**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

** **

** **

**FORM 10-Q**

** **

** **

** **

** **

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(D)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

** **

**For the quarterly periodended June 30, 2002**

** **

** **

**Commissionfile number 0-23642**

** **

****

** **

**NORTHWEST AIRLINES CORPORATION**

**(Exact name of registrant asspecified in its charter)**

** **

** **

| **Delaware**                                                        | **41-1905580**                           |
|---------------------------------------------------------------------|------------------------------------------|
| **(State or other jurisdiction of incorporation or  organization)** | **(I.R.S. Employer Identification No.)** |
|                                                                |                                     |
| **2700 Lone Oak Parkway,  Eagan, Minnesota**                        | **55121**                                |
| **(Address of principal executive offices)**                        | **(Zip Code)**                           |

** **

** **

**Registrant’s telephone number,including area code        **(612)  726-2111

** **

** **

** **

**Indicate by check mark whether the registrant (1) has filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes **ý     No o

** **

** **

**As of June 30, 2002, there were 85,779,345 shares of theregistrant’s Common Stock outstanding.**

** **

** **

----

***NorthwestAirlines Corporation***

 

 

 
| PART I.  FINANCIAL INFORMATION | Page No.                                                                                                                                                                                  |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                                                                      |   |   |
|                                | Item 1.                                                                                                                                                                                   | Financial Statements |   |
|                                |                                                                                                                                                                                      |   |   |
|                                |                                                                                                                                                                                      | Condensed  Consolidated Statements of Operations - Three months and six months ended  June 30, 2002 and 2001. | 3 |
|                                |                                                                                                                                                                                      |   |   |
|                                |                                                                                                                                                                                      | Condensed  Consolidated Balance Sheets - June 30, 2002 and December 31, 2001. | 4 |
|                                |                                                                                                                                                                                      |   |   |
|                                |                                                                                                                                                                                      | Condensed  Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and  2001. | 5 |
|                                |                                                                                                                                                                                      |   |   |
|                                |                                                                                                                                                                                      | Notes  to Condensed Consolidated Financial Statements | 6 |
|                                |                                                                                                                                                                                      |   |   |
|                                | 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 | 10 |
|                                |                                                                                                                                                                                      |   |   |
|                                | Item  3.                                                                                                                                                                                  | Quantitative  and Qualitative Disclosures About Market Risk | 15 |
|                                |                                                                                                                                                                                      |   |   |
| PART II.  OTHER INFORMATION    |                                                                                                                                                                                      |
|                                |                                                                                                                                                                                      |   |   |
|                                | Item 1.                                                                                                                                                                                   | Legal Proceedings | 16 |
|                                | Item  4.                                                                                                                                                                                  | Submission  of Matters to a Vote of Security Holders | 16 |
|                                | Item 6.                                                                                                                                                                                   | Exhibits | 16 |
|                                |                                                                                                                                                                                      |   |   |
| SIGNATURE                           | 17                                                                                                                                                                                        |
|                                |                                                                                                                                                                                      |   |   |
| EXHIBIT INDEX                       | 17                                                                                                                                                                                        |

 

 

2

----

** **

PART I. FINANCIAL INFORMATION

 

**Item 1.  Financial Statements**

 

*NorthwestAirlines Corporation*

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
|                                                         |   | **Three  Months Ended********June 30** |   | **Six Months  Ended********June 30** |   |
|--------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
| ***(Unaudited, in millions except per share amounts)***      |   | **2002**                               |   | **2001**                             |   | **2002** |   | **2001** |   |
| **Operating  Revenues**                                      |   |                                   |   |                                 |   |   |   |   |   |
| Passenger                                                    |   | $                                      | 2,052  |                                 | $      | 2,331 |   | $ | 3,870 |   | $ | 4,539 |   |
| Cargo                                                        |   | 176                                    |   | 182                                  |   | 324 |   | 367 |   |
| Other                                                        |   | 178                                    |   | 202                                  |   | 392 |   | 420 |   |
| Total operating  revenues                                    |   | 2,406                                  |   | 2,715                                |   | 4,586 |   | 5,326 |   |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| **Operating  Expenses**                                      |   |                                   |   |                                 |   |   |   |   |   |
| Salaries, wages  and benefits                                |   | 936                                    |   | 970                                  |   | 1,860 |   | 2,022 |   |
| Aircraft fuel  and taxes                                     |   | 360                                    |   | 476                                  |   | 651 |   | 956 |   |
| Selling and marketing                                        |   | 200                                    |   | 283                                  |   | 418 |   | 565 |   |
| Aircraft  maintenance materials and repairs                  |   | 151                                    |   | 185                                  |   | 296 |   | 380 |   |
| Depreciation and  amortization                               |   | 131                                    |   | 130                                  |   | 266 |   | 258 |   |
| Other rentals  and landing fees                              |   | 141                                    |   | 134                                  |   | 264 |   | 264 |   |
| Aircraft rentals                                             |   | 116                                    |   | 111                                  |   | 229 |   | 220 |   |
| Other                                                        |   | 417                                    |   | 462                                  |   | 844 |   | 933 |   |
| Total operating  expenses                                    |   | 2,452                                  |   | 2,751                                |   | 4,828 |   | 5,598 |   |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| **Operating  Loss**                                          |   | (46                                    | )      | (36                                  | )      | (242 | ) | (272 | ) |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| **Other  Income (Expense)**                                  |   |                                   |   |                                 |   |   |   |   |   |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Interest  expense, net                                       |   | (100                                   | )      | (83                                  | )      | (194 | ) | (157 | ) |
| Interest of  mandatorily redeemable preferredsecurity holder |   | (7                                     | )      | (7                                   | )      | (12 | ) | (13 | ) |
| Investment  income                                           |   | 12                                     |   | 21                                   |   | 23 |   | 37 |   |
| Foreign currency  gain (loss)                                |   | (11                                    | )      | (2                                   | )      | (11 | ) | — |   |
| Other                                                        |   | 11                                     |   | 15                                   |   | 34 |   | 40 |   |
| Total other  income (expense)                                |   | (95                                    | )      | (56                                  | )      | (160 | ) | (93 | ) |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| **Loss  Before Income Taxes**                                |   | (141                                   | )      | (92                                  | )      | (402 | ) | (365 | ) |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Income tax  benefit                                          |   | (48                                    | )      | (37                                  | )      | (138 | ) | (139 | ) |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| **Net  Loss**                                                |   | $                                      | (93    | )                                    | $      | (55 | ) | $ | (264 | ) | $ | (226 | ) |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Loss per common  share:                                      |   |                                   |   |                                 |   |   |   |   |   |
| *Basic*                                                      |   | $                                      | (1.08  | )                                    | $      | (.65 | ) | $ | (3.09 | ) | $ | (2.70 | ) |
| *Diluted*                                                    |   | $                                      | (1.08  | )                                    | $      | (.65 | ) | $ | (3.09 | ) | $ | (2.70 | ) |
|                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Average shares  used in computation:                         |   |                                   |   |                                 |   |   |   |   |   |
| *Basic*                                                      |   | 86                                     |   | 84                                   |   | 86 |   | 84 |   |
| *Diluted*                                                    |   | 86                                     |   | 84                                   |   | 86 |   | 84 |   |

 

*See accompanyingnotes.*

 

 

3

----

 

