**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)**

**OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**Forthe quarterly period ended September 30, 2004**

 

**CommissionFile Number: 0-23642**

 

**NORTHWESTAIRLINES CORPORATION**

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

** **

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

 

**(612) 726-2111**

**(Registrant’s telephone number,including area code)**

** **

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

** **

**Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).   Yes  **ý    No  o

** **

**As of September 30, 2004, there were 86,533,358shares of the registrant’s Common Stock outstanding.**

 

 

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*Northwest Airlines Corporation*

 
| PART I. FINANCIAL  INFORMATION |     |
|--------------------------------|----------|
|                           |     |   |   |
|                           | Item 1.  | Financial Statements. |   |
|                           |     |   |   |
|                           |     | Condensed  Consolidated Statements of Operations – Three months and nine months ended  September 30, 2004 and 2003 |   |
|                           |     |   |   |
|                           |     | Condensed  Consolidated Balance Sheets - September 30, 2004 and December 31, 2003 |   |
|                           |     |   |   |
|                           |     | Condensed  Consolidated Statements of Cash Flows - Nine months ended September 30, 2004  and 2003 |   |
|                           |     |   |   |
|                           |     | Notes  to Condensed Consolidated Financial Statements |   |
|                           |     |   |   |
|                           |     | The Computations of  Ratio of Earnings to Fixed Charges and Ratio of Earnings to Fixed Charges and  Preferred Stock Requirements are attached hereto and filed as Exhibits 12.1  and 12.2 |   |
|                           |     |   |   |
|                           | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations. |   |
|                           |     |   |   |
|                           | Item  3. | Quantitative  and Qualitative Disclosures About Market Risk. |   |
|                           |     |   |   |
|                           | Item 4.  | Controls and  Procedures. |   |
|                           |     |   |   |
| PART II. OTHER INFORMATION     |     |
|                           |     |   |   |
|                           | Item 1.  | Legal Proceedings. |   |
|                           | Item 6.  | Exhibits and  Reports on Form 8-K. |   |
|                           |     |   |   |
| SIGNATURE                      |     |
|                           |     |
| EXHIBIT INDEX                  |     |

 

2

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PART I.  FINANCIAL INFORMATION

 

**Item1.  Financial Statements.**

 

*Northwest Airlines Corporation*

 

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

 
| ** **                                               | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **(Unaudited, in millions except  per share amounts)**   | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating Revenues**                                   |       |                                 |       |                                |       |   |   |   |   |
| Passenger                                                |       | $                                    | 2,297      |                                | $          | 2,103 |   | $ | 6,440 |   | $ | 5,720 |   |
| Regional  carrier revenues                               |       | 304                                  |       | 235                                 |       | 795 |   | 622 |   |
| Cargo                                                    |       | 211                                  |       | 196                                 |       | 587 |   | 544 |   |
| Other                                                    |       | 240                                  |       | 157                                 |       | 704 |   | 603 |   |
| Total  operating revenues                                |       | 3,052                                |       | 2,691                               |       | 8,526 |   | 7,489 |   |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| **Operating Expenses**                                   |       |                                 |       |                                |       |   |   |   |   |
| Salaries,  wages and benefits                            |       | 952                                  |       | 955                                 |       | 2,853 |   | 2,944 |   |
| Aircraft  fuel and taxes                                 |       | 605                                  |       | 386                                 |       | 1,554 |   | 1,172 |   |
| Selling  and marketing                                   |       | 209                                  |       | 187                                 |       | 588 |   | 533 |   |
| Other  rentals and landing fees                          |       | 154                                  |       | 141                                 |       | 449 |   | 422 |   |
| Depreciation  and amortization                           |       | 126                                  |       | 144                                 |       | 504 |   | 448 |   |
| Aircraft  maintenance materials and repairs              |       | 121                                  |       | 114                                 |       | 341 |   | 342 |   |
| Aircraft  rentals                                        |       | 109                                  |       | 117                                 |       | 338 |   | 355 |   |
| Regional  carrier expenses                               |       | 322                                  |       | 135                                 |       | 866 |   | 386 |   |
| Other                                                    |       | 375                                  |       | 366                                 |       | 1,114 |   | 1,140 |   |
| Total  operating expenses                                |       | 2,973                                |       | 2,545                               |       | 8,607 |   | 7,742 |   |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| **Operating Income (Loss)**                              |       | 79                                   |       | 146                                 |       | (81 | ) | (253 | ) |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| **Other Income (Expense)**                               |       |                                 |       |                                |       |   |   |   |   |
| U.  S. Government Appropriations                         |       | —                               |       | —                              |       | — |   | 209 |   |
| Interest  expense, net                                   |       | (133                                 | )          | (117                                | )          | (390 | ) | (341 | ) |
| Interest  of mandatorily redeemable security holder      |       | —                               |       | (7                                  | )          | — |   | (19 | ) |
| Investment  income                                       |       | 14                                   |       | 9                                   |       | 40 |   | 29 |   |
| Gain  (loss), other                                      |       | 2                                    |       | 16                                  |       | (5 | ) | 223 |   |
| Total  other income (expense)                            |       | (117                                 | )          | (99                                 | )          | (355 | ) | 101 |   |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| **Income (Loss) Before Income Taxes**                    |       | (38                                  | )          | 47                                  |       | (436 | ) | (152 | ) |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| Income  tax benefit                                      |       | —                               |       | —                              |       | — |   | (30 | ) |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| **Net Income (Loss)**                                    |       | (38                                  | )          | 47                                  |       | (436 | ) | (122 | ) |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| Preferred  stock requirements                            |       | (8                                   | )          | (5                                  | )          | (22 | ) | (5 | ) |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| **Net Income (Loss) Applicable to Common  Stockholders** |       | $                                    | (46        | )                                   | $          | 42 |   | $ | (458 | ) | $ | (127 | ) |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| Earnings  (loss) per common share:                       |       |                                 |       |                                |       |   |   |   |   |
| *Basic and Diluted*                                      |       | $                                    | (0.54      | )                                   | $          | 0.49 |   | $ | (5.31 | ) | $ | (1.48 | ) |
|                                                     |       |                                 |       |                                |       |   |   |   |   |
| Average  shares used in computation:                     |       |                                 |       |                                |       |   |   |   |   |
| *Basic*                                                  |       | 87                                   |       | 86                                  |       | 86 |   | 86 |   |
| *Diluted*                                                |       | 87                                   |       | 86                                  |       | 86 |   | 86 |   |

 

*See accompanying notes.*

 

3

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*Northwest Airlines Corporation*

 

CONDENSEDCONSOLIDATED BALANCE SHEETS

 
| ** **                                                          | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|
| **(Unaudited, in millions)**                                        | ** ** | **2004**         | ** ** | **2003**        | ** ** |
|                                                                |       |             |       |            |       |
| **Assets**                                                          |       |             |       |            |       |
|                                                                |       |             |       |            |       |
| **Current Assets**                                                  |       |             |       |            |       |
| Cash  and cash equivalents                                          |       | $                | 1,395      |            | $          | 1,608 |   |
| Unrestricted  short-term investments                                |       | 1,146            |       | 1,149           |       |
| Restricted  short-term investments                                  |       | 136              |       | 126             |       |
| Accounts  receivable, net                                           |       | 524              |       | 478             |       |
| Flight  equipment spare parts, net                                  |       | 129              |       | 174             |       |
| Prepaid  expenses and other                                         |       | 582              |       | 447             |       |
| Total  current assets                                               |       | 3,912            |       | 3,982           |       |
|                                                                |       |             |       |            |       |
| **Property and Equipment**                                          |       |             |       |            |       |
| Flight  equipment, net                                              |       | 7,311            |       | 6,698           |       |
| Other  property and equipment, net                                  |       | 747              |       | 725             |       |
| Total  property and equipment                                       |       | 8,058            |       | 7,423           |       |
|                                                                |       |             |       |            |       |
| **Flight Equipment Under Capital Leases, net**                      |       | 145              |       | 250             |       |
|                                                                |       |             |       |            |       |
| **Other Assets**                                                    |       |             |       |            |       |
| Intangible  pension asset                                           |       | 750              |       | 750             |       |
| International  routes                                               |       | 634              |       | 634             |       |
| Investments  in affiliated companies                                |       | 73               |       | 67              |       |
| Other                                                               |       | 878              |       | 1,048           |       |
| Total  other assets                                                 |       | 2,335            |       | 2,499           |       |
| Total  Assets                                                       |       | $                | 14,450     |            | $          | 14,154 |   |
|                                                                |       |             |       |            |       |
| **Liabilities and Stockholders’ Equity (Deficit)**             |       |             |       |            |       |
|                                                                |       |             |       |            |       |
| **Current Liabilities**                                             |       |             |       |            |       |
| Air  traffic liability                                              |       | $                | 1,512      |            | $          | 1,272 |   |
| Accounts  payable and other liabilities                             |       | 2,237            |       | 2,274           |       |
| Current  maturities of long-term debt and capital lease obligations |       | 594              |       | 733             |       |
| Total  current liabilities                                          |       | 4,343            |       | 4,279           |       |
|                                                                |       |             |       |            |       |
| **Long-Term Debt**                                                  |       | 7,634            |       | 7,198           |       |
|                                                                |       |             |       |            |       |
| **Long-Term Obligations Under Capital Leases**                      |       | 310              |       | 354             |       |
|                                                                |       |             |       |            |       |
| **Deferred Credits and Other Liabilities**                          |       |             |       |            |       |
| Pension  and postretirement benefits                                |       | 3,432            |       | 3,228           |       |
| Deferred  income taxes                                              |       | 149              |       | 146             |       |
| Other                                                               |       | 748              |       | 724             |       |
| Total  deferred credits and other liabilities                       |       | 4,329            |       | 4,098           |       |
|                                                                |       |             |       |            |       |
| **Preferred Redeemable Stock**                                      |       | 256              |       | 236             |       |
|                                                                |       |             |       |            |       |
| **Common Stockholders’ Equity (Deficit)**                      |       |             |       |            |       |
| Common  stock                                                       |       | 1                |       | 1               |       |
| Additional  paid-in capital                                         |       | 1,464            |       | 1,460           |       |
| Accumulated  deficit                                                |       | (1,549           | )          | (1,083          | )          |
| Accumulated  other comprehensive income (loss)                      |       | (1,308           | )          | (1,340          | )          |
| Treasury  stock                                                     |       | (1,030           | )          | (1,049          | )          |
| Total  common stockholders’ equity (deficit)                   |       | (2,422           | )          | (2,011          | )          |
| Total  Liabilities and Stockholders’ Equity (Deficit)          |       | $                | 14,450     |            | $          | 14,154 |   |

