**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

 

**Washington,D.C. 20549**

 

**FORM 10-Q**

** **

| **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended March 31, 2003**

 

**Commissionfile number 0-23642**

 

**NORTHWEST AIRLINES CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                                                                                                          |   | **41-1905580**                       |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization)                                                        |   | (I.R.S. Employer Identification No.) |
|                                                                                                                  |   |                                 |
| **2700  Lone Oak Parkway, Eagan, Minnesota**                                                                          |   | **55121**                            |
| (Address of principal executive offices)                                                                              |   | (Zip Code)                           |
|                                                                                                                  |   |                                 |
| Registrant’s telephone number, including area  code      **(612)   726-2111** |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý      No  o

 

Asof March 31, 2003, there were 85,835,177 shares of the registrant’s CommonStock outstanding.

 

 

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*Northwest Airlines Corporation*

 
| PART I.   FINANCIAL INFORMATION |
|--------------------------------------|
|                                 |
|                                 | Item 1. | Financial Statements |
|                                 |   |   |
|                                 |   | Condensed Consolidated Statements of  Operations - Three months   ended March 31, 2003 and 2002. |
|                                 |   |   |
|                                 |   | Condensed Consolidated Balance Sheets -  March 31, 2003 and   December 31, 2002 |
|                                 |   | . |
|                                 |   | Condensed Consolidated Statements of Cash  Flows - Three months ended   March 31, 2003 and 2002. |
|                                 |   |   |
|                                 |   | Notes to Condensed Consolidated Financial  Statements |
|                                 |
|                                 | The Computations of  Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and  Preferred Stock Requirements are attached hereto and filed as Exhibits 12.1  and 12.2. |
|                                 |
|                                 | Item 2. | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                                 |   |   |
|                                 | Item 3. | Quantitative and Qualitative Disclosures About  Market Risk |
|                                 |   |   |
|                                 | Item 4. | Controls and Procedures |
|                                 |
| PART II.   OTHER INFORMATION    |
|                                 |
|                                 | Item 1. | Legal Proceedings |
|                                 | Item 6. | Exhibits and Reports on Form 8-K |
|                                 |
| SIGNATURE                            |
|                                 |
| CERTIFICATIONS                       |
|                                 |
| EXHIBIT INDEX                        |

 

2

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PART I.  FINANCIAL INFORMATION

 

**Item 1****.  Financial****Statements**

 

*NorthwestAirlines Corporation*

 

CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS

 
|                                                          |   | **Three  Months Ended  March 31** |   |
|---------------------------------------------------------------|--------|-----------------------------------|--------|
| ***(Unaudited, in millions except per share amounts)***       |   | **2003**                          |   | **2002** |   |
| **Operating  Revenues**                                       |   |                              |   |   |   |
| Passenger                                                     |   | $                                 | 1,848  |   | $ | 1,818 |   |
| Cargo                                                         |   | 167                               |   | 148 |   |
| Other                                                         |   | 235                               |   | 214 |   |
| Total operating  revenues                                     |   | 2,250                             |   | 2,180 |   |
|                                                          |   |                              |   |   |   |
| **Operating  Expenses**                                       |   |                              |   |   |   |
| Salaries, wages  and benefits                                 |   | 1,045                             |   | 924 |   |
| Aircraft fuel  and taxes                                      |   | 411                               |   | 291 |   |
| Selling and  marketing                                        |   | 176                               |   | 218 |   |
| Other rentals  and landing fees                               |   | 143                               |   | 123 |   |
| Depreciation and  amortization                                |   | 142                               |   | 135 |   |
| Aircraft  maintenance materials and repairs                   |   | 133                               |   | 145 |   |
| Aircraft rentals                                              |   | 118                               |   | 113 |   |
| Other                                                         |   | 408                               |   | 427 |   |
| Total operating  expenses                                     |   | 2,576                             |   | 2,376 |   |
|                                                          |   |                              |   |   |   |
| **Operating  Loss**                                           |   | (326                              | )      | (196 | ) |
|                                                          |   |                              |   |   |   |
| **Other  Income (Expense)**                                   |   |                              |   |   |   |
| Interest  expense, net                                        |   | (111                              | )      | (94 | ) |
| Interest of  mandatorily redeemable preferred security holder |   | (6                                | )      | (5 | ) |
| Investment  income                                            |   | 9                                 |   | 11 |   |
| Other                                                         |   | 8                                 |   | 23 |   |
| Total other  income (expense)                                 |   | (100                              | )      | (65 | ) |
|                                                          |   |                              |   |   |   |
| **Loss  Before Income Taxes**                                 |   | (426                              | )      | (261 | ) |
|                                                          |   |                              |   |   |   |
| Income tax  benefit                                           |   | (30                               | )      | (90 | ) |
|                                                          |   |                              |   |   |   |
| **Net  Loss**                                                 |   | $                                 | (396   | ) | $ | (171 | ) |
|                                                          |   |                              |   |   |   |
| Loss per common  share:                                       |   |                              |   |   |   |
| *Basic*                                                       |   | $                                 | (4.62  | ) | $ | (2.01 | ) |
|                                                          |   |                              |   |   |   |
| *Diluted*                                                     |   | $                                 | (4.62  | ) | $ | (2.01 | ) |
|                                                          |   |                              |   |   |   |
| Average shares  used in computation:                          |   |                              |   |   |   |
| *Basic*                                                       |   | 86                                |   | 85 |   |
| *Diluted*                                                     |   | 86                                |   | 85 |   |

 

*See accompanying notes.*

 

3

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*NorthwestAirlines Corporation*

 