*NorthwestAirlines Corporation*

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ***(Unaudited, in millions)***                                                                                         |   | **June 30********2002** |   | **December  31  2001** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                                                   |   |                    |   |                   |   |
| **Assets**                                                                                                             |   |                    |   |                   |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Current  Assets**                                                                                                    |   |                    |   |                   |   |
| Cash and cash  equivalents                                                                                             |   | $                       | 2,719  |                   | $      | 2,512 |   |
| Restricted  short-term investments                                                                                     |   | 88                      |   | 100                    |   |
| Accounts  receivable, net                                                                                              |   | 465                     |   | 512                    |   |
| Flight equipment  spare parts, net                                                                                     |   | 258                     |   | 273                    |   |
| Prepaid expenses  and other                                                                                            |   | 439                     |   | 393                    |   |
| Total current  assets                                                                                                  |   | 3,969                   |   | 3,790                  |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Property  and Equipment, net**                                                                                       |   |                    |   |                   |   |
| Flight  equipment, net                                                                                                 |   | 5,451                   |   | 5,034                  |   |
| Other property  and equipment, net                                                                                     |   | 1,068                   |   | 1,032                  |   |
| Total property  and equipment, net                                                                                     |   | 6,519                   |   | 6,066                  |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Flight  Equipment Under Capital Leases, net**                                                                        |   | 532                     |   | 543                    |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Other  Assets**                                                                                                      |   |                    |   |                   |   |
| Intangible  pension asset                                                                                              |   | 943                     |   | 943                    |   |
| International  routes, net                                                                                             |   | 634                     |   | 634                    |   |
| Investments in  affiliated companies                                                                                   |   | 265                     |   | 213                    |   |
| Other                                                                                                                  |   | 771                     |   | 766                    |   |
| Total other  assets                                                                                                    |   | 2,613                   |   | 2,556                  |   |
| **Total  Assets**                                                                                                      |   | $                       | 13,633 |                   | $      | 12,955 |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                                               |   |                    |   |                   |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Current  Liabilities**                                                                                               |   |                    |   |                   |   |
| Air traffic  liability                                                                                                 |   | $                       | 1,573  |                   | $      | 1,275 |   |
| Accounts payable  and other liabilities                                                                                |   | 2,275                   |   | 2,455                  |   |
| Current  maturities of long-term debt and capital lease obligations                                                    |   | 402                     |   | 416                    |   |
| Total current  liabilities                                                                                             |   | 4,250                   |   | 4,146                  |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Long-Term  Debt**                                                                                                    |   | 5,568                   |   | 4,828                  |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Long-Term  Obligations Under Capital Leases**                                                                        |   | 419                     |   | 393                    |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Deferred  Credits and Other Liabilities**                                                                            |   |                    |   |                   |   |
| Pension and  postretirement benefits                                                                                   |   | 1,892                   |   | 1,749                  |   |
| Deferred income  taxes                                                                                                 |   | 871                     |   | 1,005                  |   |
| Other                                                                                                                  |   | 573                     |   | 546                    |   |
| Total deferred  credits and other liabilities                                                                          |   | 3,336                   |   | 3,300                  |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Mandatorily  Redeemable Preferred Security of Subsidiary****Which Holds Solely  Non-Recourse Obligation of Company** |   | 545                     |   | 492                    |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Redeemable  Preferred Stock**                                                                                        |   | 226                     |   | 227                    |   |
|                                                                                                                   |   |                    |   |                   |   |
| **Common  Stockholders’ Equity (Deficit)**                                                                        |   |                    |   |                   |   |
| Common stock                                                                                                           |   | 1                       |   | 1                      |   |
| Additional  paid-in capital                                                                                            |   | 1,456                   |   | 1,451                  |   |
| Accumulated  deficit                                                                                                   |   | (782                    | )      | (518                   | )      |
| Accumulated  other comprehensive income (loss)                                                                         |   | (327                    | )      | (305                   | )      |
| Treasury stock                                                                                                         |   | (1,059                  | )      | (1,060                 | )      |
| Total common  stockholders’ equity (deficit)                                                                      |   | (711                    | )      | (431                   | )      |
| **Total  Liabilities and Stockholders’ Equity (Deficit)**                                                         |   | $                       | 13,633 |                   | $      | 12,955 |   |

 

*Seeaccompanying notes.*

 

 

4

----

 

*NorthwestAirlines Corporation*

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
|                                                                |   | **Six Months  Ended  June 30** |   |
|---------------------------------------------------------------------|--------|--------------------------------|--------|
| ***(Unaudited, in  millions)***                                     |   | **2002**                       |   | **2001** |   |
|                                                                |   |                           |   |   |   |
| **Net  Cash Provided by Operating Activities**                      |   | $                              | 110    |   | $ | 259 |   |
|                                                                |   |                           |   |   |   |
| **Cash  Flows From Investing Activities**                           |   |                           |   |   |   |
| Capital  expenditures                                               |   | (776                           | )      | (580 | ) |
| Net (increase)  decrease in short-term investments                  |   | 33                             |   | (29 | ) |
| Proceeds from  sale of investment in Continental Airlines, Inc.     |   | —                         |   | 582 |   |
| Other, net                                                          |   | (23                            | )      | 8 |   |
| Net cash used in  investing activities                              |   | (766                           | )      | (19 | ) |
|                                                                |   |                           |   |   |   |
| **Cash  Flows From Financing Activities**                           |   |                           |   |   |   |
| Proceeds from  issuance of short-term borrowings and long-term debt |   | 878                            |   | 1,600 |   |
| Proceeds from  sale and leaseback transactions                      |   | 136                            |   | — |   |
| Payments of  long-term debt and capital lease obligations           |   | (133                           | )      | (121 | ) |
| Payment of  short-term borrowings                                   |   | (1                             | )      | (1,103 | ) |
| Other, net                                                          |   | (17                            | )      | (13 | ) |
| Net cash  provided by financing activities                          |   | 863                            |   | 363 |   |
|                                                                |   |                           |   |   |   |
| **Increase  in Cash and Cash Equivalents**                          |   | 207                            |   | 603 |   |
| Cash and cash  equivalents at beginning of period                   |   | 2,512                          |   | 693 |   |
| Cash and cash  equivalents at end of period                         |   | $                              | 2,719  |   | $ | 1,296 |   |
|                                                                |   |                           |   |   |   |
| Available to be  borrowed under credit facilities                   |   | $                              | 1      |   | $ | 1,122 |   |
|                                                                |   |                           |   |   |   |
| Supplemental  Cash Flow Information:                                |   |                           |   |   |   |
| Interest paid                                                       |   | $                              | 171    |   | $ | 147 |   |
| Income taxes  (refunded) paid                                       |   | (124                           | )      | 28 |   |
|                                                                |   |                           |   |   |   |
| Investing and  Financing Activities Not Affecting Cash:             |   |                           |   |   |   |
| Manufacturer  financing of aircraft predelivery deposits            |   | $                              | (4     | ) | $ | (9 | ) |

 

*Seeaccompanying notes.*

 

 

5

----

 

*Northwest Airlines Corporation*

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.                           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 have beenprepared pursuant to the rules and regulations of the Securities and ExchangeCommission.  The information andfootnote disclosures normally included in annual financial statements preparedin accordance with generally accepted accounting principles have been condensedor omitted as permitted by such rules and regulations.  These financial statements and related notesshould be read in conjunction with the financial statements and notes theretoincluded in the Company’s audited consolidated financial statements for theyear ended December 31, 2001 contained in the Company’s Annual Report on Form10-K for 2001.  The Company’s accountingand reporting policies are summarized in Note 1 of the Notes to Consolidated FinancialStatements in the Annual Report.