 

*Seeaccompanying notes.*

 

4

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*Northwest Airlines Corporation*

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

 
| ** **                                                                                          | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| **(Unaudited, in millions)**                                                                        | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                                                                                |       |                                |       |   |   |
| **Cash Flows from Operating Activities**                                                            |       |                                |       |   |   |
| Net  loss                                                                                           |       | $                                   | (436       | ) | $ | (122 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in) operating activities:          |       |                                |       |   |   |
| Gain  on sale of investment in Worldspan L.P.                                                       |       | —                              |       | (199 | ) |
| Depreciation  and amortization                                                                      |       | 504                                 |       | 448 |   |
| Income  tax expense (benefit)                                                                       |       | —                              |       | (30 | ) |
| Net  receipts (payments) of income taxes                                                            |       | (5                                  | )          | 215 |   |
| Pension  and other postretirement benefit contributions less than expense                           |       | 164                                 |       | 331 |   |
| Changes  in certain assets and liabilities                                                          |       | 160                                 |       | 29 |   |
| Other,  net                                                                                         |       | 26                                  |       | 3 |   |
| Net  cash provided by (used in) operating activities                                                |       | 413                                 |       | 675 |   |
|                                                                                                |       |                                |       |   |   |
| **Cash Flows from Investment Activities**                                                           |       |                                |       |   |   |
| Capital  expenditures                                                                               |       | (434                                | )          | (831 | ) |
| Net  increase (decrease) in short-term investments                                                  |       | 8                                   |       | (618 | ) |
| Proceeds  from sale of investment in Worldspan L.P.                                                 |       | —                              |       | 278 |   |
| Other,  net                                                                                         |       | 11                                  |       | 36 |   |
| Net  cash provided by (used in) investing activities                                                |       | (415                                | )          | (1,135 | ) |
|                                                                                                |       |                                |       |   |   |
| **Cash Flows from Financing Activities**                                                            |       |                                |       |   |   |
| Proceeds  from long-term debt                                                                       |       | 462                                 |       | 885 |   |
| Payments  of long-term debt and capital lease obligations                                           |       | (664                                | )          | (246 | ) |
| Other,  net                                                                                         |       | (9                                  | )          | (64 | ) |
| Net  cash provided by (used in) financing activities                                                |       | (211                                | )          | 575 |   |
|                                                                                                |       |                                |       |   |   |
| **Increase (Decrease) in Cash and Cash Equivalents**                                                |       | (213                                | )          | 115 |   |
|                                                                                                |       |                                |       |   |   |
| Cash  and cash equivalents at beginning of period                                                   |       | 1,608                               |       | 2,097 |   |
| Cash  and cash equivalents at end of period                                                         |       | $                                   | 1,395      |   | $ | 2,212 |   |
|                                                                                                |       |                                |       |   |   |
| Cash  and cash equivalents and unrestricted short-term investments at end of period                 |       | $                                   | 2,541      |   | $ | 2,804 |   |
|                                                                                                |       |                                |       |   |   |
| Supplemental  Cash Flow Information:                                                                |       |                                |       |   |   |
| Interest  paid                                                                                      |       | $                                   | 364        |   | $ | 305 |   |
|                                                                                                |       |                                |       |   |   |
| Investing  and Financing Activities Not Affecting Cash:                                             |       |                                |       |   |   |
| Manufacturer  financing of aircraft, aircraft predelivery deposits and other non-cash  transactions |       | $                                   | 458        |   | $ | 230 |   |

 

*See accompanying notes.*

 

5

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*NorthwestAirlines Corporation*

 

NOTES TO 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 included herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  The information and footnote disclosuresnormally included in annual financial statements prepared in accordance withU.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed oromitted as permitted by such rules and regulations. These financial statementsand related notes should be read in conjunction with the financial statementsand notes included in the Company’s audited consolidated financial statements,which are provided in the Company’s Annual Report on Form 10-K for the yearended December 31, 2003.  The Company’saccounting and reporting policies are summarized in “Note 1 – Summary ofSignificant Accounting Policies” in the Annual Report on Form 10-K for 2003.

 

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

 

In the opinion ofmanagement, the interim financial statements reflect adjustments, consisting ofnormal recurring accruals, unless otherwise noted, which are necessary to presentfairly the Company’s financial position, results of operations and cash flowsfor the periods indicated.  As noted inthe Company’s Form 8-K filed with the SEC on January 28, 2004, regional carrierrevenues and related Airline Service Agreement (“ASA”) payments previouslyreported as a net amount in passenger revenues are now reported separately inrevenues and expenses for all periods presented.

 

The Company’s results ofoperations for interim periods are not necessarily indicative of the results foran entire year due to seasonal factors as well as competitive and generaleconomic conditions.  The Company’ssecond and third quarter operating results have historically been morefavorable due to increased leisure travel on domestic and international routesduring the spring and summer months.

 

## **Note2 – Recent Accounting Pronouncements**

 

The Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 was passed by Congress andsigned into law on December 8, 2003.  TheAct establishes a voluntary prescription drug benefit for eligible participantsbeginning January 1, 2006, at which time the U.S. Government will also begin topay a special subsidy equal to 28% of a retiree’s covered prescription drugexpenses between $250 and $5,000 (adjusted annually for changes in Medicare percapita prescription drug costs) to employers who sponsor equivalent plans.  In accordance with Financial AccountingStandards Board (“FASB”) Staff Position 106-2, *Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003,* which is effective forinterim periods beginning after June 15, 2004, the Company will not include theeffects of the Act in any measures of liabilities and expenses reflected in theConsolidated Financial Statements and accompanying notes until year end2004.  The Company estimates that the Actwill not have a significant impact on postretirement liabilities and benefitcosts.

 

In December 2003, theFASB revised Statement of Financial Accounting Standards (“SFAS”) No. 132, *Employers’ Disclosures about Pensions and OtherPostretirement Benefits.*  Thisrevision requires the disclosure in interim reports of the amount of netperiodic benefit cost recognized and the total amount of contributions paid andexpected to be paid during the current fiscal year if significantly differentfrom amounts previously disclosed.  TheCompany adopted the provisions of this revised statement as of December 31,2003, and has included the required disclosures in “Note 11 – Pension and OtherPostretirement Benefits”.

 

6

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During the September 2004meeting of the Emerging Issues Task Force (“EITF”), a consensus was reached onEITF Issue 04-8, *The Effect of ContingentlyConvertible Debt on Diluted Earnings per Share*.  EITF 04-8 requires companies to includecertain convertible debt and equity instruments that were previously excludedinto their calculations of diluted earnings per share.  The EITF concluded that Issue 04-8 will beeffective for periods ending after December 15, 2004, and must be applied byrestating all periods during which time the applicable convertible instrumentswere outstanding.  As further discussedin “Note 4 – Earnings (Loss) Per Share Data”, shares issuable upon conversionof the Company’s 6.625% and 7.625% senior convertible notes issued in 2003 willbe included in the Company’s diluted earnings per share calculation in periodswhere the Company reported net income applicable to common shareholders.

 

**Note 3 –Segment Information**

 

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

 

| ** **          | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|---------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **          | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Domestic            | ** ** | **$**                                | **2,037**  |                                | $          | 1,769 | ** ** | **$** | **5,826** |   | $ | 5,072 |   |
| Pacific             | ** ** | **676**                              |       | 594                                 | ** ** | **1,803** |   | 1,535 |   |
| Atlantic            | ** ** | **339**                              |       | 328                                 | ** ** | **897** |   | 882 |   |
| Operating  revenues | ** ** | **$**                                | **3,052**  |                                | $          | 2,691 | ** ** | **$** | **8,526** |   | $ | 7,489 |   |

 

7

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**Note 4 – Earnings (Loss) PerShare Data**

 

The following table setsforth the computation of basic and diluted earnings (loss) per common share: 

 
| ** **                                                                                                   | ** ** | **Three months ended  September 30** |       | **Nine months ended  September 30** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                   | ** ** | **2004**                             | ** ** | **2003**                            |       | **2004** | ** ** | **2003** | ** ** |
| Numerator:                                                                                                   |       |                                 | ** ** |                                |       |   | ** ** |   |   |
| Net  income (loss) (in millions)                                                                             | ** ** | **$**                                | **(38**    | **)**                               | $          | 47 |   | **$** | **(436** | **)** | $ | (122 | ) |
| Preferred  stock requirements (in millions)                                                                  | ** ** | **(8**                               | **)**      | (5                                  | )          | **(22** | **)** | (5 | ) |
| Net  income (loss) applicable to common shareholders (in millions)                                           | ** ** | **$**                                | **(46**    | **)**                               | $          | 42 |   | **$** | **(458** | **)** | $ | (127 | ) |
|                                                                                                         |       |                                 | ** ** |                                |       |   | ** ** |   |   |
| Denominator:                                                                                                 |       |                                 | ** ** |                                |       |   | ** ** |   |   |
| Weighted-average  shares outstanding for basic earnings (loss) per share                                     | ** ** | **86,523,146**                       | ** ** | 85,842,569                          |       | **86,327,275** | ** ** | 85,834,496 |   |
| Effect  of dilutive securities:                                                                              |       |                                 | ** ** |                                |       |   | ** ** |   |   |
| Series  C Preferred Stock                                                                                    | ** ** | **—**                           | ** ** | —                              |       | **—** | ** ** | — |   |
| Shares  held in non-qualified rabbi trusts                                                                   | ** ** | **—**                           | ** ** | 2,772                               |       | **—** | ** ** | — |   |
| Employee  stock options and restricted shares                                                                | ** ** | **—**                           | ** ** | 439,835                             |       | **—** | ** ** | — |   |
| Adjusted  weighted-average shares outstanding and assumed conversions for diluted  earnings (loss) per share | ** ** | **86,523,146**                       | ** ** | 86,285,176                          |       | **86,327,275** | ** ** | 85,834,496 |   |
|                                                                                                         |       |                                 | ** ** |                                |       |   | ** ** |   |   |
| Basic  and diluted earnings (loss) per common share:                                                         |       |                                 | ** ** |                                |       |   | ** ** |   |   |
| Net  income (loss) before preferred stock requirements                                                       | ** ** | **$**                                | **(0.45**  | **)**                               | $          | 0.54 |   | **$** | **(5.06** | **)** | $ | (1.43 | ) |
| Preferred  stock requirements                                                                                | ** ** | **(0.09**                            | **)**      | (0.05                               | )          | **(0.25** | **)** | (0.05 | ) |
| Net  income (loss) applicable to common shareholders                                                         | ** ** | **$**                                | **(0.54**  | **)**                               | $          | 0.49 |   | **$** | **(5.31** | **)** | $ | (1.48 | ) |

 

For the three and ninemonths ended September 30, 2004, incremental shares related to dilutivesecurities of 440,840 and 610,002, respectively, and for the nine months endedSeptember 30, 2003, incremental shares related to dilutive securities of266,819, were not included in the diluted earnings per share calculationbecause the Company reported a net loss for those periods.  Incremental shares related to dilutivesecurities have an anti-dilutive impact on earnings per share when a net lossis reported and therefore are not included in the calculation.