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ***(Unaudited, in  millions)***                                                                                        |   | **March 31  2003** |   | **December  31  2002** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------|--------|
|                                                                                                                   |   |               |   |                   |   |
| **Assets**                                                                                                             |   |               |   |                   |   |
|                                                                                                                   |   |               |   |                   |   |
| **Current  Assets**                                                                                                    |   |               |   |                   |   |
| Cash and cash  equivalents                                                                                             |   | $                  | 2,155  |                   | $      | 2,097 |   |
| Restricted  short-term investments                                                                                     |   | 185                |   | 100                    |   |
| Accounts receivable,  net                                                                                              |   | 413                |   | 663                    |   |
| Flight equipment  spare parts, net                                                                                     |   | 220                |   | 230                    |   |
| Prepaid expenses  and other                                                                                            |   | 414                |   | 420                    |   |
| Total current  assets                                                                                                  |   | 3,387              |   | 3,510                  |   |
|                                                                                                                   |   |               |   |                   |   |
| **Property  and Equipment**                                                                                            |   |               |   |                   |   |
| Flight  equipment, net                                                                                                 |   | 6,062              |   | 5,985                  |   |
| Other property  and equipment, net                                                                                     |   | 1,038              |   | 1,046                  |   |
| Total property  and equipment                                                                                          |   | 7,100              |   | 7,031                  |   |
|                                                                                                                   |   |               |   |                   |   |
| **Flight  Equipment Under Capital Leases, net**                                                                        |   | 287                |   | 289                    |   |
|                                                                                                                   |   |               |   |                   |   |
| **Other  Assets**                                                                                                      |   |               |   |                   |   |
| Intangible  pension asset                                                                                              |   | 818                |   | 857                    |   |
| International  routes, net                                                                                             |   | 634                |   | 634                    |   |
| Investments in  affiliated companies                                                                                   |   | 188                |   | 255                    |   |
| Other                                                                                                                  |   | 724                |   | 713                    |   |
| Total other  assets                                                                                                    |   | 2,364              |   | 2,459                  |   |
| Total Assets                                                                                                           |   | $                  | 13,138 |                   | $      | 13,289 |   |
|                                                                                                                   |   |               |   |                   |   |
| **Liabilities  and Stockholders’ Equity (Deficit)**                                                               |   |               |   |                   |   |
|                                                                                                                   |   |               |   |                   |   |
| **Current  Liabilities**                                                                                               |   |               |   |                   |   |
| Air traffic  liability                                                                                                 |   | $                  | 1,308  |                   | $      | 1,216 |   |
| Accounts payable  and other liabilities                                                                                |   | 2,767              |   | 2,710                  |   |
| Current  maturities of long-term debt and capital lease obligations                                                    |   | 497                |   | 346                    |   |
| Total current  liabilities                                                                                             |   | 4,572              |   | 4,272                  |   |
|                                                                                                                   |   |               |   |                   |   |
| **Long-Term  Debt**                                                                                                    |   | 6,187              |   | 6,250                  |   |
|                                                                                                                   |   |               |   |                   |   |
| **Long-Term  Obligations Under Capital Leases**                                                                        |   | 389                |   | 386                    |   |
|                                                                                                                   |   |               |   |                   |   |
| **Deferred  Credits and Other Liabilities**                                                                            |   |               |   |                   |   |
| Pension and  postretirement benefits                                                                                   |   | 3,193              |   | 3,050                  |   |
| Deferred income  taxes                                                                                                 |   | 114                |   | 135                    |   |
| Other                                                                                                                  |   | 686                |   | 679                    |   |
| Total deferred  credits and other liabilities                                                                          |   | 3,993              |   | 3,864                  |   |
|                                                                                                                   |   |               |   |                   |   |
| **Mandatorily  Redeemable Preferred Security of****Subsidiary Which Holds Solely  Non Recourse Obligation of Company** |   | 564                |   | 553                    |   |
| **Redeemable  Preferred Stock**                                                                                        |   | 226                |   | 226                    |   |
|                                                                                                                   |   |               |   |                   |   |
| **Common  Stockholders’ Equity (Deficit)**                                                                        |   |               |   |                   |   |
| Common stock                                                                                                           |   | 1                  |   | 1                      |   |
| Additional  paid-in capital                                                                                            |   | 1,455              |   | 1,455                  |   |
| Accumulated  deficit                                                                                                   |   | (1,712             | )      | (1,316                 | )      |
| Accumulated  other comprehensive income (loss)                                                                         |   | (1,482             | )      | (1,347                 | )      |
| Treasury stock                                                                                                         |   | (1,055             | )      | (1,055                 | )      |
| Total common  stockholders’ equity (deficit)                                                                      |   | (2,793             | )      | (2,262                 | )      |
| Total  Liabilities and Stockholders’ Equity (Deficit)                                                             |   | $                  | 13,138 |                   | $      | 13,289 |   |

 

*Seeaccompanying notes.*

 

4

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*NorthwestAirlines Corporation*

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 
|                                                                                       |   | **Three  Months Ended  March 31** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| ***(Unaudited, in  millions)***                                                            |   | **2003**                          |   | **2002** |   |
|                                                                                       |   |                              |   |   |   |
| **Cash  Flows from Operating Activities**                                                  |   |                              |   |   |   |
| Net loss                                                                                   |   | $                                 | (396   | ) | $ | (171 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |   |                              |   |   |   |
| Depreciation and  amortization                                                             |   | 142                               |   | 135 |   |
| Income tax  benefit                                                                        |   | (30                               | )      | (90 | ) |
| Net receipts of  income taxes                                                              |   | 217                               |   | 103 |   |
| Pension and  other postretirement benefit contributions less than expense                  |   | 164                               |   | 74 |   |
| Other, net                                                                                 |   | 4                                 |   | 38 |   |
| Changes in  certain assets and liabilities                                                 |   | 86                                |   | (267 | ) |
| Net cash  provided by (used in) operating activities                                       |   | 187                               |   | (178 | ) |
|                                                                                       |   |                              |   |   |   |
| **Cash  Flows from Investment Activities**                                                 |   |                              |   |   |   |
| Capital  expenditures                                                                      |   | (168                              | )      | (332 | ) |
| Net increase in  restricted short-term investments                                         |   | (45                               | )      | (50 | ) |
| Other, net                                                                                 |   | (0                                | )      | (5 | ) |
| Net cash used in  investing activities                                                     |   | (213                              | )      | (387 | ) |
|                                                                                       |   |                              |   |   |   |
| **Cash  Flows from Financing Activities**                                                  |   |                              |   |   |   |
| Proceeds from  long-term debt                                                              |   | 163                               |   | 580 |   |
| Payments of  long-term debt and capital lease obligations                                  |   | (73                               | )      | (43 | ) |
| Other, net                                                                                 |   | (6                                | )      | (8 | ) |
| Net cash  provided by financing activities                                                 |   | 84                                |   | 529 |   |
|                                                                                       |   |                              |   |   |   |
| **Increase  (Decrease) in Cash and Cash Equivalents**                                      |   | 58                                |   | (36 | ) |
|                                                                                       |   |                              |   |   |   |
| Cash and cash  equivalents at beginning of period                                          |   | 2,097                             |   | 2,512 |   |
| Cash and cash  equivalents at end of period                                                |   | $                                 | 2,155  |   | $ | 2,476 |   |
|                                                                                       |   |                              |   |   |   |
| Supplemental  Cash Flow Information:                                                       |   |                              |   |   |   |
| Interest paid                                                                              |   | $                                 | 90     |   | $ | 76 |   |
|                                                                                       |   |                              |   |   |   |
| Investing and  Financing Activities Not Affecting Cash:                                    |   |                              |   |   |   |
| Manufacturer  financing of aircraft and aircraft predelivery deposits                      |   | $                                 | 49     |   | $ | (7 | ) |

 

*See accompanying notes.*

 

5

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* *

*Northwest Airlines Corporation*

 

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1 – Basis of Presentation**

 

The condensedconsolidated financial statements of Northwest Airlines Corporation (“NWACorp.”), a holding company whose principal indirect operating subsidiary isNorthwest Airlines, Inc. (“Northwest”), include the accounts of NWA Corp. andall consolidated subsidiaries (collectively, the “Company”).  The condensed consolidated financialstatements have been prepared pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). The information and footnote disclosures normally included in annualfinancial statements prepared in accordance with generally accepted accountingprinciples have been condensed or omitted as permitted by such rules andregulations. These financial statements and related notes should be read inconjunction with the financial statements and notes thereto included in theCompany’s audited consolidated financial statements for the year ended December31, 2002 contained in the Company’s Annual Report on Form 10-K for 2002.  The Company’s accounting and reportingpolicies are summarized in Note 1 of the Notes to Consolidated FinancialStatements in the Annual Report.

 

The Company maintains aWeb site at http://www.nwa.com.  Annualreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form8-K, all amendments to those reports, and other information about the Companyare available free of charge through this Web site at http://ir.nwa.com as soonas reasonably practicable after those reports are electronically filed with orfurnished to the SEC.

 

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 periodsindicated.

 

In January 2003, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.(“FIN”) 46, *Consolidationof Variable Interest Entities*. FIN 46 requires companies that control another entity through interestsother than voting interests to consolidate the controlled entity.  FIN 46 was effective immediately forvariable interest entities created, or in which the company obtains aninterest, after January 31, 2003.  Forall variable interest entities created on or before January 31, 2003, theprovisions are effective July 1, 2003. The Company is evaluating the impact of this interpretation.

 

**Note 2 –Pension Curtailment Charge and Remeasurement**

 

During the****threemonths ended March 31, 2003, a pension curtailment charge of $58 million wasrecorded in salaries, wages and benefits expense with respect to the NorthwestAirlines Pension Plan for Contract Employees as a result of the significantworkforce reduction announced on March 21, 2003, which is discussed in “Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” below.  In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*, a remeasurement of plan assets and obligationswas also required in conjunction with the plan curtailment.  This remeasurement negatively impactedstockholders’ equity by $156 million, principally due to a lower discount rateused in computing plan obligations.

 

**Note 3 –Loss Per Share Data**

 

For the three monthsended March 31, 2003 and 2002, no incremental shares related to dilutivesecurities were added to the weighted-average shares outstanding forcalculating basic earnings per share because inclusion of such shares would beanti-dilutive.  Shares related todilutive securities excluded because their inclusion would be anti-dilutivewere 6,602,666 and 7,227,394 for 2003 and 2002, respectively.