 

In the opinion ofmanagement, the interim financial statements reflect adjustments, consisting ofnormal recurring accruals, which are necessary to present fairly the Company’sfinancial position, results of operations and cash flows for the periods indicated.

 

2.                           The income tax expense (benefit) is basedon estimated annual effective tax rates, which differ from the federalstatutory rate of 35% primarily due to state income taxes and nondeductibleexpenses.

 

3.                             As of June 30, 2002, maturities oflong-term debt through December 31, 2006 are as follows (in millions):

 

| 2002 |   | $     | 114    |   |
|------|--------|-------|--------|--------|
| 2003 |   | 227   |   |
| 2004 |   | 559   |   |
| 2005 |   | 1,372 |   |
| 2006 |   | 501   |   |

 

            The amount due in 2005includes $962 million of principal outstanding on the Company’s creditfacilities.

 

4.                             The Company is managed as one cohesivebusiness unit, from 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** |   |
|-----------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                        |   | **2002**                         |   | **2001**                       |   | **2002** |   | **2001** |   |
| Domestic                    |   | $                                | 1,640  |                           | $      | 1,855 |   | $ | 3,195 |   | $ | 3,655 |   |
| Pacific, principally  Japan |   | 483                              |   | 549                            |   | 918 |   | 1,116 |   |
| Atlantic                    |   | 283                              |   | 311                            |   | 473 |   | 555 |   |
| Total operating  revenues   |   | $                                | 2,406  |                           | $      | 2,715 |   | $ | 4,586 |   | $ | 5,326 |   |

 

5.                           As of June 30, 2002, the Company had firmorders for 84 new aircraft including 24 Airbus A330 aircraft, nine Airbus A320aircraft, 34 Airbus A319 aircraft and 17 Boeing 757-200/300 aircraft.  The Company has the right to cancel eight ofthe A330 aircraft orders.  The Companyalso had firm orders for 92 Bombardier Canadian Regional Jet (“CRJ”) aircraft,which will be leased or subleased to and operated by Northwest Airlinkcarriers, and the Company has the option to finance these aircraft throughlong-term operating leases from the manufacturer.  The Company has the right to defer the scheduled delivery ofcertain aircraft listed above for up to four years.

 

 

6

----

 

Committed expendituresfor these aircraft and related equipment, including estimated amounts forcontractual price escalations and predelivery deposits, will be approximately$1.12 billion for the remainder of 2002, $1.83 billion in 2003, $1.67 billionin 2004, $1.46 billion in 2005, $220 million in 2006 and $33 million in2007.  Consistent with prior practice,the Company intends to finance its aircraft deliveries through a combination ofinternally generated funds, debt and leveraged lease financing.  Financing commitments available for use bythe Company are in place for all of the aircraft on firm order.

 

The Company plans to replace the existing DC10-40 aircraftin service with Boeing 757-200/300 aircraft purchased or on order, with allDC10-40 aircraft removed from regularly scheduled service by the end ofSeptember 2002.  The Company also plansto replace existing Boeing 727 aircraft in service with Airbus A319/A320aircraft purchased or on order, with all Boeing 727 aircraft removed fromregularly scheduled service by the end of January 2003.  As of June 30, 2002, the Company operatednine DC10-40 aircraft and 20 Boeing 727 aircraft.  The Company continues to evaluate long-lived assets for potentialimpairment in compliance with Statement of Financial Accounting Standards(“SFAS”) No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets,*andhas previously made the necessary changes to the lives and asset values of theDC10-40 and Boeing 727 aircraft to be retired.

 

6.                           For the three and six months ended June30, 2002 and 2001, no incremental shares related to dilutive securities wereadded to the weighted-average shares outstanding for basic earnings per sharebecause of the anti-dilutive impact caused by inclusion of these securities.

 

7.                           Comprehensive loss was $114 million and$66 million for the three months ended June 30, 2002 and 2001, respectively,and $286 million and $234 million for the six months ended June 30, 2002 and2001, respectively.  Comprehensiveincome (loss) consists of net income (loss) plus other comprehensive income(loss).

 

8.                             During June 2002, a Receivables PurchaseAgreement (the “Agreement”) was executed by Northwest, NWA Funding II, LLC(“NWA Funding”), a wholly-owned, non-consolidated subsidiary of the Company,and a certain third party purchaser (the “Purchaser”) pursuant to asecuritization transaction.  During June2002, Northwest sold $114 million of accounts receivable on a non-recoursebasis to NWA Funding.  NWA Funding sold$65 million of its undivided interest in such receivables to the Purchaser,subject to specified collateral requirements. The amount of loss recognized related to receivables securitized was notmaterial.  NWA Funding maintains avariable undivided interest in these receivables and is subject to losses onits share of the receivables and, accordingly, maintains an allowance fordoubtful accounts.  The agreement is aone-year, $100 million revolving receivable purchase facility renewableannually that allows Northwest to sell additional receivables to NWA Fundingand NWA Funding to sell variable undivided interests in these receivables tothe Purchaser.  NWA Funding pays a yieldto the Purchaser equal to A1/F1 commercial paper.  Additionally, NWA Funding pays a program fee.

 

The Agreement providesfor the early termination upon the occurrence of certain events including,among others, a strike event, falling below a minimum liquidity requirement of$1.10 billion as of the last day of any fiscal quarter, or the Company notmeeting minimum credit ratings (defined as any two of the following threeevents occurring: (i) S&P’s “Long Term Local Issuer Credit” rating below aB credit rating, (ii) Moody’s “Senior Implied” rating below a B2 credit rating,or (iii) Fitch’s “Senior Unsecured Debt” rating below a B credit rating).

 

9.                             As of June 30, 2002, the Company had a$51 million receivable from the U.S. Government related to a grant under theAir Transportation Safety and System Stabilization Act.  The Company has filed its final applicationand has had discussions with representatives of the Department OfTransportation. The Company is awaiting the results of those discussions.

 

10.                       In June 2001, the Financial AccountingStandards Board issued SFAS No. 142, Goodwill and Other Intangible Assets.  SFAS 142 requires that companies testgoodwill and indefinite lived intangible assets for impairment on an annual basisrather than amortize such assets.  TheCompany adopted SFAS 142 on January 1, 2002, and as a result no longeramortizes its indefinite lived intangible assets and goodwill.  During the first quarter of 2002, theCompany performed the required transitional impairment tests of goodwill andindefinite lived intangible assets and found the fair value to be in excess ofthe carrying value of these assets.