 

Because of the Company’selection to settle the Series C Preferred Stock with cash rather than by theCompany issuing additional common stock, 6,484,065 and 6,497,719 shares ofSeries C Preferred Stock are excluded from the effect of dilutive securitiesfor the three and nine months ended September 30, 2004, respectively, and6,549,328 and 6,555,677 shares of Series C Preferred Stock are excluded fromthe effect of dilutive securities for the three and nine months ended September30, 2003, respectively.  See “Note6-Redeemable Preferred and Common Stock”, in the Company’s December 31, 2003Annual Report on Form 10-K for additional information regarding this security.

 

The dilutive securitiesdescribed above do not include 1,574,850 employee stock options and restrictedshares for the three months ended as of September 30, 2003, because theexercise prices of these options were greater than the average market price ofthe common stock for the period and the amount of assumed proceeds for theserestricted shares did not result in incremental dilutive shares under thetreasury method.  Total employee stockoptions and restricted shares outstanding of 6,465,001 as of September 30, 2004and 6,878,833 as of September 30, 2003, respectively, were not included indiluted securities because the Company reported a net loss for the three andnine months ended September 30, 2004, and for the nine months ended September30, 2003.  Additionally, 9.3 millionshares issuable upon conversion of the Company’s 6.625% senior convertiblenotes issued in May 2003 were excluded from dilutive securities for the threeand nine months ended September 30, 2004 and 2003, and 9.8 million sharesissuable upon conversion of the Company’s 7.625% senior convertible notesissued in November 2003 were excluded from dilutive securities for the threeand nine months ended September 30, 2004 because the contingent conversion featuresof the notes had not been met and because the Company presently intends to usecash for any redemptions of notes at the repurchase dates.  See “Note 3-Long-Term Debt and Short-TermBorrowings” in the Company’s December 31, 2003 Annual Report on Form 10-K foradditional information regarding these securities.  Additionally, refer to “Note 2 – RecentAccounting Pronouncements” for further information regarding the consensusreached on EITF Issue 04-8, *The Effect ofContingently Convertible Debt on Diluted Earnings per Share*.

 

8

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

 

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

 
| ** **                                                       | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                       | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net  income (loss)                                               | ** ** | **$**                                | **(38**    | **)**                               | $          | 47 |   | **$** | **(436** | **)** | $ | (122 | ) |
| Minimum  pension liability adjustments                           | ** ** | **—**                           | ** ** | —                              |       | **—** | ** ** | (156 | ) |
| Change  in unrealized gain/loss on available-for-sale securities | ** ** | **2**                                | ** ** | 1                                   |       | **(5** | **)** | 1 |   |
| Change  in deferred gain/loss from hedging activities            | ** ** | **41**                               | ** ** | (26                                 | )          | **38** | ** ** | (13 | ) |
| Foreign  currency translation adjustments                        | ** ** | **—**                           | ** ** | (5                                  | )          | **(1** | **)** | (4 | ) |
| Comprehensive  income (loss)                                     | ** ** | **$**                                | **5**      | ** **                          | $          | 17 |   | **$** | **(404** | **)** | $ | (294 | ) |

 

**Note6 – Stock-based Compensation**

 

Effective January 1,2003, the Company adopted the fair value method of recording stock-basedemployee compensation prescribed by SFAS No. 123, *Accountingfor Stock-Based Compensation*, and accounts for this change inaccounting principle using the “prospective method” as described by SFAS No.148, *Accounting for Stock-Based Compensation –Transition and Disclosure, an amendment of FASB Statement No. 123*.

 

For the three and nine months ended September 30, 2004 and 2003, the proforma results and per share amounts assuming the fair value based method hadbeen applied to all outstanding option awards are materially the same as thereported amounts because a minimal number of outstanding options were grantedprior to January 1, 2003.

 

**Note 7 – Income Taxes**

 

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

 

**Note8 – Long-term Debt**

 

At September 30,2004, maturities of long-term debt, excluding capital lease obligations,through December 31, 2008 are as follows (in millions):

 

| 2004 |   | $     | 95     |   |
|------|--------|-------|--------|--------|
| 2005 |   | 1,500 |   |
| 2006 |   | 856   | (1)    |
| 2007 |   | 1,108 | (1)    |
| 2008 |   | 517   |   |

 

----

(1)          These amounts include$79 million and $364 million of aircraft related loan obligations maturing in2006 and 2007, respectively, that may be extended for an additional nine yearsfrom their respective maturity dates, at the Company’s election.

 

9

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The amount shownin 2005 includes $962 million of principal outstanding under the Company’ssecured credit facilities due on October 24, 2005.  As of October 24, 2004, the loan will maturewithin one year and as such, this amount will be recorded as a currentliability in financial statements going forward.  These facilities currently bear interest at avariable rate equal to the one-month London Interbank Offered Rate (“ LIBOR”)plus 3.25% (5.16% as of October 20, 2004). The credit agreement includes a covenant that requires the Company,beginning in the June quarter of this year, to maintain at least a one-to-oneratio of earnings (defined as operating income adjusted to exclude the effectsof depreciation, amortization and aircraft rents and to include the effects ofinterest income) to fixed charges (comprising interest expense and aircraftrents).  If the Company fails to meetthis fixed charges coverage ratio, repayment of borrowings under the creditfacilities could be accelerated by the participant banks.  The Company met this requirement for the sixmonths ending September 30, 2004.  TheCompany is currently in discussions with the banks to restructure thefacilities well in advance of the maturity date.  Prior to a restructuring of the agreement, inview of fuel prices at historical highs and other factors, the banks haveagreed to reset the fixed charges covenant to 0.8 for the nine and twelvemonths ending December 31, 2004 and March 31, 2005, respectively, and to waivethe covenant entirely on those dates so long as the Company’s unrestricted cashremains above $1.7 billion.  As of September 30, 2004, the Company heldunrestricted cash totaling $2.54 billion.

 

On January 26,2004, Northwest completed an offering of $300 million of unsecured notes due2009.  The notes have a coupon rate of10%, payable semi-annually in cash on February 1 and August 1 of each year,beginning on August 1, 2004, and are not redeemable prior to maturity.  Each note was issued at a price of $962 per$1,000 principal amount, resulting in a yield to maturity of 11.0%.  Proceeds from the notes are used for workingcapital and general corporate purposes. The notes are guaranteed by NWA Corp.

 

In March and April2004, the Company repaid the remaining $333 million outstanding under twoissues of unsecured notes, as scheduled, with a combined original face amountof $350 million.  On March 15, $138million of 8.375% senior unsecured notes were repaid, net of $12 millionpreviously exchanged for newly issued pass-through certificates in conjunctionwith an exchange offer in December 2003. The 8.375% unsecured notes were originally issued in 1997.  Additionally, the Company repaid $195 millionof 8.52% senior unsecured notes that matured on April 7, net of $5 millionpreviously exchanged for newly issued pass-through certificates in conjunctionwith the same December 2003 exchange offer. The 8.52% unsecured notes were originally issued in 1998.

 

10

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**Note 9 –Fleet Information and Commitments**

 

The following tablepresents the number of aircraft in service and on firm order as of September30, 2004:

 
| **Aircraft Type**                     | ** ** | **Seating  Capacity** | ** ** | **Owned**  | ** ** | **Capital  Lease** | ** ** | **Operating  Lease** | ** ** | **Temporarily  Not in  Service** | ** ** | **Total  Aircraft  in Service** | ** ** | **Aircraft  on Firm  Order** | ** ** |
|---------------------------------------|------------|-----------------------|------------|------------|------------|--------------------|------------|----------------------|------------|----------------------------------|------------|---------------------------------|------------|------------------------------|------------|
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Passenger Aircraft**                |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| Airbus:                               |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| A319                                  |       | 124                   |       | 58         |       | —             |       | 12                   |       | —                           |       | 70                              |       | 11                           |       |
| A320                                  |       | 148                   |       | 43         |       | 4                  |       | 31                   |       | —                           |       | 78                              |       | 2                            |       |
| A330-200                              |       | 243                   |       | 4          |       | —             |       | —               |       | (1                               | )          | 3                               |       | 8                            |       |
| A330-300                              |       | 298                   |       | 8          |       | —             |       | —               |       | —                           |       | 8                               |       | 4                            |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| Boeing:                               |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| 757-200                               |       | 180-184               |       | 32         |       | 5                  |       | 19                   |       | (5                               | )          | 51                              |       | —                       |       |
| 757-300                               |       | 224                   |       | 16         |       | —             |       | —               |       | —                           |       | 16                              |       | —                       |       |
| 747-200                               |       | 353-430               |       | 2          |       | —             |       | 5                    |       | (1                               | )          | 6                               |       | —                       |       |
| 747-400                               |       | 403                   |       | 4          |       | —             |       | 12                   |       | —                           |       | 16                              |       | —                       |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| DC9                                   |       | 78-125                |       | 158        |       | —             |       | 5                    |       | (9                               | )          | 154                             |       | —                       |       |
| DC10                                  |       | 273                   |       | 14         |       | —             |       | 8                    |       | —                           |       | 22                              |       | —                       |       |
|                                  |       |                  |       | 339        |       | 9                  |       | 92                   |       | (16                              | )          | 424                             |       | 25                           |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Freighter Aircraft**                |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| Boeing  747-200F                      |       |                  |       | 7          |       | —             |       | 5                    |       | —                           |       | 12                              |       | —                       |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Total Northwest Operated Aircraft** | ** ** | ** **            | ** ** | **346**    | ** ** | **9**              | ** ** | **97**               | ** ** | **(16**                          | **)**      | **436**                         | ** ** | **25**                       | ** ** |
| ** **                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** **         | ** ** | ** **           | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** **                   | ** ** |
| **Regional Aircraft**                 |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| BAE  AVRO RJ85                        |       | 69                    |       | 10         |       | —             |       | 25                   |       | —                           |       | 35                              |       | —                       |       |
| Bombardier  CRJ-200/440               |       | 44-50                 |       | —     |       | —             |       | 109                  |       | (2                               | )          | 107                             |       | 20                           |       |
| SAAB  340                             |       | 30-34                 |       | —     |       | —             |       | 49                   |       | —                           |       | 49                              |       | —                       |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Total Airlink Operated Aircraft**   | ** ** | ** **            | ** ** | **10**     | ** ** | **—**         | ** ** | **183**              | ** ** | **(2**                           | **)**      | **191**                         | ** ** | **20**                       |       |
|                                  |       |                  |       |       |       |               |       |                 |       |                             |       |                            |       |                         |       |
| **Total Aircraft**                    | ** ** | ** **            | ** ** | **356**    | ** ** | **9**              | ** ** | **280**              | ** ** | **(18**                          | **)**      | **627**                         | ** ** | **45**                       |       |