 

6

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**Note 4 – Comprehensive Loss**

 

Comprehensive lossconsisted of the following for the three months ended March 31 (in millions):

 

|                                        |   | **2003** |     | **2002** |   |
|---------------------------------------------|--------|----------|----------|----------|--------|
| Net Loss                                    |   | **$**    | **(396** | **)**    | $      | (171 | ) |
| Minimum pension  liability adjustments      |   | **(156** | **)**    | —   |   |
| Deferred gain  (loss) on hedging activities |   | **22**   |     | (2       | )      |
| Foreign currency  translation adjustment    |   | **(1**   | **)**    | 1        |   |
| Comprehensive  Loss                         |   | **$**    | **(531** | **)**    | $      | (172 | ) |

 

**Note 5 – Long-term Debt**

 

At March 31, 2003maturities of long-term debt excluding capital lease obligations throughDecember 31, 2007 are as follows (in millions):

 

| 2003 |   | $     | 235        |   |
|------|--------|-------|------------|--------|
| 2004 |   | 631   | ** ** |
| 2005 |   | 1,437 |       |
| 2006 |   | 571   |       |
| 2007 |   | 682   |       |

 

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

 

On March 28, 2003,Standard and Poor’s downgraded the rating on the Company’s credit facilitiesfrom BB- to B+.  On April 10, 2003,Moody’s Investors Service downgraded the rating on the Company’s creditfacilities from Ba3 to B1.  Thesedowngrades and the measurement of certain collateral tests required under thesecredit facilities resulted in a higher interest rate for outstandingbalances.  The interest rate onborrowings under the credit facilities increased 0.75% during April 2003 andcurrently bear interest at a variable rate equal to the three-month London InterbankOffered Rate (“LIBOR”) plus 3.25% (4.59% as of April 30, 2003).

 

Due to the negativeimpact on the financial performance of the Company from the Iraq War and SevereAcute Respiratory Syndrome (“SARS”), in May 2003 the Company and its lendersamended the Revolving Credit Agreement. The amendment waives the fixed charge coverage ratio requirement for oneyear.  The first compliance measurementdate is now June 30, 2004, on the same terms as set forth in the previouslyamended credit agreement.

 

**Note 6 – Stock-based Compensation**

 

Effective January 1,2003, the Company adopted the fair value method of recording stock-basedemployee compensation contained in SFAS No. 123, *Accounting for Stock-Based Compensation*,and will account for this change in accounting principal using the “prospectivemethod” as described by SFAS No. 148, *Accounting for Stock-Based Compensation — Transitionand Disclosure, an amendment of FASB Statement No. 123*.  All employee stock option grants made on orafter January 1, 2003 will be priced based on the fair value on the date thestock-based compensation is granted, which will be amortized as compensationexpense over the vesting period.

 

On January 14, 2003, theCompany completed an option exchange program. Officers of the Company were able to exchange their existing stockoptions at a ratio of two shares subject to an old option for one share subjectto a newly issued option.  The newoptions have an exercise strike price of $8.31, the average of the high and lowstock price of the Company’s common stock on January 15, 2003.  The compensation expense related to thesenew options will be amortized over a four-year vesting period using the fairvalue method of recording stock-based compensation.  Certain other management employees of the Company were able toexchange their existing stock options for phantom units at a ratio of threeshares subject to an old option for one phantom unit.  The compensation expense related to these phantom units will berecognized over the four-year vesting period, adjusted to the current period endingstock price, consistent with how phantom units have been expensed in thepast.  Compensation expense related tostock options issued under this exchange program is anticipated to beapproximately $3 million for the year ending December 31, 2003.  The Company has agreed to effect a similaroption exchange program for outstanding awards under the Company’s stock optionplan for pilots.  Such an exchangeprogram is contingent upon commencement of codesharing under the marketingagreement with Continental Airlines, Inc. (“Continental”) and Delta Air Lines,Inc. (“Delta”).

 

7

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The following tableillustrates the effect on net loss and loss per share if the fair value basedmethod had been applied to all outstanding option awards rather than only thosegranted since January 1, 2003.  Awardsunder the Company’s plans vest over periods ranging from three to five years.

 
|                                                                                                                                      |   | **Three  months ended  March 31** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| ***(In millions except per share amounts)***                                                                                              |   | **2003**                          |   | **2002** |   |
| Net  loss, as reported                                                                                                                    |   | $                                 | (396   | ) | $ | (171 | ) |
| Add:  Stock-based employee compensation expense  included in reported net loss, net of tax effect (1)                                |   | 3                                 |   | 2 |   |
| Deduct:  Total stock-based employee compensation  expense determined under a fair value based method for all awards, net of tax  (1) |   | (3                                | )      | (4 | ) |
| Pro  forma net loss                                                                                                                       |   | $                                 | (396   | ) | $ | (173 | ) |
|                                                                                                                                      |   |                              |   |   |   |
| Loss  per share:                                                                                                                          |   |                              |   |   |   |
| Basic  - as reported                                                                                                                      |   | $                                 | (4.62  | ) | $ | (2.01 | ) |
| Basic  - pro forma                                                                                                                        |   | $                                 | (4.62  | ) | $ | (2.02 | ) |
|                                                                                                                                      |   |                              |   |   |   |
| Diluted  - as reported                                                                                                                    |   | $                                 | (4.62  | ) | $ | (2.01 | ) |
| Diluted  - pro forma                                                                                                                      |   | $                                 | (4.62  | ) | $ | (2.02 | ) |

 

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(1)               As described belowin Note 7, the Company is not recording additional tax benefits due to its netdeferred tax asset position and recent history of losses; therefore, theCompany did not include any tax effect related to the 2003 amounts shown.

 

**Note 7 – Income Taxes**

 

As of December 31, 2002,the Company had a $30 million net deferred tax liability.  During the quarter ended March 31, 2003, atax benefit of $153 million and a deferred tax asset valuation allowance of$123 million were recorded for a net tax benefit of $30 million.  Under the provisions of SFAS No. 109, *Accountingfor Income Taxes*, the realization of the future tax benefits of anet deferred tax asset is dependent on future taxable income against which suchtax benefits can be applied.  Allavailable evidence must be considered in the determination of whethersufficient future taxable income will exist. Such evidence includes, but is not limited to, the company’s financialperformance for the current and prior two years, the market environment inwhich the company operates, the utilization of past tax credits, and the lengthof relevant carryback and carryover periods. As a result of the Company’s cumulative losses over the past two fiscalyears and the full utilization of its loss carryback potential, future pre-taxlosses are not expected to be reduced by the recognition of associated taxbenefits until a net deferred tax liability is generated or the Company isprofitable.