 

 

7

----

 

The following table presents net income (loss) andearnings (loss) per share for comparable periods in 2001 adjusted foramortization of goodwill and indefinite lived intangible assets, which are nottax effected since these expenses were not deductible for tax purposes (inmillions except per share amounts):

 
|                                             |   | **Three  months ended  June 30, 2001** |   | **Six months  ended  June 30, 2001** |   |
|--------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
| **Net loss:**                                    |   |                                   |   |                                 |   |
| Reported net  loss                               |   | $                                      | (55    | )                                    | $      | (226 | ) |
| Add back:  Goodwill amortization (1)        |   | —                                 |   | —                               |   |
| Add back:  International route amortization |   | 6                                      |   | 12                                   |   |
| Adjusted net  loss                               |   | $                                      | (49    | )                                    | $      | (214 | ) |
|                                             |   |                                   |   |                                 |   |
| **Loss per common share: (2)**                   |   |                                   |   |                                 |   |
| Reported loss  per common share                  |   | $                                      | (.65   | )                                    | $      | (2.70 | ) |
| Add back:  Goodwill amortization (1)        |   | —                                 |   | —                               |   |
| Add back:  International route amortization |   | .07                                    |   | .14                                  |   |
| Adjusted loss  per common share                  |   | $                                      | (.58   | )                                    | $      | (2.56 | ) |

 

(1)          Goodwill amortization was $182,391 and $364,783 forthe three and six months ended June 30, 2001.

(2)          For the three and six months ended June 30, 2001, noincremental shares related to dilutive securities were used to calculatediluted earnings per share because of the anti-dilutive impact caused byinclusion of these securities.

 

11.                       The following tables present condensedconsolidating financial information for: (i) Northwest, (ii) on a combinedbasis, NWA Corp. and all other subsidiaries of NWA Corp., and (iii) NWA Corp.on a consolidated basis.  The principalconsolidating adjustment entries eliminate investments in subsidiaries andinter–company balances and transactions.

 

*CondensedConsolidating Statements of Operations for the three months ended June 30, 2002(in millions):*

* *
|                               |   | **Northwest** |   | **Other********Subsidiaries** |   | **Consolidating  Adjustments** |   | **NWA Corp.********Consolidated** |   |
|------------------------------------|--------|---------------|--------|-------------------------------|--------|--------------------------------|--------|-----------------------------------|--------|
| Operating  revenues                |   | $             | 2,277  |                          | $      | 182                            |   | $                                 | (53    | ) | $ | 2,406 |   |
| Operating  expenses                |   | 2,333         |   | 169                           |   | (50                            | )      | 2,452                             |   |
| Operating income  (loss)           |   | (56           | )      | 13                            |   | (3                             | )      | (46                               | )      |
| Other income  (expense)            |   | (109          | )      | (263                          | )      | 277                            |   | (95                               | )      |
| Income (loss)  before income taxes |   | (165          | )      | (250                          | )      | 274                            |   | (141                              | )      |
| Income tax  expense (benefit)      |   | (60           | )      | 12                            |   | —                         |   | (48                               | )      |
| Net income  (loss)                 |   | $             | (105   | )                             | $      | (262                           | )      | $                                 | 274    |   | $ | (93 | ) |

 

 

*CondensedConsolidating Statements of Operations for the six months ended June 30, 2002(in millions):*

 
|                               |   | **Northwest** |   | **Other********Subsidiaries** |   | **Consolidating  Adjustments** |   | **NWA Corp.********Consolidated** |   |
|------------------------------------|--------|---------------|--------|-------------------------------|--------|--------------------------------|--------|-----------------------------------|--------|
| Operating  revenues                |   | $             | 4,304  |                          | $      | 396                            |   | $                                 | (114   | ) | $ | 4,586 |   |
| Operating  expenses                |   | 4,561         |   | 374                           |   | (107                           | )      | 4,828                             |   |
| Operating income  (loss)           |   | (257          | )      | 22                            |   | (7                             | )      | (242                              | )      |
| Other income  (expense)            |   | (189          | )      | (756                          | )      | 785                            |   | (160                              | )      |
| Income (loss)  before income taxes |   | (446          | )      | (734                          | )      | 778                            |   | (402                              | )      |
| Income tax  expense (benefit)      |   | (161          | )      | 23                            |   | —                         |   | (138                              | )      |
| Net income  (loss)                 |   | $             | (285   | )                             | $      | (757                           | )      | $                                 | 778    |   | $ | (264 | ) |

 

 

8

----

 

*CondensedConsolidating Statements of Cash Flows for the six months ended June 30, 2002(in millions):*

 
|                                              |   | **Northwest** |   | **Other  Subsidiaries** |   | **Consolidating  Adjustments** |   | **NWA Corp.  Consolidated** |   |
|---------------------------------------------------|--------|---------------|--------|-------------------------|--------|--------------------------------|--------|-----------------------------|--------|
| Net cash flows  from operating activities         |   | $             | (30    | )                       | $      | 140                            |   | $                           | — |   | $ | 110 |   |
| Net cash flows  from investing activities         |   | (764          | )      | 6                       |   | (8                             | )      | (766                        | )      |
| Net cash flows  from financing activities         |   | 994           |   | (139                    | )      | 8                              |   | 863                         |   |
| Increase in cash  and cash equivalents            |   | 200           |   | 7                       |   | —                         |   | 207                         |   |
| Cash and cash  equivalents at beginning of period |   | 2,471         |   | 41                      |   | —                         |   | 2,512                       |   |
| Cash and cash  equivalents at end of period       |   | $             | 2,671  |                    | $      | 48                             |   | $                           | — |   | $ | 2,719 |   |

 

 

*CondensedConsolidating Balance Sheets as of June 30, 2002 (in millions):*

* *
|                                                                |   | **Northwest** |   | **Other Subsidiaries** |   | **Consolidating  Adjustments** |   | **NWA Corp.  Consolidated** |   |
|---------------------------------------------------------------------|--------|---------------|--------|------------------------|--------|--------------------------------|--------|-----------------------------|--------|
| **Assets**                                                          |   |          |   |                   |   |                           |   |                        |   |
| **Current Assets**                                                  |   |          |   |                   |   |                           |   |                        |   |
| Cash, cash  equivalents and restricted short-term investments       |   | $             | 2,731  |                   | $      | 76                             |   | $                           | — |   | $ | 2,807 |   |
| Accounts  receivable, net                                           |   | 451           |   | 14                     |   | —                         |   | 465                         |   |
| Other current  assets                                               |   | 545           |   | 187                    |   | (35                            | )      | 697                         |   |
| Total current  assets                                               |   | 3,727         |   | 277                    |   | (35                            | )      | 3,969                       |   |
|                                                                |   |          |   |                   |   |                           |   |                        |   |
| **Property and Equipment, net**                                     |   | 6,195         |   | 324                    |   | —                         |   | 6,519                       |   |
| **Flight Equipment Under Capital  Leases, net**                     |   | 532           |   | —                 |   | —                         |   | 532                         |   |
| **Other Assets**                                                    |   | 2,403         |   | 1,302                  |   | (1,092                         | )      | 2,613                       |   |
| **Total Assets**                                                    |   | $             | 12,857 |                   | $      | 1,903                          |   | $                           | (1,127 | ) | $ | 13,633 |   |
|                                                                |   |          |   |                   |   |                           |   |                        |   |
| **Liabilities and Stockholders’  Equity (Deficit)**            |   |          |   |                   |   |                           |   |                        |   |
| **Current Liabilities**                                             |   |          |   |                   |   |                           |   |                        |   |
| Air traffic  liability                                              |   | $             | 1,519  |                   | $      | 62                             |   | $                           | (8     | ) | $ | 1,573 |   |
| Accounts payable  and other liabilities                             |   | 2,236         |   | 67                     |   | (28                            | )      | 2,275                       |   |
| Current  maturities of long-term debt and capital lease obligations |   | 376           |   | 26                     |   | —                         |   | 402                         |   |
| Total current  liabilities                                          |   | 4,131         |   | 155                    |   | (36                            | )      | 4,250                       |   |
|                                                                |   |          |   |                   |   |                           |   |                        |   |
| **Long-Term Debt and Capital Lease  Obligations**                   |   | 5,738         |   | 249                    |   | —                         |   | 5,987                       |   |
| **Pension and Postretirement Benefits**                             |   | 1,892         |   | —                 |   | —                         |   | 1,892                       |   |
| **Deferred Income Taxes**                                           |   | —        |   | 871                    |   | —                         |   | 871                         |   |
| **Other Liabilities**                                               |   | 591           |   | 19                     |   | (37                            | )      | 573                         |   |
|                                                                |   |          |   |                   |   |                           |   |                        |   |
| **Mandatorily Redeemable Preferred Security**                       |   | 545           |   | —                 |   | —                         |   | 545                         |   |
| **Preferred Redeemable Stock**                                      |   | —        |   | 226                    |   | —                         |   | 226                         |   |
|                                                                |   |          |   |                   |   |                           |   |                        |   |
| **Common Stockholders’ Equity  (Deficit)**                     |   | (40           | )      | 383                    |   | (1,054                         | )      | (711                        | )      |
| **Total Liabilities and Stockholders’  Equity (Deficit)**      |   | $             | 12,857 |                   | $      | 1,903                          |   | $                           | (1,127 | ) | $ | 13,633 |   |