 

Committedexpenditures for the 45 aircraft and related equipment on firm order, includingestimated amounts for contractual price escalations and predelivery deposits,will be approximately $352 million for the remainder of 2004, $740 million in2005, $511 million in 2006, $205 million in 2007 and $189 million in 2008.  Consistent with prior practice, the Companyintends to finance its aircraft deliveries through a combination of internallygenerated funds, debt and long-term lease financing.  Financing commitments available for use bythe Company are in place for all of the aircraft on firm order and range from80% - 100% of each aircraft’s purchase price. The Company intends to finance all of the CRJ-200/440 aircraft on orderthrough long-term operating lease financing commitments from the manufacturer.  These aircraft will, in turn, be subleased toand operated by Pinnacle Airlines, Inc. (“Pinnacle Airlines”).  The manufacturer has the right not to providefinancing for future regional aircraft deliveries in the event the Company’scredit ratings fall below certain levels; however, if the manufacturer does notprovide financing, the Company is not obligated to take delivery.  On July 28, 2004, Standard & Poor’s(“S&P”) downgraded the corporate credit rating of the Company from B+ to B,which triggered the manufacturer’s right not to provide financing for subsequentaircraft deliveries.  Since thedowngrade, the manufacturer has continued to provide financing.

 

During the ninemonths ended September 30, 2004, the Company took delivery of seven Airbusaircraft and 33 Bombardier CRJ regional jet aircraft.  The Company subleased all of the BombardierCRJ aircraft to Pinnacle Airlines pursuant to the Company’s Airline ServicesAgreement with Pinnacle Airlines.  Inconnection with the acquisition of these 40 aircraft, the Company entered intolong-term debt arrangements and operating leases with various lenders andlessors.  The aggregate amount of debtincurred and minimum lease payments under such arrangements totaled $1.2billion.

 

11

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**Note 10– Aircraft Impairments**

 

In June 2004, as part ofa revised fleet plan, the Company determined that it does not currently intendto return to service 10 Boeing 747-200 passenger aircraft that had beentemporarily removed from operations.  As aresult, the Company recorded, as additional depreciation expense, impairmentcharges of $104 million associated with these aircraft and related inventory inthe second quarter of 2004.

 

**Note 11– Pension and Other Postretirement Benefits**

 

The Company hasseveral noncontributory pension plans covering substantially all of itsemployees.  The benefits for these plansare based primarily on years of service and, in some cases, employeecompensation.

 

The components ofnet periodic cost of defined benefit plans included the following (inmillions):

 

| ** **                                      | ** ** | **Three months ended September 30** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**                | ** ** | **Other Benefits** | ** ** |
| ** **                                      | ** ** | **2004**                            | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service  cost                                   | ** ** | **$**                               | **60**     | ** ** | $ | 62 |   | **$** | **7** | ** ** | $ | 7 |   |
| Interest  cost                                  | ** ** | **132**                             | ** ** | 132 |   | **13** | ** ** | 11 |   |
| Expected  return on plan assets                 | ** ** | **(125**                            | **)**      | (119 | ) | **—** | ** ** | — |   |
| Amortization  of prior service cost             | ** ** | **19**                              | ** ** | 19 |   | **(2** | **)** | (2 | ) |
| Recognized  net actuarial loss and other events | ** ** | **22**                              | ** ** | 14 |   | **6** | ** ** | 5 |   |
| Net  periodic benefit cost                      | ** ** | **$**                               | **108**    | ** ** | $ | 108 |   | **$** | **24** | ** ** | $ | 21 |   |

 

| ** **                                      | ** ** | **Nine months ended September 30** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **Pension Benefits**               | ** ** | **Other Benefits** | ** ** |
| ** **                                      | ** ** | **2004**                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service  cost                                   | ** ** | **$**                              | **181**    | ** ** | $ | 188 |   | **$** | **22** | ** ** | $ | 20 |   |
| Interest  cost                                  | ** ** | **396**                            | ** ** | 395 |   | **39** | ** ** | 34 |   |
| Expected  return on plan assets                 | ** ** | **(375**                           | **)**      | (355 | ) | **—** | ** ** | — |   |
| Amortization  of prior service cost             | ** ** | **57**                             | ** ** | 57 |   | **(6** | **)** | (6 | ) |
| Recognized  net actuarial loss and other events | ** ** | **67**                             | ** ** | 97 |   | **18** | ** ** | 14 |   |
| Net  periodic benefit cost                      | ** ** | **$**                              | **326**    | ** ** | $ | 382 |   | **$** | **73** | ** ** | $ | 62 |   |

 

On December 23, 2003, theCompany applied to the Internal Revenue Service (“IRS”) to reschedule some ofits plan year 2004 pension contributions, which included amounts due in both 2004and 2005, for the contract and salaried employees’ pension plans.  Subsequently, on April 10, 2004, thePresident signed into law the Pension Funding Equity Act (the “Pension Act”),which temporarily reduces the Company’s required contributions through twomechanisms: (1) certain companies were permitted to elect partial relief fromthe deficit reduction contribution requirements that otherwise would haveapplied in 2004 and 2005, an election the Company made; and (2) the applicablediscount rate used to determine funding was increased to reflect yields onindices of high quality corporate bonds instead of 30-year U.S. Treasuryrates.  Following enactment of thePension Act, the Company withdrew its request to the IRS to reschedule its planyear 2004 pension contributions.

 

Including the effect ofthe Pension Act, the Company’s 2004 calendar year cash contributions toqualified pension plans approximate $253 million.  On both April and July 15, 2004, the Companycontributed $84 million to these plans. Subsequently, on October 15, 2004, the Company contributed an additional$85 million, completing its funding obligations for the year.

 

12

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In 2004, the Companyexpects to record expense in its qualified pension plans of approximately $435million.  Absent a significant change inthe level of interest rates or the market value of plan assets between now andyear-end, the Company anticipates that expense related to its qualified plansin 2005 will again be approximately $500 million and that requiredcontributions will be near or below that amount.

 

The Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 was passed by Congress andsigned into law on December 8, 2003.  TheAct establishes a voluntary prescription drug benefit for eligible participantsbeginning January 1, 2006, at which time the U.S. Government will also begin topay a special subsidy equal to 28% of a retiree’s covered prescription drugexpenses between $250 and $5,000 (adjusted annually for changes in Medicare percapita prescription drug costs) to employers who sponsor equivalent plans.  In accordance with Financial AccountingStandards Board (“FASB”) Staff Position 106-2, *Accountingand Disclosure Requirements Related to the Medicare Prescription Drug,Improvement and Modernization Act of 2003,* which is effective forinterim periods beginning after June 15, 2004, the Company will not include theeffects of the Act in any measures of liabilities and expenses reflected in theConsolidated Financial Statements and accompanying notes until year end2004.  The Company estimates that the Actwill not have a significant impact on postretirement liabilities and benefitcosts.

 

**Note 12 –Subsequent Events**

 

*ProposedSale of Orbitz.*  OnSeptember 29, 2004, Cendant Corporation (“Cendant”), Orbitz, Inc. (“Orbitz”)and the airline owners of Orbitz entered into agreements, which provide for theacquisition by Cendant of all the shares of Orbitz for $27.50 per share incash.  The transaction is subject toregulatory and other approvals and the parties expect the transaction to closebefore year end.  Northwest currentlyholds 4,949,201 shares of class B common stock of Orbitz.  The Company anticipates that it willrecognize a gain of approximately $110 million to $120 million on the sale ofits Orbitz shares.

 

*TentativeAgreement with ALPA. *OnOctober 14, 2004, NWA Corp. announced that it reached a tentative agreementwith its pilots, represented by the Northwest unit of the Air Line PilotsAssociation International (“ALPA”).  Thetentative agreement includes $300 million in annual labor cost savings from theCompany’s pilots and its salaried workers, with pilots contributing $265million in annual wage, benefit and other contract changes and salaried andmanagement employees taking $35 million in annual salary and benefitreductions.  If all of the terms of thetentative agreement are satisfied, these labor cost reductions could beeffective as early as December 1, 2004. The agreement was subsequently approved by the ALPA Master ExecutiveCouncil and is currently subject to ratification by the Company’s pilots.  The agreement also calls for a satisfactoryrestructuring of Northwest’s $975 million revolving credit facility, prior tocontract implementation.

 

13

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

 

Financial health amongU.S. airlines, particularly the industry’s large legacy carriers, continues toweaken in the face of unprecedented challenges. Longer term trends contributing to the erosion of industry financialresults have not abated, with expansion of low cost carriers, increased productdistribution through the internet and other factors accelerating the evolutiontoward commodity ticket pricing.  Theindustry also continues to bear a growing tax burden on ticket prices and theadded costs of new airport security procedures. Meanwhile, passengers remain concerned about ongoing global terrorismand the potential spread of contagious diseases such as SARS.  As a result, revenues remain significantlybelow historical norms and, when combined with record fuel prices, wereinadequate to produce even modest profits at most airlines despite passengerloads at an all-time high during the traditionally strong summer season.

 

Northwest has takenaggressive steps to streamline operations and reduce costs in response to thisnew revenue environment and has been among the most successful U.S. airlines inbringing down non-labor expenses. Nonetheless, the Company has incurred operating and net losses over thepast three years at levels that are unsustainable on a long-term basis.  Overall operating costs remain well out ofbalance with the new pricing environment and the Company’s principal need atthis time is to bring labor expenses within industry norms.  Some airlines whose efforts to reduce costshave not kept pace with declining industry revenues are now attempting toreorganize through Chapter 11 bankruptcy proceedings.  Meanwhile, other carriers are facing theharsh reality that such a course of action may be their only means of achievingthe necessary cost restructuring to remain viable.  See “Item 7. Management’s Discussion andAnalysis of Financial Condition and Results of Operations - Northwest and theCurrent Status of the Airline Industry” in the Company’s December 31, 2003Annual Report on Form 10-K for a detailed discussion of the factorscontributing to the structural decline in industry revenue and other financialand operational challenges the Company faces. Also, refer to “Note 12 – Subsequent Events” in this quarterly reportfor a discussion of a tentative agreement reached by the Company with itspilots’ union regarding pilot and management labor savings.