 

8

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**Note 8 – Fleet Information and Commitments**

 

The following tablepresents the number of aircraft in service and on firm order as of March 31,2003:

 
| **Aircraft  Type**                    |   | **Seating  Capacity** |       | **Owned** |       | **Capital  Lease** |       | **Operating  Lease** |       | **Total  Aircraft  in Service** |       | **Aircraft  on Firm  Order** |       |
|---------------------------------------|--------|-----------------------|------------|-----------|------------|--------------------|------------|----------------------|------------|---------------------------------|------------|------------------------------|------------|
| **Passenger Aircraft**                |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| Airbus:                               |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| A319                                  |   | 124                   |       | 46        |       | —             |       | 12                   |       | 58                              | **(1)**    | 19                           |       |
| A320                                  |   | 144-148               |       | 41        |       | 4                  |       | 31                   |       | 76                              |       | 8                            |       |
| A330-200                              |   | 243                   |       | —    |       | —             |       | —               |       | —                          |       | 10                           |       |
| A330-300                              |   | 298                   |       | —    |       | —             |       | —               |       | —                          |       | 14                           |       |
|                                  |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| Boeing:                               |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| 727-200                               |   | 149                   |       | 2         |       | —             |       | —               |       | 2                               |       | —                       |       |
| 757-200                               |   | 180-184               |       | 23        |       | 14                 |       | 19                   |       | 56                              |       | —                       |       |
| 757-300                               |   | 224                   |       | 9         |       | —             |       | —               |       | 9                               | **(1)**    | 6                            |       |
| 747-200                               |   | 353-446               |       | 13        |       | —             |       | 5                    |       | 18                              |       | —                       |       |
| 747-400                               |   | 403                   |       | 4         |       | —             |       | 12                   |       | 16                              |       | —                       |       |
|                                  |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| McDonnell Douglas:                    |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| DC9                                   |   | 78-125                |       | 154       |       | —             |       | 13                   |       | 167                             |       | —                       |       |
| DC10                                  |   | 273                   |       | 13        |       | —             |       | 8                    |       | 21                              |       | —                       |       |
|                                  |   |                  |       | 305       |       | 18                 |       | 100                  |       | 423                             |       | 57                           |       |
|                                  |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| **Freighter Aircraft**                |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| Boeing 747-200F                       |   |                  |       | 5         |       | —             |       | 7                    |       | 12                              |       | —                       |       |
|                                  |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| **Total Northwest Operated Aircraft** |   |                  | ** ** | **310**   | ** ** | **18**             | ** ** | **107**              | ** ** | **435**                         | ** ** | **57**                       | ** ** |
|                                  |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| **Regional Aircraft**                 |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| AVRO RJ85                             |   | 69                    |       | 11        |       | —             |       | 25                   |       | 36                              |       | —                       |       |
| CRJ-200/440                           |   | 50/44                 |       | —    |       | —             |       | 58                   |       | 58                              |       | 71                           | ** ** |
| SAAB 340                              |   | 30-34                 |       | —    |       | —             |       | 49                   |       | 49                              |       | —                       |       |
|                                  |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| **Total Airlink Operated Aircraft**   |   |                  | ** ** | **11**    | ** ** | **—**         | ** ** | **132**              | ** ** | **143**                         |       | **71**                       |       |
|                                  |   |                  |       |      |       |               |       |                 |       |                            |       |                         |       |
| **Total Aircraft**                    |   |                  | ** ** | **321**   | ** ** | **18**             | ** ** | **239**              | ** ** | **578**                         |       | **128**                      |       |

 

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(1)One Airbus A319 aircraft and one Boeing 757-300 aircraft were delivered inMarch 2003 but were not yet in service as of March 31, 2003, and are thereforeexcluded from this table.

 

Committed expendituresfor the 128 aircraft and related equipment on firm order, including estimatedamounts for contractual price escalations and predelivery deposits, will beapproximately $1.56 billion for the remainder of 2003, $1.19 billion in 2004,$1.18 billion in 2005, $579 million in 2006 and $226 million in 2007.  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 by the Company are inplace for the 57 Northwest operated aircraft on order.  These financings range from 80% - 100% ofeach aircraft’s purchase price.  TheCompany has the option to finance the 71 CRJ-200/440 aircraft on order throughlong-term operating lease commitments from the manufacturer.  These aircraft will, in turn, be leased orsubleased to and operated by the regional carriers.  In the event the manufacturer does not provide financing forthese aircraft, the Company is not obligated to take delivery.

 

9

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**Note 9 – Pinnacle Stock Contribution to Company’s Pension Plans**

 

TheCompany has submitted an application to the Department of Labor to permit theCompany to contribute common stock of Pinnacle Airlines Corp. to the pensionplans in lieu of making certain required contributions in cash.  In January 2003, the Department of Laborissued a proposed prohibited transaction exemption that would allow the Companyto contribute common stock of Pinnacle Airlines Corp. to satisfy a portion ofthe contribution requirements to Northwest’s pension plans in 2003 and 2004.  The proposed exemption contemplates that thepension plans will have the right at any time to sell the shares back to theCompany for cash at the greater of their value at the time of contribution orthe prevailing market value.  On January15, 2003, the Company contributed 1.9 million shares, or 12.9%, of the PinnacleAirlines Corp. common stock to the pension plans to satisfy approximately $44million of its $223 million scheduled funding requirement for the 2002 planyear. However, as a result of the plans’ option to sell the shares back to theCompany, the contribution of the $44 million was not recognized on theCompany’s financial statements, which continue to fully consolidate PinnacleAirlines Corp. and do not reflect a reduction in the pension liability foraccounting purposes.  The Companyintends to contribute additional common stock of Pinnacle Airlines Corp. tosatisfy a portion of future pension contributions, including the remainder of2002 plan year requirements.  TheDepartment of Labor held a hearing on May 5, 2003 relating to the proposedprohibited transaction exemption**.**

 

**Note 10 – Segment Information**

 

The Company is managed asone cohesive business unit, from which revenues are derived primarily from thecommercial transportation of passengers and cargo.  Operating revenues from flight segments serving foreigndestinations are classified into the Pacific or Atlantic regions, asappropriate.  The following table showsthe operating revenues for each region for the three months ended March 31 (inmillions):

 

|                |   | **2003** |      | **2002** |   |
|---------------------|--------|----------|-----------|----------|--------|
| Domestic            |   | **$**    | **1,556** |     | $      | 1,555 |   |
| Pacific             |   | **474**  |      | 435      |   |
| Atlantic            |   | **220**  |      | 190      |   |
| Operating  revenues |   | **$**    | **2,250** |     | $      | 2,180 |   |

 

**Note 11 – Subsequent Event**

 

OnApril 16, 2003, the Emergency Wartime Supplemental Appropriations Act (“WartimeAct”) was signed into law by the President. Among other items, the legislation included a $2.3 billion cashreimbursement for security fees remitted to the Transportation SecurityAdministration (“TSA”) and $100 million for reimbursement of aircraft cockpitdoor reinforcements since the 2001 terrorist attacks. Northwest expects toreceive approximately $205 million for reimbursement of security fees in May2003. Retention of these funds requires compliance with requirements in theWartime Act including certain limitations on executive compensation. Amountsexpended by the Company for cockpit door reinforcement that have not beenreimbursed previously total approximately $14 million, some portion of whichwill also be paid under the legislation and recorded as a reduction to thepreviously capitalized property account. The TSA has not yet specified a date by which the latter reimbursementwill occur.

 

10

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

 

Thecurrent U.S. airline industry environment is the worst in history. Since early2001, the industry has suffered a significant decline in revenues versus whatwould have been expected based on historical growth trends. This shortfall hasbeen caused by the rapid growth of low cost airlines, increased distributionthrough the Internet, higher taxes levied on passengers, fear of futureterrorist activities and inconveniences introduced by new airport securityinitiatives, and the downturn in both the economy and businessprofitability.  See “Northwestand Airline Industry Current Status” section of Management’s Discussion andAnalysis of Financial Condition and Results of Operations in the Company’sDecember 31, 2002 Annual Report on Form 10-K for a detailed discussion of thefactors contributing to the revenue shortfall and the financial and operationalchallenges the Company faces.

 

During the first quarter,further significant developments adversely affected the airline revenueenvironment.  In late March, the UnitedStates and certain of its allies commenced military actions in Iraq.  The uncertainty leading up to and the actualonset of the war negatively impacted passenger traffic and bookings.  In addition to the military conflict in theMiddle East, concerns about SARS caused a further decline in passenger trafficand bookings, particularly to Hong Kong, Beijing and Singapore.

 

As a result of thesesignificant challenges, the financial performance of Northwest and other U.S.airlines remains disappointing.  For thequarter ended March 31, 2003, the Company reported a net loss of $396 millionand an operating loss of $326 million. The net loss per common share was $4.62in the first quarter of 2003 compared with a net loss per common share of $2.01in the first quarter of 2002.