 

 

9

----

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

 

          For thequarter ended June 30, 2002, the Company reported a net loss of $93 million andan operating loss of $46 million.  Thenet loss per common share was $1.08 compared with a net loss per common shareof $0.65 for the second quarter of 2001. The Company experienced continuing softness in business traffic causedby the weak U.S. economy and increased travel times due to heightened airportsecurity measures which continues to negatively impact corporate travel andyields industry-wide.

 

          Substantiallyall of the Company’s results of operations are attributable to Northwest andthe following discussion pertains primarily to Northwest.  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.

 

          Information with respect to the Company’s operatingstatistics follows (1):

 
|                                                       |   | **Three  months ended  June 30** |   | **%  Chg.** |   | **Six months  ended  June 30** |   | **%  Chg.** |   |
|------------------------------------------------------------|--------|----------------------------------|--------|-------------|--------|--------------------------------|--------|-------------|--------|
| Scheduled service:                                         |   | **2002**                         |   | **2001**    |   |                           |   | **2002**    |   | **2001** |   |   |   |
| Available seat  miles (ASM) (millions)                     |   | 23,537                           |   | 26,233      |   | (10.3                          | )      | 45,299      |   | 51,220 |   | (11.6 | ) |
| Revenue  passenger miles (millions)                        |   | 18,581                           |   | 20,447      |   | (9.1                           | )      | 35,118      |   | 38,713 |   | (9.3 | ) |
| Passenger load  factor (percent)                           |   | 78.9                             |   | 77.9        |   | 1.0                            | pts.   | 77.5        |   | 75.6 |   | 1.9 | pts. |
| Revenue  passengers (thousands)                            |   | 13,627                           |   | 15,049      |   | (9.4                           | )      | 25,526      |   | 28,412 |   | (10.2 | ) |
| Yield per  revenue passenger mile (cents)                  |   | 10.69                            |   | 11.16       |   | (4.2                           | )      | 10.65       |   | 11.49 |   | (7.3 | ) |
| Passenger  revenue per scheduled ASM (cents)               |   | 8.44                             |   | 8.70        |   | (3.0                           | )      | 8.26        |   | 8.69 |   | (4.9 | ) |
|                                                       |   |                             |   |        |   |                           |   |        |   |   |   |   |   |
| Operating  revenue per total ASM (cents) (2)               |   | 9.21                             |   | 9.52        |   | (3.3                           | )      | 9.04        |   | 9.49 |   | (4.7 | ) |
| Operating expense  per total ASM (cents) (2)               |   | 9.34                             |   | 9.55        |   | (2.2                           | )      | 9.49        |   | 9.75 |   | (2.7 | ) |
| Operating  expense per total ASM, fuel neutral (cents) (2) |   | 9.58                             |   | 9.55        |   | 0.3                            |   | 9.88        |   | 9.75 |   | 1.3 |   |
|                                                       |   |                             |   |        |   |                           |   |        |   |   |   |   |   |
| Cargo ton miles  (millions)                                |   | 572                              |   | 568         |   | 0.7                            |   | 1,052       |   | 1,108 |   | (5.1 | ) |
| Cargo revenue  per ton mile (cents)                        |   | 30.79                            |   | 32.11       |   | (4.1                           | )      | 30.84       |   | 33.09 |   | (6.8 | ) |
|                                                       |   |                             |   |        |   |                           |   |        |   |   |   |   |   |
| Fuel gallons  consumed (millions)                          |   | 479                              |   | 545         |   | (12.1                          | )      | 924         |   | 1,057 |   | (12.6 | ) |
| Average fuel  cost per gallon, excluding fuel tax (cents)  |   | 68.83                            |   | 81.71       |   | (15.8                          | )      | 63.98       |   | 84.54 |   | (24.3 | ) |
|                                                       |   |                             |   |        |   |                           |   |        |   |   |   |   |   |
| Number of  operating aircraft at end of period             |   |                             |   |        |   |                           |   | 438         |   | 438 |   | — |   |
| Full-time  equivalent employees at end of period           |   |                             |   |        |   |                           |   | 46,260      |   | 52,997 |   | (12.7 | ) |

 

(1)           Allstatistics exclude Pinnacle Airlines, Inc. (“Pinnacle Airlines”), formerlyExpress Airlines I, Inc., a wholly-owned Northwest Airlink regional carrier.

(2)              Excludesthe estimated revenues and expenses associated with the operation ofNorthwest’s fleet of Boeing 747 freighter aircraft, MLT Inc. (a subsidiary ofNorthwest) and gain/loss on disposal of assets.  The six months ended June 30, 2001 also excludes the provisionfor AMFA retroactive pay and benefits

# ** **

# **Results ofOperations—Three months ended June 30, 2002 and 2001**

 

*OperatingRevenues*.  Operating revenues decreased 11.4% ($309million).  System passenger revenuesdecreased 13.0% ($297 million), excluding Pinnacle Airlines.  The decrease in system passenger revenueswas primarily attributable to a 10.3% decrease in scheduled service ASMs and a3.0% decrease in passenger revenues per ASM (“RASM”).  System passenger load factor increased 1.0 point to 78.9% for thethree months ended June 30, 2002. Pinnacle Airlines passenger revenues, net of intercompany eliminations,increased 37.5% ($18 million) to $66 million due to increased capacity from 18additional Bombardier CRJ aircraft since June 30, 2001 and higher rates under anew airline services agreement with Northwest that was effective March 1, 2002.