 

For the quarter endedSeptember 30, 2004, the Company reported a net loss applicable to commonstockholders of $46 million and operating income of $79 million, versus netincome applicable to common stockholders of $42 million and operating income of$146 million for the quarter ended September 30, 2003.  Net loss per common share was $0.54 in thethird quarter of 2004, compared with diluted earnings per common share of $0.49in the third quarter of 2003.

 

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, of which MLT Inc. (“MLT”) is presentlythe most significant.  However, theCompany’s 2003 financial statements also included the results of PinnacleAirlines.  On November 24, 2003, aninitial public offering of 88.6% of Pinnacle Airlines Corp., the holdingcompany of Pinnacle Airlines, was completed. As a result of this offering, the Company no longer consolidates thefinancial results of Pinnacle Airlines Corp., which modestly affectsyear-over-year comparisons.

 

The Company’s results ofoperations for interim periods are not necessarily indicative of the resultsfor an entire year due to seasonal factors as well as competitive and generaleconomic conditions.  The Company’ssecond and third quarter operating results have historically been morefavorable due to increased leisure travel on domestic and international routesduring the spring and summer months.

 

14

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

 
| ** **                                                                              | ** ** | **Three months ended  September 30** | ** **     | ** ** | ** ** | **Nine months ended  September 30** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------|----------------|------------|------------|-------------------------------------|------------|------------|------------|
| ** **                                                                              | ** ** | **2004**                             | ** **     | **2003**   | ** ** | **% Chg.**                          | ** ** | **2004**   | ** ** | **2003** | ** ** | **% Chg.** | ** ** |
| Scheduled  service:                                                                     |       |                                 |           |       |       |                                |       |       |       |   |   |   |   |
| Available  seat miles (ASM) (millions)                                                  |       | **23,814**                           |           | 23,287     |       | 2.3                                 |       | **68,409** |       | 67,210 |   | 1.8 |   |
| Revenue  passenger miles (RPM) (millions)                                               |       | **19,744**                           |           | 18,947     |       | 4.2                                 |       | **55,225** |       | 51,865 |   | 6.5 |   |
| Passenger  load factor                                                                  |       | **82.9**                             | %              | 81.4       | %          | 1.5                                 | pts.       | **80.7**   | %          | 77.2 | % | 3.5 | pts. |
| Revenue  passengers (millions)                                                          |       | **14.8**                             |           | 14.0       |       | 5.9                                 |       | **41.6**   |       | 39.0 |   | 6.5 |   |
| Passenger  revenue per RPM (yield)                                                      |       | **11.63**                            | *¢*       | 11.10      | *¢*   | 4.8                                 |       | **11.66**  | *¢*   | 11.03 | *¢* | 5.7 | * * |
| Passenger  revenue per ASM (RASM)                                                       |       | **9.64**                             | *¢*       | 9.03       | *¢*   | 6.8                                 | * *   | **9.41**   | *¢*   | 8.51 | *¢* | 10.6 | * * |
| Total  operating ASM (millions)                                                         |       | **23,839**                           |           | 23,315     |       | 2.2                                 |       | **68,524** |       | 67,733 |   | 1.2 |   |
| Passenger  service operating expense per total ASM (2) (3) (4)                          |       | **10.24**                            | *¢*       | 9.34       | *¢*   | 9.6                                 |       | **10.36**  | *¢*   | 9.78 | *¢* | 5.9 | * * |
| Aircraft  impairment, curtailment charge, severance expense and other per total ASM (4) |       | **0.00**                             |           | 0.00       |       | n/m                                 |       | **0.15**   | *¢*   | 0.15 | *¢* | n/m | * * |
| Cargo  ton miles (millions)                                                             |       | **579**                              |           | 577        |       | 0.3                                 |       | **1,697**  |       | 1,596 |   | 6.3 |   |
| Cargo  revenue per ton mile                                                             |       | **36.45**                            | *¢*       | 34.04      | *¢*   | 7.1                                 |       | **34.59**  | *¢*   | 34.07 | *¢* | 1.5 | * * |
| Fuel  gallons consumed (millions)                                                       |       | **459**                              |           | 463        |       | (0.9                                | )          | **1,322**  |       | 1,331 |   | (0.7 | ) |
| Average  fuel cost per gallon, excluding taxes                                          |       | **124.45**                           | *¢ * | 75.60      | *¢*   | 64.6                                | * *   | **111.19** | *¢*   | 80.17 | *¢* | 38.7 | * * |
| Number  of operating aircraft at end of period                                          |       | ** **                           |           |       |       |                                |       | **436**    |       | 427 |   | 2.1 |   |
| Full-time  equivalent employees at end of period                                        |       |                                 |           |       |       |                                |       | **38,178** |       | 38,722 |   | (1.4 | ) |

 

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(1)          Allstatistics exclude Northwest Airlink regional carriers, which is consistentwith how the Company reports statistics to the Department of Transportation (“DOT”)and is comparable to statistics reported by other major network airlines.

(2)   Thisfinancial measure excludes non-passenger service expenses.  The Company believes that providing financialmeasures directly related to passenger service operations allows investors toevaluate and compare the Company’s core operating results to those of theindustry.

(3)   Passengerservice operating expense excludes the following items unrelated to passengerservice operations (in millions): 

 
| ** **                                                      | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                      | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Freighter  operations                                           |       | **$**                                | **150**    |                                | $          | 118 |   | **$** | **442** |   | $ | 355 |   |
| MLT  Inc. - net of intercompany eliminations                    |       | **44**                               |       | 39                                  |       | **153** |   | 158 |   |
| Regional  carriers - net of intercompany eliminations           |       | **322**                              |       | 135                                 |       | **866** |   | 386 |   |
| Pinnacle  Airlines, Inc. - net of intercompany eliminations (a) |       | **—**                           |       | 75                                  |       | **—** |   | 208 |   |
| Other                                                           |       | **15**                               |       | 1                                   |       | **43** |   | 14 |   |
|                                                                 |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |

 

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

 

(4)          Passengerservice operating expense per ASM includes the following items (in millions):

 
| ** **            | ** ** | **Three months ended  September 30** | ** ** | **Nine months ended  September 30** | ** ** |
|-----------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **            | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Curtailment  expenses | ** ** | **$**                                | **—** |                                | $          | — | ** ** | **$** | **—** |   | $ | 58 |   |
| Severance  expenses   | ** ** | **—**                           |       | —                              | ** ** | **—** |   | 20 |   |
| Aircraft  impairments | ** ** | **—**                           |       | —                              | ** ** | **104** |   | 21 |   |
|                       |            |                                      |            |                                     |            |  |  |  |  |  |  |  |  |

 

15

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

 

*Operating Revenues.*  Operating revenues increased 13.4% ($361million), the result of higher system passenger, regional carrier, cargo andother revenues.

 

System passenger revenuesincreased 9.2% ($194 million).  Thefollowing analysis by region is based on information reported to the Departmentof Transportation and excludes regional carriers:

 
| ** **                         | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2004**                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger  revenues (in millions)  |       | $          | 2,297      |         | $          | 1,468       |       | $            | 531        |   | $ | 298 |   |
|                               |       |       |       |         |       |        |       |         |       |
| **Increase (Decrease) from 2003:** |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)  |       | $          | 194        |         | $          | 66          |       | $            | 110        |   | $ | 18 |   |
| Percent                            |       | 9.2        | %          | 4.7          | %          | 26.1        | %          | 6.5          | %          |
|                               |       |       |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity) |       | 2.3        | %          | 2.7          | %          | 4.5         | %          | (3.4         | )%         |
| Scheduled  service RPMs (traffic)  |       | 4.2        | %          | 5.4          | %          | 4.5         | %          | (0.9         | )%         |
| Passenger  load factor             |       | 1.5        | pts.       | 2.1          | pts.       | 0.1         | pts.       | 2.3          | pts.       |
| Yield                              |       | 4.8        | %          | (0.7         | )%         | 20.6        | %          | 7.4          | %          |
| Passenger  RASM                    |       | 6.8        | %          | 2.0          | %          | 20.6        | %          | 10.3         | %          |

 

As indicated in the abovetable:

•                  Domestic passenger revenues increasedprimarily due to improved traffic, partially offset by slightly lower yields.

•                  Pacific passenger revenues increasedsubstantially due to improved traffic, which was commensurate with addedcapacity, and a significant rise in yields.

•                  Atlantic passenger revenues increaseddue to stronger yields, offset by a slight decline in traffic.

 

Regional carrier revenuesincreased 29.4% ($69 million) to $304 million, due primarily to the increasedcapacity from 37 additional Bombardier CRJ aircraft that have entered servicesince September 30, 2003.

 

Cargo revenues increased7.7% ($15 million) to $211 million due to 7.1% more cargo revenue per tonmile.  Other revenue increased 52.9% ($83million) as a result of increased rental revenue, WorldPerks program relatedrevenues, and other partner revenues.

 

16

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* *

*OperatingExpenses.*  Operatingexpenses increased 16.8% ($428 million) for the three months ended September30, 2004, principally due to the significant rise in fuel prices.  The following table and notes presentoperating expenses for the three months ended September 30, 2004 and 2003 anddescribe significant year-over-year variances (in millions):

** **
| ** **                                 | ** ** | **Three months ended** | ** ** | **Increase**   | ** ** | ** **    | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------------|------------|----------------|------------|---------------|------------|------------|------------|
| ** **                                 | ** ** | **September 30**       | ** ** | **(Decrease)** | ** ** | **Percent**   | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | **2004**               | ** ** | **2003**       | ** ** | **from 2003** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating Expenses**                     |       |                   |       |           |       |          |       |       |       |   |   |
| Salaries, wages and benefits               | ** ** | **$**                  | **952**    | ** **     | **$**      | 955           |       | $          | (3         | ) | (0.3 | )% | A |   |
| Aircraft fuel and taxes                    | ** ** | **605**                |       | 386            |       | 219           |       | 56.7       |       | B |   |
| Selling and marketing                      | ** ** | **209**                |       | 187            |       | 22            |       | 11.8       |       | C |   |
| Other rentals and landing fees             | ** ** | **154**                |       | 141            |       | 13            |       | 9.2        |       | D |   |
| Depreciation and amortization              | ** ** | **126**                |       | 144            |       | (18           | )          | (12.5      | )          | E |   |
| Aircraft maintenance materials and repairs | ** ** | **121**                |       | 114            |       | 7             |       | 6.1        |       | F |   |
| Aircraft rentals                           | ** ** | **109**                |       | 117            |       | (8            | )          | (6.8       | )          | G |   |
| Regional carrier expenses                  | ** ** | **322**                |       | 135            |       | 187           |       | 138.5      |       | H |   |
| Other                                      | ** ** | **375**                |       | 366            |       | 9             |       | 2.5        |       | I |   |
| **Total operating expenses**               | ** ** | **$**                  | **2,973**  | ** **     | **$**      | 2,545         |       | $          | 428        |   | 16.8 | % |   |   |

 

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A.           Salaries,wages and benefits were relatively unchanged, with annual wage rate increasesoffset by the consolidation of Pinnacle Airlines in 2003.