 

The March quarter resultsincluded $78 million in pre-tax charges for severance and pension curtailmentexpenses associated with workforce reductions, which were necessitated bycapacity reductions resulting from the Iraq War.  The net loss for the period also reflected a reduced tax benefit,which was limited to $30 million under prevailing accounting requirements dueto the Company’s net deferred tax asset position and recent history of losses.  See Note 7 to the Condensed ConsolidatedFinancial Statements in this report for a further discussion of the Company’stax position.

 

In response to the dropin demand due to the military actions in Iraq, on March 21 the Companyannounced plans to reduce its systemwide capacity by 12% versus its previousplans and indefinitely ground certain aircraft.  The Company also announced that, as a result of the war-relatedcapacity reductions, it was forced to decrease overall staffing levels by 4,900employees across all workgroups. Besides these actions, public concerns over the transmission of SARSprompted a further reduction in flying on certain Pacific routes.

 

Despite the substantialmeasures taken by the Company over the past two years to align its coststructure with the new industry revenue environment, continued soft demand dueto hostilities in the Middle East, SARS or other factors could lead to furtherreductions in service, additional job eliminations, or potential assetimpairments.

 

Substantially all of theCompany’s results of operations are attributable to its principal indirectoperating subsidiary, Northwest, and the following discussion pertainsprimarily to Northwest.  The Company’sresults of operations include other subsidiaries and, where indicated, thediscussion also relates to the two most significant of these, MLT, Inc. (“MLT”)and Pinnacle Airlines, Inc. (“Pinnacle Airlines”).  The Company’s results of operations for interim periods are not necessarilyindicative of the results for an entire year due to seasonal factors as well ascompetitive and general economic conditions. The Company’s second and third quarter operating results havehistorically been more favorable due to increased leisure travel on domesticand international routes during the spring and summer months.

 

11

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Information with respectto the Company’s operating statistics follows (1):

 

|                                                                                         |   | **Three months ended  March 31** |     |     |     |
|----------------------------------------------------------------------------------------------|--------|----------------------------------|----------|----------|----------|
|                                                                                         |   | **2003**                         |     | **2002** |     | **%****Chg** |   |
| Scheduled  service:                                                                          |   |                             |     |     |     |   |   |
| Available seat  miles (ASM) (millions)                                                       |   | **22,526**                       |     | 21,762   |     | 3.5 |   |
| Revenue  passenger miles (RPM) (millions)                                                    |   | **16,562**                       |     | 16,536   |     | 0.2 |   |
| Passenger load  factor                                                                       |   | **73.5**                         | %        | 76.0     | %        | (2.5 | )pts |
| Revenue  passengers (millions)                                                               |   | **12.3**                         |     | 11.9     |     | 3.2 |   |
| Passenger  revenue per RPM (yield)                                                           |   | **10.70**                        | *¢* | 10.61    | *¢* | 0.8 | * * |
| Passenger  revenue per scheduled ASM (RASM)                                                  |   | **7.86**                         | *¢* | 8.07     | *¢* | (2.6 | ) |
|                                                                                         |   |                             |     |     |     |   |   |
| Total operating  ASM (millions)                                                              |   | **22,737**                       |     | 21,818   |     | 4.2 |   |
| Operating  expense per total operating ASM(2)                                                |   | **10.16**                        | *¢* | 9.66     | *¢* | 5.2 | * * |
| Operating  expense per total operating ASM,  excluding severance and curtailment expenses(2) |   | **9.82**                         | *¢* | 9.66     | *¢* | 1.7 | * * |
|                                                                                         |   |                             |     |     |     |   |   |
| Cargo ton miles  (millions)                                                                  |   | **484**                          |     | 480      |     | 0.8 |   |
| Cargo revenue  per ton mile                                                                  |   | **34.45**                        | *¢* | 30.90    | *¢* | 11.5 | * * |
|                                                                                         |   |                             |     |     |     |   |   |
| Fuel gallons  consumed (millions)                                                            |   | **442**                          |     | 445      |     | (0.7 | ) |
| Average fuel  cost per gallon, excluding taxes                                               |   | **84.85**                        | *¢* | 58.75    | *¢* | 44.4 | * * |
|                                                                                         |   |                             |     |     |     |   |   |
| Number of  operating aircraft at end of period                                               |   | **435**                          |     | 434      |     | 0.2 |   |
| Full-time  equivalent employees at end of period                                             |   | **42,781**                       |     | 45,005   |     | (4.9 | ) |

 

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(1)               All statisticsexclude Pinnacle Airlines, a majority-owned Northwest Airlink regional carrier,which is consistent with how the Company reports statistics to the Departmentof Transportation (“DOT”) and is comparable to statistics reported by othermajor network airlines.

(2)               Excludes theexpenses associated with the operation of Northwest’s fleet of Boeing 747freighter aircraft, MLT Inc., Pinnacle Airlines, the NBA transportation programand gain/loss on disposal of assets. These expenses do not generate NorthwestASMs and therefore are excluded from the calculation. Management believes thatoperating expenses per total operating ASM, excluding severance and curtailmentexpenses is more reflective of the Company's ongoing operations because thecurtailment and severance expenses were associated with a workforce reduction.Reconciliation of total operating expenses to passenger service operatingexpenses used to calculate operating expense per total operating ASM isprovided below:

 

|                                                  |   | **Three  months ended  March 31** |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|
| ***(In millions)***                                   |   | **2003**                          |   | **2002** |   |
| Operating  expenses per GAAP                          |   | $                                 | 2,576  |   | $ | 2,376 |   |
| Freighter  operations                                 |   | (121                              | )      | (103 | ) |
| MLT  Inc. - net of intercompany eliminations          |   | (72                               | )      | (97 | ) |
| Pinnacle  Airlines - net of intercompany eliminations |   | (63                               | )      | (57 | ) |
| (Gain)/loss  on assets and NBA transportation         |   | (9                                | )      | (11 | ) |
| Passenger  service operating expenses                 |   | 2,311                             |   | 2,108 |   |
| Curtailment  expenses                                 |   | (58                               | )      | — |   |
| Severance  expenses                                   |   | (20                               | )      | — |   |
|                                                  |   | $                                 | 2,233  |   | $ | 2,108 |   |

 

12

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**Resultsof Operations—Three months ended March 31, 2003 and 2002**

 

*OperatingRevenues*.  Operatingrevenues increased 3.2% ($70 million). System passenger revenues increased 0.9% ($16 million), excludingPinnacle Airlines, which was primarily attributable to marginally better trafficand yields.  Pinnacle Airlines passengerrevenues, net of intercompany eliminations, increased 21.7% ($14 million) to$77 million due to increased capacity from 23 additional Bombardier CRJaircraft added since March 31, 2002 and higher rates under a new airlineservices agreement with Northwest that became effective March 1, 2002.

 

The following analysis by region is based oninformation reported to the Department of Transportation and excludes PinnacleAirlines:

** **
|                               |   | **System** |   | **Domestic** |   | **Pacific** |   | **Atlantic** |   |
|------------------------------------|--------|------------|--------|--------------|--------|-------------|--------|--------------|--------|
| **2003**                           |   |       |   |         |   |        |   |         |   |
| Passenger  revenues (in millions)  |   | $          | 1,771  |         | $      | 1,252       |   | $            | 360    |   | $ | 159 |   |
|                               |   |       |   |         |   |        |   |         |   |
| **Increase (Decrease) from 2002:** |   |       |   |         |   |        |   |         |   |
| Passenger  revenues (in millions)  |   | $          | 16     |         | $      | 0           |   | $            | 20     |   | $ | (4 | ) |
| Percent                            |   | 0.9        | %      | 0.0          | %      | 6.2         | %      | (2.7         | )%     |
|                               |   |       |   |         |   |        |   |         |   |
| Scheduled  service ASMs (capacity) |   | 3.5        | %      | 0.9          | %      | 13.3        | %      | (2.4         | )%     |
| Scheduled  service RPMs (traffic)  |   | 0.2        | %      | 0.7          | %      | 4.1         | %      | (10.5        | )%     |
| Passenger  load factor             |   | (2.5       | )pts.  | (0.1         | )pts.  | (7.1        | )pts.  | (6.8         | )pts.  |
| Yield                              |   | 0.8        | %      | (0.8         | )%     | 2.1         | %      | 8.8          | %      |
| Passenger  RASM                    |   | (2.6       | )%     | (0.9         | )%     | (6.1        | )%     | (0.3         | )%     |

 

As indicated in the abovetable:

•                       Domesticpassenger revenues were flat due to lower yields, which offset higher traffic.