 

 

10

----

 

The following analysis by region is based oninformation reported to the Department of Transportation (“DOT”) and excludesPinnacle Airlines:

** **
|                                |   | **System** |   | **Domestic** |   | **Pacific** |   | **Atlantic** |   |
|-------------------------------------|--------|------------|--------|--------------|--------|-------------|--------|--------------|--------|
| **2002**                            |   |       |   |         |   |        |   |         |   |
| Passenger  revenues (in millions)   |   | $          | 1,986  |         | $      | 1,360       |   | $            | 369    |   | $ | 257 |   |
|                                |   |       |   |         |   |        |   |         |   |
| **Increase  (Decrease) from 2001:** |   |       |   |         |   |        |   |         |   |
| Passenger  revenues (in millions)   |   | (297       | )      | (219         | )      | (62         | )      | (16          | )      |
| Percent                             |   | (13.0      | )%     | (13.8        | )%     | (14.3       | )%     | (5.9         | )%     |
|                                |   |       |   |         |   |        |   |         |   |
| Scheduled  service ASMs (capacity)  |   | (10.3      | )%     | (9.8         | )%     | (13.1       | )%     | (7.4         | )%     |
| Passenger load  factor              |   | 1.0        | pts.   | 1.9          | pts.   | (0.5        | )pts.  | 0.2          | pts.   |
| Yield                               |   | (4.2       | )%     | (6.9         | )%     | (0.8        | )%     | 1.4          | %      |
| Passenger RASM                      |   | (3.0       | )%     | (4.5         | )%     | (1.4        | )%     | 1.6          | %      |
|                                     |        |            |        |              |        |             |        |              |        |  |  |  |  |

 

Domestic passenger revenues decreased primarily due tolower capacity and yields, partially offset by a higher passenger loadfactor.  Northwest continued toexperience a weakened yield environment resulting from the decline in businesstravelers and industry fare discounting. Despite longer travel times due to heightened security screeningprocedures at the airports, domestic traffic has been progressively recovering,reflecting stronger leisure demand.

 

Pacific passenger revenues decreased primarily due tolower capacity.  Capacity was reduced asa result of the weakened U.S. economy. The average yen per U.S. dollar exchange rates for the three monthsended June 30, 2002 and 2001 were 129 and 123, respectively, a 4.4% weakeningin the buying power of the yen from the prior year.

 

Atlantic passenger revenues decreased primarily due tolower capacity, partially offset by higher yields and passenger loadfactor.  Capacity continues to be lowerdue to the weakened U.S. and international economies.

 

Cargo revenues decreased 3.3% ($6 million) to $176million primarily due to a 4.1% decrease in cargo revenue yield per tonmile.  Other revenues decreased 11.9%($24 million) due to decreased revenues from MLT Inc., KLM joint venturesettlements, other transportation service fees and support services, partiallyoffset by an increase in frequent flyer program partnership revenue.

 

*OperatingExpenses*.Operating expenses decreased 10.9% ($299 million).  Operating capacity was reduced 10.2% to 23.58 billion totalservice ASMs due to the continued lower demand environment.  Operating expense per total ASM decreased2.2%.

 

Salaries, wages and benefits decreased 3.5% ($34million) due to a decrease in average full-time equivalent employees partiallyoffset by higher pension expenses resulting from the new AMFA contract and alower actuarial discount rate.  Aircraftfuel and taxes decreased 24.4% ($116 million) due to a 15.8% decrease inaverage fuel cost per gallon, including an $8 million gain from hedgingtransactions, and 12.1% fewer gallons consumed as a result of fewer ASMs andthe use of more fuel efficient aircraft. Selling and marketing (consisting of commissions, credit card fees,computer reservation system fees, advertising and promotion expenses) decreased29.3% ($83 million) primarily driven by elimination of North America normalcommissions and lower revenues system wide. Aircraft maintenance materials and repairs decreased 18.4% ($34 million)as a result of a lower repair volume in 2002 due to retirements and removalfrom service of older aircraft as well as higher third-party engine andairframe repairs in the second quarter of 2001.  Depreciation and amortization increased 0.8% ($1 million) due toadditional owned aircraft partially offset by the elimination of internationalroute amortization.  Other expensesdeclined 9.7% ($45 million) largely due to decreased personnel expenses,decreased outside services and a reduced level of passenger food service,partially offset by higher insurance costs.

 

 

11

----

 

*OtherIncome and Expense.*Othernon–operating expense increased 69.6% ($39 million) primarily due tohigher interest expense related to increased debt levels and lower interestincome as a result of lower interest rates.

 

**Results of Operations—Six monthsended June 30, 2002 and 2001**

 

*OperatingRevenues.*  Operating revenues decreased 13.9% ($740million).  System passenger revenuesdecreased 15.9% ($709 million), excluding Pinnacle Airlines.  The decrease in system passenger revenueswas primarily attributable to a 11.6% decrease in scheduled service ASMs and a4.9% decrease in RASM.  System passengerload factor increased 1.9 points to 77.5% for the six months ended June 30,2002.  Pinnacle Airlines passenger revenues,net of intercompany eliminations, increased 44.9% ($40 million) to $129 milliondue to increased capacity from 18 additional Bombardier CRJ aircraft since June30, 2001, and higher rates under a new airline services agreement withNorthwest that was effective March 1, 2002.

 

The following analysis by region is based on informationreported to the DOT and excludes Pinnacle Airlines:

** **
|                                |   | **System** |   | **Domestic** |   | **Pacific** |   | **Atlantic** |   |
|-------------------------------------|--------|------------|--------|--------------|--------|-------------|--------|--------------|--------|
| **2002**                            |   |       |   |         |   |        |   |         |   |
| Passenger  revenues (in millions)   |   | $          | 3,741  |         | $      | 2,613       |   | $            | 708    |   | $ | 420 |   |
|                                |   |       |   |         |   |        |   |         |   |
| **Increase  (Decrease) from 2001:** |   |       |   |         |   |        |   |         |   |
| Passenger  revenues (in millions)   |   | (709       | )      | (480         | )      | (170        | )      | (59          | )      |
| Percent                             |   | (15.9      | )%     | (15.5        | )%     | (19.3       | )%     | (12.2        | )%     |
|                                |   |       |   |         |   |        |   |         |   |
| Scheduled  service ASMs (capacity)  |   | (11.6      | )%     | (10.0        | )%     | (14.8       | )%     | (12.4        | )%     |
| Passenger load  factor              |   | 1.9        | pts.   | 1.6          | pts.   | 2.3         | pts.   | 3.6          | pts.   |
| Yield                               |   | (7.3       | )%     | (8.2         | )%     | (7.8        | )%     | (4.1         | )%     |
| Passenger RASM                      |   | (4.9       | )%     | (6.2         | )%     | (5.4        | )%     | 0.2          | %      |
|                                     |        |            |        |              |        |             |        |              |        |  |  |  |  |

 

Domestic passenger revenues decreased primarily due tolower capacity and yields, partially offset by a higher passenger loadfactor.  Northwest continued toexperience the effects of the September 11, 2001 terrorist attacks,particularly in the first quarter of 2002. A weak U.S. economy and increased travel times due to heightened airportsecurity measures have caused a continuing decline in corporate business andleisure travel, which has adversely impacted yields throughout the year.

 

Pacific passenger revenues decreased primarily due tolower capacity and yields, partially offset by a higher passenger loadfactor.  Capacity was reduced as aresult of the September 11, 2001 terrorist attacks and the weakened Asianeconomy.  Yields were also lower due tothe weakness in the Asian economy and the weak yen.  The average yen per U.S. dollar exchange rates for the six monthsended June 30, 2002 and 2001 were 131 and 121, respectively, a 9.0% weakeningin the buying power of the yen from the prior year.

 

Atlantic passenger revenues decreased primarily due tolower capacity and yields, partially offset by a higher passenger loadfactor.  Capacity and yields were lowerdue to the September 11, 2001 terrorist attacks and weakened U.S. andinternational economies.

