$84 million to these plans, with the balance due during the remainder of2004.  As of the date of this filing, theCompany anticipates that calendar 2005 pension contributions to qualified planswill be at or below the level of pension expense for the year.  Actual 2005 pension contributions and expenseare dependent on a number of factors, including interest rates and return onplan assets, which will not be determinable until year end 2004.

 

**OtherInformation**

 

*Labor Agreements.*Approximately 90% of theCompany’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.

 

*Application for Expanded Services Between theU.S. and China.* On June 18, 2004, the United States and the People’s Republic of Chinaagreed to a series of amendments to the 1980 U.S. – China Air TransportAgreement that provide for a significant expansion of air services between thetwo countries.  On June 28, 2004, Northwest submitted applications to theU.S. Department of Transportation requesting five of the 21 additional U.S.-China all-cargo frequencies that will become available to U.S. carriers onAugust 1, 2004 and another five of the 18 all-cargo frequencies that willbecome available on March 25, 2005.  Ifsuccessful, Northwest intends to use this new authority to increase thefrequency of its cargo operations from the U.S. to Shanghai and to initiateservice to Guangzhou’s new Baiyun Airport.

 

In addition toits application for expanded all-cargo services, Northwest requested seven ofthe 14 additional combination service frequencies that will become available toU.S. carriers on August 1, 2004.  The Company intends to use thesefrequencies to provide new daily roundtrip service between Detroit andGuangzhou, via Tokyo, which would represent the only combination service toGuangzhou operated by a U.S. Carrier.

 

Theseapplications are currently pending before the U.S. Department ofTransportation.

 

*Foreign Currency.* The Company is exposed tothe effect of foreign currency exchange rate fluctuations on the U.S. dollarvalue of foreign currency-denominated operating revenues and expenses, with thelargest exposure coming from the Japanese yen. Forward contracts, collaroptions or put options are utilized to hedge a portion of anticipatedyen-denominated sales from time-to-time. Hedging gains or losses are recorded in accumulated other comprehensiveincome (loss) until the associated transportation is provided, at which timethey are recognized as an increase or decrease in revenue.  The Company did not hedge any of itsyen-denominated sales in the three months ended June 30, 2004 or 2003.  The average yen rate for the quarters endedJune 30, 2004 and 2003 was 109 and 119, respectively.  At June 30, 2004, the Company has hedged $299million, representing approximately 40% and 11% of its remaining 2004 and 2005anticipated yen-denominated sales at an average rate of 114 and 105 yen perU.S. dollar, respectively, and has recorded $9.3 million of unrealized lossesin accumulated other comprehensive income (loss) associated with those hedges.

 

20

----

 

*Aircraft Fuel.*  The Company’s earnings are significantlyaffected by changes in the price of aircraft fuel.  On an annual basis, the Company’s presentfuel consumption approximates 1.8 billion gallons, producing an $18 millioncost variance for each one-cent change in average price over a year.  In order to provide a measure of control overprice, the Company periodically hedges a portion of the price risk of fuelcosts, primarily utilizing futures contracts traded on regulated exchanges,swap agreements and options.  As of July14, 2004, the Company has hedged the price of approximately 25% of itsprojected fuel requirements for the second half of 2004 through collar optionsestablished at a crude oil price of $34 to $41 per barrel, and has recorded$4.0 million of unrealized losses in accumulated other comprehensive income(loss) associated with those hedges.

 

*Forward-Looking Statements.*  Certain of the statements made throughoutManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this report are forward-looking and are based uponinformation available to the Company on the date hereof.  The Company, through its management, may alsofrom 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 1. Business - Risk Factors Relatedto Northwest and the Airline Industry” and “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in the Company’sAnnual Report on Form 10-K for the year ended 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.

 

21

----

 

**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 Form 10-Q.  Also see “Item 7a. Quantitative andQualitative Disclosures About Market Risk” in the Company’s Annual Report onForm 10-K for 2003.

 

**Item 4.****           Controlsand 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 June 30, 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 June 30, 2004.

 

22

----

 

PART II.  OTHER INFORMATION

 

**Item 1.****           Legal Proceedings.**

 

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

 

*Force Majeure Arbitrations.*  In June 2004, an arbitrator denied the AMFAgrievance with respect to the Company’s invocation of “force majeure” inconnection with the Iraq War and sustained the AMFA grievance relating to theCompany’s invocation of “force majeure” in connection with the SARS epidemicwith respect to a yet to be determined number of laid off AMFA members, whichnumber will be less than 150.

 

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 4.****           Submission of Matters to a Vote of SecurityHolders.**

 

The Companyheld its Annual Meeting of Stockholders on April 23, 2004.  The stockholders of the Company voted on twoitems at the Annual Meeting.  The firstwas a proposal to elect twelve Common Stock directors, each to serve until thenext annual meeting of stockholders. Votes were cast by the holders of theCommon Stock as follows:

 
| **Nominee**          | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------------|------------|---------------|------------|--------------------|------------|
| Richard H. Anderson  |       | 76,868,970    |       | 2,924,668          |       |
| Richard C. Blum      |       | 63,249,895    |       | 16,543,743         |       |
| Alfred A. Checchi    |       | 76,693,223    |       | 3,100,415          |       |
| John M. Engler       |       | 76,902,077    |       | 2,891,561          |       |
| Robert L. Friedman   |       | 76,271,650    |       | 3,521,988          |       |
| Doris K. Goodwin     |       | 75,695,379    |       | 4,098,259          |       |
| Dennis F. Hightower  |       | 70,771,990    |       | 9,021,648          |       |
| Frederic V. Malek    |       | 61,708,568    |       | 18,085,070         |       |
| V.A. Ravindran       |       | 70,766,085    |       | 9,027,553          |       |
| Douglas M. Steenland |       | 76,851,489    |       | 2,942,149          |       |
| Leo M. van Wijk      |       | 63,716,481    |       | 16,077,157         |       |
| Gary L. Wilson       |       | 76,725,859    |       | 3,067,779          |       |

 

The seconditem was the election by the holders of the outstanding Series C PreferredStock of a slate of three Series C directors, Messrs. Benning, Kourpias andRistow, each to serve until the next annual meeting of stockholders.  The Series C directors were elected by thefollowing vote:

 

4,733,041votes in favor

1,889 votesagainst

456abstentions

 

23

----

 

**Item 6.****           Exhibits and Reports on Form 8-K.**

 

(a)                    Exhibits:

 

12.1                           Computation of Ratio ofEarnings to Fixed Charges

12.2                           Computation of Ratio ofEarnings to Fixed Charges and Preferred Stock Requirements

31.1                           Rule 13a-14(a)/15d-14(a)Certifications

31.2                           Rule 13a-14(a)/15d-14(a)Certifications

32.1                           Section 1350 Certifications

32.2                           Section 1350 Certifications

 

(b)                   Reportson Form 8-K:

On April 21,2004, the Company filed a Form 8-K containing a press release issued April 21,2004, and forward looking guidance.  Thispress release contained the Company’s first quarter 2004 earnings release andforward looking guidance, which was also provided in the Company’s firstquarter 2004 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 23rd day of July 2004.

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

 

 

EXHIBIT INDEX

 
| ** ** | **Exhibit  No.** | ** ** | **Description**                                                                     |
|------------|------------------|------------|-------------------------------------------------------------------------------------|
|       | 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) Certifications                                            |
|       | 31.2             |       | Rule  13a-14(a)/15d-14(a) Certifications                                            |
|       | 32.1             |       | Section 1350  Certifications                                                        |
|       | 32.2             |       | Section 1350  Certifications                                                        |

 

24

----