•                       Pacificpassenger revenues increased primarily due to higher traffic and yields.

•                       Atlanticpassenger revenues decreased primarily due to lower traffic, which waspartially offset by higher yields.

 

Cargo revenues increased 12.8% ($19 million) to $167million due to an 11.5% increase in yield per ton mile and 0.8% more cargo tonmiles flown.  Other revenue increased9.8% ($21 million), primarily from flying for the U.S. military under the CivilReserve Air Fleet Program.

 

*OperatingExpenses*.  Operatingexpenses increased 8.4% ($200 million). The following table presents operating expenses for the three monthsended March 31, 2003 and describes significant variances from the three monthsended March 31, 2002:

 
| **(in millions)**                          |   | **Three  Months  Ended  March 31, 2003** | ** ** | **Increase  (Decrease)  from 2002** | ** ** | **Percent  Change** | ** ** | **Note** | ** ** |
|--------------------------------------------|--------|------------------------------------------|------------|-------------------------------------|------------|---------------------|------------|----------|------------|
| **Operating Expenses**                     |   |                                     |       |                                |       |                |       |     |       |
| Salaries, wages and benefits               |   | $                                        | 1,045      |                                | $          | 121                 |       | 13.1     | %          | A |   |
| Aircraft fuel and taxes                    |   | 411                                      |       | 120                                 |       | 41.2                |       | B        |       |
| Selling and marketing                      |   | 176                                      |       | (42                                 | )          | (19.3               | )          | C        |       |
| Other rentals and landing fees             |   | 143                                      |       | 20                                  |       | 16.3                |       | D        |       |
| Depreciation and amortization              |   | 142                                      |       | 7                                   |       | 5.2                 |       | E        |       |
| Aircraft maintenance materials and repairs |   | 133                                      |       | (12                                 | )          | (8.3                | )          | F        |       |
| Aircraft rentals                           |   | 118                                      |       | 5                                   |       | 4.4                 |       | G        |       |
| Other                                      |   | 408                                      |       | (19                                 | )          | (4.4                | )          | H        |       |
| **Total operating expenses**               |   | $                                        | 2,576      |                                | $          | 200                 |       | 8.4      | %          |   |   |

 

13

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A.                Salaries,wages and benefits increased due to annual rate increases, $20 million ofseverance expenses, a $58 million pension curtailment charge and $29 millionfrom higher ongoing pension expense, partially offset by savings from a 3.8%decrease in average full-time equivalent employees.

B.                  Aircraftfuel and taxes were higher due to a 44.4% increase in the average fuel cost pergallon to 85 cents, net of hedging transactions, partially offset by 0.7% fewer****fuelgallons consumed from the use of more fuel efficient aircraft on 4.2% highertotal capacity.  Fuel hedge transactionsreduced fuel costs by $49 million in the first quarter of 2003 compared to $15million in the first quarter of 2002.

C.                  Sellingand marketing (consisting of commissions, credit card fees, computerreservation system fees, advertising and promotion expenses) decreased $42million due primarily to the elimination of North American base commissions inthe second quarter of 2002 and lower promotion expenses.

D.                 Otherrentals and landing fees increased primarily due to higher rates across thesystem, due in large part to unfunded security mandates imposed on airports bythe TSA.

E.                   Depreciationexpense increased due to additional owned aircraft and the acceleratedretirement of certain aircraft.

F.                   Aircraftmaintenance materials and repairs decreased by $12 million primarily as aresult of lower material usage.

G.                  Aircraftrentals increased due to additional leased aircraft, partially offset by lowervariable interest rates on existing leases.

H.                 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.

 

*OtherIncome and Expense.* Non-operating expense increased 53.8% ($35 million) primarily due tohigher interest expense related to increased debt levels from new financings,lower earnings from affiliates and a gain from a litigation settlement in 2002.

 

**Liquidity and Capital Resources**

 

As of March 31, 2003, the Company had cash, cashequivalents and restricted short-term investments of $2.34 billion.  This amount includes $185 million ofrestricted short-term investments, resulting in total liquidity of $2.16billion.

 

*Cashflows.* Liquidity increased by $58 million during the quarter,largely due to positive operating cash flow.

 

Net cash provided by operating activities for thethree months ended March 31, 2003 was $187 million, a $365 million increasefrom the $178 million of cash used in operating activities for the three monthsended March 31, 2002.  This increase wasdue primarily to a tax refund that was $114 million higher in 2003 than 2002,$58 million received for settlement of contracts that had been in place tohedge third and fourth quarter 2003 fuel usage, the payment in January 2002 of$216 million of aviation taxes originally due between September 11, 2001 andJanuary 15, 2002, and repayment of $61 million outstanding under the NWAFunding, LLC revolving receivables facility, also in January 2002.  These favorable variances were partiallyoffset by a larger operating loss in 2003.

 

Investing activities consisted primarily of capitalexpenditures on aircraft, facility improvements and ground equipment purchases,and included the acquisition of the following aircraft for the three monthsended March 31:

 
|            |   | **2003**   |   | **2002** |   |
|-----------------|--------|------------|--------|----------|--------|
| Airbus  A319    |   | **2**      |   | 6        |   |
| Boeing  747-400 |   | **—** |   | 1        |   |
| Boeing  757-300 |   | **2**      |   | —   |   |
|            |   | **4**      |   | 7        |   |

 

Financing activities in the first quarter of 2003consisted primarily of financing two Airbus A319 aircraft and one Boeing757-300 aircraft with escrowed funds from pass-through certificate offeringsand one Boeing 757-300 aircraft with long-term debt, plus payment of debt andcapital lease obligations.  Financingactivities in the first quarter of 2002 consisted primarily of the issuance of$300 million of 9.875% unsecured notes due 2007, the financing of six AirbusA319 aircraft and one Boeing 747-400 aircraft with escrowed funds frompass-through certificate offerings, plus payment of debt and capital leaseobligations.

 

14

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In addition to the purchase of the aircraft discussedabove, the Company took delivery of one Boeing 757-300 aircraft and sevenBombardier CRJ aircraft during the three months ended March 31, 2003.  The Boeing 757-300 aircraft was acquiredthrough a non-cash transaction with the manufacturer and the Bombardier CRJaircraft were financed with long-term operating leases and subleased toPinnacle Airlines.

 

*Debt.*  At March 31, 2003 maturities of long-termdebt excluding capital lease obligations through December 31, 2007 are asfollows (in millions):

 

| 2003 |   | $     | 235    |   |
|------|--------|-------|--------|--------|
| 2004 |   | 631   |   |
| 2005 |   | 1,437 |   |
| 2006 |   | 571   |   |
| 2007 |   | 682   |   |

 

The amount due in 2005includes $962 million of principal outstanding on the Company’s creditfacilities.  See Note 5 to the CondensedConsolidated Financial Statements for additional discussion of the bank creditfacilities.

 

Due to the negative impact on the financialperformance of the Company from the Iraq War and SARS, in May 2003 the Companyand its lenders amended the Revolving Credit Agreement.  The amendment waives the fixed chargecoverage ratio requirement for one year. The first compliance measurement date is now June 30, 2004, on the sameterms as set forth in the previously amended credit agreement.