 

Cargo revenues decreased 11.7% ($43 million) to $324million due to a 6.8% decrease in cargo revenue yield per ton mile and 5.1%fewer cargo ton miles, resulting from reduced U.S. demand for Asian goods andthe weakened yen exchange rate.  Otherrevenues decreased 6.7% ($28 million) due primarily to decreased revenues fromMLT Inc., KLM joint venture settlements, other transportation service fees andsupport services, partially offset by an increase in frequent flyer programpartnership revenue.

 

*OperatingExpenses*.  Operating expenses decreased 13.8% ($770million).  Operating capacity wasreduced 11.5% to 45.40 billion total service ASMs due primarily to theSeptember 11, 2001 terrorist attacks and the weakened economy.  Operating expense per total ASM decreased2.7%, excluding the $92 million provision for AMFA retroactive pay and benefitsin 2001.

 

 

12

----

 

Salaries, wages and benefits decreased 8.0% ($162million) due to a decrease in average full-time equivalent employees of 12.7%and a 2001 provision for retroactive wages and benefits related to the AMFAcollective bargaining agreement.  Thisdecline was partially offset by higher wages and higher pension expensesresulting from the new AMFA contract and a lower actuarial discount rate.  Aircraft fuel and taxes decreased 31.9%($305 million) due to a 24.3% decrease in the average fuel cost per gallon,including a $23 million gain from hedging transactions, and 12.6% fewer gallonsconsumed as a result of fewer ASMs and use of more fuel efficientaircraft.  Selling and marketing(consisting of commissions, credit card fees, computer reservation system fees,advertising and promotion expenses) decreased 26.0% ($147 million) due to lowerrevenues system wide and, in particular, in the Pacific where commission ratesare higher.  Aircraft maintenancematerials and repairs decreased 22.1% ($84 million) as a result of a lowerrepair volume in 2002 due to retirements and removal from service of olderaircraft as well as higher third-party engine and airframe repairs in2001.  Depreciation and amortizationincreased 3.1% ($8 million) due to additional owned aircraft partially offsetby the elimination of international route amortization.  Other expenses declined 9.5% ($89 million)largely due to decreased personnel expenses and a reduced level of passengerfood service, partially offset by higher insurance costs.

 

*OtherIncome and Expense.*  Other non–operating expense increased72.0% ($67 million) primarily due to higher interest expense related toincreased debt levels and lower interest income as a result of lower interestrates.  A $27 million gain from the saleof the Company’s remaining shares of Continental recorded in 2001 was offset byhigher earnings from affiliates and a gain from a litigation settlement in2002.

 

# **Liquidity and Capital Resources**

 

At June 30, 2002, the Company had cash, cashequivalents and restricted short-term investments of $2.81 billion.  This amount includes $88 million ofrestricted short-term investments, resulting in total liquidity of $2.72billion.

 

Net cash provided by operating activities for the sixmonths ended June 30, 2002 was $110 million, a $149 million decrease from the$259 million cash provided by operating activities for the six months endedJune 30, 2001.  The decrease in cashprovided by operating activities is due primarily to the payment of aviationtaxes deferred for the period of September 11, 2001 through January 15, 2002and other changes in working capital.

 

Investing activities in the six months ended June 30,2002 consisted primarily of the purchase of 11 Airbus A319 aircraft, two Boeing747-400 aircraft, two Boeing 757-200 aircraft and one Airbus A320 aircraft,costs to commission aircraft before entering revenue service, aircraftmodifications and aircraft deposits. Investing activities in the six months ended June 30, 2001 consistedprimarily of the January sale of 6.7 million shares of Continental Class ACommon Stock held by the Company for $450 million and the subsequent sale ofthe remaining shares of Continental Class B Common Stock held by the Companyfor $132 million, partially offset by the purchase of eight Airbus A319aircraft, one Boeing 757-200 aircraft, costs to commission aircraft beforeentering revenue service, aircraft modifications and aircraft deposits.

 

Financing activities in the six months ended June 30,2002 consisted primarily of the issuance of $300 million of 9.875% unsecurednotes due 2007, the financing of 11 Airbus A319 aircraft, one Boeing 747-400aircraft and one Airbus A320 aircraft with escrowed funds from pass-throughcertificate offerings issued in 2001, financing of two Boeing 757-200 aircraftwith long-term bank debt, the sale and leaseback of one Boeing 747-400, and thepayment of debt and capital lease obligations. Financing activities in the six months ended June 30, 2001 consistedprimarily of the Company’s draw in March, and subsequent repayment in May, of$1.10 billion under its credit facilities, the issuance of $300 million of8.875% unsecured notes due 2006, the financing of eight Airbus A319 aircraft,seven of which were financed with escrowed funds from pass-through certificateofferings and one with long-term bank debt, and the payment of debt and capitallease obligations.  At June 30, 2002,$348 million of unused pass-through trust certificate proceeds were held inescrow to finance a portion of the aircraft scheduled for delivery in theremainder of 2002, and is not included in the Company’s debt or cash balances.

 

In addition to the purchased aircraft discussed above,the Company took delivery of seven Bombardier CRJ aircraft during the sixmonths ended June 30, 2002.  Theseaircraft were financed with long-term operating leases and subsequentlysubleased to Pinnacle Airlines.

 

 

13

----

 

In August 2002,the Company completed an offering of $749 million of pass-through trustcertificates to finance or refinance the acquisition of 11 new Airbus A319aircraft, six new Boeing 757-300 aircraft and three new Airbus A330 aircraftscheduled to be delivered between October 2002 and December 2003.  The cash proceeds from the issuance ofcertificates are invested and held in escrow with a depositary bank and enablethe Company to finance the acquisition of these aircraft through secured debtfinancing or leveraged leases.  Ifleveraged leases are obtained for certain of these aircraft, under which theaircraft may be sold and leased back to Northwest, the debt underlyingpass-through certificates will not be direct obligations of the Company orNorthwest.

 

The current aircraft delivery schedule provides forthe acquisition of 84 aircraft over the next five years.  See Note 5 to the Condensed ConsolidatedFinancial Statements for additional discussion of aircraft capital commitments.

 

As of June 30, 2002, the Company had a $51 millionreceivable from the U.S. Government related to a grant under the AirTransportation Safety and System Stabilization Act.  The Company has filed its final application and has haddiscussions with representatives of the Department Of Transportation.  The Company is awaiting the results of thosediscussions.

 

**Other Information**

 

*Labor Agreements.*Approximately 91% of the Company’s employees aremembers of collective bargaining units. At June 30, 2002, all of the Company’s union workers were undercontract.

 

The Company’s collective bargaining agreement with theAir Line Pilots Association (“ALPA”) becomes amendable on September 13, 2003after ALPA ratified a one year extension of their current collective bargainingagreement on June 4, 2002.  Theagreement includes a pay increase of 4.5 percent on September 13, 2002 and asecond pay increase of 5.5 percent on September 12, 2003.  The Company and ALPA also agreed to begincontract talks in January 2003, with the mutual goal of achieving a newagreement by September 13, 2003.