B.             Aircraftfuel and taxes were significantly higher due to a 64.6% increase in the averagefuel cost per gallon to $1.24, net of hedging transactions, partially offset by0.9% less gallons consumed due to the operation of more fuel efficientaircraft.

C.             Sellingand marketing expense increases were primarily volume related, reflecting 9.2%higher passenger revenue and an increased provision for frequent flyer programmiles.

D.            Otherrentals and landing fees were higher, due primarily to airport credits receivedin 2003, as well as increased rates and capacity versus 2003.

E.              Depreciationexpense decreased in the third quarter 2004 primarily due to the impact ofimpairment charges booked in prior periods and certain aircraft becoming fullydepreciated, partially offset by depreciation on new aircraft deliveries.

F.              Aircraftmaintenance materials and repairs expense increased by $7 million, dueprimarily to higher materials usage.

G.             Aircraftrentals decreased, largely due to the consolidation of Pinnacle Airlines in 2003,partially offset by increased amortization on certain leases that expiredduring the quarter.

H.            Regionalcarrier expenses increased largely due to the 2003 consolidation of PinnacleAirlines operating expenses ($75 million), which were previously recorded onother line items, and the 2003 elimination of intercompany transactions ($44million). The remaining increase of $68 million was primarily driven by theaddition of 37 CRJ aircraft leased by Pinnacle Airlines from Northwest andsubstantially higher fuel costs.

I.                 Otherexpenses (which include MLT operating expenses, outside services, insurance,passenger food, personnel expenses, communication expenses and supplies)increased primarily due to increased operations.

 

*OtherIncome and Expense.* Non-operating expense increased $18 million, primarily due to higherinterest expense related to increased debt levels.

 

17

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**Resultsof Operations—Nine months ended September 30, 2004 and 2003**

 

*Operating Revenues.*  Operating revenues increased 13.8% ($1,037million), the result of higher system passenger, regional carrier, cargo andother revenues.

 

System passenger revenuesincreased 12.6% ($720 million).  Thefollowing analysis by region is based on information reported to the Departmentof Transportation and excludes regional carriers:

** **
| ** **                          | ** ** | **System** | ** ** | **Domestic** | ** ** | **Pacific** | ** ** | **Atlantic** | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **2004**                            | ** ** | ** ** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **   | ** ** |
| Passenger  revenues (in millions)   |       | $          | 6,440      |         | $          | 4,330       |       | $            | 1,352      |   | $ | 758 |   |
|                                |       |       |       |         |       |        |       |         |       |
| **Increase  (Decrease) from 2003:** |       |       |       |         |       |        |       |         |       |
| Passenger  revenues (in millions)   |       | $          | 720        |         | $          | 327         |       | $            | 296        |   | $ | 97 |   |
| Percent                             |       | 12.6       | %          | 8.2          | %          | 28.0        | %          | 14.6         | %          |
|                                |       |       |       |         |       |        |       |         |       |
| Scheduled  service ASMs (capacity)  |       | 1.8        | %          | 2.7          | %          | (0.3        | )%         | 1.5          | %          |
| Scheduled  service RPMs (traffic)   |       | 6.5        | %          | 5.6          | %          | 9.6         | %          | 4.3          | %          |
| Passenger load  factor              |       | 3.5        | pts.       | 2.2          | pts.       | 7.9         | pts.       | 2.3          | pts.       |
| Yield                               |       | 5.7        | %          | 2.4          | %          | 16.9        | %          | 9.9          | %          |
| Passenger RASM                      |       | 10.6       | %          | 5.4          | %          | 28.4        | %          | 13.0         | %          |

 

As indicated in the abovetable:

•                  Domestic passenger revenues increasedprimarily due to improved traffic and yields.

•                  Pacific passenger revenues increasedsignificantly as a result of stronger traffic and substantially improvedyields.

•                  Atlantic passenger revenues increasedprimarily due to improved traffic and a strong rise in yields.

 

Regional carrier revenuesincreased 27.8% ($173 million) to $795 million, due primarily to the increasedcapacity from 37 additional Bombardier CRJ aircraft that have entered servicesince September 30, 2003.

 

Cargo revenues increased7.9% ($43 million) to $587 million due to 6.3% more cargo ton miles flown.  Other revenue increased 16.7% ($101 million)as a result of increased rental revenue, ticket change fees, and WorldPerksprogram related revenue, partially offset by the Civil Reserve Air Fleetprogram revenue recorded in 2003.

 

*OperatingExpenses.*  Operatingexpenses increased 11.2% ($865 million) for the nine months ended September 30,2004.  The following table and notespresent operating expenses for the nine months ended September 30, 2004 and2003 and describe significant year-over-year variances (in millions):

 
| ** **                                  | ** ** | **Nine months ended** | ** ** | **Increase**   | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|----------------|------------|---------------|------------|------------|------------|
| ** **                                  | ** ** | **September 30**      | ** ** | **(Decrease)** | ** ** | **Percent**   | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **2004**              | ** ** | **2003**       | ** ** | **from 2003** | ** ** | **Change** | ** ** | **Note** | ** ** |
| **Operating  Expenses**                     |       |                  |       |           |       |          |       |       |       |   |   |
| Salaries, wages  and benefits               |       | **$**                 | **2,853**  |           | **$**      | 2,944         |       | $          | (91        | ) | (3.1 | )% | A |   |
| Aircraft fuel  and taxes                    |       | **1,554**             |       | 1,172          |       | 382           |       | 32.6       |       | B |   |
| Selling and  marketing                      |       | **588**               |       | 533            |       | 55            |       | 10.3       |       | C |   |
| Depreciation and  amortization              |       | **504**               |       | 448            |       | 56            |       | 12.5       |       | D |   |
| Other rentals  and landing fees             |       | **449**               |       | 422            |       | 27            |       | 6.4        |       | E |   |
| Aircraft  maintenance materials and repairs |       | **341**               |       | 342            |       | (1            | )          | (0.3       | )          | F |   |
| Aircraft rentals                            |       | **338**               |       | 355            |       | (17           | )          | (4.8       | )          | G |   |
| Regional carrier  expenses                  |       | **866**               |       | 386            |       | 480           |       | 124.4      |       | H |   |
| Other                                       |       | **1,114**             |       | 1,140          |       | (26           | )          | (2.3       | )          | I |   |
| **Total  operating expenses**               |       | **$**                 | **8,607**  |           | **$**      | 7,742         |       | $          | 865        |   | 11.2 | % |   |   |

 

18

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A.           Salaries,wages and benefits decreased primarily due to $20 million of severance expensesand a $58 million pension curtailment charge both recorded in 2003, theconsolidation of Pinnacle Airlines in 2003 (prior to the initial publicoffering of Pinnacle Airlines Corp. in November), and a 1.4% decrease inaverage full-time equivalent employees. These were partially offset by annual wage rate increases in 2004.

B.             Aircraftfuel and taxes were higher due to a 38.7% increase in the average fuel cost pergallon to $1.11, net of hedging transactions, partially offset by theconsolidation of Pinnacle Airlines in 2003. Fuel hedge transactions reduced fuel costs by $2 million for the ninemonths ended September 30, 2004 compared to an $82 million reduction for thenine months ended September 30, 2003.

C.             Sellingand marketing expenses were higher, primarily due to a 12.6% increase inpassenger revenue and an increased provision for frequent flyer program miles.

D.            Depreciationexpense increased for the nine months ended September 30, 2004 primarily due toa $104 million write-down on certain Boeing 747-200 aircraft, partially offsetby a 2003 write-down of $21 million recorded on Boeing 727-200 aircraft.

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

F.              Aircraftmaintenance materials and repairs expense was essentially unchanged year overyear.

G.             Aircraftrentals expense decreased primarily due to the consolidation of PinnacleAirlines in 2003, partially offset by higher amortization on certain leasesthat expired during the last quarter.

H.            Theincrease in regional carrier expenses was largely due to the 2003 consolidationof Pinnacle Airlines operating expenses ($208 million), which were previouslyrecorded on other line items, and the 2003 elimination of intercompanytransactions ($117 million). The remaining increase of $155 million wasprimarily driven by the addition of 37 CRJ aircraft leased by Pinnacle Airlinesfrom Northwest and higher fuel costs.

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

 

*OtherIncome and Expense.* Non-operating income decreased $456 million, primarily due to thereceipt in 2003 of $209 million under the Emergency Wartime SupplementalAppropriations Act as reimbursement for security fees previously paid to theTSA, a $199 million gain from the sale of the Company’s investment in WorldspanL.P. and higher 2004 interest expenses related to increased debt levels.

 

**Liquidityand Capital Resources**

 

As of September 30, 2004,the Company had cash, cash equivalents and short-term investments of $2.68billion.  This amount includes $136million of restricted short-term investments (which may include amounts held ascash), resulting in liquidity of $2.54 billion.

 

*Cashflows.* Liquidity decreased by $213 million during the ninemonths ended September 30, 2004, largely due to capital expenditures and debtpayments.

 

Net cash provided byoperating activities for the nine months ended September 30, 2004 was $413million, a $262 million decrease from the $675 million of cash provided byoperating activities for the nine months ended September 30, 2003.  This decrease was driven by significantunusual items included in 2003 cash flows from operations, including a $217million tax refund and a one-time $209 million reimbursement of security feesreceived from the U.S. Government, offset by improved performance in 2004 and ahigher level of forward bookings.