 

*AircraftCommitments*. Committed expenditures for the 128 aircraft and related equipment onfirm order, including estimated amounts for contractual price escalations andpredelivery deposits, will be approximately $1.56 billion for the remainder of2003, $1.19 billion in 2004, $1.18 billion in 2005, $579 million in 2006 and$226 million in 2007.  Consistent withprior practice, the Company intends to finance its aircraft deliveries througha combination of internally generated funds, debt and long-term leasefinancing.  Financing commitmentsavailable for use by the Company are in place for the 57 Northwest operatedaircraft on order.  These financingsrange from 80% - 100% of each aircraft’s purchase price.  The Company has the option to finance the 71CRJ-200/440 aircraft on order through long-term operating lease commitmentsfrom the manufacturer, and these aircraft will, in turn, be leased or subleasedto and operated by the regional carriers. In the event the manufacturer does not provide financing for theseaircraft, the Company is not obligated to take delivery.

 

*ReceivablesPurchase Agreement.* In June 2002, a Receivables Purchase Agreement was executed byNorthwest, NWA Funding II, LLC (“NWA Funding”), a wholly-owned,non-consolidated subsidiary of the Company, and third party purchasers (the“Purchasers”).  The agreement is a364-day, $100 million maximum revolving receivables purchase facility,renewable annually for five years at the option of the Purchasers, that allowsNWA Funding to sell variable undivided interests in accounts receivableacquired from Northwest to the Purchasers. NWA Funding pays a yield to the Purchasers equal to the rate on A1/F1commercial paper plus a program fee.

 

The agreement provides for early termination upon theoccurrence of certain events including, among others, a strike event causing asignificant schedule reduction for seven consecutive days, failure to maintaina minimum liquidity requirement of $1.10 billion as of the last day of anyfiscal quarter, or the Company’s failure to meet minimum credit ratings(defined as any two of the following three events: (i) Standard & Poor’s“Long Term Local Issuer Credit” rating below a B credit rating, (ii) Moody’sInvestors Service “Senior Implied” rating below a B2 credit rating, or (iii)Fitch Ratings “Senior Unsecured Debt” rating below a B credit rating).  The Company is presently in discussions withthe Purchasers to renew the receivables purchase facility for another 364-dayperiod.

 

*ProceedsAvailable for Aircraft Financing*.  As of March 31, 2003, $573 million of unused pass-throughcertificate proceeds were held in escrow and are not assets or directobligations of, or guaranteed by, the Company and therefore are not included inthe condensed consolidated balance sheets. The unused pass-through certificate proceeds are available to finance aportion of the aircraft scheduled for delivery in 2003.

 

15

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*Pension Funding Obligations.*  TheCompany has several noncontributory pension plans covering substantially all ofits employees.  Funding obligationsunder these plans are governed by the Employee Retirement Income Security Actof 1974 (“ERISA”).  As of December 31,2002, the Company’s pension plans were underfunded by $3.95 billion ascalculated in accordance with SFAS No. 87, *Employers’ Accounting for Pensions*. On acurrent liability basis utilized for cash contribution purposes, the plans wereunderfunded by approximately $3.1 billion. Before the impact of a conditional authorization to reschedule certainpayments, the Company’s 2003 pension contributions associated with the 2003plan year were estimated to be $468 million. The Company also had, as of March 31, 2003, $223 million of mandatorycontributions related to the 2002 plan year remaining to be paid in 2003.  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 November 5, 2002, the Companysubmitted an application to the Internal Revenue Service (“IRS”)for authorization to reschedule, over a five year period beginning in April2004, the $454 million in 2003 plan year contributions required under thepension plans for contract and salaried employees.  On April 15, 2003, the IRS approved the application, subject tothe Company's satisfaction of certain conditions imposed by the Pension BenefitGuaranty Corporation (“PBGC”).  TheCompany has reached an agreement with the PBGC (subject to final documentation)to satisfy the conditions for waiving plan year 2003 contributions by grantingthe plans a lien on certain assets of the Company (certain domestic slots,routes, aircraft and engines), the values of which exceed the amount ofrescheduled contributions.

 

The Company has also submittedan application to the Department of Labor to permit the Company to contributecommon stock of Pinnacle Airlines Corp. to the pension plans in lieu of makingcertain required contributions in cash. In January 2003, the Department of Labor issued a proposed prohibitedtransaction exemption that would allow the Company to contribute common stockof Pinnacle Airlines Corp. to satisfy a portion of the contributionrequirements to Northwest’s pension plans in 2003 and 2004.  The proposed exemption contemplates that thepension plans will have the right at any time to sell the shares back to theCompany for cash at the greater of their value at the time of contribution orthe prevailing market value. The Company then contributed 1.9 million shares,or 12.9%, of the Pinnacle Airlines Corp. common stock to the pension plans tosatisfy approximately $44 million of its $223 million scheduled fundingrequirement for the 2002 plan year. However, as a result of the plans' optionto sell the shares back to the Company, the contribution of the $44 million wasnot recognized on the Company’s financial statements, which continue to fullyconsolidate Pinnacle Airlines and do not reflect a reduction in the pensionliability for accounting purposes.  TheCompany intends to contribute additional common stock of Pinnacle AirlinesCorp. to satisfy a portion of future pension contributions, including theremainder of 2002 plan year requirements. The Department of Labor held a hearing on May 5, 2003 relating to theproposed prohibited transaction exemption.

 

*CreditRating Agency Actions.* On February 25, 2003, Fitch Ratings downgraded Northwest Airlines,Inc.’s senior unsecured debt rating from B+ to B.  On March 28, 2003, Standard & Poor’s downgraded the Company’scorporate credit rating from BB- to B+ and lowered Northwest Airlines, Inc.’ssenior unsecured debt rating from B to B-. On April 10, 2003, Moody’s Investors Service downgraded the Company’ssenior implied rating from B1 to B2 and lowered Northwest Airlines Inc.’s seniorunsecured rating from B2 to Caa1.

 

The lowering of the Company’s credit ratings couldmake it more difficult to renew outstanding letters of credit that back certainobligations or to maintain other existing financing, while also increasing thecost of such arrangements.  In addition,reduced credit ratings could potentially limit access to new financings,including instruments used in the Company’s fuel hedging program, or raise thecost to complete these transactions. For information regarding the lowering of the Company’s credit ratingson its secured credit facilities during the three months ended March 31, 2003,see Note 5 of the “Notes to Condensed Consolidated Financial Statements” inthis Quarterly Report on Form 10-Q.  Forinformation regarding the Receivables Purchase Agreement and credit ratingrequirements, see “Receivables Purchase Agreement” above.

 

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**CriticalAccounting Estimates**

 

Therehave been no material changes to the Company’s critical accounting policies andestimates from the information provided in “Item 7.  Management’s Discussion and Analysis of Financial Condition andResults of Operations” included in the Company’s Annual Report on Form 10-K for2002.  However, certain charges recordedduring the March quarter impacted pension liabilities and expense as describedbelow.

 

*PensionLiability and Expense.*  During the three months ended March 31,2003, the Company recorded a $58 million pension curtailment charge to theNorthwest Airlines Pension Plan for Contract Employees as a result of thesignificant workforce reduction announced on March 21, 2003.  This charge represents the unrecognizedprior service cost that otherwise would have been amortized over future yearsof service.

 

In accordance with SFASNo. 88, *Employers’Accounting for Settlements and Curtailments of Defined Benefit Pension Plansand for Termination Benefits*, a remeasurement of the plan’s assetsand obligations was required in conjunction with the plan curtailment.  A remeasurement requires that the Companyreview its current actuarial assumptions and revise them as necessary as of thecurtailment date.  As a result of thisreview, the Company reduced the discount rate used to measure plan liabilitiesfrom 6.75% to 6.50%.  The discount ratereflects the rate at which the pension liabilities could be effectively settledat the date of measurement.  Inestimating this rate, the Company looked to rates of return on fixed-incomeinvestments of similar duration to the liabilities in the plan that receivehigh investment grade ratings by recognized ratings agencies.  The fair market value of the plan’s assetshad also decreased in value since December 31, 2002.  These changes were the primary factors associated with a $156million reduction to stockholders’ equity resulting from the remeasurement.