 

*Aircraft Fuel*. The Company’s earnings are affected by changes inthe price and availability of aircraft fuel. In order to provide a measure of control over price and supply, theCompany trades and ships fuel and maintains fuel storage facilities to supportits flight operations.  The Company alsomanages a portion of the price risk of fuel costs primarily utilizing futurescontracts traded on regulated exchanges and fuel swap agreements.  As of June 30, 2002, the Company hasrecorded $8 million of unrealized gains (net of $5 million of hedgingineffectiveness) in accumulated other comprehensive income (loss) as a resultof fuel hedge contracts, which if realized, will be recorded as a reduction tofuel expense when the related fuel inventory is utilized.  As of June 30, 2002, the Company has hedgedthe price of approximately 49% of its remaining 2002 fuel requirements.

 

*Foreign Currency.* The Company is exposed to the effect of foreigncurrency exchange rate fluctuations on the U.S. dollar value of foreigncurrency-denominated operating revenues and expenses.  The Company’s largest exposure comes from the Japanese yen.  The Company’s effective average yen per U.S.dollar exchange rate, including hedge activity for the three months ended June30, 2002 and 2001, was 116 and 102, respectively.  From time to time, the Company uses financial instruments tohedge its exposure to the Japanese yen. As of June 30, 2002, the Company has recorded $10 million of unrealizedgains in accumulated other comprehensive income (loss) associated with forward contractspurchased to hedge a portion of its 2002 yen-denominated sales.  Hedging gains or losses are recorded inrevenue when transportation is provided. During the three months ended June 30, 2002, the Company realizedpre-tax gains of $8 million associated with forward contracts purchased tohedge its yen-denominated sales.  AtJune 30, 2002, the Company has hedged approximately 67% of its anticipatedyen-denominated sales at an average rate of 113 yen per U.S. dollar for theremainder of 2002.  In July 2002, theCompany has hedged approximately 40% of its anticipated yen-denominated salesfor the third and fourth quarter of 2003 at an average rate of 114 yen per U.S.dollar.

 

*Forward-Looking Statements.* Certain of the statements madethroughout Management’s Discussion and Analysis of Financial Condition andResults of Operations are forward-looking and are based upon informationavailable to the Company on the date hereof. The Company through its management may also from time to time make oralforward-looking statements.  Inconnection with the “safe harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995, the Company is hereby identifying importantfactors that could cause actual results to differ materially from thosecontained in any forward-looking statement made by or on behalf of theCompany.  Any such statement isqualified by reference to the following cautionary statements.

 

It is not reasonablypossible to itemize all of the many factors and specific events that couldaffect the outlook of an airline operating in the global economy.  Such risks and uncertainties include, amongothers, the future level of air travel demand, the Company’s future loadfactors and yields, the airline pricing environment, increased costs for security,the cost and availability of aviation insurance coverage and war risk coverage,the general economic condition of the U. S.

 

 

14

----

 

and other regions of the world, the price andavailability of jet fuel, labor negotiations both at other carriers and theCompany, low-fare carrier expansion, capacity decisions of other carriers,actions of the U.S. and foreign governments, foreign currency exchange ratefluctuation, inflation and other factors discussed herein. Additionalinformation with respect to these factors and these and other events that couldcause differences between forward-looking statements and future actual resultsis contained in Item 1. “Risk Factors Related to Northwest and NWA Corp.” and“Risk Factors Related to the Airline Industry” in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2001.

 

Developments in any of these areas, as well as otherrisks and uncertainties detailed from time to time in the Company’s Securitiesand Exchange Commission filings, could cause the Company’s results to differfrom results that have been or may be projected by or on behalf of theCompany.  The Company cautions that theforegoing list of important factors is not inclusive.  The Company undertakes no obligation to publicly update or reviseany forward-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.

 

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

 

Informationrequired by this item is provided under the captions “Aircraft Fuel” and“Foreign Currency” within “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in this Quarterly Report on Form10-Q.  Also see “Item 7a. Quantitativeand Qualitative Disclosures About Market Risk” within the Company’s Annual Reporton Form 10-K for 2001.

 

 

15

----

PART II.  OTHER INFORMATION

 

**Item 1.    LegalProceedings**

 

Referenceis made to “Item 3. Legal Proceedings” in the Company’s Annual Report on Form10-K for 2001.  In addition, in theordinary course of its business, the Company is party to various other legalactions 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**

 

TheCompany held its Annual Meeting of Stockholders on May 3, 2002.  The stockholders of the Company voted onthree items at the Annual Meeting.  Thefirst was a proposal to elect eleven Common Stock directors, each to serveuntil the next annual meeting of stockholders. Votes were cast by the holders of the Common Stock as follows:

 
| **Nominee**           |   | **Votes For** |   | **Votes Withheld** | ** ** |
|-----------------------|--------|---------------|--------|--------------------|------------|
| Richard H.  Anderson  |   | 80,174,469    |   | 4,734,827          |       |
| Richard C. Blum       |   | 75,297,509    |   | 9,611,787          |       |
| Alfred A.  Checchi    |   | 74,542,288    |   | 10,367,008         |       |
| Doris K. Goodwin      |   | 83,989,495    |   | 919,801            |       |
| Dennis F.  Hightower  |   | 84,079,450    |   | 829,846            |       |
| Frederic V.  Malek    |   | 75,275,810    |   | 9,633,486          |       |
| Walter F.  Mondale    |   | 83,074,466    |   | 1,834,830          |       |
| V.A. Ravindran        |   | 84,088,911    |   | 820,385            |       |
| Douglas M.  Steenland |   | 80,236,165    |   | 4,673,131          |       |
| Leo M. van Wijk       |   | 75,338,453    |   | 9,570,843          |       |
| Gary L. Wilson        |   | 83,904,263    |   | 1,005,033          |       |

 

Thesecond item was the election by the holders of the outstanding Series CPreferred Stock of a slate of three Series C directors, Messrs. Benning,Kourpias and Ristow, each to serve until the next annual meeting ofstockholders.  The Series C directorswere elected by the following vote:

 
| Votes in favor |   | 4,823,768 |   |
|----------------|--------|-----------|--------|
| Votes against  |   | 206       |   |
| Abstentions    |   | 228       |   |

 

Thethird item was a stockholder proposal requesting that the Board of Directorsredeem the Company’s poison pill and not issue a poison pill unless theissuance is voted on by the stockholders of the Company. The stockholderproposal was not approved by the stockholders. The vote with respect to the proposal was as follows:

 
| Votes in favor   |   | 38,485,376 |   |
|------------------|--------|------------|--------|
| Votes against    |   | 45,462,844 |   |
| Abstentions      |   | 307,466    |   |
| Broker non-votes |   | 7,233,821  |   |

 

# **Item 6.    Exhibits**

 
| (a)    | Exhibits: |                                                                                                                         |
|--------|-----------|------------------------------------------------------------------------------------------------------------------------------|
|   | 12.1      | Computation of Ratio of Earnings to Fixed Charges.                                                                           |
|   | 12.2      | Computation of Ratio of Earnings to Fixed Charges  and Preferred Stock Requirements.                                         |
|   | 99.1      | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 |
|   | 99.2      | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 |

 

 

16

----

#### SIGNATURE

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized this 9th day of August 2002.

 
| NORTHWEST AIRLINES CORPORATION |
|--------------------------------|
|                           |
| By                             | /s/  James G. Mathews |
|                           | James G. Mathews*Vice  President - Accounting & Tax 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.                                         |
| 99.1        | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 |
| 99.2        | Certification Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 |

 

 

17

----