 

19

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

 
| ** **      | ** ** | **Nine months ended  September 30** | ** ** |
|-----------------|------------|-------------------------------------|------------|
| ** **      | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| Airbus A319     |       | **—**                          |       | 9 |   |
| Airbus A330-300 |       | **1**                               |       | 3 |   |
| Airbus A330-200 |       | **1**                               |       | — |   |
| Boeing 757-300  |       | **—**                          |       | 5 |   |
|            |       | **2**                               |       | 17 |   |

 

Financing activities inthe nine months ended September 30, 2004 included financing one Airbus A330-200and one Airbus A330-300 aircraft with long-term debt, the issuance of $300million unsecured notes due 2009, repayment of $138 million of 8.375% unsecurednotes in March 2004, repayment of $195 million 8.52% unsecured notes in April2004, plus payment of other debt and capital lease obligations.  Financing activities in the nine months endedSeptember 30, 2003 consisted primarily of financing eight Airbus A319, twoAirbus A330-300 and three Boeing 757-300 aircraft with escrowed funds from apass-through certificates offering, two Boeing 757-300 and one Airbus A330-300aircraft with long-term debt, the issuance of $150 million of 6.625% seniorconvertible notes due in 2023, and payments of debt and capital leaseobligations.

 

In addition to thefinanced aircraft discussed above, the Company also took delivery of threeAirbus A330-200 and two Airbus A330-300 aircraft and 33 Bombardier CRJ200/440regional jets during the nine months ended September 30, 2004.  These Airbus A330-200 and A330-300 aircraftwere acquired largely through non-cash transactions with the manufacturer,which are reflected as long-term debt on the Company’s consolidated balancesheets but are not classified as financing activities for cash flowpurposes.  The Bombardier CRJ aircraftwere acquired with long-term operating leases and subleased to PinnacleAirlines.

 

In total, theCompany took delivery of seven Airbus aircraft and 33 Bombardier CRJ regionaljet aircraft during the nine months ended September 30, 2004.  The Company subleased all of the BombardierCRJ aircraft to Pinnacle Airlines pursuant to the Company’s Airline Services Agreementwith Pinnacle Airlines.  In connectionwith the acquisition of these 40 aircraft, the Company entered into long-termdebt arrangements and operating leases with various lenders and lessors.  The aggregate amount of debt incurred andminimum lease payments under such arrangements totaled $1.2 billion.

 

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

 

| 2004 |   | $     | 95     |   |
|------|--------|-------|--------|--------|
| 2005 |   | 1,500 |   |
| 2006 |   | 856   | (1)    |
| 2007 |   | 1,108 | (1)    |
| 2008 |   | 517   |   |

 

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(1)          These amounts include$79 million and $364 million of aircraft related loan obligations maturing in2006 and 2007, respectively, that may be extended for an additional nine yearsfrom their respective maturity dates, at the Company’s election.

 

The amount shown in 2005includes $962 million of principal outstanding under the Company’s securedcredit facilities due on October 24, 2005. As of October 24, 2004, the loan will mature within one year and assuch, this amount will be recorded as a current liability in financialstatements going forward.  The Company’ssecured credit facilities at September 30, 2004, consisted of a $725 millionrevolving credit facility ($11 million of which has been utilized to establishletters of credit) available until October 2005, and a $250 million 364-dayrevolving credit facility available until October 2004 and renewable annuallyat the option of the lenders; however, to the extent any portion of the $250million facility is not renewed for an additional 364-day period, the Companymay

 

20

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borrow up to the entire non-renewed portion of the facility and suchborrowings would then mature in October 2005. Borrowings under the credit agreement are secured by the Company’sPacific route system and certain aircraft. These facilities currently bear interest at a variable rate equal to theone-month London Interbank Offered Rate (“ LIBOR”) plus 3.25% (5.16% as ofOctober 20, 2004).  The credit agreementincludes a covenant that requires the Company, beginning in the June quarter ofthis year, to maintain at least a one-to-one ratio of earnings (defined asoperating income adjusted to exclude the effects of depreciation, amortizationand aircraft rents and to include the effects of interest income) to fixedcharges (comprising interest expense and aircraft rents).  If the Company fails to meet this fixedcharges coverage ratio, repayment of borrowings under the credit facilitiescould be accelerated by the participant banks. The Company met this requirement for the six months ending September 30,2004.  The Company is currently indiscussions with the banks to restructure the facilities well in advance of thematurity date.  Prior to a restructuring ofthe agreement, in view of fuel prices at historical highs and other factors,the banks have agreed to reset the fixed charges covenant to 0.8 for the nineand twelve months ending December 31, 2004 and March 31, 2005, respectively,and to waive the covenant entirely on those dates so long as the Company’sunrestricted cash remains above $1.7 billion.  As of September 30, 2004,the Company held unrestricted cash totaling $2.54 billion.

 

On January 26, 2004,Northwest completed an offering of $300 million of unsecured notes due2009.  The notes have a coupon rate of10%, payable semi-annually in cash on February 1 and August 1 of each year,beginning on August 1, 2004, and are not redeemable prior to maturity.  Each note was issued at a price of $962 per$1,000 principal amount, resulting in a yield to maturity of 11.0%.  Proceeds from the notes are used for workingcapital and general corporate purposes. The notes are guaranteed by NWA Corp.

 

In March and April2004, the Company repaid the remaining $333 million outstanding under twoissues of unsecured notes, as scheduled, with a combined original face amountof $350 million.  On March 15, $138million of 8.375% senior unsecured notes were repaid, net of $12 million previouslyexchanged for newly issued pass-through certificates in conjunction with anexchange offer in December 2003.  The8.375% unsecured notes were originally issued in 1997.  Additionally, the Company repaid $195 millionof 8.52% senior unsecured notes that matured on April 7, net of $5 millionpreviously exchanged for newly issued pass-through certificates in conjunctionwith the same December 2003 exchange offer. The 8.52% unsecured notes wereoriginally issued in 1998.

 

*AircraftCommitments.*  Committedexpenditures for the 45 aircraft and related equipment on firm order, includingestimated amounts for contractual price escalations and predelivery deposits,will be approximately $352 million for the remainder of 2004, $740 million in2005, $511 million in 2006, $205 million in 2007 and $189 million in 2008.  Consistent with prior practice, the Companyintends to finance its aircraft deliveries through a combination of internallygenerated funds, debt and long-term lease financing.  Financing commitments available for use bythe Company are in place for all of the aircraft on firm order and range from80% - 100% of each aircraft’s purchase price. The Company intends to finance all of the CRJ-200/440 aircraft on orderthrough long-term operating lease financing commitments from the manufacturer.  These aircraft will, in turn, be subleased toand operated by Pinnacle Airlines.  Themanufacturer has the right not to provide financing for future regionalaircraft deliveries in the event the Company’s credit ratings fall belowcertain levels; however, if the manufacturer does not provide financing, theCompany is not obligated to take delivery. On July 28, 2004, S&P downgraded the corporate credit rating of theCompany from B+ to B, which triggered the manufacturer’s right not to providefinancing for subsequent aircraft deliveries. Since the downgrade, the manufacturer has continued to providefinancing.

 

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

 

On April 15, 2003, the IRSapproved the application submitted by the Company to reschedule, over a fiveyear period beginning in April 2004, the $454 million in 2003 plan yearcontributions under the pension plans for contract and salaried employees.  The Company satisfied the conditions forwaiving plan year 2003 contributions by granting the plans a lien on certainassets of the Company (certain domestic slots, international routes, aircraftand engines).

 

21

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On December 23, 2003, theCompany applied to the IRS to reschedule some of its plan year 2004 pensioncontributions, which included amounts due in both 2004 and 2005, for thecontract and salaried employees’ pension plans. Subsequently, on April 10, 2004, the President signed into law thePension Act, which temporarily reduces the Company’s required contributionsthrough two mechanisms: (1) certain companies were permitted to elect partialrelief from the deficit reduction contribution requirements that otherwisewould have applied in 2004 and 2005, an election the Company made; and (2) theapplicable discount rate used to determine funding was increased to reflectyields on indices of high quality corporate bonds instead of 30-year U.S.Treasury rates.  Following enactment ofthe Pension Act, the Company withdrew its request to the IRS to reschedule itsplan year 2004 pension contributions.

 

Including the effect ofthe Pension Act, the Company’s 2004 calendar year cash contributions toqualified pension plans approximate $253 million.  On both April and July 15, 2004, the Companycontributed $84 million to these plans. Subsequently, on October 15, 2004, the Company contributed an additional$85 million, completing its funding obligations for the year.

 

In 2004, the Companyexpects to record expense in its qualified pension plans of approximately $435million.  Absent a significant change inthe level of interest rates or the market value of plan assets between now andyear-end, the Company anticipates that expense related to its qualified plansin 2005 will again be approximately $500 million and that requiredcontributions will be near or below that amount.

 

**OtherInformation**

 

*LaborAgreements.*Approximately 89% of the Company’s employees aremembers of collective bargaining agreements. On October 14, 2004, NWA Corp. announced that it reached a tentativeagreement with its pilots, represented by the Northwest unit of the Air LinePilots Association International (“ALPA”). The tentative agreement includes $300 million in annual labor costsavings from the Company’s pilots and its salaried workers, with pilotscontributing $265 million in annual wage, benefit and other contract changesand salaried and management employees taking $35 million in annual salary andbenefit reductions.  If all of the termsof the tentative agreement are satisfied, these labor cost reductions could beeffective as early as December 1, 2004. The agreement was subsequently approved by the ALPA Master ExecutiveCouncil and is currently subject to ratification by the Company’s pilots.  The agreement also calls for a satisfactoryrestructuring of Northwest’s $975 million revolving credit facility, prior tocontract implementation.

 

Northwestcurrently is in contract discussions with representatives of the InternationalAssociation of Machinists and Aerospace Workers, and the Transport Workers ofAmerica. Preliminary contract discussions will commence in the coming weekswith the Aircraft Mechanics Fraternal Association, the Professional FlightAttendants Association, Northwest Airlines Meteorology Association, andAircraft Technical Support Association.

 

*Alliance Matters. *OnSeptember 13, 2004, Northwest, together with KLM and Continental Airlines,formally joined the global SkyTeam Alliance. The addition of Northwest, KLM and Continental make SkyTeam the world’ssecond largest and fastest growing airline alliance.  The nine members of the SkyTeam alliance,Northwest, KLM, Continental, Delta, Air France, Alitalia, Aeromexico, CSA CzechAirlines and Korean Air, currently serve 341 million passengers annually with14,320 daily departures to 658 global destinations in more than 130countries.  Effective September 15, 2004,Northwest customers were able to accrue and redeem frequent-flier miles intheir WorldPerks account for travel on any of the airlines that belong toSkyTeam.  This alliance affords customersthe options and flexibility of traveling on multiple airlines while beingtreated as a customer traveling on one airline.