 

**Other Information**

 

*Labor Agreements.*Approximately91% of the Company’s employees are members of collective bargaining units.  The Company’s collective bargainingagreement with the International Association of Machinists and AerospaceWorkers (“IAM”) representing Agents, Clerks, Equipment Service Employees andStock Clerks became amendable on February 25, 2003.  Pursuant to the Railway Labor Act, this agreement remains ineffect while the Company and the IAM pursue an agreement on a newcontract.  The Company is currently innegotiations with the IAM and its other labor unions in an effort to alignwages, benefits and work rules with the new revenue environment and to remaincompetitive with other airlines achieving permanent cost reductions throughbankruptcy proceedings or the threat of bankruptcy proceedings.

 

*Alliances.*  In August 2002, the Company announced thatit had signed a cooperative marketing agreement with Continental andDelta.  The marketing agreement isdesigned to connect the three carriers’ domestic and international networks andprovide for code sharing and reciprocity of frequent flyer and airport clubprograms.  Northwest, Continental andDelta received approval on the agreement in January 2003 from the U.S.Department of Justice and, on March 31, 2003, the DOT also gave its finalapproval.  The three airlines expect tobegin implementation of the agreement in the near future.

 

*WORLDSPAN*.  Northwest, Delta and AMR Corporation holdrespective partnership interests of 33.7%, 40.0% and 26.3% in WORLDSPAN, aglobal Computer Reservations System. WORLDSPAN provides travel technology for travel suppliers, travelagencies, e-commerce sites and corporations worldwide.  On March 3, 2003, an agreement was signed byTravel Transaction Processing Corporation, an entity formed by CitigroupVenture Capital Equity Partners L.P. and Teachers’ Merchant Bank, to purchaseWORLDSPAN from the three airline owners. This transaction, which is scheduled to be completed in mid-2003, issubject to financing, government approvals and other closing conditions.

 

*Aircraft Fuel*.  The Company’s earnings are affected bychanges in the price of aircraft fuel. In order to provide a measure of control over price, the Companyperiodically hedges a portion of the price risk of fuel costs, primarilyutilizing futures contracts traded on regulated exchanges, swap agreements andoptions.  As of March 31, 2003, the Companyhad $44 million of unrealized gains (net of $5 million of hedgingineffectiveness recorded in fuel expense for the three months ended March 31,2003) in accumulated

 

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other comprehensiveincome (loss) as a result of fuel hedge contracts.  Such gains, if realized, will be recorded in fuel expense whenthe related fuel inventory is utilized. During the three months ended March 31, 2003, the Company settled all ofits fuel hedge contracts associated with third and fourth quarter 2003 fueldeliveries, thereby locking in gains. As a result, the Company’s cash balance as of March 31, 2003 includedapproximately $58 million realized from these transactions.  Fuel expense in the second half of 2003 willreflect such gains as an offset to fuel price. As of March 31, 2003, the Company has hedged the price of approximately55% of its projected fuel requirements for the second quarter of 2003.

 

*Foreign Currency.*The Company is exposed to the effect of foreign currency exchange ratefluctuations on the U.S. dollar value of foreign currency-denominated operatingrevenues and expenses, with the largest exposure coming from the Japanese yen.Forward contracts, collar options or put options are utilized to hedge aportion of anticipated yen-denominated sales. 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 its firstquarter 2003 yen-denominated sales, resulting in an effective rate of 119, theprevailing average market rate for the period. This compares to an effective rate of 117 for the quarter ended March31, 2002, which included the impact of yen hedges in place at the time.  At March 31, 2003, the Company has hedgedapproximately 22% of its anticipated yen-denominated sales at an average rateof 114 yen per U.S. dollar for the remainder of 2003 and has recorded $3 millionof unrealized gains in accumulated other comprehensive income associated withthose hedges.

 

*U.S. Government Aid Package*.On April 16, 2003, the Wartime Act wassigned into law by the President.  Amongother items, the legislation included a $2.3 billion cash reimbursement forsecurity fees remitted to the TSA and $100 million for reimbursement ofaircraft cockpit door reinforcement improvements since the 2001 terroristattacks.  Northwest expects to receiveapproximately $205 million for reimbursement of security fees in May 2003.  Retention of these funds requires compliancewith requirements in the Wartime Act including certain limitations on executivecompensation.  Amounts expended by theCompany for cockpit door reinforcement that have not been reimbursed previouslytotal approximately $14 million, some portion of which will also be paid underthe legislation.  The TSA has not yetspecified a date by which the latter reimbursement will occur.

 

*Forward-Looking Statements.*  Certain of the statements made throughoutManagement’s Discussion and Analysis of Financial Condition and Results ofOperations are forward-looking and are based upon information available to theCompany on the date hereof.  The Companythrough its management may also from time to time make oral forward-lookingstatements.  In connection with the“safe harbor” provisions of the Private Securities Litigation Reform Act of1995, the Company is hereby identifying important factors that could causeactual results to differ materially from those contained in any forward-lookingstatement made by or on behalf of the Company. Any such statement is qualified by reference to the following cautionarystatements.

 

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 forsecurity, the cost and availability of aviation insurance coverage and war riskcoverage, the general economic condition of the U. S. and other regions of theworld, the price and availability of jet fuel, the war with Iraq and itsaftermath, concerns over SARS, the possibility of additional terrorist attacksor the fear of such attacks, 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.  Additional information with respect to thesefactors and these and other events that could cause differences betweenforward-looking statements and future actual results is contained in “Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations” above, and “Item 1. Risk Factors Related to Northwest and theAirline Industry” and “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2002.

 

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Developments in any ofthese areas, as well as other risks and uncertainties detailed from time totime in the Company’s Securities and Exchange Commission filings, could causethe Company’s results to differ from results that have been or may be projectedby or on behalf of the Company.  TheCompany cautions that the foregoing list of important factors is notinclusive.  The Company undertakes noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.  These statements deal with the Company’sexpectations about the future and are subject to a number of factors that couldcause actual results to differ materially from the Company’s expectations.

 

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

 

Information required bythis item is provided under the captions “Foreign Currency” and “Aircraft Fuel”within “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” in this Quarterly Report on Form 10-Q.  Also see “Item 7a. Quantitative and Qualitative Disclosures AboutMarket Risk” in the Company’s Annual Report on Form 10-K for 2002.

 

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

 

On May 9, 2003, anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the Chief Executive Officer and ExecutiveVice President and Chief Financial Officer, of the effectiveness of the designand operation of the Company’s disclosure controls and procedures.  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 May 9, 2003.

 

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PARTII.  OTHERINFORMATION

 

**Item 1****.****                     LegalProceedings**

 

Reference is made to“Item 3.  Legal Proceedings” in theCompany’s Annual Report on Form 10-K for 2002.

 

*Hall v. United Air Lines, et al.*  The trial which was scheduled for April 2003has been rescheduled for September 2003.

 

*Spirit Airlines v. NorthwestAirlines.*  On March31, 2003, the Court granted Northwest’s motion for summary judgement anddismissed the case.  Spirit Airlines hasfiled a notice of appeal.

 

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 6****.****                     Exhibits**

 

(a)              Exhibits:

12.1                              Computationof Ratio of Earnings to Fixed Charges.

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

99.1                              CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

99.2                              CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

(b)             Reports on Form8-K:

Form8-K dated January 24, 2003

 

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 15th day of May 2003.

 

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

 

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CERTIFICATIONS

 

I, Richard H. Anderson,certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of Northwest Airlines Corporation;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: May 9, 2003

 

 
|  /s/ Richard H.  Anderson |   |
|--------------------------------|--------|
|                           |
| Richard H. Anderson            |
| Chief Executive Officer        |

 

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I, Bernard L. Han,certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of Northwest Airlines Corporation;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3. Based on my knowledge,the financial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this quarterlyreport is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date: May 9, 2003

 

 
|  /s/ Bernard L.  Han |   |
|---------------------------|--------|
|                      |
| Bernard L. Han            |
| Chief Financial Officer   |

 

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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 |

 

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