 

On September 24, 2004,the SkyTeam alliance members Air France, Delta, Alitalia and CSA Czech alongwith Northwest and KLM filed a Joint Application for Antitrust Immunity (“ATI”)for their transatlantic operations. Northwest and KLM currently have ATI under which they operate theirtransatlantic joint venture, while the other four SkyTeam members referencedalso have ATI.  The application wouldbridge the antitrust immunity between the two alliances, enabling these sixSkyTeam members to coordinate their international operations more closely,creating a more powerful transatlantic alliance that will allow the carriers toenhance cooperation in marketing, coordinate flight schedules, and integratesales, cargo and some pricing and revenue management initiatives.

 

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*Expanded Services Between the U.S. and China.*  On June 18, 2004, the United States and thePeople’s Republic of China agreed to a series of amendments to the 1980 U.S. –China Air Transport Agreement that provide for a significant expansion of airservices between the two countries.  OnJuly 23, 2004, the DOT gave Northwest the authorization for seven additionalcombination (passenger and cargo) service frequencies that became available tothe Company on August 1, 2004.  TheCompany will use these frequencies to provide new daily roundtrip servicebetween Detroit and Guangzhou, via Tokyo, effective October 31, 2004.  Northwest will be the only U.S. carrieroperating combination service to Guangzhou.

 

Inaddition, on September 3, 2004, the DOT gave Northwest the authorization forsix additional U.S. – China all-cargo frequencies, three of which becameavailable to Northwest on August 1, 2004, and another three that will becomeavailable on March 25, 2005.

 

*ForeignCurrency.* The Company is exposed to the effect of foreigncurrency exchange rate fluctuations on the U.S. dollar value of foreigncurrency-denominated operating revenues and expenses, with the largest exposurecoming from the Japanese yen.  Forwardcontracts, collar options or put options are utilized to hedge a portion ofanticipated yen-denominated sales from time-to-time.  Hedging gains or losses are recorded inaccumulated other comprehensive income (loss) until the associatedtransportation is provided, at which time they are recognized as an increase ordecrease in revenue. The Company hedged $130 million of its yen-denominatedsales in the three months ended September 30, 2004, resulting in an effectiverate of 114 yen per U.S. dollar for that period.  The Company hedged $115 million of itsyen-denominated sales in the three months ended September 30, 2003, alsoresulting in an effective rate of 114 yen per U.S. dollar, the prevailingaverage contract rate for the period.  AtSeptember 30, 2004, the Company has hedged $169 million, representingapproximately 25% and 10% of its remaining 2004 and calendar year 2005anticipated yen-denominated sales, at an average rate of 114 and 105 yen perU.S. dollar, respectively, and has recorded $10.3 million of unrealized gainsin accumulated other comprehensive income (loss) associated with those hedges.

 

*Aircraft Fuel.*  The Company’s earnings are significantlyaffected by changes in the price of aircraft fuel.  On an annual basis, the Company’s presentfuel consumption approximates 1.8 billion gallons, producing an $18 millioncost variance for each one-cent change in the average annual price.  In order to provide a measure of control overprice, the Company periodically hedges a portion of this risk, primarilyutilizing futures contracts traded on regulated exchanges, swap agreements andoptions.  As of September 30, 2004, theCompany has hedged the price of approximately 30% of its projected fuelrequirements for the fourth quarter of 2004 through collar options establishedat a crude oil price of $34 to $41 per barrel, and has recorded $27.6 millionof unrealized gains in accumulated other comprehensive income (loss) associatedwith those hedges.  As of the date ofthis filing, the Company has not hedged any of its projected fuel requirementsfor 2005.

 

*War Risk Insurance.* As a result of the Air Transportation Safetyand System Stabilization Act (“Airline Stabilization Act”), the U.S. FederalGovernment assumes most war risk insurance coverage.  This coverage was scheduled to expire onAugust 31, 2004, but has been extended by the Government until December 31,2004.  While the Government may againextend the deadline for providing excess war risk coverage, there is noassurance that any extension will occur, or if it does, how long the extensionwill last.  See “Risk Factors Related toNorthwest and the Airline Industry” in the Company’s December 31, 2003 AnnualReport on Form 10-K for additional information regarding war risk coverage andinsurance costs.

 

*SEC Inquiry.*  The Company has received aninformal request for information from the Securities and Exchange Commission inconnection with an inquiry related to accounting for pension and otherpost-retirement benefit plans.  TheCompany is cooperating with the inquiry, which involves several othercompanies.  The SEC has stated that theinquiry should not be construed as an indication by the Commission or its staffthat any violation of laws has occurred. The Company believes its accounting practices in this area areappropriate.

 

*Forward-LookingStatements.*  Certain ofthe statements made throughout Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and elsewhere in this report areforward-looking and are based upon information available to the Company on thedate hereof.  The Company, through itsmanagement, may also from time to time make oral forward-lookingstatements.  In connection with the “safeharbor” provisions of the Private Securities Litigation Reform Act of 1995, theCompany is hereby identifying important factors that could cause actual resultsto differ materially from those contained in any forward-looking statement madeby or on behalf of the Company.  Any suchstatement is qualified by reference to the following cautionary statements.

 

The Company believes thatthe material risks and uncertainties that could affect the outlook of an airlineoperating in the global economy include, among others, the future level of airtravel demand, the Company’s future passenger traffic and yields, the airlinepricing environment, increased costs for security, the cost and availability ofaviation insurance coverage and war risk coverage, the general economiccondition of the United States and other regions of the world, the price andavailability of jet fuel, the aftermath of the war in Iraq, the possibility ofadditional terrorist attacks or the fear of such attacks, concerns about SARSor other influenza or

 

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contagious illnesses, labor negotiations both at other carriers and theCompany, low cost 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 1.Business - Risk Factors Related to Northwest and the Airline Industry” and “Item7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations” in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2003.

 

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 undertakes no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, future eventsor otherwise.  These statements deal withthe Company’s expectations about the future and are subject to a number offactors that could cause actual results to differ materially from the Company’sexpectations.  All subsequent written ororal forward-looking statements attributable to the Company, or persons actingon behalf of the Company, are expressly qualified in their entirety by thefactors described above.

 

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## **Item 3.    Quantitative andQualitative Disclosures About Market Risk.**

 

Informationrequired by this item is provided under the captions “Foreign Currency” and “AircraftFuel” within “Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in this Quarterly Report on Form10-Q.  Also see “Item 7a. Quantitativeand Qualitative Disclosures About Market Risk” in the Company’s Annual Reporton Form 10-K for 2003.

 

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

 

Anevaluation was performed under the supervision and with the participation ofthe Company’s management, including the President and Chief Executive Officerand the Executive Vice President and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures as of September 30, 2004. Based on that evaluation, the Company’s management, including thePresident and Chief Executive Officer and the Executive Vice President andChief Financial Officer, concluded that the Company’s disclosure controls andprocedures were effective in ensuring that material information relating to theCompany 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 September 30, 2004.

 

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PART II.  OTHERINFORMATION

 

**Item 1.        LegalProceedings.**

 

Referenceis made to “Item 3.  Legal Proceedings”in the Company’s Annual Report on Form 10-K for 2003.

 

*Force Majeure Arbitrations. *In June 2004, an arbitratordenied the AMFA grievance with respect to the Company’s invocation of “forcemajeure” in connection with the Iraq War and sustained the AMFA grievancerelating to the Company’s invocation of “force majeure” in connection with theSARS epidemic with respect to a number of laid off AMFA members.  As a result,**in August 2004, the Company was ordered to reinstate up to 73mechanic positions, at locations of its choosing, based on operationalneeds.  Additionally, the arbitratorruled that no claims for lost wages, benefits or any other retroactive paymentswere justified.

 

Inaddition, in the ordinary course of its business, the Company is party tovarious other legal actions which the Company believes are incidental to theoperation of its business.  The Companybelieves that the outcome of the proceedings to which it is currently a partywill not have a material adverse effect on the Company’s consolidated financialstatements taken as a whole.

# ** **

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

 

(a)     Exhibits:

 
| 10.1 |   | Form of Deferred Stock  Award Agreement                                                                                    |
|------|--------|----------------------------------------------------------------------------------------------------------------------------|
| 10.2 |   | Form of Restricted  Stock Award Agreement                                                                                  |
| 10.3 |   | Form of Phantom Stock  Award Agreement                                                                                     |
| 10.4 |   | Northwest Airlines  Corporation E-Commerce Incentive Compensation Program (as amended), including  form of Award Agreement |
| 12.1 |   | Computation of Ratio of  Earnings to Fixed Charges                                                                         |
| 12.2 |   | Computation of Ratio of  Earnings to Fixed Charges and Preferred Stock Requirements                                        |
| 31.1 |   | Rule 13a-14(a)/15d-14(a)  Certification                                                                                    |
| 31.2 |   | Rule  13a-14(a)/15d-14(a) Certification                                                                                    |
| 32.1 |   | Section 1350  Certification                                                                                                |
| 32.2 |   | Section 1350  Certification                                                                                                |

 

(b)     Reports on Form 8-K:

On July 21, 2004,the Company filed two Form 8-K’s containing a press release issued July 21,2004, and forward looking guidance.  Thepress release also contained the Company’s second quarter 2004 earningsrelease.  The forward looking guidancewas also provided in the Company’s second quarter 2004 earnings conferencecall.

 

#### SIGNATURE

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized this 28th day of October 2004.

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

 

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#### EXHIBIT INDEX

 
| **Exhibit No.** | ** ** | **Description**                                                                                                            |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Form of Deferred Stock  Award Agreement                                                                                    |
| 10.2            |       | Form of Restricted  Stock Award Agreement                                                                                  |
| 10.3            |       | Form of Phantom Stock  Award Agreement                                                                                     |
| 10.4            |       | Northwest Airlines  Corporation E-Commerce Incentive Compensation Program (as amended), including  form of Award Agreement |
| 12.1            |       | Computation of Ratio of  Earnings to Fixed Charges                                                                         |
| 12.2            |       | Computation of Ratio of  Earnings to Fixed Charges and Preferred Stock Requirements                                        |
| 31.1            |       | Rule  13a-14(a)/15d-14(a) Certification                                                                                    |
| 31.2            |       | Rule  13a-14(a)/15d-14(a) Certification                                                                                    |
| 32.1            |       | Section 1350  Certification                                                                                                |
| 32.2            |       | Section 1350  Certification                                                                                                |

 

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